partners in charity inc petitioner v commissioner of internal revenue respondent docket no 1701-11x filed date p was established as a nonprofit corporation under the laws of illinois p applied for recognition of tax-exempt status explaining that its primary activity was to provide down-pay- ment assistance grants to home buyers r determined that p was a charitable_organization described in sec_501 in actual operation p required each home seller to pay to p the down-payment amount along with a fee r retro- actively revoked his determination and p filed for a declara- tory judgment under sec_7428 held p’s down-payment assistance program was not operated for a charitable purpose and p engaged in substantial commercial activities that did not further an exempt_purpose therefore p is not an organization described in sec_501 held further r did not abuse his discretion in making his adverse determina- tion retroactive to the date of p’s incorporation alvin s brown for petitioner mark a weiner for respondent gustafson judge after examining the activities of peti- tioner partners in charity inc pic for the year sec_2002 and the internal_revenue_service irs issued to pic a final adverse determination_letter dated date revoking its recognition of pic’s tax-exempt status the rev- ocation was retroactively effective to the date of pic’s incor- poration on date on date pic timely petitioned this court pursuant to sec_7428 and rule seeking a declaratory_judgment that pic was an organization described in sec_501 during and the examination years and that the irs’s revocation of pic’s tax-exempt status be declared null and void the issues for decision are whether during the exam- ination years pic was operated exclusively for a charitable purpose we hold that it was not and whether in retro- actively revoking its determination that pic was an organization described in sec_501 the irs abused its discretion we hold that it did not unless otherwise indicated all section references are to the internal_revenue_code u s c and all rule references are to the tax_court rules_of_practice and procedure verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports findings_of_fact the administrative record underlying the irs’s adverse determination was filed with the court in accordance with rule and a subsequent trial was conducted in wash- ington d c the parties stipulated some of the facts pic’s formation before creating pic charles konkus was a real_estate developer in the chicago area focusing his business ventures on developments for medium- to high-income consumers mr konkus observed that home ownership was becoming more difficult for low-income individuals and he decided to create a means for helping home buyers mr konkus incorporated pic as an illinois not-for-profit corporation on date mr konkus served as pic’s executive director devoting hours a week to the job and receiving no direct compensation in return in addition to mr konkus pic had two other individuals on its board_of directors-katy motlagh and jeanne weaver-but they devoted virtually no time to their positions with pic mr konkus exercised unchecked control_over pic’s operations and finances pic’s application_for recognition of tax-exempt status in date pic submitted to the irs form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code on which pic reported partners in charity will provide down payment assistance program for low income individuals and families to allow individuals who could not otherwise do so to own their own home partners in charity sic will also engage in other affordable housing efforts using excess contribu- tions to develop low-income apartments for seniors and families the acquisition and rehabilitation of single-family homes and contributions to other housing related charitable organizations such as faith based charities community based charities and national charities such as habitat for humanity in response to a question regarding pic’s expected sources of financial support pic reported on form partners in charity sic will solicit gifts from corporations foundations and individuals with whom the members directors and offi- cers have personal relationships in addition pic reported verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner that it expected to receive gifts grants and contributions of dollar_figure during and dollar_figure during and that it expected to pay contributions gifts grants and similar amounts of dollar_figure and dollar_figure during and on date the irs asked pic to provide assur- ances that pic would serve a charitable_class mentioning the safe_harbor guidelines in revproc_96_32 c b and that no private interests of individuals with a financial stake in the project would be furthered on date pic submitted to the irs a statement of policy signed by mr konkus as president treasurer director of pic which stated partners in charity inc has adopted a policy to comply with the low_income_housing safe_harbor guidelines in that at least of units for a given project will be made available for families earning or less of the area’s median income as adjusted for family size the remaining of the units for a given project will be made available to persons on the lower end of the economic spectrum who may not necessarily be members of a charitable_class the directors and officers in partners in charity inc are not real_estate developers property managers or owners of significant parcels of undeveloped lands partners in charity inc intends to have a commu- nity-based board_of directors once it established a track record and can attract qualified community-based individuals to serve the irs’s prior determination on date the irs ruled favorably on pic’s application and issued to pic a determination_letter that stated b ased on information you supplied and assuming your operations will be as stated in your application_for rec- ognition of exemption we have determined you are exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 this determination was effective as of pic’s incor- poration date date the dpa program as its title suggests pic’s down payment assistance dpa program provided home buyers with funds to use for down payments for home purchases however it obtained those funds along with a fee from home sellers and in only two-tenths of of its transactions did pic make a dpa grant where the seller was not reimbursing the down pay- verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports ment and pic’s fee a seller’s payment to pic equaled the down payment amount that pic gave to the buyer plus pic’s fee-ie either of the final sale price or in the case of a professional home builder dollar_figure pic created and used a document entitled gift letter and grant application to effect its agreements with buyers and created and used a seller participation_agreement for agreements between itself and sellers in addition to those documents pic collected the following information the prop- erty’s address the buyer’s annual income the buyer’s gender and ethnicity the name of the loan originator and lending institution the type of loan the buyer intended to use a copy of the purchase contract a copy of the first two pages of the appraisal report and copy of the settlement statement hud-1 much of this information appeared on a form called the gift funds request form which was created by pic and filled out by the buyer’s lender seller participation_agreement pic induced a prospective seller to sign a seller participa- tion agreement this agreement provided that a seller’s property would qualify as a participating home in pic’s program if the seller a agreed to accept the buyer’s terms for financing using an eligible_loan program that accepted charitable gifts from non-profit organizations and b deliv- ered the real_estate purchase contract to a pic-approved escrow officer or closing agent the seller participation_agreement further provides pic agrees to assist in the dissemination of pre-qualification information to prospective homebuyers including the pic home buying guide and to utilize the pic program to provide home ownership education and down payment assistance to qualified homebuyers any one of which may elect to purchase the participating home in consideration of the foregoing seller agrees to make a contribution to pic in the amount of the down payment amount plus a fee of of the purchase_price within business days from the transfer of the participating home to the buyer emphasis added the seller participation_agreement states t he seller’s contribution will not be used to provide down payment assist- ance to the buyer of the seller’s participating home instead to fund the current buyer’s dpa grant pic used money it had acquired from previous sellers’ contributions verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner pic would then use the current seller’s payments to fund future grants and to cover pic’s operating_expenses a seller was obligated to make a contribution to pic only if a homebuyer utilizing the pic program purchases the seller’s participating home gift letter and grant application a buyer requested pic funding by submitting to pic a signed gift letter and grant application which stated in part once partners in charity inc a non-profit organization has received the following a signed copy of this form a copy of the seller participation_agreement the lender’s request for gift funds copy of appraisal first pages only copy of purchase and sale agreement closing office wire instructions pic will wire gift funds to the closing office in the amount of the down payment to assist you in the purchase of your new home the terms of the grant application are consistent with pic’s practices that its payment of a dpa grant was subject_to the condition_precedent that pic receive a seller participation_agreement pursuant to which the seller agreed to con- tribute to pic the grant amount plus a fee if a home buyer using the pic program purchased the seller’s house if the buyer was unsuccessful in obtaining a loan or if the lender did not actually provide the loan proceeds shortly after pic’s funds were received by the closing office then the buyer agreed that the escrow agent would return the down payment funds to pic if the purchase transaction con- cluded successfully then the buyer was under no obligation to repay the dpa grant to pic the flow of funds at closing the record contains several hud-1 settlement statements for transactions in which pic participated the hud-1 lists pic’s dpa grant as an amount_paid by or on behalf of bor- pic also donated a small portion of each seller’s contribution to other charitable organizations verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports rower and it lists the seller’s contribution and fee to pic as a reduction in amount due to the seller an escrow agent generally transferred the seller’s payments to pic at closing or shortly thereafter thus the essence of the arrangement was that the buyer was excused from having to come up with the money to make a down payment and the down payment was instead indirectly paid_by the seller out of the sales proceeds that were provided by the lender the buyers’ incomes although pic collected information about grantee buyers’ annual incomes and ethnicities pic did not use this or any other information to assure that a grantee was a member of the class described in the policy statement families earning or less of the area’s median income as adjusted for family size that pic provided when the irs was consid- ering its application pic did not collect any information con- cerning the buyer’s marital or parental status and so could not know family size pic made the dpa program avail- able indiscriminately to a broad range of buyers not just those with low incomes or in under-served populations mr konkus testified at trial about an example of an dollar_figure home certainly a modest house your honor that was financed by a loan from the federal housing authority fha that required a down payment of -calling for as we noted above the seller’s contribution did not directly fund the down payment in his own transaction which came instead from funds ad- vanced to the escrow agent by pic however since of the sellers participating in the pic dpa program contributed at closing an amount equal to the down payment plus pic’s fee it is clear that a given seller indirectly provided the down payment for his own transaction one of pic’s fliers advertised if you can get the mortgage we’ll give you the down payment it’s extremely easy to receive your free gift from pic in fact there is only one requirement you must meet you must qual- ify for any eligible_loan program with your lender don’t worry they have many programs to meet your needs another flyer advertised no income asset or first time buyer restrictions congress created the fha through the national housing act of ch sec_2 stat pincite codified as amended pincite u s c sec fha was established primarily for the purpose of insuring mort- gage lenders against default by borrowers id sec b before fha can insure a single-family home mortgage the loan must meet certain eli- gibility requirements set forth in the national housing act u s c sec one of these eligibility requirements involves the down payment verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner pic to make a dpa grant of dollar_figure however throughout and almost of pic’s dpa grants exceeded dollar_figure and pic made at least two dpa grants of dollar_figure or more to assist buyers purchasing property priced over dollar_figure million pic also collected information about buyers’ financing arrangements in most cases buyers using pic’s dpa pro- gram obtained fha loans this fact however does not show that the pic buyers are members of a charitable_class con- trary to mr konkus’s assertions there does not appear to have been a maximum income level that would have dis- qualified a borrower from receiving an fha loan rather the only limitations on fha loans appear to have been related to a borrower’s credit-worthiness and the value of the pur- chased house in addition pic did not limit its program to buyers who used fha financing any financing including conventional mortgages was permissible payment by and benefits to sellers pic advertised that its dpa program financially benefited sellers by providing sellers with ready buyers enabling the sellers to sell for higher prices and allowing them to sell faster because of the larger pool of of the home’s acquisition_cost id sec b see u s c sec c f_r secs 17-dollar_figure mortgage provisions pic points to no specific rule regulation or guideline that re- stricts fha loans to the poor several of pic’s promotional materials claimed that pic’s dpa pro- gram generally increased sellers’ net_proceeds one particular flyer listed step-by-step instructions for sellers and after stating that sellers were re- quired to pay pic the down payment amount and a fee the flyer stated to make the transaction fair for you the buyer will most likely offer full value on your property this benefits you dramatically to illustrate this you need to know that on average sellers take a reduction in the price to sales_price of this means that a home listed at dollar_figure would normally sell for dollar_figure to dollar_figure if the buyer didn’t use the pic pro- gram if they use the program you will most likely sell your home for the list price of dollar_figure and contribute dollar_figure of the downpayment plus a fee of only of the sales_price to pic this means you’ll net dollar_figure instead of dollar_figure-dollar_figure that’s dollar_figure-dollar_figure more for using pic we’re helping you pic your future verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports potential buyers consistent with the language in the seller participation_agreement that pic’s benefits to sellers were in consideration for sellers’ contributions and fees we find that in pic’s transactions with sellers the seller paid pic a fee for a service pic received virtually all of its funding from payments by sellers for the services it provided to them and when considered in combination with pic’s marketing strategy commission-like fee structures and significant revenues we find that pic’s commercial activity with sellers was a substantial part of pic’s oper- ation this commercial activity was in fact pic’s primary purpose pic’s other activities in conjunction with the dpa program pic educated poten- tial buyers about purchasing a home and about various responsibilities associated with home ownership the edu- cational materials provided by pic also helped buyers to develop action plans for buying a home pic’s educational programs were evidently informative and we assume bene- ficial to prospective home buyers however we find that pro- viding education to home buyers was neither pic’s exclusive nor its primary purpose pic contends that by requiring a copy of an fha appraisal report before making a dpa grant it assured that prospec- tive houses were habitable clean and decent properties suit- able for low-income buyers in addition pic alleges that it examined hud-1 settlement statements to assure that buyers were not paying inappropriate fees collecting the appraisal report and the hud-1 might have provided pic with information that if examined carefully might have helped enable it to protect buyers from uninhabitable or unsafe property or inappropriate lender fees but we find that pic did not use information from the appraisal reports another pic flyer that was directed to sellers and builders stated participating in the pic program opens up the seller’s market by because more buyers qualify there are no restrictions like many bond or local affordable housing programs no first time home- buyer requirements no income asset restrictions no recapture clauses the borrower never needs to pay it back no reserved re- quired no geographic boundaries use with any program verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner and the hud-1 statements for these purposes pic requested only the first two pages of appraisal reports and this limited excerpt would not provide adequate information for evaluating the habitability of a house for instance information about adverse environmental conditions that the property might have eg lead-based paint or repairs that the property might need would often be omitted from those two pages or would be discussed in an addendum or addi- tional comments to the appraisal report not provided to or examined by pic pic did not require or request a home inspection report on a house before making a dpa grant in addition pic received the hud-1 only after the purchase was already completed and any review of lender fees reported on the hud-1 would have come too late to provide any benefit to buyers pic thus did not protect buyers from hazardous fees or uninhabitable properties with regard to other affordable housing efforts men- tioned in pic’s form_1023 pic’s financial statements indicate that pic lent dollar_figure to partners in charity mar- keting which mr konkus owned and which in he renamed restoration america but we cannot tell from the record how these funds were used nor whether the loan had a charitable purpose pic did not persuade us that excess pic funds were used to develop low-income apartments for seniors and families or to acquire and rehabilitate single- family homes for low-income individuals pic’s finances pic’s income and expenditures greatly exceeded the expectations it reported on its form_1023 according to annual financial reports pic received payments from home sellers participating totaling dollar_figure in and dollar_figure in revenues from home sellers were pic’s primary source_of_income in and and pic did not receive any charitable contribu- tions gifts or grants in those years the dpa program in in pic made big_number dpa grants totaling dollar_figure similarly in pic made big_number dpa grants totaling dollar_figure pic also reported revenue from interest on cash investments divi- dends and gain from the sales of securities verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports apart from its dpa grant obligations pic incurred expenses in totaling dollar_figure of this amount dollar_figure was for marketing expenses paid to royale dynamics inc rdi a company discussed below that was wholly owned by mr konkus’s wife similarly in pic incurred expenses totaling dollar_figure which included dollar_figure paid to rdi apart from dpa grants pic’s aggre- gate payments to rdi accounted for its largest expenditures in both and by the end of pic had accumulated unrestricted net assets totaling dollar_figure royale dynamics inc rdi is a for-profit illinois corporation wholly owned by mr konkus’s wife tammy butler rdi was created in and by ms butler had developed experience marketing in the mortgage industry mr konkus decided to use his wife’s company to promote pic’s dpa program to lenders who offered mortgage products to low-income borrowers most likely to benefit from pic’s services in pic entered into an exclusive marketing agreement with rdi under which rdi would design all marketing web site and advertising materials and would promote the pic program in the mort- gage and real_estate industry pic’s contracts with rdi stated that rdi’s objective was to enable pic to close the highest