department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date contact person identification_number contact number employer_identification_number form required to be filed tax years vil dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors inay not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions the instructions in notice further action if you disagree with our proposed deletions you should follow if you agree with our deletions you do not need to take any in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 47632s if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil legend founder director b date c state d e related_organization f g city state h web site related_organization dear we have considered your application_for recognition of exemption from federal_income_tax based on the information provided we have under internal_revenue_code sec_501 concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do your net_earnings inure to the benefit of insiders thus precluding exemption under sec_501 of the code yes for the reasons stated below do your operations serve the private benefit of for-profit enterprises which would preclude exemption under sec_501 of the code yes for the reasons stated below have you failed exclusively for an exempt_purpose under sec_501 of the code yes for the reasons stated below to demonstrate that you meet the operational_test by operating letter cg catalog number 47630w do you qualify for tax exemption under sec_501 of the code no for the reasons stated below facts you were incorporated by d on b as a non-profit corporation under c law will be located in downtown g your headquarters d your founder sole incorporator and president indicates he has worked on forming a number of non-profit organizations d named twelve other entities he has formed most of these entities have not received tax-exempt status d states one entity e which was described as the parent was denied exemption and is now a for-profit entity two others are also for-profit organizations all these entities use the same website d has created the website also is referred to as e in addition to describing you the website e describes a variety of entities including a tax consulting service a radio talk show devoted to tax discussion a healthcare consulting service a government watchdog organization and an organization soliciting funds for a particular disease most of d’s ideas involved gaining some referrals from the internal_revenue_service friends and even some d dreamed up d indicates he is a former irs employee and stated his former irs manager challenged him to take a free and necessary service performed for the taxpayer and turn it into a profitable business purposes stated in bylaws e e e e e e e e to provide a means for initially non-profits and other government run operations to figure out which public sector jobs can be changed to private sector operations to provide educational programs and support for many of these organizations to avoid getting themselves in these positions to provide access to professional and personal resource tocreate more opportunities and decrease debt burdens to provide a network of feedback on issues of concern to users and the board_of directors to provide a readily accessible mechanism for regional program development to privatize what government does and do a better job costing less in tax dollars to even potentially provide government another way to finance the current health care crisis d has stated that the same bylaws were used for other entities he created governance you have five board members one of which is d your board members were selected by d because d has known them for a couple of years initially d was the only member of your governing body and your application stated right now there is only one person who is in the position to be making all the decisions d recruited four additional members described the individuals as neighbors and indicated he worked with one at another place of employment when resumes of the board members were requested only were reluctantly supplied you provided no other indication of involvement of the new board members in your operation letter cg catalog number 47630w project a significant income expenses you plan to raise funds through grants donations and fundraising your projected annual income for your first year was more than dollar_figure your second year more than dollar_figure and your third year more than dollar_figure a substantial part of your revenue will be in the form of grants you have recruited a grant writer to help raise funds you plan to hire a minimum of employees you submitted position descriptions for your various employees which were obtained from other organizations your largest expense is salaries and wages nevertheless you profit each year when asked about your financial statements specifically the excess revenues over expenses you stated the figures are all estimates and were very similar as those when you applied for’ exemption for another entity when asked about expenses for the benefit of members d indicated as an example fees paid for d's attendance indicated information may have been confused with information that should have been associated with the application of another organization you indicated referrals would be a source of funding but you did not provide a clear explanation of this when requested you will accept donor advice as to how donated funds are spent you stated that the donor will not exercise significant control_over his her donations however things may change as time goes on you will operate a website providing information to the public regarding your projects statements networking explaining financial events your at in d_ activities you will conduct research to take services currently provided by the government and turn them into for-profit businesses in the private sector or promote the establishment of independent non-profit organizations to provide them you will engage in these activities once your application is approved your activities will be done either based on referrals or what your research team has dreamed up the ideas will then be transferred over to a team to determine if the idea is possible by analyzing what a new service that would take on this hypothetical firm would demand the goal is to create more private sector jobs and decrease the burdens on taxpayers you plan to offer a public services scholarship to students pursuing a career in public services as well as a small_business scholarship to transform aspiring student entrepreneurs into founders you estimate of your time will be fundraising and the remaining devoted to administrative work and day to day activities in tapes music literature artworks choreography scientific discoveries or a number of activities you will publish own or have you indicated that you would engage in rights other intellectual_property the only publishing thus far has been on e website you will have written contracts for individuals or organizations to raise funds for you however none have been completed you will fundraise for other organizations you will maintain separate_accounts for contributors you will provide goods or services to individuals or organizations and may make grants to organizations you will not limit the provisions of goods or services to any specific individual or group this includes not limiting the goods or services to a family_member or an individual with a business relationship you will make contributions to other organizations including those created by d and discussed on the website e you will provide scholarships its acceptance of terms and conditions that it e the website states in a collection of online resources including ads forums and various e-mails according to the website you were initially designed as a multi-medium to back up the web site and work with the radio talk show your goal is to research the findings of similar organizations to see which can be turned into profitable ventures e is also a for-profit entity that is also operated by d you are designed to continue where e had started by educating its audiences on the importance of reporting every is letter cg catalog number 47630w source_of_income ethically you share a website h with e the for-profit entity your program will be based on a process the process begins with a suggestion received from the public or through your own research then the suggestion is evaluated as to what is needed to turn the public service into a taxable entity evaluation is performed utilizing research by your staff as well as research publicly available performed by others the final stage will be spinning off the entrepreneurship into the private sector you anticipate that the spin-off businesses will be similar to those created by colleges and universities additional information on your application_for exemption was requested five times your responses did not include the requested detailed information regarding your activities and operations your descriptions were consistently vague you continually stated that your activities would begin once your application_for exemption was approved also when you did provide yes or no responses you followed by stating that things may change as time goes on your employee job descriptions and bylaws were only examples from other organizations regarding your budgets you stated that the figures you are using are all guesses and you assume there will be disbursements in the future you provided an example of your plans by citing the success of for-profit package delivery services as alternatives to the united_states postal service in describing the radio talk show you explained it will air discussions between taxpayers and irs contact representatives by broadcasting these conversations the listening audience would grow in size d later stated he was forced to change it to where there would be actors instead of actual phone calls conducted by irs contact reps and taxpayers with respect to your scholarship program you stated that the decisions regarding number of grants awarded amount of grants procedures or how the program is administered should be done by a committee however no such committee exists you have not submitted any research or educational materials that will be used in your programs finally you continually referenced programs and activities that are conducted by other organizations with which d is involved law sec_501 of the code provides that an organization described in sec_501 shall be exempt from taxation sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual a -1 a section an organization is not exempt from tax merely because it is not organized and operated for profit in order to establish its exemption it is necessary that every such organization claiming exemption file an application form with the internal_revenue_service regulations income_tax regulations states that the of sec_1_501_a_-1 of the regulations states that an organization claiming exemption under sec_501 and described in any paragraph of sec_501 other than sec_501 shall file the form of application prescribed by the commissioner and shall include thereon such information as required by such form and the instructions issued thereto sec_1_501_c_3_-1 of the regulations provides that organization described in sec_501 an organization must be both organized in order to be exempt as an and letter cg catalog number 47630w operated exclusively for one or more of the purposes specified organization fails to meet either the organizational_test or the operational_test it is not exempt in such section if an sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 sec_1_501_c_3_-1 of the regulations provides that an organization is not organized and operated exclusively for charitable purposes unless it serves a public rather than a private interest to meet this requirement that it serve a public purpose an organization must establish that it is not organized or operated for the benefit of private interests sec_1_501_c_3_-1 of the regulations states that the term charitable is used in sec_501 of the code in its generally accepted legal sense the term includes but is not limited to activities such as relief of the poor and distressed or of the underprivileged advancement of education lessening the burdens of government and the promotion of social welfare promoting social welfare also includes lessening neighborhood tensions eliminating prejudice and discrimination defending human and civil rights secured_by law or combating community deterioration sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community revrul_66_104 1966_1_cb_135 - a nonprofit organization which makes funds available to authors and editors for preparing teaching materials and writing textbooks and under the terms of the contract with the publisher receives royalties from sales of the published materials and then shares them with those individuals does not qualify for exemption from federal_income_tax as a charitable educational or literary organization under sec_501 c of the internal_revenue_code of although educational interests are served by the publication of better teaching materials the facts in this case show only an enterprise conducted in an essentially commercial manner in which all a monetary return accordingly it is held that the instant organization does not qualify for exemption from federal_income_tax as an organization described in sec_501 c of the code participants expect to receive the revrul_68_16 1968_1_cb_246 - a fund set up as an adjunct to a school of business administration that is exempt from federal_income_tax for the sole purpose of providing business students with instruction and experience in managing securities may be exempt from federal_income_tax under sec_501 of the internal_revenue_code of the fund is used by the students as an adjunct to their course of instruction to obtain knowledge and experience in security portfolio management thus the fund contributes to their education accordingly the organization is exempt from federal_income_tax under sec_501 of the code revrul_69_441 - by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge of letter cg catalog number 47630w indebtedness the organization is relieving the poor and distressed furthermore by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization is instructing the public on subjects useful to the individual and beneficial to the community accordingly the organization is exempt from federal_income_tax under sec_501 of the code compare revrul_65_299 c b which holds that a nonprofit organization formed to advise counsel and assist individuals in solving their financial difficulties by budgeting their income and expenses and effecting an orderly program for the payment of their obligations qualifies for exemption from federal_income_tax under sec_501 of the code rather than under sec_501 in that case the organization was not engaged in any educational activities and the families or individuals eligible for assistance were not limited to those who were in need of such assistance as proper recipients of charity proc c rev b section dollar_figure provides that an organization seeking recognition of exemption under sec_501 must submit a completed form_1023 a substantially completed application including a letter application is one that includes a detailed narrative statement of proposed activities of contemplated expenditures description narrative and a c b proc rev section dollar_figure provides that exempt status may be recognized in advance of an organization's operations if the proposed activities are described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements for exemption pursuant to the section of the internal_revenue_code under which exemption is claimed an organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures a mere restatement of exempt purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement 203_fsupp_126 e d s c found that use of a large part of a foundation’s funds for a scholarship grant to the son of a foundation trustee resulted in inurement of earnings awareness est’ programs involving training seminars lectures etc 71_tc_1067 described an organization engaged in activities relating to in areas of inttapersonal licensing arrangements with a for-profit corporation was held not to be exempt under sec_501 the court held that although the organization was educational in nature it served commercial purposes of the for-profit corporation and therefore was not operated exclusively for exempt purposes communication conducted under which were and john marshall law school and john ustc ct_cl described a private law school operated by two brothers the court found that a series of interest-free unsecured loans used by the brothers to purchase a home and furnish it scholarships for their children and other personal expenses including travel health spa membership and entertainment resulted in inurement to individuals university v marshall states united 82_tc_215 an organization was organized to provide education and charity but failed to provide sufficient details regarding its proposed operations letter cg catalog number 47630w the court held that it failed to prove that it would operate exclusively for exempt purposes under sec_501 of the code children for adoption in easter house v u s cl_ct affd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health related_services to unwed mothers and their children rather the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held the organization was not operated exclusively for purposes that described in sec_501 a manner indistinguishable from agencies engaged in health-related court found advertising substantial adoption for-profit services incident merely were that that the the of to salvation navy v commissioner tcmemo_2002_275 the tax_court found that one of the reasons why the organization did not qualify for exemption from federal_income_tax was because it could not prove that it was not organized to serve the private interests of its founder peoples prize v commissioner t c memo petitioner has for the most part provided only generalizations in response to repeated requests by respondent for more detail on prospective activities such generalizations do not satisfy us that petitioner qualifies for the exemption 70_fedclaims_782 noted exemption from a strictly interpreted matter of legislative grace and the federal_income_tax is not a right it burden rests with the applicant to prove that it is entitled to exempt status the organization failed to establish an administrative record that showed it was operated for exclusively exempt purposes the court found instead that it was part of a tax_avoidance scheme and primarily provided private benefits is application of law inurement sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual you do not meet the requirements of sec_501 or sec_1_501_c_3_-1 of the regulations because you have not established your operations will not inure to the benefit of your founder d you are similar to the organizations in charleston chair company v united_states and john marshall law school and john marshall university v united_states in that your operations will benefit d letter cg catalog number 47630w and d's for-profit enterprise the facts clearly show d substantially controls all operations and makes all decisions after several requests you submitted resumes for three board members however you provided no evidence anyone other than d was involved in your operations or d formed you as well as several other entities member benefit is described as decisions networking events d attends referrals are described as referrals d makes your primary method of attracting clients or marketing your products and services is through the e website which is owned by d’s for-profit company similar to the organization subject_to the ruling in salvation navy v commissioner you have not demonstrated that you were not organized to serve the private interests of your founder your purpose includes creating taxable entities and the examples you give include entities created by d further you state relatives and friends of board members may receive scholarships and or other_benefits private benefit you do not meet the requirements of sec_1_501_c_3_-1 of the regulations and you are similar to the organizations in est of hawaii v commissioner new dynamics foundation v united_states and easter house v u s because you have not demonstrated that you are organized and operated to serve a an insubstantial part of your operations will result in benefit to clients subscribers and businesses you form or assist you consistently stated your purpose is to privatize government services and create profitable businesses therefore your primary purpose is to promote the private interests of for-profit enterprises rather than a public interest interest more than rather than private public a failure to demonstrate an exempt_purpose - operational_test sec_501 of the code sets forth two main tests for an organization to be recognized as exempt as noted in sec_1_501_c_3_-1 of the regulations an organization must be both organized and operated exclusively for purposes described in sec_501 you did not submit information sufficient to conclude that you are organized and operated exclusively for charitable purposes as specified in sec_501 of the code in addition to showing that it is both organized and operated exclusively for one or more of the purposes described in sec_501 of the code to be exempt an organization must provide a substantially complete application as described in sec_1 a and a of the regulations is as noted in new dynamics foundation supra exemption from federal_income_tax is not a right it a strictly interpreted matter of legislative grace and the burden rests with the applicant to prove that it is entitled to exempt status your application did include some information required by the form_1023 and its instructions such as copies of bylaws and organizing document however your application did not meet the requirements of sec_1 a - a and a - a of the regulations your activity description did not include detailed information regarding your program despite several requests for specific information about your activities you have faileg to provide an adequate description you failed to provide complete information regarding your planned public service scholarship and instead stated many decisions would be made by committee you provided virtually no information regarding your plans to develop private sector businesses from current government provided services and failed to establish how privatizing government jobs you continually referenced activities conducted by other organizations or d in d’s individual capacity c purpose addition furthers section in a letter cg catalog number 47630w in fact another almost all you failed to distinguish your operations from other entities including related for-profit entities you repeatedly referred to the e website as a means of describing your activities the e website describes numerous entities many of which are for-profit your bylaws financial statements and other information was the same as information d used for other entities your response to our requests for information about your activities often discussed the activities of d's other the information was so intertwined one organization could not easily be entities distinguished from activities you describe are typically conducted by commercial businesses this includes the use of a website to market services and products assisting individuals in creating profitable businesses and the provision of consulting services similar to the organizations subject_to the rulings in est of hawaii v commissioner and easter house v u s your activities serve a substantial nonexempt commercial purpose also when you did provide some information you qualified the information by stating that things may change in the future simply stating that you plan to provide such programs is not sufficient to demonstrate how any of your programs will be operated your application does not satisfy the requirements to describe proposed activities in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements for exemption pursuant to the section of the internal_revenue_code under which exemption is claimed as specified in sec_1_501_a_-1 and sec_1_501_a_-1 of the regulations and sections dollar_figure and dollar_figure of revproc_2012_9 2012_1_cb_283 an organization must also satisfy the organizational and operational tests described in the regulations to qualify for recognition as an organization exempt from federal taxation in order to meet the organizational_test you must have a valid purpose clause that limits the organization's purposes to one or more exempt purposes and does not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes you meet the organizational_test however you operate exclusively for charitable or educational_purposes as required by sec_1_501_c_3_-1 of the regulations an applicant must establish an administrative record showing that it operates primarily to accomplish an exempt_purpose s described in sec_501 of the code and that it is not organized or operated for the benefit of private interests provided enough information to demonstrate that have you not not currently conduct any activities you do you do not intend to commence your other operations until you are recognized as an exempt_organization the research and business development information submitted is not sufficient and includes multiple inconsistencies and references to other entities for example you described an educational program of educating the public about federal_income_tax rules and regulations however you later stated that the program is actually conducted by f you provided many position descriptions and a budget that you later stated were either guesses or obtained from other organizations as examples the service may recognize exempt status in advance of operations if an applicant describes its proposed operations in sufficient detail to permit a conclusion that will clearly meet the requirements for exemption in accordance with sec_501 of the code however as described in a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement la verdad v commissioner a mere restatement of exempt purposes or it letter cg catalog number 47630w your activities are not educational or charitable based on the information you provided you have failed to establish that your operations will be exclusively educational or charitable the regulations in sec_1_501_c_3_-1 define educational as the instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community you are distinguishable from the organizations in revrul_68_16 and revrul_69_441 because you are not conducting an educational program although you stated that you plan to conduct research and evaluate what is needed to turn a public service into a taxable entity you have not provided any evidence of an educational program other than provision for a proposed public service scholarship program your primary activity will be researching and evaluating existing government services for their potential as private sector businesses such an activity does not provide instruction or training for the purpose of improving or developing an individual's capabilities within the meaning of sec_1_501_c_3_-1 of the regulations nor do you provide any instruction of the public you do plan to offer a scholarship program for students pursuing a career in public service however the program has not been described in detail and it is not operational at this time unlike the organizations in revrul_68_16 supra and revrul_69_441 supra you do not offer programs that are structured primarily to improve an individual's understanding of their problems or their skills in solving them nor do you provide instructions to students you provided no evidence that your research will be published and made available to the public you are similar to the organization in revrul_66_104 supra in that you have not shown that you will not be operated in a commercial manner even if educational interests might possibly be served by the publication of your research results you have not published any research to date nor have you begun your scholarship program your plans to create for-profit entities to provide needed services to the public that are currently provided by governmental units are not educational you do not operate a substantive on-going educational program you did not explain your research methodology you did not clarify the writings and findings or explain exactly how you will use the information you did not define your role in privatizing jobs you indicated taxable entities would be created you do not dedicate any revenue to activities involving educational programs therefore you failed to establish that your research activities provide instruction or training useful to the individual and beneficial to the community within the meaning of sec_1_501_c_3_-1 of the regulations you provided no evidence that you intend to establish a method of publishing the results of your research thus your activities are not educational within the meaning of sec_501 your time and resources are devoted to researching the potential for converting existing government services into private for-profit entities the creation of for-profit entities to provide services that are currently the domain of a governmental_unit does not provide relief to the poor and distressed within the meaning of sec_1_501_c_3_-1 of the regulations or serve any other purpose recognized as charitable not only do your activities not further an exempt_purpose as recognized by statute or by case law they do further a substantial nonexempt commercial purpose conducting research regarding how to convert existing government services into profitable private companies and then spinning off’ the newly created entities does not further educational or charitable purposes rather you are operating like a commercial enterprise seeking to maximize profits not as a charitable or educational_organization seeking to serve the public while your budgets include money for a public service scholarship your primary activity is not educational or charitable your primary goal is the creation of for-profit letter cg catalog number 47630w entities therefore as stated in easter house v u s your business_purpose and not the advancement of educational and charitable purposes is your primary goal thus your activities are not charitable within the meaning of sec_501 you are similar to the organization in peoples prize v commissioner supra in response to repeated requests for more detail regarding your proposed activities either you failed to provide the requested information or the submitted information contradicted previously submitted information you failed to demonstrate that your activities are or will be conducted in a charitable or educational manner as required you have not submitted copies of any educational materials agendas curriculums schedule of classes or instructor information you simply stated that you will not begin offering most of your programs or develop solicitation marketing and educational materials until you are approved as tax-exempt more than an insubstantial part of your activities are in furtherance of a nonexempt purpose in contravention of sec_1_501_c_3_-1 of the regulations therefore you are not operated for an exempt_purpose conclusion based on the facts and applicable law you do not qualify for exemption under sec_501 of the code because you have not established your operations will not inure to the benefit of d more than an insubstantial part of your operations will result in private benefit to your clients subscribers and businesses you form or assist and you have not provided sufficient evidence to demonstrate that you are organized and operated exclusively for exempt purposes within the meaning of sec_501 of the code an organization that fails to provide a substantially completed application and fails to meet the organizational or operational tests described in the regulations is not exempt therefore you do not qualify for exemption under sec_501 to protest you you have the right to file a protest if you believe this determination is incorrect must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page publication these items include of - n w p a o the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury done by adding to the appeal the following signed declaration this may be letter cg catalog number 47630w under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement lf an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation a proper power_of_attorney form_2848 power of during the appeal process you must file attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications a protest within days you will not be able to file if you do not file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 applicable address and any supporting documents to the mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh letter cg catalog number 47630w you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely holly o paz director exempt_organizations rulings and agreements enclosure publication letter cg catalog number 47630w


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa gsemasek postn-125258-16 uilc date november to luanne m parker appeals team case leader office of appeals from blaise g dusenberry senior technical reviewer procedure administration subject additional information for gross and substantial_valuation_misstatement penalties this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether ---------------------------------- taxpayer is subject_to the accuracy-related_penalty based on an underpayment attributable to a substantial or gross_valuation_misstatement for taxable_year ------- ------- or both when the service calculated the penalty by valuing only a limited number of the items of property claimed by taxpayer on the returns conclusion facts taxpayer is an s_corporation which operates retail stores in multiple states selling a wide variety of products and supplies related to ------------------------------------------------ taxpayer’s products include -------------------------------------------------------and related supplies the taxpayer also distributes --------------------- including ----------------------------- postn-125258-16 -------------------------------------------------- taxpayer makes charitable donations to certain ---------------------------------------------------------------- during ------- through ------- taxpayer purchased -------------------------- for dollar_figure-------------- near the end of ------- taxpayer donated the --------- to the ----------------------------- when the taxpayer filed its tax_return for taxable_year ------- it claimed an itemized_deduction for a charitable_contribution in the amount of dollar_figure---------------- based on the claimed combined fair market values of the -------------------- to document the fair market values taxpayer included with its ------- return a completed noncash charitable_contributions form and an appraisal which was earlier prepared by ---------------- --------- ----------------did not create a separate appraisal report for each --------donated by the taxpayer during ------- rather he created one appraisal report for all of the ------- --------- donated during ------- the report listed appraised and valued each -------- individually and then added the values of the individual items together to calculate the total fair_market_value for all of the items contributed to the ----------------------------- from december ------- through august ------- taxpayer purchased ------------------------and ------------------------------------ for the total purchase_price of dollar_figure---------------- near the end of ------- taxpayer donated the ------------------------------------------ to ------------------------------ -------- when the taxpayer filed its tax_return for taxable_year ------- it claimed an itemized_deduction for a charitable_contribution in the amount of dollar_figure---------------- based on the claimed combined fair market values of these items to document the fair market values taxpayer included with its return a completed noncash charitable_contributions form and an appraisal which had been prepared by --------------- he did not create a separate appraisal report for each -------------------------------------- donated by the taxpayer during ------- rather ----------------created one appraisal report for all of the articles of property donated the report listed appraised and valued each ----------------- and -----------------individually and then added the values of the individual items together to calculate the total fair_market_value for all of the items contributed to the ----------------- ------------- the service examined taxpayer’s returns for taxable years ------- and ------- and sought to determine whether taxpayer complied with the appraisal requirements of code sec_170 respecting non-cash charitable_contributions specifically the service examined the taxpayer’s records and those of --------------- in order to determine if the latter is a not a qualified_appraiser because he was regularly used by taxpayer for appraisal services to accomplish this the service considered the number of reports --- --------------- prepared for the taxpayer in comparison to the number prepared for all other individuals and entities during ---------------- and ------- the examination also took into account the total time --------------- devoted to furnishing appraisals to the taxpayer and income received from the taxpayer in comparison to those variables for all other individuals and entities for which --------------- performed appraisals postn-125258-16 the service determined that --------------- is not a qualified_appraiser respecting the charitable_contribution deductions for non-cash donations claimed by the taxpayer and that consequently the deductions should be denied for taxable years ------- and ------- the service’s examination also focused on whether taxpayer is liable for accuracy- related penalties for taxable years ------- and ------- based on underpayments reflected in the taxpayer’s returns that are attributable to the alternative causes listed in code sec_6662 the service concluded that because the values of the --------------------- claimed by the taxpayer when calculating the charitable_contribution_deduction for taxable_year ------- exceeded the correct values by more than percent the taxpayer is liable for the gross_valuation_misstatement penalty under sec_6662 the service determined that the underpayment reflected on the taxpayer’s ------- return is alternatively due to a substantial_valuation_misstatement and thus subject_to a penalty pursuant to code sec_6662 and e in reaching these conclusions however the service’s office of art appraisal service did not perform an appraisal of each of the --------------- the taxpayer donated to the ---------------------------------- rather the service selected -------------- based on a random statistical sampling and appraised only these selected --------- because the service’s appraisal of the --------- randomly selected for review concluded that the values were overstated by at least percent the service concluded that all of the donated ---------- had values overstated by at least percent the service used the same methodology to determine the correct fair market values of the --------------- the taxpayer donated to the ---------------------------- in taxable_year ------- the service selected for review by a random statistical sample ----out of the --------------- the taxpayer donated to the ----------------------------- which was the foundation for the charitable_contribution_deduction claimed by the taxpayer the service accordingly determined the accuracy-related_penalty based on a gross_valuation_misstatement or alternatively a substantial_valuation_misstatement you requested our views on whether the service may calculate the values of multiple articles of property through reliance on a random sample of some of the properties in determining the taxpayer’s liability for the gross valuation or substantial_valuation_misstatement penalty under sec_6662 law and analysis sec_6662 imposes a penalty of of the portion of an underpayment_of_tax reflected in a taxpayer’s return attributable to a substantial_valuation_misstatement sec_6662 a substantial_valuation_misstatement exists if the value or adjusted the service concluded that dollar_figure---------------- the fair_market_value the taxpayer used in calculating the portion of its deduction for the donation of -------------------------------------- to the ------------------------------ was correct postn-125258-16 basis_of_property claimed on a return i sec_150 percent or more of the amount determined to be the correct value or adjusted_basis sec_6662 if the reported value or adjusted_basis exceeds the correct amount by at least percent the valuation misstatement is considered gross and the penalty increases to sec_6662 see eg united_states v woods 134_sct_557 696_f3d_1124 11th cir no penalty may be imposed under sec_6662 for a taxable_year unless the portion of the underpayment attributable to a substantial or gross_valuation_misstatement exceeds dollar_figure sec_6662 sec_1_6662-5 the determination of whether there is a substantial or gross_valuation_misstatement in the case of the return of a pass-through entity is made at the entity level sec_1_6662-5 however the dollar_figure limitation is applied at the taxpayer level id the regulation implementing the substantial and gross_valuation_misstatement penalties under code sec_6662 includes the following rule for determining the penalty in the case of multiple properties f multiple valuation misstatements on a return - determination of whether valuation misstatements are substantial or gross -- the determination of whether there is a substantial or gross_valuation_misstatement on a return is made on a property-by-property basis assume for example that property a has a value of but a taxpayer claims a value of and that property b has a value of but the taxpayer claims a value of because the claimed and correct values are compared on a property-by-property basis there is a substantial_valuation_misstatement with respect to property b but not with respect to property a even though the claimed values are percent or more of the correct values when compared on an aggregate basis sec_1_6662-5 emphasis added when the service determines a taxpayer has misstated the value or adjusted_basis of more than one property on his return sec_1_6662-5 requires the service to calculate the correct value or adjusted_basis of each property individually the example included within sec_1_6662-5 takes into account that when a taxpayer misstates the values of multiple articles of property on his return some of the the example under sec_1_6662-5 is outdated because it reflects the misstatement percentage threshold for a substantial_valuation_misstatement under code sec_6662 prior to the effective date of the provision in the pension_protection_act of p l a a 120_stat_1083 ppa by which congress lowered the thresholds for substantial and gross_valuation_misstatements to percent and percent respectively for tax returns filed after date for returns filed before the effective date of ppa the threshold for a substantial_valuation_misstatement was percent and for the gross_valuation_misstatement penalty to apply the taxpayer had to misstate the property’s value or adjusted_basis by percent or more postn-125258-16 valuation misstatements may be sufficient to meet the percent threshold under code sec_6662 while other misstatements may not there are reported cases in which a taxpayer misstated the value or adjusted_basis of more than one article of property for a single taxable_period woods outside_basis of multiple pass-through entities 583_f3d_471 7th cir in son-of-boss transaction misvaluation of tugboat fleet our research did not however disclose a reported case in which a court addressed whether the service may determine the substantial or gross_valuation_misstatement penalty under code sec_6662 based on an appraisal of some but not all of the properties claimed on the taxpayer’s return here it appears that the service did not appraise each --------- -------- individually for taxable_year --------or ------- because the large number of --------- made appraisal of all of them impractical case development hazards and other considerations postn-125258-16 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


t c memo united_states tax_court estate of john kenly deceased betty b kenly personal representative petitioner v commissioner of internal revenue respondent docket no filed date r determined a deficiency in estate_tax on the theory that certain property titled in decedent's name was decedent's separately owned property only one- third of which passed to decedent's wife p contends that no deficiency in estate_tax exists because that property was community_property and decedent’s share passed to decedent's wife held the property in issue was decedent's separate_property gregory a robinson and donald w harris for petitioner katherine holmes ankeny for respondent memorandum findings_of_fact and opinion halpern judge respondent has determined a deficiency in federal estate_tax of dollar_figure and an accuracy related penalty of dollar_figure respondent’s determination_of_a_deficiency relates primarily to her determination that certain property was the separate_property of decedent john kenly decedent at the time of his death and was not community_property as a result of concessions made by respondent the only issue we must decide is whether the property in question was separate_property or community_property unless otherwise noted all section references are to the internal_revenue_code in effect at the time of decedent's death and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some facts have been stipulated and are so found the stipulations of fact filed by the parties and accompanying exhibits are incorporated herein by this reference in the petition petitioner betty b kenly petitioner represents that her address is in meadview arizona decedent died intestate on date at the time of his death decedent was married to petitioner decedent and petitioner had been married for years and they had resided in arizona for all of that time decedent was also survived by two sons mark and rodney kenly and by several grandchildren the new mexico ranch in frank kenly decedent’s father bought a ranch in new mexico the new mexico ranch decedent did not pay any money toward the purchase of the new mexico ranch by statutory warranty deed recorded in the new mexico ranch was granted to frank kenly and john kenly as joint_tenants the recorded statutory warranty deed included the following statement which was signed by frank kenly and decedent statement of intention to create joint_tenancy frank kenly and john kenly hereby state that the effect of the foregoing deed has been explained to the sic and they hereby declare that it is their wish and intention that they take the property described in the deed as joint_tenants with the right_of_survivorship and not as community_property nor as tenants in common in frank kenly signed and recorded an affidavit stating that he and decedent were the owners of the new mexico ranch according to an exchange_agreement signed by frank kenly and decedent in decedent owned an undivided one-half interest in the new mexico ranch the divorce proceeding in date petitioner initiated an action for divorce from decedent the action by filing a complaint the complaint in an arizona court the divorce court petitioner was represented by counsel petitioner filed a financial statement with the divorce court the financial statement the financial statement contained a list of several properties that petitioner claimed were community_property the financial statement failed to list the new mexico ranch as community_property in the complaint petitioner requested that the divorce court order decedent to file an inventory of all community_property the divorce court so ordered in date decedent filed an answer to the complaint which included a list of community_property that list did not include the new mexico ranch petitioner made no objection to that omission the action was twice set for trial the action was not tried and was dismissed in date exchange of interest in new mexico ranch for interest in dunlap property in frank kenly and decedent's mother zona kenly bought property near dunlap road in phoenix arizona the dunlap property in decedent exchanged his interest in the new mexico property for frank kenly’s interest in the dunlap property the intent of decedent and frank kenly was that frank kenly divest himself of his interest in the dunlap property and decedent divest himself of his interest in the new mexico property attorney john hughes represented decedent in that exchange in a statutory quitclaim_deed executed in frank kenly conveyed his interest in the dunlap property to decedent in a replacement deed signed in frank kenly again quitclaimed his interest in the dunlap property to decedent in to insure that decedent had received all of frank kenly's interest in the dunlap property frank kenly conveyed his interest in an additional strip of land on the border of the dunlap property that conveyance was evidenced by a quitclaim_deed that identified decedent as the grantee on date decedent explained in an affidavit that since march of the date on which the interest of frank kenly was conveyed to your affiant your affiant and his mother zona kenly have paid the taxes on and have been in open and adverse possession of the additional strip of land in the former owners of the dunlap property executed a quitclaim_deed to correct title to the dunlap property that quitclaim_deed identified the donees as decedent and zona kenly in zona kenly and decedent sold a portion of the dunlap property the warranty deed that evidenced the sale identified the sellers as zona kenly an unmarried woman and john kenly husband of betty blair kenly dealing with his sole and separate_property exchange of acres in dunlap property for windmill ranch in zona kenly and decedent exchanged a 40-acre parcel of the dunlap property the 40-acre parcel for property in kingman arizona the windmill ranch in addition to that property the former owners of the windmill ranch assigned to zona kenly and decedent their rights under a lease the lease john hughes represented decedent in the exchange the title report prepared in connection with the exchange lists the insureds as zona kenly and decedent and states that the interest insured under the policy is a fee simple vested in zona kenly a widow and john kenly a married man as his sole and separate_property the sellers of the windmill ranch assigned the lease to zona kenly a divorced woman and john kenly as his sole and separate_property according to the warranty deed for the 40-acre parcel the sellers were zona kenly a widow and john kenly a married man dealing with his sole and separate_property the sellers of the windmill ranch by warranty deed conveyed title to that property to zona kenly a widow and john kenly a married man as his sole and separate_property on date petitioner had signed and recorded a disclaimer deed with respect to the 40-acre parcel that deed referred to petitioner as the undersigned and decedent as the spouse it stated the spouse has acquired title to description of the 40-acre parcel the property above described is the sole and separate_property of the spouse having been purchased with the separate funds of the spouse the undersigned has no past or present right title interest claim or lien of any kind or nature whatsoever in to or against said property this instrument is executed not for the purpose of making a gift to the spouse but solely for the purpose of clearly showing of record that the undersigned has and claims no interest in and to said property now therefore in consideration of the premises the undersigned does hereby disclaim remise release and quit-claim unto the spouse and to the heirs and assigns of said spouse forever all right title interest claim and demand which the undersigned might appear to have in and to the above described property exchange of acres in dunlap property for portion of bard property in date zona kenly and decedent exchanged an 80-acre parcel of the dunlap property the 80-acre parcel for acres of property in bard california the 794-acre bard parcel in this triangular exchange phoenix commerce center venture venture bought the 794-acre bard parcel from mr conley and venture exchanged it with zona kenly and decedent for the 80-acre parcel of the dunlap property the sales_price for the 80-acre parcel was dollar_figure according to the warranty deed for the 80-acre parcel the sellers were zona kenly a divorced woman and john kenly a married man dealing with his sole and separate_property according to the grant deed for the 794-acre bard parcel the buyers were zona kenly a divorced woman and john kenly a married man dealing with his sole and separate_property the escrow instructions involved in the exchange of the 80-acre parcel and the 794-acre bard parcel identified the sellers of the 80-acre parcel and the purchasers of the 794-acre bard parcel as zona kenly a divorced woman and john kenly a married man dealing with his sole and separate_property the title insurance_policy covering the 794-acre bard parcel identified the owners of that parcel as zona kenly a divorced woman and john kenly a married man dealing with his sole and separate_property in date petitioner signed a quitclaim_deed to decedent with respect to the 794-acre bard parcel in petitioner signed a quitclaim_deed with respect to the 80-acre parcel in zona kenly and decedent agreed to lease the acre bard parcel to tanimura antle inc tanimura antle from date to date for a total rent of dollar_figure according to the lease agreement the lessors were john kenly and zona kenly dealing with their sole and separate_property purchase of additional parcel of bard property in zona kenly and decedent bought an additional acres of property in bard california the 125-acre bard parcel the 794-acre bard parcel and the 125-acre bard parcel together will be referred to as the bard property for dollar_figure before completing the purchase of the 125-acre bard parcel decedent and zona kenly made a counteroffer to the sellers of that parcel that counteroffer identified the offerors to include john kenly husband of betty kenly dealing with his sole and separate_property and zona kenly a widow according to the terms of that sale the buyers made a downpayment of dollar_figure and gave a promissory note for dollar_figure zona kenly made the downpayment with a check drawn on her checking account in the amount of dollar_figure zona kenly and decedent signed a promissory note for dollar_figure for the balance of the purchase_price the escrow instructions relating to the purchase of the 125-acre bard parcel identified the buyers of the 125-acre bard parcel as decedent and zona kenly stated that zona kenly was a widow and stated that decedent was dealing with his sole and separate_property the sellers of the 125-acre bard parcel by warranty deed conveyed title to that property to john kenly husband of betty kenly as his sole and separate_property and sic zona kenly a widow in petitioner signed and recorded a disclaimer deed with respect to the 125-acre bard parcel that deed referred to petitioner as the undersigned and decedent as the spouse and stated the spouse has acquired title to description of the 125-acre bard parcel the property above-described is the sole and separate_property of the spouse having been purchased with the separate funds of the spouse the undersigned has no past or present right title interest claim or lien of any kind or nature whatsoever in to or against said property this instrument is executed not for the purpose of making a gift to the spouse but solely for the purpose of clearly showing of record that the undersigned has and claims no interest in and to said property now therefore in consideration of the premises the undersigned does hereby disclaim remise release and quitclaim unto the spouse and to the heirs and assigns of said spouse forever all right title interest claim and demand which the undersigned might appear to have in and to the above described property note the parties are cautioned that by completing and executing this document legal rights duties and obligations are created by signing the parties acknowledge that they have been advised to seek and obtain independent legal counsel to all matters contained in the within document prior to signing same and that said parties have obtained advice or choose to proceed without same in zona kenly and decedent executed a new lease agreement with tanimura antle leasing the bard property from date to date for a total rent of dollar_figure according to the lease agreement the lessors were john kenly and zona kenly c o windmill ranch box sandy route kingman arizona dealing with their sole and separate_property decedent’s acquisition of zona’s interest in bard property decedent and zona kenly were partners in the windmill ranch partnership the partnership the partnership managed the bard property and the windmill ranch in date decedent and zona kenly received a proposal to purchase the bard property and the windmill ranch zona kenly did not want to receive cash but instead wanted to receive a substitute property as a result on date by a document titled memorandum agreement of reduction of partnership_interest zona reduced her interest in the partnership to percent in consideration for receiving the windmill ranch the intended results were that decedent would own percent of the bard property and zona would own percent of the windmill ranch according to the warranty deed granting the windmill ranch to zona kenly the grantors were windmill ranch partnership and john kenly husband of betty kenly dealing with his sole and separate_property decedent died before he could complete a sale of the bard property california ancillary probate proceeding decedent died intestate michael hughes was attorney for petitioner in her capacity as personal representative of decedent michael hughes and his father attorney john hughes advised decedent's children rodney kenly and mark kenly that the bard property was community_property in date rodney kenly and mark kenly each renounced any intestate share in decedent's_estate the documents evidencing their renunciation were prepared by michael hughes by letter dated date phillip j krum jr a california attorney advised michael hughes of certain options concerning the disposition of the bard property in pertinent part the letter stated under our corporations code a partnership_interest is classified as personal_property while it is sometimes necessary to probate personal_property belonging to a decedent who was not domiciled in california california will apply the law of the decedent's domicile for purposes of determining intestate_succession accordingly if we take the view that title to the property in bard was really held by the partnership rather than in tenancy-in-common california will apply arizona law as i understand it from our earlier conversation then the decedent’s children would in effect take of decedent’s partnership_interest on the other hand if we can take the position that the property was not at the time of the decedent’s death truly a partnership asset but was held as title reflects by the decedent as tenants-in-common with his mother then california law will apply and if the decedent’s interest is community that interest will pass entirely to the spouse on date petitioner filed a spousal property petition in the superior court of california county of imperial the california court averring that the bard property was community_property the petition also requested the california court to determine that a one-half interest in the bard property passed from decedent to petitioner by intestate_succession and to confirm that the remaining one-half interest was petitioner’s in her own right a hearing was scheduled for date notice of hearing was given to petitioner and to decedent's two sons mark and rodney kenly no notice was given to any of decedent's grandchildren a hearing was held on date no one asked to be heard and no one opposed the petition the petition was granted the judge finding that petitioner was the surviving_spouse and that the described property passes to her the estate_tax_return petitioner included one-half of the value of the bard property in the gross_estate as decedent's interest in that property petitioner then deducted the value of that interest as property passing to decedent's spouse thus none of the value of the bard property was included in decedent's taxable_estate i introduction opinion decedent died intestate on date survived by his wife petitioner two sons and grandchildren decedent possessed an interest in certain california real_property the a full transcript of the hearing is as follows the court john kenly mr krum that matter is ready your honor the court is there anyone who wishes to be heard in the petition of betty kenly to survive under spousal property petition to the property of her husband john kenly mr krum your honor for the record perhaps the court will note that betty kenly is present today as is mark kenly the son the court anyone who wishes to oppose this petition the record will show no appearances everything appears to be in order the petition is granted the court finds that betty kenly is the surviving_spouse and the described property passes to her mr krum thank you your honor bard property at the time of his death we must decide whether at the time of decedent's death the interest in the bard property was decedent’s separate_property or community_property ii relevant law a state law we look to state law to determine property rights 54_tc_633 citing 387_us_456 the realty of a decedent is disposed of in accordance with the laws of the state in which it is located in re herbert’s estate p 2d cal ct app cf cal civ code sec_755 west real_property within this state is governed by the law of this state except where the title is in the united_states the bard property is located in california and consequently we must look to california law to determine how it passed on decedent’s death if the bard property was decedent's separate_property then one-third of his interest in that property passed to petitioner under the intestate_succession law the record is ambiguous as to whether at the time of decedent's death the bard property was owned by the windmill ranch partnership the partnership petitioner clearly believes that the bard property was not owned by the partnership although she has not proposed a finding to that effect at trial respondent's counsel stated that she had no knowledge that the bard property had ever been deeded to the partnership we shall assume without deciding that the bard property was not owned by the partnership of the state of california cal prob code sec_6401 west if the bard property was community_property then petitioner owned one-half of the property in her own right and received the other half pursuant to the california intestate_succession law cal prob code sec west upon the death of a married_person one-half of the community_property belongs to the surviving_spouse and the other half belongs to the decedent cal prob code sec_6401 west as to community_property the intestate share of the surviving_spouse is the one-half of the community_property that belongs to the decedent under section see also in re estates of spear p 2d ariz ct app surviving_spouse owns one-half of the community_property outright and this one- half ownership_interest is not a part of the decedent spouse's estate in relevant part the california probate code sec_28 and c west states that the term community_property means b all property wherever situated and all real_property situated in this state heretofore acquired during the marriage by a married_person while domiciled elsewhere that is community_property under the laws of the place where the acquiring spouse was domiciled at the time of its acquisition c all real_property situated in this state acquired during the marriage by a married_person in exchange for real_property wherever situated that is community_property under the laws of the place where the acquiring spouse was domiciled at the time the property so exchanged was acquired decedent was domiciled in arizona at all times here relevant so that we must look to arizona law to determine the applicable community_property law if the bard property was community_property under the laws of arizona or was acquired in exchange for property that was community_property under the laws of arizona then it is community_property under the laws of california we must ascertain the law of arizona as the highest court of the state would apply it 387_us_456 under arizona law property acquires its character as community or separate_property at the time of its acquisition potthoff v potthoff p 2d ariz ct app bender v bender p 2d ariz ct app myrland v myrland p 2d ariz ct app property received by one spouse as a gift is the separate_property of that spouse ariz rev stat ann sec that ownership does not change except by operation of law or through an agreement between husband and wife potthoff v potthoff p 2d pincite in certain cases the character of a spouse's separate_property may be changed to community_property if the circumstances clearly demonstrate that that spouse intended to effect a change in the status of his separate_property moser v moser p 2d ariz ct app citing beam v bank of america p 2d cal where one spouse exchanges his separate_property for new property the new property remains his separate_property nace v nace p 2d ariz property purchased during marriage with separate_property remains such b the federal estate_tax the federal estate_tax law requires that there shall be included in the value of the gross_estate the value of all property to the extent of the decedent’s interest therein at the time of his death sec_2033 in determining the value of the taxable_estate there is allowed a deduction for the value of any interest in property that is included in the gross_estate and that passes from the decedent to the surviving_spouse sec_2056 one-half of the value of property held in community that being the decedent's interest in the property is includable in a decedent's gross_estate 674_f2d_761 9th cir the surviving spouse's one-half interest in community_property is excluded from the gross_estate see also 62_tc_84 4_tc_125 property passing to the surviving_spouse by intestate_succession qualifies for the deduction provided for in sec_2056 the marital_deduction sec_20_2056_c_-1 estate_tax regs thus if we find that the bard property was decedent’s separate_property the full value of that property is includable in the gross_estate and the marital_deduction equals one-third if we find that the bard property was community_property then only one-half of the value of that property is includable in the gross_estate and the marital_deduction equals that one-half petitioner bears the burden_of_proof rule a iii analysis a introduction the parties agree that decedent’s ownership of the bard property can at least in major part be traced back to decedent’s ownership of an interest in the new mexico ranch we must decide whether the new mexico ranch was community_property or separate_property in decedent's hands at the time he acquired his interest therein if decedent acquired his interest in the new mexico ranch as separate_property we must determine whether on brief petitioner states the evidence shows that the bard ranch property was acquired in exchange for dunlap property in arizona which was exchanged for the new mexico ranch property in new mexico petitioner ignores the fact that acres of the bard property was acquired by purchase petitioner has neither averred nor proposed as a finding of fact that any of the purchase_price of that acres was paid with community funds indeed we have found that a substantial portion of the purchase_price was paid_by decedent’s mother that of course suggests a gift to decedent we assume from petitioner’s failure to plead or propose facts consistent with decedent’s purchase of his interest in the property with community funds that petitioner relies solely on the argument that although not initially community_property decedent’s interest in the acre tract subsequently became community_property if petitioner intends any other argument she has failed either to propose a factual predicate therefor or to state such argument we shall consider only the argument petitioner made it was converted to community_property if the new mexico ranch was not converted to community_property we must determine whether any of the property for which it was exchanged or the 125-acre bard parcel4 was converted to community_property petitioner argues for any alternative that would make the bard property community_property b california ancillary probate proceeding following decedent’s death petitioner filed a spousal property petition in the superior court of california county of imperial the california court averring that the bard property was community_property petitioner also requested the california court to determine that a one-half interest in the bard property passed from decedent to petitioner by intestate_succession and to confirm that the remaining one-half property interest was petitioner’s in her own right the petition was granted the judge finding that petitioner was the surviving_spouse and that the described property passes to her petitioner relies on the determinations of the california court to support her argument that the bard property was community_property respondent argues that the determinations of the california court do not bind this court relying on 387_us_456 we agree with respondent see supra note the lesson of 387_us_456 is that respondent having been absent from the state court_proceeding that established rights to the decedent’s property is entitled to her day in federal court unless she could not there prevail the california court did not explain the basis of its determination sec_5 we do not know whether the california court was determining a question of california law as to community_property or was relying on the unopposed averments made by petitioner that the bard property was community_property therefore we cannot rule out that respondent had she been present in the california court would have prevailed in opposing petitioner’s claim that the bard property was community_property the situation here is not unlike the situation we faced in 54_tc_633 bosch applied state court decision concerning ownership of property of decedent including community_property not determinative on the record before us there is no explanation of how and why the state court reached its decision we conclude that we are not bound by the determinations of the california court and we will not follow those determinations c decedent’s acquisition of an interest in the new mexico ranch decedent acquired an interest in the new mexico ranch when that property was bought and paid for by decedent’s father the see supra note property was granted to decedent and his father as joint_tenants and petitioner was not a grantee decedent paid nothing towards the purchase_price of the property which suggests that he received his interest in the property as a gift from his father petitioner testified that she and decedent worked at the new mexico ranch for five or six summers after the ranch was acquired by decedent and his father she testified that she did not consider that work as liquidating a debt to decedent’s father for decedent’s interest in the property she testified that probably nothing would have happened if she and decedent had not worked at the property petitioner has failed to prove that decedent’s father did not make a gift to decedent and to decedent alone of decedent’s interest in the new mexico ranch section of arizona revised statutes annotated provides all property acquired by either husband or wife during the marriage except that which is acquired by gift devise or descent is the community_property of the husband and wife implicitly property acquired by gift to one spouse alone is the separate_property of that spouse decedent’s interest in the new mexico property was acquired by gift to decedent and for that reason was not upon its acquisition community_property d decedent did not change the character of his interest in the new mexico property or any of the successor properties to community_property decedent’s ownership of the bard property can for the most part be traced through a series of exchanges to his ownership of an interest in the new mexico ranch hereafter the bard property and its predecessors the windmill ranch and the dunlap property but not the new mexico ranch will be referred to as the successor properties we have determined that upon acquisition decedent’s interest in the new mexico ranch was his separate_property under arizona law when one spouse uses separate_property to purchase new property the new property remains separate_property nace v nace p 2d pincite thus unless the character of decedent’s interest in either the new mexico property or any of the successor properties changed to a community interest the bard property was decedent’s separate_property petitioner has failed to show such a change the various deeds and other documents set forth or discussed in our findings_of_fact speak against a change john hughes who represented decedent and petitioner in certain of the transactions here involved testified that decedent had told him that decedent’s interests in the new mexico ranch and dunlap property were community_property on the other hand robert harman a real_estate broker who brokered the exchange of the dunlap property for the bard property and the purchase of the 125-acre bard parcel testified that decedent had told him that his interests in those properties were to be his sole and separate interests petitioner testified that she believed that she had a community interest in the new mexico ranch and the successor properties yet she failed to list the new mexico property in the financial statement filed with the divorce court during the course of the divorce proceeding she initiated moreover she did not object when decedent failed to list that property in the inventory of community_property he filed with the divorce court petitioner testified that she performed bookkeeping and other management services in connection with the operation of the partnership that testimony does not lend support to her argument that the character of the new mexico ranch and the successor properties was changed to community_property the performance of services by one spouse will not standing alone effect a change in character of the other spouse's separate_property myrland v myrland p 2d pincite husband performed services for his wife's business one of the assets of which was the wife's separately owned real_property held husband's performance of services did not change the character of the real_property to community_property horton v horton p ariz fact that husband helped construct a building on the wife's separately owned real_estate does not transmute the building or the real_estate into community_property based on the evidence before us we are unable to conclude that decedent intended to or did change the character of his interest in the new mexico property or any of the successor properties to community_property petitioner has failed to carry her burden of proving such a change we find as an ultimate fact that the bard property was decedent’s separate_property at the time of his death e conclusion the new mexico ranch was decedent's separate_property petitioner has not persuaded us that the character of either that property or the successor properties changed during decedent's lifetime therefore decedent's interest in the bard property was decedent's separate_property on the date of his death and therefore the value of that property is includable in his gross_estate petitioner received a one-third interest in that property under the intestate_succession laws of the state of california and only the value of that one-third interest is deductible in computing the taxable_estate decision will be entered under rule


internal_revenue_service number release date index numbers ------------------ ----------------------------------------- -------------------------------------- --------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc corp b04 plr-139216-07 date date ------------------------------------------------- ------------- --------------------------------------- legend parent ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- state a date date date company official ----------------------------------------------------------------------------- -------------------------------------------------------------------------- tax professional ---------------------------------------------- ---------------------------------------------------------------------------- dear ------------ --------------------------- -------------------------- -------------------- ------------------- ------------- plr-139216-07 this letter responds to a letter dated date submitted on behalf of parent a state a corporation is the common parent of an affiliated_group of an election under sec_1_337_d_-2t c to recognize some or all of a loss upon the parent requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election additional information was submitted in letters dated date and date the extension is being requested in order to allow parent to file a sec_1_337_d_-2t c statement under sec_1_337_d_-2t c of the income_tax regulations the election to recognize some or all of a loss upon the disposition of stock of a subsidiary the election was required to be filed with parent’s consolidated federal_income_tax return for the taxable_year ended date which was filed on date the material information submitted for consideration is summarized below corporations filing a consolidated federal_income_tax return on a calendar_year basis sub was included on parent’s consolidated_return for the taxable_year ended date on date which is in the taxable_year ended date parent’s investment in sub became entirely worthless disposition of the stock of a subsidiary was required to be filed with or as part of parent’s income_tax return for the year of its disposition however for various reasons the election was not filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file a valid election the period of limitations on assessment under sec_6501 of the internal_revenue_code has not expired for the taxable_year for which the election should have been field or for any subsequent taxable_year recognized by a member of a consolidated_group with respect to the disposition of stock of a subsidiary gain_or_loss is recognized in whole or in part stock of a subsidiary only if a separate statement entitled sec_1_337_d_-2t c statement is included with the return in accordance with sec_1_337_d_-2t c 2t a to the extent the taxpayer establishes that the loss is not attributable to the recognition of built-in_gain on the disposition of an asset including stock and securities 2t c must be included with or as part of the taxpayer's return for the year of the disposition sec_1_337_d_-2t c provides that the statement required under sec_1 d - sec_1_337_d_-2t a provides that a disposition means any event in which sec_1_337_d_-2t c provides that sec_1_337_d_-2t c applies with respect to sec_1_337_d_-2t c provides that loss is not disallowed under sec_1 d - sec_1_337_d_-2t a provides that no deduction is allowed for any loss plr-139216-07 in general sec_1_337_d_-2t applies with respect to dispositions and deconsolidations after date and before date if loss is recognized because stock of a subsidiary becomes worthless the disposition with respect to the stock is treated as occurring on the date the stock became worthless sec_1 d - 2t g under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i section sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when it is established that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_337_d_-2t c therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes that it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the government will not be prejudiced if relief is granted see sec_301 b v based on the facts and information submitted including the affidavits submitted and the representations that have been made we conclude that parent has shown that it acted reasonably and in good_faith in failing to timely file the election that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government accordingly an extension of time is plr-139216-07 granted under sec_301_9100-3 until days from the date on this letter for parent to file the election the election statement should be entitled sec_1_337_d_-2t c statement and must include all the material specified by sec_1_337_d_-2t c the election is to be filed with the director who has jurisdiction over parent’s return within the time period specified above the above extension of time is conditioned on parent's consolidated group's tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been made timely taking into account the time_value_of_money no opinion is expressed as to parent's consolidated group's tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' tax_liability is lower sec_301_9100-3 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion as to whether or when sub’s stock did become worthless in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain information and affidavits provided by parent company official and tax professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-139216-07 being sent to your authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely _ken cohen___________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc