internal_revenue_service number release date index number -------------------------------------- ----------------------------- ------------------------------ -------------------------------- - 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 psi b01 plr-125380-06 date september ----------------------------- legend legend x ---------------------------------- state -------- d1 --------------------- dear ---------------- this responds to the letter dated date submitted on behalf of x requesting relief under ' b of the internal_revenue_code facts according to the information submitted x was incorporated on d1 under the laws of state the shareholder of x intended that x be treated as an s_corporation effective on d1 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under ' b however if an s election is made after the first two and one-half months of plr-125380-06 a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no ' a election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and ' b shall not apply x did not timely file an election to be treated as an s_corporation under ' a x has however established reasonable_cause for not making a timely s election and is entitled to relief under ' b conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely dianna k miosi chief branch office of associate chief_counsel passthroughs and special industries


t c memo united_states tax_court michael j rozzano jr and rose marie rozzano petitioners v commissioner of internal revenue respondent docket no filed date paul a nidich for petitioners terry serena for respondent memorandum findings_of_fact and opinion goldberg special_trial_judge respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure for taxable_year and dollar_figure for taxable_year unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioners’ ongoing horse-boarding activity was a bona_fide business activity within the meaning of sec_183 during the taxable years in issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference petitioners resided in loveland ohio on the date the petition was filed in this case history of petitioners’ horse-boarding activity petitioners purchased a tract of land in clermont county ohio in date for dollar_figure at the time of purchase the property contained one barn one indoor horse arena pastures and a residence petitioners purchased the property to provide their family including their two adult children with ample land and a home where they all could live and enjoy their shared love of horses at the time of the purchase petitioners’ adult daughter was involved in the horse industry in memphis tennessee shortly after acquiring the property petitioners purchased at least one horse and petitioner wife mrs rozzano engaged in a remodeling of the residence petitioners maintained the property as their primary residence between and in petitioner husband mr rozzano was hired to be the president of armour swift eckridge inc a publicly_held_corporation mr rozzano’s new position required that he relocate to chicago illinois which was approximately hours from their residence at this time petitioners decided that instead of selling the property which they had dubbed sugar tree farm sugar tree they would try to operate a horse- boarding business between and mr rozzano changed jobs at least twice as he was hired in to be the executive vice president and sales manager for thorn apple valley inc and in he was hired to be the senior vice president and general manager of plumrose u s a during petitioners resided approximately hours away from sugar tree in west bloomfield michigan while mr rozzano worked at thorn apple valley inc after relocating to chicago in petitioners began their horse-boarding activity this activity made use of the stalls housed in the barn at sugar tree an indoor arena and the adjacent fields because petitioners resided more than miles from sugar tree they employed at least one person to look after the property and run the day-to-day operations taking place there between and when sugar tree was sold petitioners rented a great number of the available stalls for horse- boarding typically between percent and percent of the stalls were rented at any given time during the taxable years in issue petitioners charged in the range of dollar_figure per month for each horse boarded at sugar tree in addition to the boarded horses petitioners kept their own horse and pony in the stables however the last time that petitioners rode either horse was in mr rozzano applied his extensive business knowledge and experience to the activity at sugar tree using various computer_software programs he compiled spreadsheets and projected budgets for the activity he also performed most of the major upkeep on sugar tree including mowing the fields mending horse fences mucking stalls and also feeding horses on those days that he was present at sugar tree according to mr rozzano during the time that petitioners lived away from sugar tree which was approximately percent of the time of and some small part of he would wake up each saturday morning drive approximately 5-plus hours from west bloomfield michigan to sugar tree loveland ohio spend to hours each day of the weekend mowing mucking and mending and then get back in his car late sunday afternoon and drive hours back to west bloomfield mr rozzano testified that he made this trip every weekend and holiday until they temporarily moved back to reside full time at sugar tree sometime in between and petitioners reported the following amounts of income and expenses from their activities at sugar tree on their schedules c profit or loss from business gross_receipts expenses net profit loss dollar_figure dollar_figure big_number big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number gross_receipts expenses net profit loss dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number during the taxable years in issue petitioners reported income on their federal_income_tax returns as follows dollar_figure wages salaries tips dollar_figure taxable interest dollar_figure dollar_figure dollar_figure dollar_figure tax-exempt_interest ordinary dividends dollar_figure dollar_figure taxable refunds dollar_figure dollar_figure business income or loss big_number big_number capital_gain or loss big_number big_number rollover pensions and annuities rollover total dollar_figure dollar_figure during the taxable years in issue petitioners claimed the following business_expense sec_1 on their schedules c advertising car and truck expenses insurance interest office expenses dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number these figures have been rounded to the nearest dollar big_number big_number big_number big_number big_number big_number repairs and maintenance supplies taxes and licenses travel meals utilities wages other expenses veterinarian dollar_figure groundskeeping big_number farrier big_number hay and feed big_number bedding total big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cash expenses before depreciation big_number depreciation total expenses big_number big_number big_number big_number big_number substantiation of these figures is not in dispute during and petitioners received the following monthly income from the number of horses boarded as shown below month income horses month income horses january dollar_figure dollar_figure january february dollar_figure dollar_figure february march dollar_figure march dollar_figure april dollar_figure april dollar_figure dollar_figure may dollar_figure may june2 -------- -- june dollar_figure july dollar_figure july dollar_figure august dollar_figure august dollar_figure september dollar_figure september dollar_figure october dollar_figure dollar_figure october november dollar_figure november dollar_figure december dollar_figure december dollar_figure figures for date were not included in the record after sustaining yearly losses in the early years of operations petitioners were somewhat but not overly concerned with the losses_incurred because they thought that they could get a handle on the expenses and get them under control but as time went on it became evident to petitioners that there were too many contingencies that were beyond their control which caused their losses to be greater than they ever expected petitioners attempted to forecast a profit or at least a break- even point by utilizing both detailed operating statements and projected budgets which modified their business plan however they were unable to reach a break-even point even after following their carefully modified business plan factors contributing to their inability to keep to plan included a variance in hay costs fluctuating upon the number of horses and unpredictable conditions whereby petitioners were unable to grow an adequate amount of hay on their pastures this resulted in the purchase of additional hay moreover a leaky roof in one of the years at issue resulted in a loss of a large portion of their hay reserves petitioners provided full care and all of the services required of the horses boarded at sugar tree in particular the indoor arena provided a benefit to their boarders in the winter as the horses could be ridden indoors in petitioners arrived at the conclusion that their horse-boarding activity would never be profitable irrespective of their years of detailed business analyses and budget projections sometime in petitioners decided to sell sugar tree as an ongoing business by doing so petitioners had to maintain the property and the boarding activity to show it to prospective buyers as an ongoing business petitioners began to share their intent to sell with colleagues in the horse-boarding and breeding business in the area after listing the property in for dollar_figure and placing advertisements in at least one national horse breeding periodical petitioners sold the farm in for dollar_figure respondent mailed to petitioners on date a notice_of_deficiency for taxable years and at the time of the filing of the petition and pursuant to rule petitioners requested that the case be conducted as a small_tax_case before the trial however petitioners’ attorney requested pursuant to rule c an order directing that the small case designation be removed respondent raised no objection to petitioners’ request and filed an answer on date the trial date respondent also requested in his answer that the deficiencies for taxable years and be increased to dollar_figure and dollar_figure respectively the increased deficiencies are a result of respondent’s misapplication of the provisions of sec_183 to the excess of loss reported minus income in the notice_of_deficiency respondent computed the deficiencies by recatagorizing the excess losses as deductible unreimbursed business_expenses on petitioners’ schedules a itemized_deductions opinion in this case we are asked to decide whether petitioners’ continuing horse-boarding activity was a bona_fide business activity within the meaning of sec_183 near the end of its operation in order to arrive at a decision our inquiry cannot separate the taxable years before us from the earlier years of petitioners’ business operations accordingly we must consider not only petitioners’ horse-boarding activities in these taxable years but also their activities in prior years to construct an accurate picture of petitioners’ total business activity horse-boarding activity the parties disagree as to whether petitioners engaged in their schedule c activity with an objective of making a profit within the meaning of sec_183 during the taxable years in issue in addition petitioners disagree with respondent’ sec_3 when the case was called for trial the parties offered into evidence exhibit 14-j a document showing that respondent conducted an examination of petitioners’ federal_income_tax return and the results of the audit respondent objected on the grounds of a lack of foundation hearsay and that petitioners sought to introduce this evidence for estoppel the court continued request for an increase in the deficiencies in the event that we sustain respondent in this matter sec_183 disallows deductions attributable to an activity_not_engaged_in_for_profit sec_183 provides two exceptions to this general_rule the first provided by sec_183 permits deductions that otherwise would be allowable without regard to whether the activity is engaged in for profit the second provided by sec_183 permits deductions that would be allowable only if the activity were engaged in for profit to the extent that the gross_income from the activity exceeds the deductions allowable pursuant to sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 in general the commissioner’s determination set forth in the notice_of_deficiency is presumed correct rule a 290_us_111 in certain circumstance sec_3 continued overruled respondent’s objection and admitted exhibit 14-j into evidence together with the stipulation the court instructed respondent that it would not bar him from maintaining a different position with respect to the taxable years at issue in the present case the court informed the parties that it would weigh this piece of evidence in the light of the entire record in the case we recognize the implication of this documentation is that respondent allowed_depreciation on assets held for use in petitioners’ horse-boarding activities in taxable_year the burden_of_proof shifts to respondent sec_7491 rule a because the issue in this case is a legal one we reach our decision without regard to the burden_of_proof however petitioners contend that sec_7491 and rule a are applicable with respect to the increases in the deficiencies pleaded in respondent’s answer they are correct on this point in deciding whether petitioners’ horse-boarding activity was engaged in for profit during the taxable years at issue we must inquire whether petitioners had an actual and honest objective of making a profit from the activity 78_tc_642 affd without opinion 702_f2d_1205 d c cir the taxpayers’ expectation need not be a reasonable one id pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs whether there is present an actual and honest objective of making a profit is a question of fact that is to be resolved upon a consideration of all relevant circumstances with the greatest weight being given to the objective factors rather than the taxpayers’ expression of their intent dreicer v commissioner supra pincite golanty v commissioner supra pincite sec_1_183-2 and b income_tax regs sec_1_183-2 income_tax regs lists these relevant factors that we now consider the manner in which the taxpayers carry on the activity the expertise of the taxpayers or their advisers the time and effort expended by the taxpayers in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayers in carrying on similar or dissimilar activities the taxpayers’ history of income or loss with respect to the activity the amount of occasional profits the financial status of the taxpayers and whether elements of pleasure or recreation are involved golanty v commissioner supra pincite sec_1_183-2 income_tax regs based on our consideration of these factors and in the light of the detailed record in this case we conclude that petitioners’ horse-boarding activity was carried on as a business within the meaning of sec_162 and sec_183 during the taxable years at issue in reaching this conclusion we view the following facts and circumstances as most persuasive manner in which taxpayers carried on the activity respondent contends that the manner in which petitioners conducted their horse-boarding activity does not indicate that the activity was engaged in for profit during the years in issue the relevant inquiries before us include whether petitioners conducted their business in a manner similar to other comparable businesses whether petitioners maintained complete and accurate books_and_records and whether changes were attempted to improve profitability see 72_tc_659 sec_1_183-2 income_tax regs as to their manner of conduct during the taxable years in issue petitioners for the most part rented more than one-half of the available stalls in their barn petitioners provided detailed monthly boarding records for and which list each horse and the expenses_incurred from the inception of their activities in through the years in issue petitioners also maintained extensive and separate accountings for all of their horse-boarding income and expenses using a software program tailored to small farm operators based on these facts we are satisfied that petitioners’ maintenance of complete and accurate records in this case supports a profit objective see 90_tc_960 affd without published opinion 899_f2d_18 9th cir sec_1_183-2 income_tax regs as to petitioners’ other business practices although petitioners made no great effort to advertise their boarding service to the general_public we do not find their lack of advertising indicative of an absence of profit_motive as their word-of-mouth approach in attracting clientele was clearly successful as they had at one point during the years in issue percent of their stalls rented notably however despite the significant stall rental statistics and petitioners’ thorough accounting methods we cannot overlook mr rozzano’s refreshingly candid testimony at trial that he came to realize sometime in that petitioners would neither earn a profit nor reach a break-even point if they held to their existing boarding fees nor could they raise boarding fees or hire additional help in order to become profitable mr rozzano reached this conclusion after he analyzed all factors necessary to attempt to make the business more profitable in fact after his analysis he calculated that these measures ie raising boarding fees and hiring additional help would likely increase his operating costs taking into account the scope of the services provided to the boarders moreover it was likely that the terms of the contracts then existing with the boarders meant that any modification to the monthly rental agreements would have placed petitioners in breach of contract mr rozzzano then did what any prudent business person would do attempt to lessen expenses until the business including the property could be sold petitioners’ rental fees remained unchanged after mr rozzano decided to sell sugar tree a decision made sometime in notably petitioners still kept meticulous business records and used word-of-mouth to advertise their boarding services during the years in which they were continuing the boarding activities while at the same time preparing the property for sale mr rozzano also testified that it was primarily the cost associated with hay feed that caused their business to experience ongoing losses we note that for and hay and feed expenses accounted for percent and percent respectively of all cash expenses before depreciation to this end petitioners devised a strategy to ensure that their hay supply costs could be mitigated so as to reduce losses and accord with their budget projections petitioners took steps to ensure that the hay would remain dry and free from infestation and that their helper would not waste it unnecessarily petitioners also took steps in and to reduce other operating_expenses such as travel meals and utilities these costs did in fact decrease from to although petitioners did make efforts to reduce their hay expenses by protecting their supply an increase in the number of boarders in coupled with an increase in the wholesale price of the feed resulted in an increase in hay costs while we recognize that efforts to improve profitability can be indicative of whether petitioners intended to realize a profit we do not find their refusal to raise stall rental prices or hire additional help especially in the light of their existing contracts of their decision to sell sugar tree and of their efforts to reduce hay and other costs dispositive on the issue of their profit_motive it is beyond this court’s purview to second-guess petitioners’ business judgment or the manner of operations of their business we decline to do so in this case we are presented with taxpayers who admit that during they became aware that they could not make a profit but yet still continued business operations while taking steps to mitigate their expenses until the business and property could be sold accordingly we now address whether petitioners’ admission at trial should trump the other facts and circumstances of this case while we cannot disregard mr rozzano’s admission that at some point in he realized that his hopes of turning the boarding activities into a profitable business were unattainable we do not find that as of that moment petitioners’ activities ceased to be a bona_fide business within the meaning of sec_183 moreover our decision comports with this court’s holding in dreicer where greater weight must be afforded to the consideration of all of the facts and circumstances in this case the facts and circumstances surrounding petitioners’ actions between the time of their realization with respect to profitability in and the ultimate disposal of the property in show that they continued to conduct their horse-boarding activities in a businesslike manner even after petitioners’ realization with respect to the profitability of their horse-boarding activities their actions illustrate steps taken to mitigate costs and to try to achieve at least a break-even point until the business could be sold first petitioners held contracts for stall rentals which they did not change nor could they change for fear of being in breach second petitioners made active attempts to reduce hay and feed costs third petitioners continued to rent stalls maintain their ongoing operations and even moved back to the property on a full-time basis in finally and perhaps most significantly the amount of operating costs borne by petitioners comprised a large share of their wage income in the years at issue petitioners had wages of dollar_figure in and dollar_figure in and reported net out-of-pocket expenses in those years from sugar tree of dollar_figure and dollar_figure respectfully these net out-of-pocket expenditures were percent and percent of petitioners’ wages in and respectfully we cannot conclude based on the entirety of the foregoing that their activities turned from business into hobby overnight in based upon mr rozzano’s admission at trial for gross_income of dollar_figure less cash expenses before depreciation of dollar_figure for gross_income of dollar_figure less cost of expenses before depreciation of dollar_figure expertise of and effort expended by the taxpayers respondent does not challenge either petitioners’ expertise or the time and effort expended on the activity at issue we believe that petitioners have established through credible testimony that they not only were well possessed of the knowledge necessary to operate a horse-boarding business but that mr rozzano contributed vast amounts of time to the operations at sugar tree first petitioners were well aware from their experience as horse owners of the requirements for boarding horses before they commenced activity at sugar tree second horse-boarding unlike other horse-related endeavors such as breeding and training while it entails risk to be sure is rather simple in its day-to-day execution horses are taken out to pasture turned out fed returned to stables to rest taken out again fed again and retired to their stables there is nothing in the record that suggests that petitioners were not well versed and extremely competent in these practices finally although we suspect that mr rozzano’s testimony that he spent every weekend and holiday for years performing upkeep at sugar tree may be an overstatement we find him a credible and forthright witness overall and moreover we believe that he performed most if not all of the major upkeep projects on sugar tree himself therefore we believe that the expertise of and time and effort expended by petitioners support a finding that the activity was engaged in for profit expectation that assets would appreciate petitioners argue that the increase in the value of sugar tree and the efforts they expended and expenses they incurred in upkeep of the property support a conclusion that the horse- boarding activity was engaged in for profit we disagree on the issue of whether appreciation of land supports petitioners’ profit intent the relevant inquiry is whether the holding of the land for appreciation and the conducting of the horse-boarding constitute a single activity or separate activities sec_1 d income_tax regs determining whether the two undertakings are a single activity requires the examination of all of the facts of the case the most significant facts being those that show the degree of organizational and economic interrelationship of the undertakings id in this case petitioners primarily purchased the land for personal enjoyment and not to engage in a business therefore they had no bona_fide intention at the time of purchase to realize a profit that could offset later operating losses as they had not yet contemplated any business using the property only subsequent to the purchase did petitioners use the property in their horse-boarding activities moreover we note that the variable costs of petitioners’ horse-boarding activities including fees veterinarian care etc exceeded the gross_income produced by the activities with the result that the horse-boarding activities do not meet the test imposed under the regulation pertaining whether such activities will be integrated see sec_1_183-1 income_tax regs accordingly we believe in this case that their holding the property for appreciation and horse-boarding are separate activities see sec_1_183-2 income_tax regs 72_tc_659 72_tc_28 irrespective of this conclusion however we do not believe that petitioners’ inability to argue the appreciation of their land is ultimately determinate on the issue of whether the horse-boarding activity was engaged in for profit financial status of the taxpayers the fact that petitioners have substantial income from sources other than the activity at issue may indicate that the activity was not engaged in for profit cf engdahl v commissioner respondent argues that mr rozzano’s income from his job in executive management was sufficient to absorb the expenses in operating sugar tree indicating that it was not operated for profit we disagree as previously stated these out-of-pocket expenditures were percent and percent of petitioners’ wages in and respectively we are not persuaded that petitioners were able to absorb easily the losses attributable to the activity at sugar tree during these years as previously stated the income reported by petitioners on their tax returns for the years in controversy does not in our opinion demonstrate that the losses_incurred by petitioners were offset either by petitioners’ income in those years or excessive_depreciation deductions claimed by them moreover whatever income petitioners may have had during the years in issue is secondary to the primary inquiry as to whether or not petitioners engaged in the activity with a genuine intent to profit from it we note that petitioners had no other income in the years at issue apart from mr rozzano’s work and a 3-week holiday job taken by mrs rozzano at the gap inc by both of petitioners’ adult children had left the familial home and so the physical work and personal efforts expended by petitioners were not being done for the immediate benefit of their children we believe it unlikely given the distance petitioners regularly traveled to and from sugar tree the liability risk inherent to their activity and the nature and extent of the physical labor which they performed while at sugar tree that petitioners would maintain a hobby costing thousands of dollars and entailing much physical labor elements of pleasure recreation respondent argues that not only are mr rozzano’s claims regarding his involvement with the work done at sugar tree improbable but that regardless of the amount of effort petitioners put into the activity elements of pleasure should trump any consideration that the activity was a business we disagree until sometime in petitioners resided at least hours away from sugar tree this distance required petitioners to travel between their home and sugar tree on weekends and holidays we believe based on their credible testimony at trial that once at sugar tree petitioners did perform a significant amount if not all of the major upkeep on the property furthermore petitioners did not ride either of their horses for pleasure after we do not find that the pleasure that petitioners may have experienced through their ownership of sugar tree should trump a finding that the horse- boarding activity was operated for profit see 59_tc_312 possibly the only elements of pleasure taken by petitioners were either when watching their own horses frolic in the pasture or in the mere fact that they could attest to owning a horse farm near lexington kentucky therefore on the basis of all of the evidence in the record of this case the circumstances of which are unique we conclude and hold that petitioners conducted their horse-boarding activity in the years in issue as a bona_fide business within the meaning of sec_183 accordingly decision will be entered for petitioners


t c summary opinion united_states tax_court ruben a villa-ignacio and zenaida a villa-ignacio petitioners commissioner of internal revenue respondent v docket no 3340-13s filed date ruben a villa-ignacio and zenaida a villa-ignacio pro sese matthew m johnson and gorica b djuraskovic for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for after a concession by petitioners the issue for decision is whether they are liable for a deficiency attributable principally to an erroneous refund we hold that they are background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and the accompanying exhibits petitioners resided in the state of illinois at the time that the petition was filed with the court in petitioners received gross social_security_benefits of dollar_figure which they correctly reported on line 20a of their form_1040 u s unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure petitioners concede that they failed to report on their return dividend income of dollar_figure from exxon-mobil corp dollar_figure from general electric co and dollar_figure from mcdonald’s corp but see infra note individual_income_tax_return petitioners also correctly reported the taxable_amount of those benefits dollar_figure on line 20b on their return in manually processing petitioners’ return respondent made a transcription error in entering the amount of petitioners’ gross social_security_benefits from line 20a thus instead of the amount that petitioners had correctly reported dollar_figure respondent mistakenly entered dollar_figure a dollar_figure error this data entry error in turn caused respondent to recalculate pursuant to the formula prescribed by sec_86 the taxable_amount of petitioners’ social_security_benefits on line 20b from the amount reported by petitioners dollar_figure to dollar_figure this then served to decrease the amounts of petitioners’ adjusted_gross_income taxable_income and total_tax respondent’s recalculation of petitioners’ total_tax also served to increase the amount of the overpayment they had claimed on their return as well as to increase the amount of the refund that they subsequently received sometime thereafter respondent concluded that petitioners had correctly reported both the gross amount and the taxable_portion of their social_security_benefits and that respondent had erred in recalculating their tax as to in processing the return respondent also increased the amount of petitioners’ overpayment and refund by dollar_figure for a making_work_pay_credit that they had neglected to claim on their return those benefits accordingly by notice_of_deficiency respondent determined a deficiency in petitioners’ income_tax for based principally on the erroneous refund petitioners responded by timely filing a petition for redetermination with this court discussion5 the parties agree that petitioners correctly reported both the gross amount and the taxable_portion of their social_security_benefits on their tax_return the parties further agree that petitioners received a refund in an amount larger than that to which they were entitled because respondent recalculated their tax after making a data entry error nevertheless petitioners contend that they should not be liable for the portion of the deficiency attributable to the erroneous refund because such portion is not attributable to any error that they made on their return as will be explained below the refund at issue in this case is actually a rebate of tax initially paid_by petitioners and erroneously determined by respondent not to have been due in the case of such a rebate refund discussed infra the law is well settled that the making of an erroneous refund does not the notice_of_deficiency also determined that petitioners had underreported their dividend income by dollar_figure see supra note the relevant facts are not in dispute accordingly we decide the disputed issue without regard to the burden_of_proof preclude the commissioner from issuing a notice_of_deficiency to recover such refund see 757_f2d_1157 11th cir 733_f2d_435 6th cir aff’g tcmemo_1982_735 526_f2d_1 9th cir aff’g tcmemo_1974_ the law underlying this conclusion is sec_6211 which defines the term deficiency as relevant herein sec_6211 defines a deficiency in tax as the difference between the amount if any by which the tax imposed by law exceeds the tax shown by the taxpayer on the taxpayer’s return less the amount of any rebate made to the taxpayer the definition may be expressed by the following equation deficiency tax imposed tax reported rebate which is mathematically the same as deficiency tax imposed tax reported rebate as relevant herein the term rebate is defined by the statute to mean so much of an abatement credit refund or other repayment as was made on the ground that the tax imposed by law was less than the amount shown on the return sec_6211 a rebate refund is made because of a substantive recalculation by the commissioner ie on the ground that the tax due is less than the amount shown by the taxpayer on the taxpayer’s return see sec_6211 b acme steel co v commissioner tcmemo_2003_118 wl clayton v commissioner tcmemo_1997_327 aff’d per curiam without published opinion 181_f3d_79 1st cir sec_301_6211-1 proced admin regs and the example therein see also 383_f3d_656 7th cir a deficiency can arise as a result of a determination that the rebate was in error not all refunds are rebates an erroneous nonrebate refund is recoverable only through a civil_action brought in the name of the united_states or under administrative procedures if those are available see sec_7405 63_f3d_83 1st cir clayton v commissioner tcmemo_1997_327 aff’d per curiam without published opinion 181_f3d_79 1st cir examples of nonrebate refunds are refunds issued because the commissioner credited a taxpayer’s payment twice or the commissioner applied a payment to the wrong tax_year acme steel co v commissioner tcmemo_2003_118 wl at as illustrative of the types of such accounting errors that give rise to nonrebate refunds see 63_f3d_83 wrong tax_year and 49_f3d_340 7th cir payment credited twice another example of a nonrebate refund is one issued to an unauthorized recipient 112_tc_103 tentative refunds paid to the former common parent of an affiliated_group were paid to the wrong taxpayer accordingly the refunds were nonrebate refunds that were not recoverable from the successor common parent through the deficiency procedures in short nonrebate refunds bear no relation to a recalculation of tax_liability acme steel co v commissioner wl at in the instant case the refund was a rebate refund because respondent recalculated petitioners’ tax_liability in consequence of the conclusion albeit erroneous that they had overstated their social_security_benefits see thomas v commissioner tcmemo_2014_118 categorizing a refund as a rebate refund in a factually similar case involving social_security_benefits in other words the refund was a rebate refund because of respondent’s admittedly erroneous conclusion that the amount of tax due is less than the tax_shown_on_the_return see acme steel co v commissioner wl at or as we stated in lesinski v commissioner tcmemo_1997_234 wl at a refund is a rebate refund if it is related to the recalculation of the taxpayers’ tax_liability petitioners received a rebate refund of dollar_figure the portion of that rebate refund attributable to the omitted making_work_pay_credit of dollar_figure was correct the dollar_figure based on the erroneous recalculation of tax_liability in respect of of the dollar_figure discrepancy in gross social_security_benefit sec_85 was properly taxable at the marginal_rate applicable to petitioners’ return thus resulting in a recalculated tax_liability of dollar_figure petitioners’ social_security_benefits was not correct and for the reasons explained above constituted a deficiency although the court can appreciate petitioners’ frustration in having to repay the erroneous refund paid in respect of what respondent concedes was their proper reporting of social_security_benefits the fact remains that on the record herein there is no legal basis on which respondent may be estopped from seeking to recover such refund see 90_tc_684 86_tc_157 see also 381_us_68 77_tc_765 in sum petitioners are liable for the tax that the law imposes on their income and they may not obtain a windfall because of respondent’s mistake the additional dollar_figure of the deficiency is attributable to the admittedly unreported dividends making a total deficiency of dollar_figure however the record suggests that such portion of the deficiency may have been determined without regard to the maximum rate prescribed by sec_1 as applicable to qualified dividends see sec_1 for this reason a recomputation of the overall deficiency may be required we do not decide nor do we have jurisdiction to decide in the instant case whether any interest accruing on the deficiency attributable to the erroneous rebate refund should be abated pursuant to sec_6404 mandating the abatement of interest under prescribed conditions with respect to erroneous refund checks accordingly the court holds that petitioners are liable for the deficiency attributable to the erroneous refund thomas v commissioner tcmemo_2014_ to reflect our disposition of the disputed issue as well as petitioners’ concession subject_to the possible modification mentioned supra note decision will be entered under rule


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n all tax years identification_number form required to be filed employer_identification_number contact person contact number number release date date date uil dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in 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 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 file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty 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 if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action 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 if you have any questions about your federal_income_tax status and responsibilities please contact irs customer service at information_letter or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter information_letter department of the treasury internal_revenue_service washington d c identification_number co employer_identification_number contact number date date uil legend b c d e l m dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below you were incorporated in the your letter from the department of assessments and taxation charter division indicates that you are ted as a non-stock ordinary business your stated purposes as represented in your form_1023 application are as follows i the settling of debt for individuals who are being sued and or harassed by creditors ii the negotiating of payment arrangements for individuals burdened by debts exceeding their ability to pay iii the providing of counseling for debtors and creditors that may prevent loss of wages by garnishments and in some cases loss of employment that would otherwise increase the public burden iv the providing of education to individuals suffering financial hardship caused by debt and finally v the enabling of individuals through education the ability to recover from debt by responsible budgeting and proper handling of credit information you provided indicates that your primary activity in furtherance of your purposes consists of the sale of debt settlement and debt negotiation services to the general_public you provide these services on behalf of individuals who owe money to creditors and the creditors have initiated legal actions to collect the money owed them your current staff consists of b c d and e in your form_1023 application you indicated that b c and d are the sole members of your board_of director ave represented that b’s salary is and that c and d are receiving a salary of each you have not indicated the of salary paid to e you represented that b mpleted a credit counselor course that granted him a certificate of completion you provided no evidence that the other staff members have completed such a course you also represented in exhibit-8 that b is a u s government certified credit counselor you have not submitted any substantiation for this claim you further stated in your letter dated that c d and e are each responsible for marketing customer service and ne your sole source of revenue is an up-front dollar_figure fee charged to individuals who purchase your services in your letter dated you made the following statement regarding your fee the fee of dollar_figure the experience of and input of b it is based in part on a percentage of s experiencing financial hardship that are willing and have the ability to pay a nominal fee for help in b’s experience with for-profit organizations a similar level of work is performed for amounts exceeding dollar_figure to the applicant’s knowledge and belief there are very few if any commerci ses that render the kind of charitable and educational_services applicant proposes to provide free of charge to the public information you provided in your le attached as exhibit -5 indicated that if clients do not pay the dollar_figure t your representation in that letter you stated the following you ind that you cannot afford to make payments at this time due to lack of employment be advised that a judgment is good for several years depending on the state in which you live please retain this letter so that when you return to work you may call us for help in resolving this matter prior to the creditor filing for a wage attachment you indicated in your letter dated that once you get consent usually with a telephone call you send the clie ms the first items are a welcome letter attached-exhibit sec_2 2-a requesting documentation of indebtedness and a brief narrative of ‘how it works ’ this includes notices from the court stating that a creditor or creditors are suing the client the next item is a limited power_of_attorney attached-exhibit that the client signs and returns conveying authority to applicant to contact the creditor or creditors on the client’s behalf the final item is a financial statement attached-exhibit that is required by most attorneys representing creditors assessing the clients financial hardship the limited power_of_attorney states that you have the authorization to represent the client with respect to the following matters the preparation and execution of correspondence to and receipt of correspondence from creditors and anyone holding or having an interest in debt obligations of mine ours or relating in any way to such credit obligations the negotiation settlement and clarification of any amount owed by me us to any creditors to represent me us as attorney- in-fact with regard to any matter within the scope of the services set forth in the agreement entered into on this date between me us and l including and limited to negotiations for no other matter you stated that during your telephone conversation with clients you make inquiry as to his her employment or retirement status and whether they are disabled or on assistance you further stated that you ask the following whether or not there are other creditors seeking judgment against them if it is determined that the respondent will pay the fee for service then the cost of service is stated as dollar_figure and arrangements are made to have payment sent by money order or taken over the p ith a check -draft applicant then instructs the client to have no further contact or conversations with the creditor to relax and allow the process to work on their behalf after the client returns the previously mentioned items you stated that an evaluation is performed based on the level of debt and the client’s ability to pay and a proposal is drafted and forwarded by fax and u s postal service to the creditors representative attorney if a response is not obtained within ten days a follow-up phone call is made to the respective attorney to ascertain whether or not the proposal is satisfactory or if adjustments are necessary if and when the representing attorney agrees to settle the debt for the proposed sum or payment plan the client is forwarded an agreement for signature you advertise the availability of your services to the general_public through direct mail letters sent to potential clients in your letter dated you stated the following with regard to the purchase of leads the list of potenti clients is obtained from public records l employs the services of m in your letter dated you indicated that there are approximately individual letters per day th also made the following statement during the course of any given week l receives about telephone calls from individuals being sued by a creditor on average people per week pay a small fee to negotiate or settle the debt in question moreover in your letter dated you made the following statement regarding potential clients multitudes of to us with credit card debt that started in the to range that has inflated to the range becaus t a on costs you further stated the uals you target your services to other groups of individuals are those who have revolving credit or installment agreements that have been charged off hospitals collecting for services landlords suing for back rents or damages that exceeded security deposit lease and sales companies suing for repossessions of automobiles and equipment and employers suing current and former employees are all types of individuals utilizing applicant’s services you have provided copies of two volumes containing exhibits of information to be used in the conduct of your operations the information covered in volume one exhibits included a statement of revenue and expenses the names of fee based clients monthly sample of client contacts initial contact documents and educational materials the educational materials consist of a page on building your savings a page on choosing a credit card a page on consolidation loans pages on consume credit law a page on consumer’s resource handbook a page on credit bureaus and credit reports a page on credit rejection a page on credit repair and credit clinics a page on dealing with creditors pages on definition of terms when buying a home a page on establishing and reestablishing credit pages on fair credit reporting a page on mortgage foreclosure a page on negotiating with creditors pages on tax time-get organized pages on techniques for successful budgeting a page on tips to prevent credit card fraud a page on top ten purchase mistakes and pages on when the income decreases but the bills don’t you have provided no evidence that these materials have been shared and discussed with clients we note that you have a no contact policy with clients after they pay for the settlement the information covered in volume two exhibits included counselor reference material obtained from certified credit counselor course certified credit counselor course materials certificate of completion and settlement agreements from plaintiff’s attorney you also submitted a textbook titled credit when credit is due though the author of the textbook was identified you did not indicate who authored the educational materials contained in volume one you did not indicate how when or where your educational materials would be used nor did you explain the requirements and procedure for receiving a certificate completion in your credit counselor course in your letter dated you made the following statement regarding information you provide to clients t calls from people stating they have a large accumulation of debt and little money to pay their creditors they want to file bankruptcy but don’t understand the process or where to start we give these people general information about the bankruptcy procedure and offer instruction in finding an attorney who will advise and represent them at the lowest fee possible this allows them to get their bankruptcy handled quickly saving them time and money as well as months of stress and complication with future lawsuits you provided no information regarding which attorneys they are referred to you also made the following statement in regards to your educational efforts since we deal exclusively with consumers being sued by creditors the overwhelming educational aspect of our business deals with the entry of a judgment what a judgment is how the procedure works how it can be resolved and the ramifications of apathy are what we convey to the consumer the letter attached as exhibits a copy of a direct mail letter which is clearly designed to aggressively sell your services to potential clients a copy of a refund check sent to a client and a copy of maryland’s debt management licensing law your sample direct mail letter which you attached as exhibit-1 contains the following language call immediately time is critical to stop this before the court grants a judgment you also stated the following call and talk to one of our professionals now while there is still time and time is money yours we can help stop law suits stop wage attachments stop creditor harassment your statement of revenue and expenses for through shows th program service fees totaling dollar_figure ages and ng dollar_figure and excess revenue over expenses of dollar_figure your total revenue amounted to and your total expenses were dollar_figure in your letter dated you indicated that the cost of your direct mail letter operation represents ap of the annual budget you further represented that the cost of purchasing the client names addresses and relevant information represents approximately of the yearly budget you have no fundraising program in operation moreover you have not shown any expenditures_for charitable and or educational programs sec_501 of the code exempts from federal_income_tax corporations organize and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to exempt as an organization described in sec_501 and organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do 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 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term educational refers 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 in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications it aided low- income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization which held the funds in a_trust account and disbursed the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon voluntary contributions primarily from the creditors participating in the organization’s budget plans for its support the service found that 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_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code revrul_78_99 1978_1_cb_152 held that the provision of individual and group counseling for widows based on their ability to pay is an educational activity in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational nor scientific but rather commercial in addition the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in easter house v united_states 846_f2d_78 fed cir aff’g cl_ct the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because it operated for a substantial commercial purpose rather than for the exempt purposes of providing educational and charitable services to unwed mothers and children the services for unwed mothers and children were merely provided incident to the organization’s adoption service business the agency’s operation was funded completely by the fixed fees charged adoptive parents it relied entirely on those fees and sought no funds from federal state or local sources nor engaged in fund raising programs nor did it solicit contributions moreover the court found that adoption services do not in and of themselves constitute an exempt_purpose on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations in 283_fsupp2d_58 d d c the court relied the credit repair organizations act croa u s c section et seq effective date imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed u s c section 1679b sec_501 organizations are by definition excluded from regulation under the croa the croa defines a credit repair organization as a any person who uses any instrumentality of interstate commerce or the mails to sell provide or perform or represent that such person can or will sell provide or perform any service in return for the payment of money or other valuable consideration for the express or implied purpose of- i improving any consumer’s credit record credit history or credit rating or ii providing advice or assistance to any consumer with regard to any activity or service described in clause i u s c section 1679a the courts have interpreted this definition broadly to apply to credit counseling agencies the federal trade commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation it is providing a service covered by the croa 21_fsupp2d_424 n d n j in ftc v gill 265_f3d_944 9th cir aff’g 183_fsupp2d_1171 the appellate court inferred that a credit repair organization that first promised a free consultation but charged fees in advance of the full performance of services was being operated as a charity primarily for purposes of evading regulation under the croa revproc_90_27 1990_1_cb_514 provides in part that exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere statement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned and the nature of the contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that its proposed activities will be exempt a record of actual operations may be required before a ruling or determination_letter will be issued an organization must establish through the administrative record that it is organized and operated as a sec_501 organization denial of exemption may be based solely upon failure to provide information describing in adequate detail how the operational_test will be met american science foundation v commissioner tcmemo_1986_556 82_tc_215 pius xii academy v commissioner tcmemo_1982_97 exempt status can be recognized in advance of operations if proposed operations can be described in enough detail to permit a conclusion that the organization will clearly meet the requirements of sec_501 american science foundation v commissioner tcmemo_1986_556 the organization has the burden of providing sufficient documentation or other substantive information regarding its activities and operations which would establish entitlement to tax-exempt status information that is vague or nonspecific is not sufficient to meet the requirements under sec_501 tully v commisioner t c memo our analysis of the information you submitted does not allow us to conclude that you meet the organizational requirements necessary to show that you are organized exclusively for charitable and educational_purposes moreover you do not satisfy the operational requirements to be recognized as exempt under sec_501 of the code there is no evidence that your primary purpose is to provide financial education to individuals or to the general_public in that you do not have a tailored education program with a structured educational methodology in place in fact the administrative record demonstrates that you operate for the substantial non- exempt_purpose of selling debt settlement and debt negotiation services to the general_public another non-exempt purpose appears to be your operation to avoid regulation under the croa in addition you have not shown that your income will not inure to the benefit of the members of your board_of directors the fact that you are organized under the general corporation law of the state of maryland as an ordinary non-stock business rather than under the nonprofit law is clear evidence that you do not meet the organizational requirements necessary to show that you are organized exclusively for charitable and educational_purposes within the meaning of sec_501 additionally even if you were organized under a nonprofit statute your purposes as stated in your form_1023 application include activities that are not in furtherance of exempt purposes as required under sec_1_501_c_3_-1 of the regulations negotiating and settling debt disputes are not inherently charitable or educational_purposes these are purposes that may be achieved only in a commercial manner these same activities are often performed by both for- profit financial planning companies and bankruptcy attorneys therefore you have not established that you are organized exclusively for exempt purposes within the meaning of sec_501 that you are operating in the manner of a commercial business is reflected in the fact that the debt settlement and debt negotiation services you offer are sold to anyone who is willing to purchase your services no court or irs ruling has indicated that the sale of debt settlement and debt negotiation services is a charitable activity since the sale of debt settlement and debt negotiation services to the general_public is your primary purpose and is substantial in nature we cannot conclude that you are operating for charitable purposes moreover there is no evidence that your activities are restricted to the benefit of the poor you also have not provided any evidence that the fees you charge clients are below your cost or any less than would be paid_by individuals serviced by a for-profit debt settlement and debt negotiation company in airlie foundation v commissioner supra one of the factors considered in assessing commerciality was the extent and degree of below cost services provided you provided no evidence that your clients ever receive free services or services according to their ability to pay merely placing or receiving a phone call from a potential client would not be construed as providing a free service to be considered free these services would have to be the same services received by a client who pays the dollar_figure that you provided a refund to an individual client is not evidence that you are not g as a for -profit business you even stated in the letter to a client attached as exhibit- that the client who was unemployed should call when you return to work moreover it would appear that your fee bears no relation to the costs of providing your service and is a purely profit-making tool you have provided no economic rationale for the amount you charge for your services other than you charge what the market will bear you have provided no financial studies or other information that would justify this particular fee you did however state that the fee is based on b’s experience with for-profit organizations that provide a similar level of work it is also noteworthy that your completed financial statement for through showed that you had a significant amount of excess re enses which is indicative of a successful for-profit business unlike most charitable organizations you receive no support from contributions from the general_public government or private_foundation grants or assistance from the united way in fact you have no fundraising program to solicit such contributions by comparison for-profit business enterprises are supported by fees paid_by those who receive services while charitable institutions often do provide services to individuals the cost is generally subsidized by contributors who do not receive anything in return in b s w group inc v commissioner supra the court cited lack of solicitation and sole support from fees as negative factors for exemption see also easter house v united_states supra you have not shown that revenues from operation of your debt settlement and debt negotiation services are used for any purpose other than to cover operating_expenses like any ordinary commercial business your expenditures are used exclusively to pay salaries and other expenses you have not provided any information to indicate that you plan to dedicate significant revenue to activities involving educational and or charitable programs in fact your actual and proposed budgets for and show no revenue used for charitable and or educational programs in id staff with no volunteer help and having no direct expenditures_for charitable and educational_purposes you are similar to the organization described in easter house v united_states supra where the court determined that the organization was not exempt because its conduct of adoption services was in furtherance of a non-exempt commercial purpose thus the totality of the facts and circumstances show that you are operated for the substantial non-exempt business_purpose of selling debt settlement and debt negotiation services to the general_public the information you submitted provides no basis for us to conclude that you offer either education to the public on subjects useful to the individual and beneficial to the community or training to the individual you have failed to provide any evidence that your debt settlement and debt negotiation program is an incidental adjunct to a substantial and substantive program of public education and individual counseling any discussion with clients does not appear to include any educational material or counseling component as you stated in your letter dated the educational materials you submitted are specifically tailored to the business of assisting a client in dealing with the entry of a judgment that is what a judgment is how the procedure works how it can be resolved and the ramifications of apathy are what we convey to the consumer these materials are clearly used to sell your product additionally you failed to explain where when and how the educational materials-provided in volume one would be used in the context of a structured substantive educational program thus you have failed to establish that your primary focus is not the sale of your debt settlement and debt negotiation services rather than the provision of substantial education to your clients moreover you have provided no evidence that your interaction with clients will not be of short duration there is no evidence that you plan to provide a series of sessions with in-depth education directed to the particular needs of the client or to dedicate the time necessary to address the financial problems faced by the client your interaction with clients appears to be designed purely to expedite the sale of debt settlement and debt negotiation services to potential clients in fact your letter of representation tells them not to contact you further furthermore of your employees only b has been granted a certificate of completion in a credit counselor course we further note that b’s use of the title u s government certified credit counselor has no basis in fact and can be considered misleading in an apparent attempt to lend additional credence to b’s credentials that is not deserved there is no evidence that b has ever been certified by federal government as credit counselor it is apparent that the vast majority of all your employee time is spent in selling debt settlement and debt negotiation services the language used in your direct mail letter and other documents is clearly intended to aggressively convince potential clients that it would be to their financial benefit to enroll in your debt settlement and debt negotiation services program furthermore the amount of time and revenue you dedicate to sending out your direct mail letters is convincing evidence that your primary focus is on garnering business and not public education or meaningful personal counseling the budget that you included with your application shows no separately budgeted item for educational activities you have not provided specific detailed information as to the amount of time a counselor spends in credit education versus the amount of time spent in persuading clients to purchase your debt settlement and debt negotiation services lastly the job responsibilities held by c d and e include marketing customer service and negotiation these job descriptions are of the kind that would be commonly associated with an ordinary for-profit business including one providing debt settlement and debt negotiation services your apparent attempt to avoid regulation under the croa also indicates that you are operated for a substantial non-exempt purpose see u s c section et seq this statute imposes restrictions on credit repair organizations including forbidding advance_payment before services are fully performed u s c section 1679b as stated above the courts have interpreted the croa so as to apply to the activities of credit repair organizations the information you provided can only be interpreted as evidence that you charge an advance fee a practice forbidden to for-profit organizations under the croa your debt settlement and debt nego ram requires that prospective clients pay up -front fees in your letter dated you make clear that in the initial telephone conversation with a poten diately ask questions that are intended to determine if a client will pay the fee for service before your services are commenced you also indicate that the fee is dollar_figure and arrangements are made to have payment sent by money order or taken over th phone with a check -draft based on the information you have submitted it appears that you are seeking exemption as a charitable_organization because your activities would not otherwise be permitted a commercial for-profit corporation in this regard you are similar to the organization described in ftc v gill supra in that one of your purposes appears to be evading regulation under the croa the fact that your organization may not be defined as a credit repair organization under the laws of your state does not mean that it is not considered a credit repair organization under the croa you also have not established that there will be no inurement of income accruing to the benefit of b c or d there seems to be great likelihood of inurement to these individuals in that they all serve on the board_of directors as members and employees and have a vote on compensation arrangements leasing arrangements and other financial matters that would affect their personal and business financial interests this situation gives rise to an inherent conflict of interests that would potentially adversely impact your financial well being revproc_90_27 requires an applicant to submit sufficient information during the application process for the service to conclude that the organization is in compliance with the organizational and operational requirements of sec_501 before a ruling is issued you failed to indicate the amount of salary to be paid to e you failed to provide evidence that staff members other than b have completed a credit counseling course aside from the limited power_of_attorney you failed to provide a copy of other agreements you may have with clients you failed to provide substantive evidence that your fee is any less than would be charged by a for-profit company you failed to provide credible_evidence that you have provided free services to any clients you failed to explain the requirements and procedures for receiving a certificate of completion in the credit counseling course you failed to provide a copy of any contract s involved in the purchase of leads you failed to provide information on the attorneys you use when making referrals in bankruptcy matters you failed to describe when where and how the educational materials would be used in an educational program with a structured educational methodology you failed to provide specific detailed information on the amount of time and revenue to be spent in persuading clients to purchase debt settlement and debt negotiation services versus the amount of time and revenue spent on counseling and education the vague and nonspecific information and documentation you provided does not meet the burden of showing that your activities and operations are such that you are entitled to recognition of exemption under sec_501 see tully supra accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code you have the right to protest this ruling if you believe it is incorrect to protest you should submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practices requirements if you do not protest this ruling in a timely manner it will be considered by the internal_revenue_service as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory judgement or decree under this section 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 administrative remedies available to it within the internal_revenue_service if we do not hear from you within days this ruling will become final and a copy will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 se t eo ra t washington when sending additional letters to us with respect to this case you will expedite their receipt by using the following address if you do not intend to protest this ruling and if you agree with our proposed deletions as shown in the letter attached to notice you do not need to take any further action if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter lois g lerner director exempt_organizations rulings agreements sincerely


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date cc ita b04 conex-121292-05 office_of_chief_counsel number info release date uil the honorable j randy forbes member u s house of representatives 425-h south main street emporia va dear congressman forbes thank you for your letter dated date concerning the payments made to tobacco quota holders and producers under the fair and equitable tobacco reform act of fetra you asked how we will treat the payments for federal tax purposes we expect to publish guidance on the taxation of fetra payments in the near future i appreciate your comments if you have further questions please call me or ------------ - --------------identification number ------------- at sincerely michael j montemurro acting branch chief office of associate chief_counsel income_tax and accounting


department of the treasury internal_revenue_service washington d c number info release date uil date date person to contact and id number contact telephone number dear this is in response to your letter dated date regarding the publicity of form_5227 split-interest trust information_return we apologize for the delay in our response the pension_protection_act amended sec_6034 to provide that e very trust described in sec_4947 shall furnish such information with respect to the taxable_year as the secretary may by forms or regulations require as relevant here this permitted the irs to consolidate the filing_requirements for split-interest_trusts previously such trusts may have had to file both form_5227 previously required by sec_53_6011-1 and form 1041-a required by sec_6034 sec_6104 requires that the information required by sec_6034 be made available for public inspection specifically it provides that the information required to be furnished by sec_6033 sec_6034 and sec_6058 together with the names and addresses of such organizations and trusts shall be made available to the public at such times and in such places as the secretary may prescribe nothing in this subsection shall authorize the secretary to disclose the name or address of any contributor to any organization or trust in the case of a_trust which is required to file a return under a this subsection shall not apply to information regarding beneficiaries which are not organizations described in sec_170 emphasis added your letter states that in virtually all instances the name of a trust’s non- charitable_beneficiary is included in the name of the trust itself you suggest that filers of form_5227 be permitted to omit the name of the split-interest trust or that the irs devise some other mechanism to protect the name of the contributor or non-charitable beneficiary that may appear in the name of the trust sec_6104 does not protect the name of the trust whether it may incorporate the name of a contributor or non-charitable beneficiary or otherwise for example sec_6104 does not protect the names and addresses of an organization’s officers on form_990 although the officers may be also contributors to the organization the officers’ names and addresses are protected when they appear in schedule b of form_990 schedule of contributors moreover sec_6104 does not protect the names of sec_509 organizations even though a common naming convention may identify the contributors to the organization the irs has no current plans to image and make available to the public copies of all forms on dvd as the service does with the form_990 series the determination to make all such forms available to the public will depend on the level of public interest and irs resources at this time we plan to make form_5227 available only if the requester knows the specific name of the specific split- interest trust entity if you have any further questions feel free to contact me at -------------------- sincerely lois g lerner director exempt_organizations


shannon l fernandez petitioner v commissioner of internal revenue respondent docket no filed date r determined that for p failed to report income of dollar_figure from the los angeles county employees retirement association received on account of a divorce agreement treated like a qualified_domestic_relations_order awarding her a portion of her former husband’s disability pay p argues that either the dollar_figure is excluded from her income under sec_104 because sec_402 provides that an alternate_payee pursuant to sec_414 who is the former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alter- nate payee under a qualified_domestic_relations_order or she steps into the shoes of her former spouse and therefore should receive the same tax treatment on the payments held p may not exclude the dollar_figure from income under sec_104 j christopher toews for petitioner kris h an and laura beth salant for respondent opinion wherry judge this case is before the court on a petition for redetermination of a deficiency respondent determined that petitioner had unreported income of dollar_figure resulting in an income_tax deficiency of dollar_figure for the tax_year this case stems from petitioner’s receipt of dollar_figure from the los angeles county employees retirement association lacera pursuant to a divorce agreement awarding her a portion of her former husband’s disability pay the issue for decision is whether petitioner may exclude the dollar_figure from income under sec_104 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the taxable_year at issue the rule references are to the tax_court rules_of_practice and procedure verdate 0ct jun jkt po frm fmt sfmt v files fernan sheila fernandez v commissioner background this case was submitted at the scheduled trial session fully stipulated pursuant to rule the parties’ stipula- tion of facts with accompanying exhibits is incorporated herein by this reference at the time the petition was filed petitioner resided in california on date mr fernandez whom petitioner mar- ried on date began working for the los angeles county sheriff’s department while working for the los angeles county sheriff’s department mr fernandez became disabled and retired on date at the time of his retirement mr fernandez did not qualify for normal retire- ment under the lacera plan on the basis of his age and years_of_service because he did not meet the 20-year service requirement therefore mr fernandez opted for a service- connected disability retirement and began receiving service- connected disability retirement benefits from lacera effec- tive date petitioner and mr fernandez were legally_separated on date and then filed for divorce the divorce became final before the year at issue in this case on date the california superior court entered an order and stipulated division of retirement benefits that awarded petitioner a percentage of mr fernandez’ retirement benefits from lacera it stated that petitioner’s percentage would be computed as number of months of lacera service between date of marriage date and date of separation date divided by months of service in lacera system at time of retirement of member time sec_50 times retirement allowance payable to member petitioner is enti- tled to receive monthly retirement benefit distributions from lacera until mr fernandez’ death during the tax_year petitioner received dollar_figure in distributions from lacera for the tax_year lacera issued petitioner a form 1099-r distribution from pen- sions annuities retirement or profit-sharing_plans iras insurance contracts etc treating dollar_figure as taxable and dollar_figure as nontaxable petitioner did not include any of the nothing in the record explains why the dollar_figure was treated as nontaxable verdate 0ct jun jkt po frm fmt sfmt v files fernan sheila united_states tax_court reports amount received from lacera in her federal_income_tax return on date respondent sent to petitioner a notice_of_deficiency determining a dollar_figure deficiency in income_tax on date petitioner timely petitioned the court for redetermination of the deficiency discussion as a general_rule the commissioner’s determination of a taxpayer’s liability in the notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 sec_61 defines gross_income as all income from whatever source derived including pensions unless otherwise provided sec_104 provides otherwise by authorizing an exclusion with respect to compensation_for injuries or sickness such exclusions from gross_income are construed narrowly see 515_us_323 sec_104 provides in pertinent part as fol- lows sec_104 compensation_for injuries or sickness a in general -except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical etc expenses for any prior taxable_year gross_income does not include- amounts received under workmen’s compensation acts as com- pensation for personal injuries or sickness regulations promulgated under sec_104 further explain the exclusion sec_104 excludes from gross_income amounts which are received by an employee under a workmen’s compensation act such as the long- shoremen’s and harbor workers’ compensation act u s c c or under a statute in the nature of a workmen’s compensation act which pro- vides compensation to employees for personal injuries or sickness incurred in the course of employment sec_104 also applies to compensa- tion which is paid under a workmen’s compensation act to the survivor or survivors of a deceased employee sec_1_104-1 income_tax regs the parties do not dispute that sec_104 excludes from mr fernandez’ income the amounts he received from lacera the question is whether the same section excludes verdate 0ct jun jkt po frm fmt sfmt v files fernan sheila fernandez v commissioner the amounts petitioner received attributable to mr fernandez’ benefits under the stipulated division of retire- ment benefits petitioner argues that the dollar_figure is excluded from her income because sec_402 provides that an alter- nate payee pursuant to sec_414 who is the former spouse of the participant shall be treated as the distributee of any distribution of payment made to the alternate_payee under a qualified_domestic_relations_order qdro sec_402 provides that amounts distributed from employee trusts are taxable to the distributee except as otherwise provided in this section and sec_72 provides that except as otherwise provided in this chapter gross_income includes any amount_received_as_an_annuity under an endowment or life_insurance_contract nowhere in sec_402 or sec_72 is sec_104 mentioned sec_402 explicitly provides for pur- poses of subsection a of sec_402 and sec_72 an alternate_payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribu- tion or payment made to the alternate_payee under a quali- fied domestic_relations_order if congress had included sec_104 in this portion of the statute the result in this case might be different however without congressional approval we decline to expand the reach of sec_402 beyond the sections specifically referred to in its text in the alternative petitioner argues that because she steps into the shoes of her former husband and he was injured at the time of his early retirement she should be taxed in the same manner as her former husband a version of sec_104 allowing an injured person to exclude disability_income from his or her taxable_income has been in the code since the revenue act of when it was added because under the present law it is doubtful whether amount sec_3 as petitioner points out the order entered in her divorce case is not technically a qdro because it relates to a distribution from a government_plan however under sec_414 the distribution is treated in the same manner as one made pursuant to a qdro we note that generally tax-qualified plans are subject_to sec_401 which prohibits any assignment_or_alienation of the benefits of the plan and that sec_402 was added to the code in order to create an exception to the erisa preemption provision with respect to these qdro orders s rept no pincite 1984_2_cb_447 sec_402 under very explicit circumstances protects the rights of former spouses by allowing for the assignment of benefits pursuant to a qdro although part of that protection the purpose of sec_402 was not as petitioner argues to prevent the taxation of benefits assigned from a former spouse verdate 0ct jun jkt po frm fmt sfmt v files fernan sheila united_states tax_court reports received as compensation_for personal injury or sick- ness are required to be included in gross_income h_r rept no c b part in all of the years since to our knowledge petitioner’s particular issue has not been before the court we note that petitioner did not suffer an injury and the senate explicitly stated as compensation_for personal injury in the case at hand the compensation was not for petitioner’s personal injury but that of her former husband petitioner does not cite any relevant law to establish her position we similarly find none and in the absence of congressional intent we note that we have strictly construed sec_104 to conform to the general purview of sec_61 that all income is taxable unless explicitly excluded see baldwin v commissioner tcmemo_2000_306 citing 43_f3d_1446 fed cir accordingly we find that the dollar_figure is taxable_income to petitioner and she is liable for the deficiency the court has considered all of petitioner’s contentions arguments requests and statements to the extent not dis- cussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered for respondent f this outcome should come as no surprise to petitioner although not controlling on this court we note that the order and stipulated division of retirement benefits stated that d istribution under this order shall be taxable to the non-member petitioner and not the member her former spouse we further note that the state court did not decrease petitioner’s share of the disability payments because it believed that she would receive the money tax free verdate 0ct jun jkt po frm fmt sfmt v files fernan sheila