possible number of t ransactions and quickly obtain market share and a national presence in the delivery of the pic program services to this end rdi created mate- rials marketing the pic program to buyers sellers and home builders as well as marketing materials and sales technique training for real_estate agents and lenders to help them generate business and close transactions in exchange for its service obligations rdi was to receive of pic’s fees generated from each transaction that used a pic dpa grant subject_to the following limitations rdi’s annual compensation could not exceed dollar_figure in and dollar_figure in rdi’s compensation from pic was similar to that of other firms in the dpa industry pic provided substantially_all of rdi’s revenue in and verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner irs’s revocation the irs examined pic’s activities during the year sec_2002 and and on date the irs issued a final adverse determination revoking its recognition of pic’s tax- exempt status the irs concluded that pic did not operate exclusively for an exempt_purpose as required under sec_501 the irs’s conclusion was based on its findings that pic’s net_earnings inured to the benefit of private individuals or shareholders more than an insubstantial part of pic’s activities was not in furtherance of an exempt_purpose pic operated for the benefit of private interests and pic operated for the primary purpose of carrying on an unrelated_trade_or_business the final adverse determination_letter states in a header that the applicable tax years are and subsequent however the text states that the irs made its adverse deter- mination retroactive to pic’s incorporation date date i procedural issues opinion sec_7428 confers jurisdiction on the tax_court i n a case of actual controversy to make a declaration with respect to an organization’s continuing qualification as an organization described sec_501 that is exempt from tax under sec_501 for purposes of sec_7428 a determination with respect to continuing qualification includes any revocation of or other change in a qualification sec_7428 the parties have tried this case under rule a which provides disposition of an action for declaratory_judgment involving a revocation may be made on the basis of the administrative record alone only where the parties agree that such record contains all the relevant facts and that such facts are not in dispute emphasis added since pic does not agree that the administrative record contains all the rel- evant facts we do not limit the evidence to that which is con- tained in the administrative record furthermore rule b provides that in an action involving a revocation the verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports court may upon the basis of the evidence presented make findings_of_fact which differ from the administrative record the parties did not address the standard of review that we should apply although both implicitly tried it under a de novo standard with the commissioner free to make new arguments at trial see h_r rept no pincite 1976_3_cb_977 the court is to base its determina- tion upon the reasons provided by the internal_revenue_service in its notice to the party making the request for a determination or based upon any new argument which the service may wish to introduce at the time of the trial cf ihc health_plans inc v commissioner tcmemo_2001_246 wl at aff ’d 325_f3d_1188 10th cir in these circumstances the burden_of_proof rests on the petitioner to demonstrate that the irs’s determination was incorrect rule a rameses sch of san antonio tex v commissioner tcmemo_2007_85 pic’s pretrial memo- randum contends that the burden should shift to the commissioner pursuant to sec_7491 the commissioner argues that sec_7491 does not apply in a declaratory_judgment action brought under sec_7428 because we determine by the preponderance_of_the_evidence the facts in this case that relate to the revocation of petitioner’s exemp- tion ruling we need not determine whether the burden_of_proof on the issue of tax-exempt status has shifted see mar- tin ice cream co v commissioner 110_tc_189 ndollar_figure on the issue of the retroactivity of the irs’s adverse deter- mination our standard of review is different sec_7805 provides that t he secretary_of_the_treasury may prescribe the extent if any to which any ruling including any judicial decision or any administrative deter- mination other than by regulation relating to the internal under the pre-2003 rule the petitioner in a declaratory_judgment action bore the burden_of_proof with regard to reasons offered in the deter- mination or revocation letter and the commissioner bore the burden_of_proof with any new reasons rule c 109_tc_661 however in we amended rule deleting paragraph c because we did not wish to suggest by rule that section does not apply to declaratory_judgment actions rule note 120_tc_641 thus we assume the gen- eral rules in rule a apply in this declaratory_judgment action verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner revenue laws shall be applied without retroactive effect pursuant to this authority the secretary has given the irs discretion to retroactively revoke exemption rulings or deter- mination letters where the organization omitted or mis- stated a material fact or operated in a manner materially different from that originally represented c f_r sec_601_201 statement of procedural rules a retroactive revocation of a tax-exemption ruling will not be disturbed in the absence of an abuse_of_discretion 353_us_180 and we therefore review that retroactive determination for abuse_of_discretion ii sec_501 a in general in order to be described in sec_501 an organiza- tion must be both organized and operated exclusively for certain specified exempt purposes which include religious charitable educational and scientific purposes sec_501 am campaign acad v commissioner t c pincite3 the commissioner does not dispute that pic is organized exclusively for exempt purposes since pic’s orga- nizing documents do not fail to so state see c f_r sec_1_501_c_3_-1 income_tax regs but instead maintains that pic failed to operate exclusively for exempt purposes a requirement that calls for an examination of pic’s actual operations determining whether an organization pursues an exempt_purpose requires more than a superficial observation of its activities 70_tc_352 the purpose towards which an organiza- tion’s activities are directed and not the nature of the activi- c f_r sec_1_501_c_3_-1 income_tax regs provides an organization will be regarded as operated exclusively for one or more ex- empt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an or- ganization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose emphasis added that is under the statute the exempt purposes must be exclusive but the regulation provides that an organization may be tax exempt even if its operations include activities in furtherance of non-exempt purposes pro- vided that those activities are insubstantial pic’s non-exempt purposes and associated activities are very substantial verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports ties themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization research may further an exempt scientific purpose but the same research undertaken in a different context may be part of a taxable business see eg 76_f2d_597 2d cir aff ’g 30_bta_670 distributing religious literature may further an exempt reli- gious purpose or in a different context it may be part of a taxable enterprise 285_f2d_800 ct_cl teaching may further an exempt educational purpose but the same sort of teaching under- taken in a different context may be part of a taxable for- profit enterprise see eg 135_f2d_371 7th cir aff ’g 46_bta_464 rameses sch of san antonio tex v commis- sioner tcmemo_2007_85 one may feed the hungry in a soup kitchen or in a four-star restaurant one may heal the sick in a third-world clinic or in a lucrative medical practice one may build a chapel in apostolic poverty with st francis or in a construction business likewise one may contribute down payments in order to house the homeless poor or in order to facilitate a commercial real_estate business even in a commercial profit-motivated context such activities may be wholesome and commendable but they will not support tax-exempt status unless they are undertaken to further an exempt_purpose moreover the requisite purpose does not consist simply of a charitable motive ie a desire that charitable benefit ultimately result from one’s activities someone’s main subjective motive for engaging in an activity may be for example religious but his religious_organization will be tax exempt only if the organization is operated to accomplish a religious purpose in scripture press found f 2d pincite an organization that published and sold sunday school mate- rials was held not exempt notwithstanding the sincere reli- gious motives of its principals we think that plaintiff ’s assertion that its instructional activities are more important to plaintiff than its selling activities is entirely sincere the evidence in this case shows that throughout its history scrip- ture press has been led by people of devout and intense religious convic- tion however the intensity of the religious convictions of the plaintiff ’s members and officers cannot operate to exempt them from the tax law verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner if the activities of the plaintiff cannot in themselves justify such an exemption likewise a founder’s subjective motive to educate poor people or facilitate their housing will not support tax-exempt status for his organization if it is not actually operated to accomplish a tax-exempt purpose to determine pic’s purpose within the meaning of sec_501 we therefore examine not mr konkus’s subjec- tive motives but pic’s activities in their context b charitable_class pic contends that it operated to serve charitable purposes by providing to low-income individuals both dpa grants and financial counseling seminars and other educational pro- grams designed to prepare potential home buyers for the responsibility of home ownership pic made over big_number grants in both and about a day totaling over dollar_figure million per year of its proffered activities pic’s dpa program was certainly its primary activity during and with the educational programs either secondary or supplemental to the dpa program the commissioner argues that pic’s dpa program was not operated to achieve a chari- table purpose accordingly our first inquiry is whether pic’s dpa program served a charitable purpose the term charitable for purposes of sec_501 includes relief of poverty advancement of education or science advancement of religion and other pur- poses that are beneficial to the public or the community at large c f_r sec_1_501_c_3_-1 see also 88_tc_1 aff ’d without published opinion 838_f2d_465 4th cir it would be possible to provide home-purchase down payment grants in such a manner that they further charitable purposes see revrul_2006_27 2006_1_cb_915 but merely inducing home sellers to pay a fee and to provide funds for home buyers’ down payments does not establish a charitable purpose for the purpose of the program to be charitable the recipients of the down payment grants must be members of a charitable_class so that their receipt of the verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports grants helps to relieve the poor and distressed 12-or furthers some other charitable purpose see am campaign acad v commissioner t c pincite7 pic’s grants were not targeted to a charitable_class pic contends that it relieved the poor and distressed by following the guidelines set forth in revproc_96_32 1996_1_cb_717 that revenue_procedure describes a situation involving organizations that provide low-income_housing assistance that the irs considers to be charitable because the organizations relieve the poor and distressed the rev- enue procedure’s first requirement is that- t he organization establishes for each project that a at least percent of the units are occupied by residents that qualify as low-income and b either at least percent of the units are occupied by residents that also meet the very low-income limit for the area or percent of the units are occupied by residents that also do not exceed percent of the area’s very low-income limit up to percent of the units may be provided at market rates to persons who have incomes in excess of the low-income limit id sec_3 c b pincite the commissioner does not dispute that an organization like pic which provides down payment assistance could rely on revproc_96_32 supra but the commissioner argues that pic fails to satisfy the requirements set out therein while pic ostensibly adopted a policy similar to the requirement of revproc_96_32 supra quoted above pic’s policy was only nominal pic did not implement any internal controls to assure that it accomplished its stated policy to the contrary pic offered its dpa grants to anyone who qualified for a mortgage and requested down payment assistance and there were no income limits pic argues that in fact it served low-income individuals pointing to pic’s requirement that grant recipients report relying on government accountability office publication no mortgage financing additional action needed to manage risks of fha- insured loans with down payment assistance date the commissioner alternatively contends that seller-funded down payment as- sistance programs do not actually benefit buyers pic’s literature indicates that its contribution of the down payment discourages the buyers from negotiating the price and consequently results in substantially higher sale prices-thus possibly causing a net reduction in the amount of equity that the typical buyer has in the house however since we find other bases for our holding that pic did not operate exclusively for charitable purposes we do not reach this alternative argument verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner their annual income pic argues that examination of those income figures indicates that grant recipients were in fact low-income individuals pic also cites the fact that almost all of its grant recipients qualified for fha loans these argu- ments fail for two reasons low first merely establishing after the fact that grant recipi- ents generally had incomes when the program indiscriminately offered the grants to anyone who wanted them does not establish that the organization was operated for an exempt_purpose as we noted above the key factor for exemption under sec_501 is the purpose of the activity and not the nature of the activity b s w grp inc v commissioner t c pincite pic’s assertions if true might enable one to say that the pic’s activities had a charitable effect which would be commendable but such an effect does not alone warrant tax-exempt status under sec_501 while evidence of an organization’s effect is often indicative of the organization’s purpose the effect per se may not carry the day as the founders of scripture press learned when the religious effects of their publications did not result in tax-exempt status scripture press found f 2d pincite second pic’s evidence does not establish that in fact its grants went to persons with low incomes pic did not use grantees’ income and family size as qualification criteria in its grant approval process though it represented to the irs that it would do so rather pic approved grants without regard to grantees’ incomes moreover pic did not provide any analysis or statistics that would support a finding that its grantees were poor distressed or underprivileged or that providing down payment assistance to them would constitute relief to such classes see c f_r sec_1_501_c_3_-1 pic merely asserts without evidence that it served low and moderate income buyers similarly showing that many pic grantees had been approved for fha loans does not establish that pic operated to relieve poverty as we noted above there do not appear to have been any income limitations that would have prevented upper-income individuals from qualifying for an fha loan more important even if fha rules did restrict fha loans to individuals with low incomes pic did not limit its program to buyers that used fha financing rather pic’s dpa verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports grants were available to individuals with any type of financing not just financing often used by low-income buyers indiscriminately giving money away to anyone who will take it is not a charitable purpose even if some of the recipi- ents are poor people sec_501 requires more it requires that the money be given away in such a way that it furthers a purpose of reducing poverty promoting edu- cation science or religion or promoting another public good we conclude that during and pic’s dpa program did not operate for a charitable purpose c commerciality during the examination years pic engaged in two over- lapping but distinct forms of activities activities that ulti- mately benefited the buyers eg dpa grants and home owner education and activities that ultimately benefited the sellers eg providing ready buyers and promoting faster sales at generally higher prices pic’s transactions with sellers generated significant revenues over dollar_figure million in and dollar_figure million in and were clearly substan- tial even assuming arguendo that pic’s buyer-benefiting activities served an exempt_purpose pic’s seller-benefiting activities failed to further an exempt_purpose and defeat the contention that pic was operated exclusively for a charitable purpose see 326_us_279 the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or impor- tance of truly exempt purposes an organization is not necessarily disqualified from tax- exempt status solely because it generates fees in exchange for goods or services or because it conducts a business how- ever if an organization conducts activity with an apparently commercial character as its primary activity ‘that fact weighs heavily against exemption ’ 950_f2d_365 7th cir quoting b s w grp inc v commissioner t c pincite aff ’g tcmemo_1990_484 when an organization engages in substantial fee-for- service or other business activities the regulations under verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner sec_501 provide two overlapping standards to con- sider whether the organization was organized or oper- ated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 c f_r sec_1_501_c_3_-1 and whether the activity fails to further the organization’s exempt_purpose sec_1 c - c if the answer to either of those is yes then the organization is not operated exclusively for an exempt pur- pose pic fails under both standards if a trade_or_business is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the performance of a charitable educational or other purpose or function consti- tuting the basis for its exemption under sec_501 then it is an unrelated_trade_or_business sec_513 a tax-exempt_organization cannot operate for the primary purpose of car- rying on an unrelated_trade_or_business c f_r sec_1_501_c_3_-1 we are to consider all the circumstances in deciding whether pic is operated for the primary purpose of carrying on an unrelated_trade_or_business or whether pic’s fee-generating activity furthered a charitable purpose impor- tant factors indicating a nonexempt commercial purpose include the particular manner in which an organization’s activities are conducted the commercial hue of those activi- ties and the existence and amount of annual or accumulated_profits b s w grp inc v commissioner t c pincite pic required the payment of fees in more than of its transactions by the end of pic had generated accumu- lated profits of dollar_figure with the small exception of interest and capital_gains from securities seller fees were pic’s only source of revenue in and pic contracts with rdi encouraged clos ing the highest possible number of t ransactions and quickly obtain ing market share and resulted in significant funds paid to pic’s director’s wife as a purported charitable_organization pic nominally satisfied hud guidelines as a source for down payment assistance but in fact pic’s arrangement with sellers ie with regard to fha loans u s c sec b b allows borrowers to acquire down payment funds from family members hud pol- icy allowed down payment funds from a few additional sources the bor- rower’s employer or labor_union a governmental entity a charitable orga- continued verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports pic pays down payment money into escrow in advance of closing and obtains reimbursement of it from the seller through the closing was substantially equivalent to trans- actions that were disallowed under hud policy ie home sellers providing potential buyers with down payments to facilitate sales see infra note by using its founder’s expertise and relationships in the real_estate business and using its ability to facilitate otherwise impermissible trans- actions for the apparent benefit of both sellers and buyers pic was able to create a lucrative fee-generating business apart from funding buyers’ grants for the benefit of sellers pic’s seller-related activities did nothing to further pic’s purported charitable goals see revrul_2006_27 supra pic’s primary purpose was to broker as many transactions as possible and thus to generate significant net profits regardless of whether the transactions achieved a charitable end accordingly even if pic’s dpa program had served a charitable_class of buyers it did not pic did not operate exclusively for charitable purposes see easter house v united_states cl_ct holding that an adoption agency that provided related health and educational_services to pregnant women who agreed to place their newborns for adoption with the organization was not exempt because the business_purpose was the primary goal of the adoption agency aff ’d without published opinion 846_f2d_78 fed cir rather since pic’s fee-generating activity was its primary purpose for operating and that activity was not substantially related aside from the need of such organization for income or funds to a charitable end pic operated for the primary purpose of carrying on an unrelated_trade_or_business see sec_513 c f_r sec_1_501_c_3_-1 pic argues that it did not give seller funds to a buyer- an important requirement under the hud guidelines see 539_fsupp2d_40 d d c pic contends that it received fees from sellers only after closing and that the fees were necessary for pic nization and a close friend with a clearly defined and documented interest in the borrower hud handbook rev pincite date however hud policy did not allow down payment assistance to come di- rectly from home sellers or parties with an interest in the transaction pe- nobscot indian nation v hud 539_fsupp2d_40 d d c verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner to recoup the costs of its grants and therefore the seller- paid fees furthered the grant-making purpose this argu- ment misses its mark before pic gave funds to a buyer pic required a promise from the seller that immediately after closing the seller would pay pic the buyer’s grant amount plus a fee-and the evidence shows that in fact the seller’s payment was made to pic from the escrow ie without risk that the seller would renege in essence a dpa grant went from pic to the buyer to the seller and right back to pic more important however pic’s argument fails to provide an explanation for its very substantial profits and for its obvious profit_motive no entity accumulates profits of dollar_figure million in two years by accident those profits are strong evidence that pic’s commercial activities with sellers were its primary pur- pose d educational and other activities pic also argues that it devoted significant time and resources to financial counseling seminars and other edu- cational programs designed to prepare potential home buyers for the responsibility of home ownership which pic contends supports a conclusion that it operated for educational pur- poses pic’s efforts to educate potential buyers were signifi- cant and perhaps even commendable however we cannot analyze pic’s educational activities in a vacuum they must be considered in conjunction with pic’s other substantial activities-in particular its dpa program and transactions with sellers neither of which furthered exempt purposes many for-profit non-exempt businesses go to considerable efforts to educate their potential consumers teaching can further a tax-exempt educational purpose or it can further non-exempt purposes in pic’s case its teaching was a means to the end of clos ing the highest possible number of t ransactions pic argues that its recouping its dpa grants from the sellers is simi- lar to a tax-exempt hospital’s recouping fees associated with medical_care it provides a hospital provides medical_care whereas pic does not of course provide housing nor does it actually provide down payment funds for the house sale but merely provides cover for the fact that the seller is providing the down payment but even assuming that pic’s activity is analogous to that of a tax-exempt hospital pic points to no instance of a tax-exempt hospital’s profiting so handsomely from the recouping of fees verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie united_states tax_court reports moreover as the supreme court has instructed the pres- ence of a single non-educational or non-charitable purpose if substantial in nature will destroy the exemption regard- less of the number or importance of truly educational or charitable purposes better bus bureau of wash d c u s pincite accordingly even if pic provided helpful edu- cation to potential buyers the presence of its other substan- tial non-exempt activities prevents us from concluding that pic was operated exclusively for educational_purposes e conclusion since we have determined that pic failed to serve a chari- table class and that a substantial amount of its activity did not further a charitable purpose but furthered instead an unrelated business and since either of these determinations by itself is fatal to pic’s claim to be an organization described in sec_501 we need not address the irs’s other reasons for revoking pic’s exempt status ie private_inurement and private benefit iii retroactive effect the last issue we must address is the propriety of the irs’s making its revocation retroactive as we explained above in part i sec_7805 and sec_26 c f_r sec_601_201 give the irs discretion to retroactively revoke exemption rulings or determination letters where the organization omitted or misstated a material fact or oper- ated in a manner materially different from that originally represented and we review that retroactive revocation for abuse_of_discretion pic operated in a manner that was different from what it represented to the irs in its application pic represented there that its purpose was to provide down payment assist- ance program for low income individuals and families that its down payment assistance will be provided only to individuals who have a financial need for such services and that pic intended to meet the safe_harbor guidelines set forth in revproc_96_27 supra which would assure that certain percentages of individuals pic served had incomes at specified levels below the area’s median income despite these representations both the administrative record and the verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie partners in charity inc v commissioner trial record show that pic did not have any income limita- tions for its grantees nor did it screen buyers for down pay- ment assistance based on income rather pic provided a grant to any home buyer who qualified for a loan pic reported on its form_1023 that it would solicit gifts from corporations foundations and individuals with whom the members directors and officers have personal relation- ships however pic received virtually all of its funding from sellers and contrary to pic’s characterization seller payments were not gifts nor did pic have personal relation- ships with sellers instead those receipts were in consider- ation for the services pic provided the sellers for these reasons we conclude that the irs did not abuse its discretion in revoking its initial determination retro- actively decision will be entered for respondent f verdate mar feb jkt po frm fmt sfmt v files boundv wit bvacdb partne jamie


t c memo united_states tax_court john s gibson f k a john s mactavish petitioner v commissioner of internal revenue respondent docket no filed date peter l milinkovich for petitioner john c schmittdiel for respondent memorandum opinion panuthos chief special_trial_judge this case is before the court on petitioner’s motion for litigation and administrative costs filed pursuant to sec_7430 and rule all references to sec_7430 are to that section as in effect at the time the petition was filed unless otherwise indicated all other 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 we must decide whether petitioner is entitled to administrative and litigation costs after concessions ’ the issue for decision is whether respondent’s position in the underlying proceeding was substantially justified we hold that respondent’s position was substantially justified and therefore petitioner is not entitled to an award of administrative and litigation costs petitioner seeks fees and costs totaling dollar_figure the parties submitted memoranda and affidavits supporting their positions we decide the motion on the basis of those memoranda affidavits and the record in this case neither party requested a hearing and we conclude that a hearing is not necessary to decide this motion see rule a petitioner resided in ramsey minnesota at the time he filed his petition background respondent began an examination of petitioner’s federal_income_tax returns for tax years through sometime in petitioner did not file a federal_income_tax return for t respondent concedes that petitioner substantially prevailed with respect to the amount in controversy met the net_worth requirement as provided by sec_7430 and exhausted his administrative remedies tax_year and this tax_year was also included as part of the examination during the examination respondent obtained petitioner’s accounts_receivable book redbook respondent computed gross_receipts and proposed adjustments to income relying on the redbook petitioner sent respondent a letter on at least one occasion to dispute the method by which respondent interpreted the redbook in proposing adjustments to gross_receipts each time petitioner or his representative identified errors respondent considered the information and modified the adjustments to income respondent issued a notice_of_deficiency to petitioner on date respondent determined deficiencies in petitioner’s federal income taxes penalties and additions to tax as follows additions to tax penalties year deficiency sec_6651 a sec_6654 sec_6662 a dollar_figure dollar_figure ---- s654 big_number --- --- big_number big_number --- big_number big_number big_number dollar_figure --- petitioner did not attach to his motion for costs a copy of the correspondence but the notice_of_deficiency makes reference to unspecified allegations of error by petitioner - - respondent computed gross_receipts for through by relying on petitioner’s redbook respondent reconstructed income for the tax_year using the bank_deposits method petitioner timely filed a petition with this court petitioner disagreed with respondent’s method of calculating gross_receipts petitioner alleged in the petition as follows the petitioner disagrees with each and every adjustment set forth in respondent’s notice_of_deficiency the respondent has recomputed petitioner’s income based on a method that is so flawed and full of errors that it lacks all basis in reality furthermore since the income computation is incorrect the penalties which are applied against the income are not appropriate and are therefore disputed petitioner did not specifically identify the alleged errors made by respondent in the notice_of_deficiency in his answer respondent generally denied the allegations of error at some point in respondent with petitioner’s assistance calculated income for and via the bank_deposits method petitioner provided information to respondent’s appeals officer to establish that certain deposits for and were not taxable the parties agreed to the amount of unreported gross_receipts for tax years through shortly thereafter between date and date the parties reconstructed petitioner’s income and expenses for tax_year the parties also reached agreement regarding the adjustment to business gross_receipts for the gross_receipts per the notice of --- - deficiency and the gross_receipts per the agreement are set forth below year notice_of_deficiency agreed amount dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number total big_number big_number a stipulation of settlement based on the agreement of the parties was filed on date the deficiencies additions and penalty agreed to are as follows additions to tax penalty year deficiency sec_6651 a sec_6654 sec_6662 a dollar_figure dollar_figure --- none --t --- sec_191 none none --- none big_number big_number none --- petitioner argues that respondent was not substantially justified because respondent used a flawed method of determining income by treating the redbook as a cash receipts journal instead of including as income the amounts petitioner actually received petitioner contends that respondent’s determination resulted in an overstatement of income petitioner further argues that respondent should have used a bank_deposits or net_worth_method we note that while neither party presented evidence as to whether petitioner reported income and expenses by the cash or accrual_method we assume that the method_of_accounting and reporting is not in issue in this case -- - to verify income finally petitioner asserts that the need to independently verify the calculation gross_receipts arose from the irs’ distrust of the taxpayer not the inadequacy of the records respondent contends that he was substantially justified because he relied on petitioner’s books_and_records in determining income pursuant to sec_446 and when it became apparent that petitioner’s books_and_records were inaccurate respondent in concert with petitioner’s counsel employed the bank_deposits method further respondent claims that he was substantially justified as to tax_year because petitioner did not file a tax_return and therefore respondent was required to compute income it was by use of the bank_deposits method that the parties were able to resolve the amounts in dispute discussion a sec_7430 sec_7430 provides that the prevailing_party in any administrative or court_proceeding may be awarded a judgment for reasonable_administrative_costs incurred in connection with such administrative proceedings within the internal_revenue_service irs and reasonable_litigation_costs incurred in connection with such court proceedings see sec_7430 c the prevailing_party must exhaust his administrative remedies - and the prevailing_party must not protract either the administrative or court proceedings see sec_7430 the parties agree that petitioner exhausted his administrative remedies ’ a prevailing_party is defined as a taxpayer who substantially prevails as to the amount in controversy or with respect to the most significant issue or set of issues see sec_7430 c a sec_301_7430-5 proced admin regs respondent concedes that petitioner substantially prevailed as to the amount in controversy or with respect to the most significant set of issues petitioner will nevertheless fail to qualify as the prevailing_party if respondent can establish that respondent’s position in the administrative and court proceedings was substantially justified see sec_7430 b b substantial justification the commissioner will be substantially justified where his position has a reasonable basis in both law and fact see 487_us_552 900_f2d_655 3d cir affg in part and revg in part on other grounds 92_tc_510 748_f2d_1011 5th cir as a result of our conclusion herein we need not decide whether petitioner protracted the proceeding --- - a position is substantially justified if the position is justified to a degree that could satisfy a reasonable person pierce v underwood supra pincite construing similar language in the equal_access_to_justice_act the commissioner’s position may be incorrect but nevertheless be substantially justified ‘if a reasonable person could think it correct ’ 108_tc_430 quoting pierce v underwood supra pincite n the fact that the commissioner eventually loses or concedes a case does not establish that his position was unreasonable see 991_f2d_359 7th cir 975_f2d_1150 5th cir 931_f2d_1044 5th cir 92_tc_760 however it does remain a factor to be considered see estate of perry v commissioner supra 100_tc_457 affd in part revd in part and remanded on another issue 43_f3d_172 5th cir as relevant herein we review the commissioner’s position as of the date of the notice_of_deficiency to determine whether he was substantially justified with respect to the recovery_of administrative costs see sec_7430 b we examine the commissioner’s position in his answer to the petition to determine whether he was substantially justified with respect to the recovery_of litigation costs see 930_f2d_759 9th cir 861_f2d_131 5th cir affg 89_tc_79 ordinarily we consider the reasonableness of each of these positions separately see huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding on other issues tcmemo_1991_144 in the present case however we jointly consider the positions because there is no indication that respondent’s position changed between the issuance of the notice_of_deficiency on date and the filing of the answer to the petition on date see 106_tc_76 c reasonable basis in law and fact taxpayers are required to maintain books_and_records in accordance with rules and regulations prescribed by the secretary see sec_6001 generally taxpayers must keep such permanent books of account or records sufficient to establish gross_income deductions or other matters required to be shown on the return sec_1_6001-1 income_tax regs accounting_records include the taxpayer’s regular books and other records and data necessary to support entries on books and tax returns see sec_1_446-1 income_tax regs taxable_income is generally computed under the method_of_accounting on the basis of which the taxpayer regularly computes -- - his income in keeping his books see sec_446 however if the method_of_accounting or the books do not clearly reflect income the commissioner may compute income through any method that clearly reflects income see sec_446 348_us_121 695_f2d_145 5th cir 43_tc_824 zamzam v commissioner tcmemo_2000_371 the commissioner’s reconstruction_of_income need only be reasonable it need not be exact see holland v united_states supra 54_tc_1530 40_tc_30 diesel country truck stop inc v commissioner tcmemo_2000_317 the commissioner need not concede an adjustment until he has received and verified adequate substantiation for the items in guestion simpson fin services v commissioner tcmemo_1996_317 citing 854_f2d_263 7th cir affg t c memo see sokol v commissioner supra pincite respondent relied on petitioner’s books_and_records in computing gross_receipts for through respondent determined in the notice_of_deficiency for tax years and that petitioner omitted gross_receipts totaling dollar_figure although respondent’s method of computing gross_receipts was not error free respondent wa sec_75 percent accurate in the determination in the notice_of_deficiency using petitioner’s books_and_records after respondent filed his answer petitioner and third parties provided documents to respondent that led respondent to adjust the computation of income respondent had a reasonable basis in law and fact in relying on petitioner’s records in determining the deficiencies petitioner argues that respondent was not substantially justified because respondent should have used the bank_deposit_method in his determination rather than relying on the redbook petitioner further asserts that respondent’s agent misconstrued the redbook according to petitioner the only reason respondent sought to substantiate the gross_receipts reported and in the case of not reported was respondent’s vendetta against petitioner in essence petitioner refutes the accuracy of his own books_and_records petitioner repeatedly emphasizes that respondent was not substantially justified because respondent did not verify gross_receipts through another method we reject we do not address since respondent employed the method bank_deposits which petitioner argues respondent should have used the notice_of_deficiency determined gross_receipts for through of dollar_figure the parties agreed that under the bank_deposits method petitioner failed to report gross_receipts of dollar_figure for those years petitioner’s nonsensical arguments even assuming the agent misconstrued petitioner’s books_and_records it is apparent that the records did not accurately reflect income further each time petitioner provided additional information to respondent recomputations were made to the proposed_adjustment to income ’ d conclusion we hold that petitioner is not entitled to an award of administrative and litigation costs because respondent’s position was substantially justified in so holding we have carefully considered the remaining arguments made by the parties and to the extent not discussed above we consider those arguments to be without merit in order to reflect the foregoing an appropriate order and decision will be entered as indicated petitioner did not file a return for tax_year in a year after respondent filed his answer to the petition the parties began a yearlong process of calculating petitioner’s gross_receipts respondent was not unreasonable in his initial determination or the consideration of documentation to verify gross_receipts for


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue list 408a krekkkekereekeerekrere krkkkekekreekkkeekrerer kekkkkekekekeekeee legend decedent a taxpayer b_trust c roth jra x roth_ira y dear kekekeeek ieee hanne es andoeineedotii iii iir irr rie i rr iie rii sri ie rii this is in response to your request dated date submitted by your authorized representative as supplemented by your letter dated date in which you request a ruling that roth_ira x and roth_ira y will not be treated as inherited iras within the meaning of sec_408 of the internal_revenue_code the code with respect to you and that you be permitted to rollover over the proceeds of roth_ira x and roth_ira y into a roth_ira maintained in your own name the following facts and representations have been submitted under penalty of perjury in support of the ruling requested decedent a died on at age decedent a was married to taxpayer b on the date of his death decedent a maintained two roth individual_retirement_accounts roth_ira x and roth_ira y decedent a designated trust c as the beneficiary of roth_ira x and roth_ira y trust c provides that upon decedent a’s death taxpayer b his spouse becomes the sole trustee of trust c trust c provides that upon decedent a’s death trust c is divided into two sub-trusts the marital trust and the family_trust the marital trust is to be funded with a pecuniary amount which after certain adjustments equals the amount of the minimum_marital_deduction required in order that the least possible federal estate_tax will be payable at decedent a’s death trust c further provides that the remainder is to be allocated to the family_trust trust c provides that the trustee’s decision as to the property to be allocated to the marital trust shall be final and conclusive and binding upon all beneficiaries with certain exceptions not relevant here it is taxpayer b’s intention as sole trustee of trust c -to allocate the assets of trust c other than roth_ira x and roth_ira y to the family_trust up to the basic exclusion amount of dollar_figure the remainder of trust c’s assets including roth_ira x and roth_ira y would be allocated to the marital trust under the terms of trust c the trustee shall pay all net_income of the marital trust to taxpayer b in addition the trustee may distribute to taxpayer b or use for her benefit any portion or all of the principal of the marital trust as the trustee deems desirable for her support comfort and welfare in her accustomed manner of living or for any other purpose the trustee believes to be for taxpayer b's best interests a’s primary concern is for taxpayer b’s well-being and happiness and the trustee need not consider the interest of any other beneficiary in making distributions to her or for her benefit this provision further states that decedent under the terms of trust c the trustee has the power to distribute trust property in cash or in_kind as sole trustee of trust c taxpayer b proposes to make a distribution of roth_ira x and roth_ira y to herself as beneficiary of the marital trust under her power to do so for any purpose because to do so is in her best interest it is taxpayer b’s intention to roll over said distribution into one or more iras set up and maintained in her own name at all times subsequent to decedent a’s death roth_ira x and roth_ira y have been maintained in the name of decedent a based on the facts and representations you requested the following rulings roth_ira x and roth_ira y will not be treated as inherited iras within the meaning of sec_408 of the code with respect to taxpayer b taxpayer b is eligible to roll over or have transferred by means of a trustee to trustee transfer roth_ira x and roth_ira y into a roth_ira set up and maintained in her own name as long as the rollover of such distribution occurs no later than the day from the date said distribution is received from the ira with respect to your ruling requests sec_408a of the code provides that except as provided in such section a roth_ira shall be treated for tax purposes in the same manner as an individual_retirement_plan defined in sec_7701 of the code as an individual_retirement_account or individual_retirement_annuity under sec_408 or sec_408 sec_408a of the code provides that no rollover_contribution may be made to a roth_ira unless it is a qualified_rollover_contribution sec_408a of the code provides that for purposes of that section the term qualified_rollover_contribution includes a rollover_contribution to a roth_ira from another such account sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides in summary that the rollover rules of sec_408 do not apply to inherited iras _4- sec_408 of the code provides that the term inherited ira means an ira obtained by an individual other than the ira owner's spouse as a result of the death of the ira owner sec_1_408-8 of the income_tax regulations question and answer q a provides that a surviving_spouse of an ira owner may elect to treat the spouse’s entire_interest as a beneficiary in an individual's ira as the spouse’s own ira of the ira and have an unlimited right to withdraw amounts from the ira trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust in order to make this election the spouse must be the sole beneficiary ifa in this case decedent a designated trust c as the beneficiary of roth_ira x and roth_ira y decedent a’s surviving_spouse taxpayer b is sole trustee of trust c under the terms of trust c the decision as to which property will be allocated to the marital trust rests with taxpayer b as trustee subject_to certain restrictions not applicable here intends to allocate decedent a’s roth_ira x and roth_ira y to the marital trust pursuant to this authority taxpayer b as trustee of the marital trust taxpayer b has the power to distribute to herself any portion or all of the property of the marital trust for any purpose the trustee believes to be in her best interests taxpayer b intends to distribute the proceeds of roth_ira x and roth_ira y to herself as beneficiary of the marital trust and to then rollover the distribution to one or more roth iras maintained in her own name generally if the proceeds of a decedent's ira are payable to a_trust and are paid to the trustee of the trust who then pays them to the decedent's surviving_spouse as the beneficiary of the trust the surviving_spouse is treated as having received the ira proceeds from the trust and not from the decedent accordingly such surviving_spouse in general is not eligible to roll over the distributed ira proceeds into her own ira however the general_rule will not apply where the surviving_spouse is the sole trustee of the decedent's trust and has the sole authority and discretion under trust language to pay the ira proceeds to herself the surviving_spouse may then receive the ira proceeds and roll over the amounts into an ira set up and maintained in her name therefore with respect to your ruling requests we conclude as follows roth_ira x and roth_ira y will not be treated as inherited iras within the meaning of sec_408 of the code with respect to taxpayer b taxpayer b is eligible to roll over or have transferred by means of a trustee to trustee transfer a distribution of the proceeds of roth_ira x and roth_ira y into a roth_ira set up and maintained in her own name as long as the rollover of such distribution occurs no later than the day from the date said distribution is made from the ira no opinion is expressed as to the tax treatment of the transaction described in this ruling under the provisions of any other section of either the code or regulations which may be applicable this letter is based on the assumption that that roth_ira x and roth_ira y met the requirements of sec_408a of the code at all relevant times and that the trust is valid under applicable state law rollover roth_ira established by taxpayer b will also meet the requirements of sec_408a at all relevant times it also assumes that any this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact id serseeeses at - please address all correspondence to se t ep ra t3 sincerely yours laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose lido iiek cc


aa e ate pra a tl department ofthe treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division aug uniform issue list legend taxpayer ira x amount a amount b financial_institution a financial_institution b dear ek xk xe er this is in response to your request dated date as supplemented by correspondence dated april june and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer represents that he received a distribution from ira x totaling amount a in ira x in a 12-month certificate of deposit cd taxpayer had invested amount a and he asserts that he had intended to roll over amount a into another 12-month ira cd when it matured as he had consistently done with amount a with prior ira cds but his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to his depositing the money in a non-ira cd by mistake and contrary to his established intent taxpayer maintained ira x with financial_institution a and invested ira x in a 12-month ira cd on date the assets in ira x were originally distributed from another ira and previously had been invested in a series of consecutive 12-month ira cds with timely rollovers to the next upon maturation of the previous 12-month ira cd on may taxpayer took a full distribution of amount a from ira x upon maturation of the 12-month ira cd and as he had done in the past he intended to deposit it into another ira cd with financial_institution b however he mistakenly deposited it into a regular non-ira cd on date by the time taxpayer became aware of the error the 60-day rollover period had expired a 12-month ira cd requires that it be reinvested every year when it matures taxpayer has represented and established through submitted documentation a - consistent practice for many years of rolling over the ira assets into a new ira cd when the prior ira cd matured based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to a portion of the distribution of amount a specifically amount b sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under section’ sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includibie in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 related to required distributions under sec_401 and incidental death_benefit requirements of sec_401 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer is consistent with his assertion that he intended to roll over amount a when his 12-month ira cd had matured but that his failure to accomplish a timely rollover was caused by depositing amount a into a regular non-ira cd by mistake and contrary to his established intent and previous practice therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer is granted a period of days from the issuance of this ruling letter to contribute amount b into an ira provided all other requirements of sec_408 except the 60-day requirement are met with respect to such contribution amount b will be considered a rollover_contribution within the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code regarding required distributions no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t2 sincerely yours ipfe manager lans technical group enclosures deleted copy of ruling letter notice of intention to disclose


number release date id office uilc cca_2011112816420644 -------------- from ---------------------- sent monday date pm to -------------------- cc --------------------- subject request for advice ------------------------ ---------- you asked our office to provide advice regarding whether a revenue_officer has authority to contract with a landlord to rent a building in which the taxpayer's personal_property to be seized is located for a period preceding the actual seizure sec_6341 authorizes the secretary to determine allowable expenses of levy and sale sec_301_6341-1 states that such expenses include the expenses of protection and preservation of the property during the period subsequent to the levy as well as the actual expenses_incurred in connection with the sale thereof irm states that the expenses of levy and sale include expenses or liabilities incurred to protect and preserve property during the period following service of a levy insurance police and private guards custodial or maintenance help rent or storage utilities trucking etc as well as actual expenses_incurred in connection with the sale these authorities establish that expenses of levy can only be generated following service of levy the ics history transcript you provided indicates that the notice_of_levy was not provided until date thus despite the revenue officer's oral agreement with the landlord to rent the -------- -------------- space for the period prior to providing the notice_of_levy and seizing the property he lacks authority to make such an agreement because that pre-levy rent is not an expense of sale contemplated by and the accompanying regulations please let me know if you have any questions or would like to further discuss this matter thanks ------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -----------------------


department of the treasury internal_revenue_service washington d c feb set ep khe ts oo tax_exempt_and_government_entities_division u i l xxxxxxxxxxxxxx xxxxxxxxxxxxxx xxxxxxxxxxxxxx xxxxxxxxxxxxxx legend taxpayer a xaxxaxxxxxxxxxx plan x xxxxxxxxxxxxx financial_institution b xxxxxxxxxxxxx amount d amount e amount f ira y xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx credit_union c xxxxxxxxxxxx date date date xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx 201618u14 dear this letter is in response to your request dated date as supplemented by correspondence dated october and date and date in which you request a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested on date taxpayer a received a distribution of amount d from plan x amount f was withheld for federal income taxes taxpayer a asserts that his failure to accomplish a rollover of amount f within the 60-day period prescribed by sec_402 of the code was due to the delay of international mail delivery financial_institution b was the custodian for plan x financial_institution b closed taxpayer a’s account in plan x and on date1 he received a check for amount e on date less than days after date taxpayer a rolled over amount e into ira y with credit_union c taxpayer a represents that once he became aware that ira y was established and amount e had been rolled over into ira y he made an online request with credit_union c to withdraw amount f from his checking account and deposit amount f into ira y on date after the 60-day rollover period amount f was deposited into ira y based on the foregoing facts and representations you request that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_402 of the code with respect to amount d sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be included in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomp lished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 of the code sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code sec_401 of the code provides the rules for governing direct transfers of eligible rollover distributions sec_1_401_a_31_-1 of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 i r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred based on the information presented and documentation submitted by taxpayer a no waiver of the 60-day rollover requirement is necessary with respect to amount e because the rollover of that amount was accomplished timely however such information and documentation does not support the assertion that taxpayer a’s failure to accomplish a timely rollover of amount f was due to delay of international mail delivery rather in this case after the 60-day rollover period taxpayer a made an online request to transfer amount f from his personal checking account to ira y further the documentation submitted does not demonstrate that taxpayer a failed to accomplish a rollover due to any of the factors cited in revproc_2003_16 therefore pursuant to sec_408 of the code the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount f from ira y this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions concerning this letter please contact xxxxxxxxxxxxxxxx xxxxxxxxxxxxxaxxxx at xxxxxxxxxxxx all correspondence should be addressed to se t ep ra t3 sincerely yours de cade j jl dé te carolyn e zimmerman acting manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


t c memo united_states tax_court jonathan harris petitioner v commissioner of internal revenue respondent docket no filed date jonathan harris pro_se frederick j lockhart jr for respondent memorandum opinion laro judge this case is before the court on respondent’s motion to dismiss for failure to state a claim upon which relief can be granted and to impose a penalty under sec_6673 as supplemented petitioner did not file a federal_income_tax section references are to the applicable versions of the continued return for or respondent prepared a form 4549a income_tax examination changes and issued to petitioner a notice_of_deficiency dated date that determined the following deficiencies in petitioner’s federal_income_tax and additions to tax_year deficiency sec_6651 sec_6651 sec_6654 additions to tax dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure see below see below dollar_figure see below dollar_figure with regard to the sec_6651 addition_to_tax for each year the note marked by the stated that the amount of the addition_to_tax cannot be determined at this time but an addition_to_tax of percent will be imposed for each month or fraction thereof of nonpayment up to percent based on the liability shown on this report petitioner while residing in wheat ridge colorado timely petitioned this court in his petition petitioner denies being a subject liable to tax and argues among other things that he has by his actions relinquished his subject status of u s citizenship and that this court lacks jurisdiction to decide the case continued internal_revenue_code rule references are to the tax_court rules_of_practice and procedure respondent filed a motion to dismiss the case for failure to state a claim upon which relief can be granted and to impose a penalty under sec_6673 the motion was calendared for a hearing at a date session of the court in denver colorado petitioner failed to appear when the case was called rule b requires that a petition filed in this court contain clear and concise assignments of each and every error that the petitioning taxpayer alleges to have been committed by the commissioner in the determination of any deficiency addition_to_tax or penalty in dispute rule b further requires that the petition shall contain clear and concise lettered statements of the facts on which the taxpayer bases the assignments of error see 123_tc_213 78_tc_646 any issue not raised in the pleadings is deemed to be conceded see rule b funk v commissioner supra pincite further the failure of a party to plead or otherwise proceed as provided in the court’s rules may be grounds for the court to hold such party in default either on the motion of another party or on the initiative of the court see rule a meeker v commissioner tcmemo_2005_146 ward v commissioner tcmemo_2002_147 the court also may dismiss a case and enter a decision against a taxpayer for the failure properly to prosecute or to comply with the rules of this court see rule b meeker v commissioner supra ward v commissioner supra we agree with respondent that petitioner has failed to state a claim upon which relief can be granted see funk v commissioner supra pincite meeker v commissioner supra petitioner has failed to present the court with a petition containing clear and concise assignments of error that petitioner alleges the commissioner has committed in the determination of the deficiency or the additions related thereto petitioner has likewise failed to include in his petition clear and concise statements of the facts on which he bases his assignments of error petitioner’s petition contains only the type of frivolous arguments that have been repeatedly made and rejected by this and other courts see eg funk v commissioner supra the petition neither conforms to this court’s rules_of_practice and procedure nor states a claim upon which relief can be based due to the absence from the petition of specific justiciable allegations of error and of supporting facts this court shall grant respondent’s motion see id in respondent’s motion respondent also asks the court to impose a penalty on petitioner under sec_6673 sec_6673 authorizes this court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless a taxpayer’s position is frivolous or groundless if it is ‘contrary to established law and unsupported by a reasoned colorable argument for change in the law ’ 114_tc_136 quoting 791_f2d_68 7th cir we find that petitioner has advanced frivolous and groundless statements contentions and arguments we further find that petitioner has instituted this proceeding primarily for delay under the circumstances presented we shall impose on petitioner a penalty in the amount of dollar_figure to reflect the foregoing an appropriate order of dismissal and decision will be entered for respondent


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi - plr-116298-03 date date number release date index number x a d1 year dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a the president and sole shareholder of x represents that x was intended to be an s_corporation effective for x’s year taxable_year however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective for its year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x effective for its year taxable_year a copy of this letter should be attached to the form_2553 plr-116298-03 -2- except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours matthew lay senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes