internal_revenue_service national_office technical_advice_memorandum february third party communication none date of communication not applicable tam-142230-05 number release date index uil no case-mis no director -------------------------------------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference -------------------------------- --------------------- -------------------- ---------------------------------- ---------------- --------------- --------------------------- legend parent corp a corp b llc a llc b corp c corp d state x state y month year year state act dollar_figurep dollar_figureq -------------------------------- ----------------- ---------------------------------- ------------------ ----------------------------------- --------------------------------------- ----------------------------------- ------------- ------------- -------------- ------- ------- ----------------------------------------------------- ----------------- ----------------- tam-142230-05 issues whether parent had a fixed liability under sec_1_461-1 of the income_tax regulations for driver services in year whether parent properly applied the ½ month rule in sec_1_461-4 of the income_tax regulations to its liability for driver services conclusions facts parent did not have a fixed liability for driver services in year parent did not properly apply the ½ month rule to its liability for driver services parent is a publicly traded state x transportation company primarily engaged in hauling ------------ shipments of general commodities in both interstate and intrastate commerce parent owns a majority of the trucks it uses to haul merchandise from various locations throughout the united_states parent also engages the services of independent contractors who own and operate their own trucks to haul merchandise throughout the united_states for federal_income_tax purposes parent files a consolidated_income_tax_return on a calendar_year basis and uses an overall accrual_method of accounting in month year parent altered its organizational structure in this restructuring parent changed the entity form and legal domicile of two of its subsidiaries corp a and corp b prior to the restructuring parent owned percent of corp a and corp a owned percent of corp b the restructuring is described in further detail below corp a a state x corporation was a first-tier wholly owned subsidiary of parent corp a owned or leased a number of terminals and employed individuals who performed maintenance services on parent’s trucks and trailers in year corp a changed domiciles from state x to state y and converted from a corporation to a single- member limited_liability_company all of the operations assets and liabilities of corp a transferred to the successor llc a for federal_income_tax purposes llc a is treated as a division of parent as single member llcs are disregarded entities as such all income and expense items of llc a are combined with parent’s income for federal_income_tax purposes corp c a new state y corporation was formed during the restructuring it is a first-tier subsidiary of llc a the sole asset of corp c is a one percent interest in the capital and profits of llc b tam-142230-05 corp b a state y corporation was a first-tier subsidiary of corp a it employed all of the drivers responsible for performing the freight driver services for parent corp b’s sole asset was its workforce parent compensated corp b for its driver services through an intercompany service fee neither parent nor any affiliate of parent ever compensated corp b through an advance_payment for driver services expected to be rendered in the future as a result corp b never received an advance_payment for driver services prior to the restructuring as part of the month year restructuring corp b was converted to a two- member llc llc b pursuant to the state act under the state act llc b’s existence was deemed to have commenced on the date corp b commenced its existence and llc b was deemed to be the same entity as corp b for all purposes of the laws of the state y thus the operations assets and liabilities of corp b remained vested in llc b after the conversion in addition pursuant to advice from its tax advisor llc b retained corp b’s federal taxpayer_identification_number for payroll reporting purposes llc b is treated as a partnership for federal_income_tax purposes and the membership interests of llc b are owned by llc a and by corp c llc b operates on a calendar_year basis and uses an overall accrual_method of accounting on december year parent and llc b entered into a receivables management agreement this agreement provided that parent may pay llc b for services rendered with certain accounts_receivable and that llc b agreed to accept these receivables without_recourse to parent under the agreement corp d1 is the designated agent responsible for collecting these receivables for a fee of dollar_figure percent of the net trade receivables on december year parent and llc b entered into a services agreement services contract the services contract effective on december year had a one-year term that was automatically renewable unless expressly terminated within days of the end of the preceding one-year period pursuant to the services contract llc b agreed to provide to parent upon reasonable request and in sufficient numbers to meet the needs of parent over-the-road truck drivers holding valid commercial drivers’ licenses and meeting applicable state department of transportation requirements pursuant to the services contract llc b agreed to provide transportation services in exchange for a payment on a per-mile basis for the cost of insurance driver pay and driver benefits the services contract specified that the payment per mile is calculated based on the costs incurred by llc b to provide the transportation services to parent plus a five percent mark-up and dividing the sum computed in step by the total miles driven llc b compensated its drivers based on corp d is a state x corporation also formed during the month year restructuring it is a first-tier wholly owned subsidiary of parent corp d employs a significant number of administrative personnel who are responsible for providing most of the support services to parent and its affiliates tam-142230-05 the number of miles driven on a weekly basis and it provided its drivers with a competitive benefits package payment generally was due under the services contract within fifteen days following the receipt of an invoice from llc b however the services contract provided parent the option to prepay up to three and one-half months the prepayment period worth of driver services that were reasonably expected to be rendered by llc b within the prepayment period the prepayment could be made in cash or cash equivalents such as trade receivables accounts_receivable in addition the services contract provided parent with a prepayment discount equal to of the short-term applicable_federal_rate in effect for the month in which the prepayment was made times the average period covered by the prepayment further it specified the manner in which to determine the face_amount of receivables needed to satisfy a prepayment this amount was to equal the prepayment amount less the prepayment discount plus the product of the discounted prepayment amount times of the short-term applicable_federal_rate in effect for the month in which the prepayment was made times the average period of time that the receivables remain outstanding the services contract did not contain any refund provisions with regard to the prepayment on december year parent exercised its prepayment option in the amount of dollar_figurep according to the terms and conditions of the services contract after applying the prepayment discount in accordance with the services contract parent transferred dollar_figureq of accounts_receivable to llc b on december year the advance_payment as a prepayment for the driver services that it expected llc b to render during the period january year through march year the expenses represented by the advance_payment amount consisted of estimated expenses that parent anticipated would be incurred by llc b during the first three months of year for driver salaries and wages payroll_taxes interest advertising for driver positions pension profit sharing plans employee_benefits programs driver travel lodging driver physicals and other deductions according to parent it relied on historical data existing customer orders existing long term contracts and forecasts of future demand to determine that it could expect llc b to render approximately dollar_figurep of driver services for the three month period from january year to march year in year for book purposes parent recorded the advance_payment as an asset for tax purposes parent deducted the advance_payment as an expense law and analysis issue although the services contract authorized a prepayment up to ½ months’ worth of driver services that were reasonably expected to be rendered by llc b within the prepayment period the dollar_figurep prepayment here actually represented driver services that were reasonably expected to be rendered during a month period not a ½ month period generally under sec_1_461-1 all the events have occurred that establish the tam-142230-05 sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business for a taxpayer using an accrual_method of accounting sec_461 and the regulations thereunder provide rules for determining when a liability is incurred specifically sec_1_461-1 provides that under an accrual_method a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability collectively the all_events_test it is fundamental to the all_events_test that although expenses may be deductible before they have become due and payable liability must first be firmly established 481_us_239 a taxpayer may not deduct a liability that is contingent nor may a taxpayer deduct an estimate of an anticipated expense no matter how statistically certain if it is based on events that have not occurred by the close of the taxable_year 291_us_193 each of the three prongs of the all_events_test fact of liability amount determinable with reasonable accuracy and economic_performance must be met before the liability is incurred this issue addresses whether all the events have occurred that establish the fact of the liability fact of the liability when the event fixing the liability whether that be the required performance or other event occurs or payment therefore is due whichever happens earliest revrul_80_230 1980_2_cb_169 revrul_79_410 1979_2_cb_213 amplified by revrul_2003_90 2003_2_cb_353 thus with regard to services the event fixing the liability generally is the performance of services unless payment is due prior to the services being performed the term liability is not limited to items for which a legal_obligation to pay exists at the time of payment thus for example amounts prepaid for goods or services and amounts paid without a legal_obligation to do so may not be taken into account by an accrual basis taxpayer any earlier than the taxable_year in which those amounts are incurred sec_1_446-1 taxpayer’s obligation to pay see eg 47_tc_58 acq 1967_2_cb_2 in the instant case the services contract generally provides that llc b will provide driver services upon parent’s request and will bill parent on a per mile basis after the services have been provided it further provides that parent will pay the charges for services within fifteen days following receipt of llc b’s bill because payment under the services contract is not due until after the services are performed the first event that occurs to fix parent’s liability is llc b’s performance of services thus the fact of the liability for driver services was established in year we note that sec_267 does not apply to this transaction because both parent and llc b use an accrual_method of accounting see sec_267 the terms of a contract are relevant in determining the events that fix a tam-142230-05 parent argues that its liability for driver services was fixed in year in that year the services contract was executed and parent made the advance_payment under the prepayment option of the services contract we do not believe either one of these events fixed parent’s liability for the driver services first it is well established that an accrual basis obligor is not permitted to deduct an expense stemming from a bilateral contractual arrangement that is mutual promises prior to the performance of the contracted for services by the obligee revrul_80_182 1980_2_cb_167 citing 21_tc_996 aff’d 219_f2d_588 3d cir an agreement for services to be performed in the next year did not fix the liability but was simply an agreement under which a liability would be incurred in the future and 37_bta_817 aff’d per curium 108_f2d_1010 2d cir required to renovate the apartments after a period of months in holding the taxpayers did not have a fixed liability until the renovation occurred the court stated in amalgamated housing the taxpayers owned apartment buildings and were they the taxpayers did not have to wait until they had actually paid for the renovating before they could accrue their liabilities to pay for that renovating but on the other hand they could not property accrue as an expense the estimated cost of the renovating prior to the end of the period of months and prior to the time that the painter rendered some services although petitioners were obligated to renovate they had no liability to pay anyone anything until someone had performed some services the accrual is for services in renovating not of the duty to renovate the accrual_method does not permit the anticipation of future expenses prior to the rendition of the services for which the payment is due id pincite citations omitted in 30_tc_550 the taxpayer was denied a deduction for guaranteed installation services for machines sold but uninstalled the court stated the prepayment of services raises the issue of whether the advance_payment should be capitalized under sec_263 as of date however sec_1_263_a_-4 provides that a taxpayer is not required to capitalize amounts paid to create any right or benefit for the taxpayer that does not extend beyond the earlier of - i months after the first date on which the taxpayer realizes the right or benefit or ii the end of the taxable_year following the taxable_year in which the payment is made although this 12-month rule was not effective during the taxable_year at issue lmsb did not raise capitalization as an issue because after the advance notice of proposed rulemaking proposed a 12-month rule the commissioner of lmsb advised examiners not to pursue this issue if they had not already prepared a form_5701 as of date tam-142230-05 there can be no doubt that under its sales contracts the petitioner was obligated to render some services in connection with the installation of its machines and the estimate of cost made by the petitioner was not substantially different from the amounts subsequently expended however until those services were rendered there was no definite liability on the part of the petitioner to pay any amount to any person the liability was contingent until there was performance id pincite see also 171_f2d_395 8th cir taxpayer’s contractual obligation to pay moving costs in a future year became final when the contract was executed but was not fixed until the moving services were performed 144_f2d_45 2d cir it is well settled that deductions may only be taken for the year in which the taxpayer’s liability to pay becomes definite and certain even though the transactions such as the contract in the present case which occasioned the liability may have taken place in an earlier year citations omitted 26_bta_685 contractual obligation to purchase tires in a future year did not create a fixed liability 18_bta_954 a contract for future railroad track removal services did not fix the taxpayer’s liability but was simply an agreement under which a liability would be incurred in the future william j ostheimer 1_bta_18 lessee’s obligation under lease to restore or replace certain property at the end of the lease_term was not fixed until the property was restored or replaced enactment of the economic_performance rules in the tax act sec_461 added the economic_performance requirement to the all_events_test but did not change the requirement that a liability must be fixed and determinable with reasonable accuracy although the statute is clear that the economic_performance rules did not change the first two prongs of the all_events_test it has been argued that the legislative_history to sec_461 provides that after the mere existence of a contract is enough to fix a taxpayer’s liability in addressing the record-keeping required for taxpayers to prove compliance with the economic_performance requirement the house report provides the fixed liability determinations in the cases cited above are not affected by the in the absence of unusual circumstances the existence of a valid contract requiring another person to provide property or services to the taxpayer prior to the end of the taxable_year or ½ months thereafter in the case of recurring items would be sufficient to establish compliance with the economic_performance standard with respect to the taxpayer’s liability for an expense reflected in such contract h_rep_no page this language was intended to illustrate what proof a taxpayer might use to show compliance with the economic_performance requirements and was not intended to illustrate when a liability is fixed the legislative_history does tam-142230-05 not provide any support for the proposition that a liability is fixed merely upon the existence of a valid contract indicates that the irs and treasury_department believed that the mere execution of a contract does not satisfy the fixed liability prong of the all_events_test the preamble explains why former example in the proposed_regulations was removed further the preamble to the final regulations implementing sec_461 clearly commentators also said example of sec_1_461-4 of the proposed_regulations which illustrates the ½ month rule suggests that an executory_contract satisfies the all_events_test the examples in the proposed and final regulations are intended to illustrate the principles of economic_performance they are not intended to illustrate all aspects of the all_events_test nevertheless this example and example of sec_1_461-4 of the proposed_regulations are removed from the final regulations to avoid any implication that an executory_contract satisfies the all_events_test emphasis added finally parent’s facts are not analogous to the line of cases holding that a liability preamble to t d fed reg date c b thus neither sec_461 nor the regulations there under change the result of the cases discussed above nor do they affect our analysis in the instant case may be fixed by a statutory or regulatory obligation to perform certain activities see 77_tc_1369 271_f2d_930 3d cir acq 1958_2_cb_5 192_f2d_1002 4th cir in each of these cases the taxpayer engaged in strip mining and was required_by_law to file a reclamation plan accompanied by a bond equal to the total estimated reclamation costs the court in each case held that the taxpayer had a fixed liability for reclamation costs in the year in which the mining ceased rather than in the year in which the reclamation activities occurred these cases are often cited for the proposition that a statutory or regulatory obligation can fix a taxpayer’s liability see also 476_us_593 casino had fixed liability for guaranteed_payment amounts on progressive slot machines that were not yet won because the liability was fixed by state gaming regulations after the last play of the slot machine 158_f3d_484 9th cir casino could deduct value of slot club points won by slot club member but not yet redeemed because the liability was fixed by state gaming regulations once a member accumulated a certain number of points the services contract in this case does not impose the same level of regulatory oversight that was common to the reclamation and casino cases thus those cases do not require a conclusion that a fixed liability exists upon the mere execution of the services contract in this case in fact parent has no liability under the services contract in this case unless and until llc b provides driver services to parent further in the reclamation and casino cases cited above the existence of the tam-142230-05 statute or regulation was not the event that fixed the liability instead the courts in those cases considered what event under the statute or regulation triggered the liability for example in the reclamation cases the court held that it was the strip mining itself and not the statute alone that created the reclamation liability similarly in hughes and gold coast the courts determined that the event creating the liability was not the state gaming regulation but instead the last play of the slot machine before the end of the tax_year and accumulation by a club member of the minimum number of points needed to redeem a prize respectively therefore even if the services contract created the equivalent of a statutory or regulatory obligation that obligation was not triggered by the mere execution of the services contract see also chrysler corp v commissioner t c memo warranty liability not fixed by mere existence of warranty 114_tc_293 oil company’s expectation and prediction that it would be required to perform restoration to certain oil field equipment and facilities did not fix the restoration liability 62_tc_786 aff’d 564_f2d_886 9th cir statutory requirement to overhaul aircraft after specified number of flight hours did not fix overhaul liability obligated parent to pay for driver services in the event that parent ever requested those services and llc b provided the services parent had no liability to pay under the services contract unless and until any driver services were performed thus performance of services by llc b was a condition_precedent to the establishment of parent’s liability for driver services the execution of the services contract in year did nothing more than establish a contractual duty to pay in the future if contingent services were provided there is no indication in the facts of this case that any services were performed by llc b under the services contract in year thus the execution of the services contract in year did not fix parent’s liability to llc b for the driver services neither did the advance_payment fix parent’s liability for the driver services under the services contract parent argues that the advance_payment somehow changes the result of the cases discussed above and provides an earlier date for the liability being fixed as noted above it is clear that a liability is fixed if payment is due under the terms of a contract however the advance_payment in this case was not due under the services contract in year the services contract merely provided that parent could at its option prepay an estimated amount to cover services to be provided in the next ½ months therefore parent’s liability for the driver services was not fixed in year see sec_1_446-1 amounts prepaid for goods or services and amounts in the instant case the services contract between parent and llc b merely as noted earlier in the discussion of this issue the second prong of the all_events_test provides that a liability is not incurred unless the amount of the liability can be determined with reasonable accuracy thus even if parent’s liability for driver services were fixed in year parent would also have to show tam-142230-05 paid without a legal_obligation to do so may not be taken into account by an accrual basis taxpayer any earlier than the taxable_year in which those amounts are incurred parent has not cited any authority holding that an optional prepayment by an accrual_method taxpayer can accelerate the establishment of a liability that is otherwise not fixed until a later year the particular facts of this case raise other questions as well issue in year thus no deduction in year is permitted however even assuming that parent had a fixed liability in year and could determine the amount with reasonable accuracy an issue not addressed in this technical_advice_memorandum it also would have to meet the economic_performance prong of the all_events_test see sec_461 and sec_1_461-4 sec_461 provides that if the liability of the taxpayer arises out of the providing of services to the taxpayer by another person economic_performance occurs as such person provides such services see also sec_1_461-4 therefore under this general_rule economic_performance would occur with respect to the driver services as the services are provided by llc b to parent even though the advance_payment is made prior to the services being performed as discussed in issue parent did not have a fixed liability for driver services that the amount could be determined with reasonable accuracy we understand that parent has not yet provided substantiation to the field regarding how it determined the amount of its liability the only authority cited by parent in support of its position that the advance_payment fixed the liability for driver services is 76_tc_84 acq 1981_2_cb_2 in which the court allowed a deduction for an accrual_method taxpayer’s prepayment of intangible_drilling_and_development_costs idc two days before the end of its taxable_year to an unrelated drilling contractor pursuant to a contract to drill six wells however the government did not raise the issue as to whether the taxpayer’s liability for the drilling expenses met the all_events_test in the year of the deduction until filing its reply brief with the court thus the court refused to consider the government’s arguments stating that these issues were effectively abandoned during the early stages of this proceeding therefore without considering the issue of whether the contract represented a fixed obligation in the year of the deduction under the all_events_test the court assumed that the liability was fixed and ruled in favor of the taxpayer see also cheroff v commissioner t c memo commissioner conceded both elements of the all_events_test for idc costs thus these cases are not relevant to determining whether parent’s advance_payment fixed its liability for driver services see 859_f2d_783 9th cir holding that idc liability was not fixed on execution of the contract and distinguishing stradlings and cheroff on the basis that those cases did not consider the application of the all_events_test for example the advance_payment was made by a transfer of trade receivables between related parties and the sole basis for determining the amount of the advance_payment was to take advantage of the ½ month rule in sec_1_461-4 these particular facts call into question whether even a mandatory prepayment under the services contract would have fixed the liability in this case see 301_f2d_190 2d cir determining the proper tax treatment of transactions involving related parties requires close scrutiny however an exception to the economic_performance rule for services is the so- tam-142230-05 called ½ month rule in sec_1_461-4 that rule provides that a taxpayer is permitted to treat services or property as provided to the taxpayer ie as economic_performance as the taxpayer makes payment to the person providing the services or property if the taxpayer can reasonably expect the person to provide the services or property within ½ months after the date of payment thus parent in this case argues that it can treat the advance_payment as meeting economic_performance so long as parent can reasonably expect the services to be provided within ½ months after the advance_payment the question is whether this rule contemplates that all of the services under the services contract must be provided within ½ months or whether this rule permits parent to accelerate into year a deduction for ½ months’ worth of services to be provided in year the particular liability in this case is for driver services to be provided both during and after the ½ month period following the advance_payment in general a liability is not divisible unless different services are required to be provided to the taxpayer under a single contract in which case economic_performance occurs and any applicable economic_performance exception will apply separately with regard to each service provided sec_1_461-4 the services contract in this case provides for driver services to be performed and billed on a per-mile basis it does not provide for different or divisible services in the absence of a divisible contract there is no authority in the sec_461 regulations allowing parent use the ½ month rule for some portion of the liability for driver services under the services contract even if parent can reasonably estimate the amount of services that will be provided to it within ½ months although sec_1_461-4 does not specifically state that all the services must be provided within ½ months that conclusion is implicit in the language that requires the services not a pro-rata amount or portion of services to be provided within ½ months emphases added the language of the regulation does not provide that taxpayers may use the rule to meet economic_performance for a service liability to the extent of services provided for example compare the language of the ½ month rule with the language of the ½ month rule for deferred_compensation under sec_1 b - payment for this purpose has the same meaning as is used when determining whether a taxpayer using the cash_receipts_and_disbursements_method of accounting has made a payment sec_1 g ii a thus for example payment includes the furnishing of cash or cash equivalents and the netting of offsetting accounts payment does not include an amount transferred as a loan refundable deposit or contingent payment in this case parent has not shown that the receivables transferred as the advance_payment which were transferred to llc b without_recourse are cash equivalents in addition parent has not demonstrated that the advance_payment was not a loan refundable deposit or contingent payment although the services contract is silent as to whether parent could receive a refund of the advance_payment we think a voluntary prepayment in a transaction between unrelated parties generally would be refundable therefore even assuming the advance_payment is a cash_equivalent it may not constitute payment for sec_461 purposes or even a deductible expense under sec_162 if the advance_payment is a loan refundable deposit or contingent payment parent has the burden of clearly showing its entitlement to a deduction for the advance_payment see 503_us_79 parent has not yet done that unlike the deferred_compensation rule the ½ month rule is an all or nothing tam-142230-05 1t b providing that a plan or method or arrangement is presumed to defer the receipt of compensation_for more than a brief period of time after the end of an employer’s taxable_year to the extent that compensation is received after the 15th day of the 3rd calendar month after the end of the employer’s taxable_year in which the related_services are rendered emphasis added rule with respect to a particular liability or a properly divisible portion of a liability therefore the ½ month rule does not apply to allow a deduction for the advance_payment made in year for services to be performed in the first ½ months of year because the term of the services contract extends beyond the ½ month period see also fsa lexi sec_463 date issue concluding that the taxpayer may not deduct a prorated amount of services under sec_1_461-4 if not all services will be provided within ½ months caveat s k provides that it may not be used or cited as precedent a copy of this technical_advice_memorandum is to be given to parent section


t c memo united_states tax_court etta m lowery petitioner v commissioner of internal revenue respondent docket no filed date etta m lowery pro_se marty j dama for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined the following deficiencies in and penalties with respect to petitioner’s federal income taxes year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure dollar_figure dollar_figure unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions by respondent the issues for decision are whether petitioner is entitled to deduct amounts received as compensation_for services from allstate insurance co allstate and first command financial planning first command as other miscellaneous deductions miscellaneous_itemized_deductions claimed on schedule a itemized_deductions for and is entitled to deduct expenses for her home health care business claimed on schedule c profit or loss from business for and must include in her gross_income the distribution to her from the savings and profit sharing fund of allstate employees the distribution is liable for a 10-percent additional tax under sec_72 for respondent concedes income_tax adjustments of dollar_figure and dollar_figure for and respectively the self-employment_tax and related deductions and the amount of petitioner’s personal_exemption are computational matters see sec_151 sec_164 sec_1401 sec_1402 petitioner argued in her pretrial memorandum and at trial that the court did not have jurisdiction and respondent must pursue the return of the refunds under sec_7405 on brief however she advanced no argument in support of this contention it is therefore deemed abandoned see 121_tc_308 the distribution and is liable for a sec_6662 accuracy-related_penalty for each of the years and findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference at the time the petition was filed petitioner resided in texas petitioner worked for allstate as a sales manager in and as a district manager in and part of she worked for first command for the remainder of in and petitioner received dollar_figure dollar_figure and dollar_figure respectively as compensation petitioner included these amounts in her federal_income_tax returns for and and claimed miscellaneous_itemized_deductions in equal amounts petitioner also claimed dollar_figure in schedule c deductions for expenses related to her home herbal health care business for her deductions were claimed for advertising expenses automobile expenses supplies travel meals and entertainment and other expenses she claimed her house had been flooded and therefore she could not recover any receipts from she did petitioner claimed total schedule a itemized_deductions of dollar_figure dollar_figure and dollar_figure for and respectively respondent disallowed miscellaneous_itemized_deductions of dollar_figure dollar_figure and dollar_figure for and respectively not give respondent’s revenue_agent cathy street ms street the names of her suppliers or other information to reconstruct the claimed expenses she also claimed dollar_figure in schedule c deductions for petitioner received from the savings and profit sharing fund of allstate employees a distribution of dollar_figure by check dated date petitioner deposited the check into her interest-bearing checking account at bank of america she wa sec_48 years old when she received the distribution petitioner did not include the distribution in her income for ms street issued a summons to petitioner’s bank to obtain bank records and performed a bank account analysis to identify the source of the deposit at trial petitioner claimed allstate insurance_company is not a trade_or_business she also disputed the w-2s and information on the grounds that allstate insurance_company first command financial planning and etta lowery do not fit within the specific kind and class expressly itemized in the definition of trade_or_business under a nor does etta lowery fit within the specific kind and class expressly in the definition of employee c and in the federal_register on tuesday date at page sec_404 we advised petitioner that her arguments were frivolous and warned her that the court might impose a penalty under sec_6673 if she continued to assert such arguments opinion i burden_of_proof as a general_rule the taxpayer bears the burden of proving the commissioner’s deficiency determinations incorrect rule a 290_us_111 sec_6201 provides that if the taxpayer in a court_proceeding asserts a reasonable dispute with respect to the income reported on an information_return and has fully cooperated with the commissioner then the commissioner shall have the burden of producing reasonable and probative information in addition to the information_return in addition sec_7491 provides that if the taxpayer introduces credible_evidence and meets certain other prerequisites the commissioner shall bear the burden_of_proof with respect to factual issues relating to the taxpayer’s liability for a tax imposed under subtitle a or b of the code petitioner has not raised a reasonable dispute within the meaning of sec_6201 she has also failed to introduce any credible_evidence or substantiate her deductions as required by sec_7491 therefore petitioner bears the burden_of_proof ii deductions deductions are a matter of legislative grace and taxpayers have the burden of showing that they are entitled to any deduction claimed rule a 292_us_435 taxpayers are required to maintain records that are sufficient to enable the commissioner to determine their correct_tax liability sec_6001 sec_1_6001-1 income_tax regs additionally taxpayers bear the burden of substantiating the amount and purpose of the item claimed as a deduction 65_tc_87 affd per curiam 540_f2d_821 5th cir a miscellaneous_itemized_deductions petitioner argues that her compensation from allstate and first command is deductible as a miscellaneous itemized_deduction because neither allstate nor first command is a trade_or_business she also claims that she herself is not a trade_or_business and that she is not an employee of allstate or first command petitioner advances shopworn arguments characteristic of tax-protester rhetoric that have been universally rejected by this and other courts see 436_f3d_533 5th cir affg tcmemo_2005_39 we shall not painstakingly address petitioner’s assertions with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit see 737_f2d_1417 5th cir accordingly we sustain respondent’s disallowance of the miscellaneous_itemized_deductions b schedule c deductions petitioner did not substantiate any of her schedule c deductions accordingly we sustain respondent’s disallowance of the schedule c deductions iii the distribution_generally a distribution from a qualified_retirement_plan is includable in the distributee’s gross_income in the year of the distribution sec_72 sec_72 imposes a percent additional tax on the taxable_amount of an early distribution from a qualified_retirement_plan as defined in sec_4974 unless an exception applies a distribution is early if made to an employee who has not attained age sec_72 petitioner wa sec_48 years old when she received the distribution in petitioner did not offer any evidence of an applicable exception we therefore sustain respondent’s determinations that the distribution is includable in petitioner’s income for and that she is liable for the percent additional tax see rule a the term qualified_retirement_plan includes a plan described in sec_401 sec_4974 regardless of whether the additional tax under sec_72 is a penalty or an additional_amount for which the respondent would have the burden of production under sec_7491 respondent has satisfied any such burden by showing petitioner was not when she received the distribution see milner v commissioner tcmemo_2004_111 n iv sec_6662 accuracy-related_penalty pursuant to sec_6662 and b and taxpayers may be liable for a penalty of percent of the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations or attributable to a substantial_understatement_of_income_tax the term understatement means the excess of the amount of tax required to be shown on a return over the amount of tax imposed which is shown on the return reduced by any rebate within the meaning of sec_6211 sec_6662 generally an understatement is a substantial_understatement when it exceeds the greater of dollar_figure or percent of the amount of tax required to be shown on the return sec_6662 in addition sec_6662 defines negligence as any failure to make a reasonable attempt to comply with the provisions of the code and disregard means any careless reckless or intentional disregard the commissioner has the burden of production with respect to the accuracy-related_penalty sec_7491 to meet this burden the commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets this burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect rule a see higbee v commissioner supra pincite whether otherwise applied because of a substantial_understatement_of_income_tax or negligence or disregard of rules or regulations the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith see sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant see id further an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 respondent has satisfied the burden of production petitioner’s and income_tax returns contain understatements of tax greater than dollar_figure and greater than percent of the amount of tax required to be shown on the returns sec_6662 petitioner did not offer any evidence of reasonable_cause or good_faith accordingly we sustain respondent’s determination as to the sec_6662 accuracy-related_penalties for and v sec_6673 penalty sec_6673 authorizes the court to impose a penalty not to exceed dollar_figure if the taxpayer took frivolous or groundless positions in the proceeding or instituted the proceeding primarily for delay a taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir we warned petitioner that her arguments were frivolous and have been universally rejected by this and other courts we further advised petitioner that the court has the discretion to impose a penalty of up to dollar_figure if she were to proceed with such arguments although respondent has not moved for a sec_6673 penalty and we decline to impose the penalty at this time we take this opportunity to warn petitioner that we may impose this penalty if she returns to the court and proceeds in a similar manner in the future see 115_tc_576 in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we conclude they are irrelevant or without merit to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court whistleblower 11332-13w petitioner v commissioner of internal revenue respondent docket no 11332-13w filed date sealed for petitioner sealed for respondent memorandum opinion kroupa judge this case is before the court on the whistleblower’s motion to seal and the whistleblower’s motion to proceed anonymously under rule a the whistleblower has demonstrated that sealing the record i sec_1 appropriate in this circumstance because failure to do so could result in severe physical harm to the whistleblower the whistleblower has also demonstrated that proceeding anonymously is necessary to protect the whistleblower’s professional reputation economic interests and personal safety we will grant both motions background the following information is stated only for purposes of resolving the pending motions and not for purposes of establishing the validity of the whistleblower’s claim petitioner is a whistleblower that reported a tax_fraud scheme to the government during the whistleblower’s employment the whistleblower learned of a tax structure involving the whistleblower’s employer and several related entities and subsidiary companies targets when the whistleblower raised concerns over the tax structure to the whistleblower’s employer the whistleblower’s employer used physical force and armed men to intimidate the the court is issuing this memorandum opinion because there is a lack of whistleblower caselaw all section references are to the internal_revenue_code in effect for all relevant times and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all amounts are rounded to the nearest dollar whistleblower and prevent disclosure the whistleblower was subsequently fired the whistleblower reported the tax scheme to the government and for several years assisted the government in its investigation of targets based partly on the whistleblower’s information the government eventually recovered more than dollar_figure million in taxes penalties and interest the whistleblower filed a form_211 application_for award for original information on date and submitted to the irs whistleblower office whistleblower office documentary_evidence related to the targets’ actions the whistleblower disclosed subsequently the whistleblower resubmitted form_211 on date seeking an award under sec_7623 the whistleblower office sent the whistleblower an award_determination under sec_7623 the whistleblower filed the petition seeking judicial review of the whistleblower office sec_7623 award_determination throughout the investigation government investigators warned the whistleblower that the targets and individuals the whistleblower reported were dangerous and were linked to violent events and terrorist organizations indeed the whistleblower alleges that over the last years at least one person who reported alleged wrongdoing against one of the targets was killed under suspicious circumstances after learning that the whistleblower was subpoenaed to provide documents to the government targets filed multiple retaliatory actions against the whistleblower to determine the whistleblower’s role in the investigation and to silence the whistleblower the whistleblower incurred significant personal_expense spent time and suffered professional reputational costs defending against these actions that were designed to intimidate and threaten the whistleblower the whistleblower has also received significant physical threats the whistleblower received a death threat from the targets communicated through their counsel after learning of the individuals and entities involved the government offered to place the whistleblower in the witness protection program the whistleblower declined placement in the witness protection program but requested and was granted confidential informant status the whistleblower was also forced to hire counterterrorism experts to advise the whistleblower’s family on safety and protect the whistleblower on trips abroad this protection cost the whistleblower tens of thousands of dollars despite their efforts targets have not discovered the identity of the whistleblower they were aware only that the whistleblower was subpoenaed by the government the whistleblower filed the motion to seal and the motion to proceed anonymously at the same time the whistleblower filed the petition respondent filed notices of no objection to both motions discussion we are asked to decide whether the docket record in this case should remain sealed and whether the whistleblower should be permitted to proceed anonymously we begin by describing the general presumption of openness that attaches to judicial proceedings generally official records of all courts shall be open and available to the public for inspection and copying 435_us_589 in re coordinated pretrial proceedings 101_frd_34 c d cal hearings and the evidentiary record of proceedings before this court shall be open to the public sec_7458 sec_7461 common_law statutory law and the u s constitution all support this important principle warner commcns inc u s pincite 85_tc_914 in re coordinated pretrial proceedings in petroleum prods antitrust litig f_r d pincite the right to inspect and copy judicial records however is not absolute warner commcns inc u s pincite courts have supervisory power over their own records and files and courts have denied access to records where the court files might become a vehicle for improper purposes id sealing the record this court has broad discretionary power to control and seal if necessary records and files in our possession willie nelson music co v commissioner t c pincite we may in our discretion seal the record or portions of the record if justice so requires and the party seeking such relief demonstrates good cause sec_7461 rule a at t co v grady 594_f2d_594 7th cir willie nelson music co v commissioner t c pincite tavano v commissioner tcmemo_1991_237 aff’d 986_f2d_1389 11th cir to determine whether sealing the record is appropriate we must weigh the presumption however gauged in favor of public access to judicial records against the interests advanced by the parties warner commcns inc u s pincite at t co v grady f 2d pincite willie nelson music co v commissioner t c pincite taxpayers seeking to seal court records must come forward with appropriate testimony and factual data to show good cause 410_f2d_553 ndollar_figure 5th cir 92_tc_180 willie nelson music co v commissioner t c pincite citing 686_f2d_276 5th cir tavano v commissioner tcmemo_1991_237 taxpayers may not rely on conclusory or unsupported statements to establish claims of harm that would result from disclosure willie nelson music co v commissioner t c pincite in re coordinated pretrial proceedings in petroleum prods antitrust litig f_r d pincite good cause has been demonstrated and records have been sealed where there is a demonstrated risk of physical harm to the taxpayer or the taxpayer’s family 127_tc_89 good cause has also been demonstrated where patents trade secrets or confidential information are involved or where an individual’s business reputation will be hurt see 656_f2d_1101 5th cir striking an individual’s name from factual resumes on due process grounds as resumes were prepared in criminal proceeding where the individual was not indicted 616_f2d_458 10th cir sealing portions of record involving documents alleged to be subject_to attorney-client_privilege or work product doctrine 575_f2d_870 c c p a sealing record involving patent application proceeding so that the information would remain a trade secret in the event of an adverse decision sendi v prudential-bache sec f_r d d d c sealing parties’ tax returns to protect confidentiality and privacy interests merely asserting annoyance embarrassment or harm to a person’s personal reputation however is generally insufficient to demonstrate good cause and overcome the strong common_law presumption in favor of access to court records willie nelson music co v commissioner t c pincite record not sealed where nationally known entertainer sought to avoid public scrutiny or news coverage of case tavano v commissioner tcmemo_1991_237 record not sealed where taxpayer had civil suit pending against employer and did not want employer to learn facts of case the whistleblower’s counsel submitted an affidavit that demonstrates the severe degree of harm the whistleblower and the whistleblower’s family members would risk if we do not seal the record the affidavit and the petition demonstrate several key facts first targets are linked to terrorist organizations the whistleblower received a death threat communicated through targets’ counsel in connection with the whistleblower’s cooperation with the government investigation targets used armed guards to break into the whistleblower’s office finally the government offered to place the whistleblower into the witness protection program we find this fact compelling it demonstrates the credibility of the death threat and the true risk of severe physical harm to the whistleblower the supporting documents also demonstrate that targets have engaged in a pattern of harassment and litigious behavior with the goal of intimidating the whistleblower to remain silent targets’ conduct has caused the whistleblower to spend significant amounts of money to defend against several actions in multiple forums and to hire counterterrorism experts to protect the whistleblower and the whistleblower’s family additionally targets’ actions against the whistleblower have caused damage to the whistleblower’s professional reputation the court also agrees with the whistleblower that the facts in this case are very specific and involve numerous events that would be recognizable by targets and in turn might enable them to discover the whistleblower’s identity in toto we find these facts compelling the whistleblower has demonstrated that the whistleblower and the whistleblower’s family are at significant risk of severe physical harm if the case does not remain sealed targets have shown a pattern of intimidation aggression and physical threats of harm towards the whistleblower this court will not place the whistleblower or the whistleblower’s family in jeopardy as there is a substantial risk that if the record is not sealed targets will uncover the whistleblower’s identity and seek retribution we must evaluate this risk of physical harm against the public interest in access to judicial records see warner commcns inc u s pincite 214_f3d_1058 9th cir at t co f 2d pincite willie nelson music co v commissioner t c pincite after careful consideration of the alleged facts of this case we find that the balance favors the whistleblower the risk of extreme physical harm to the whistleblower and the whistleblower’s family outweighs the countervailing public interest favoring open judicial proceedings permission to proceed anonymously the whistleblower has also requested permission to proceed anonymously proceeding anonymously is necessary to protect the whistleblower’s professional reputation economic interests and personal safety recently this court adopted rule to create a mechanism to preserve the anonymity of whistleblowers and non-party taxpayers whistleblowers seeking to proceed anonymously must file a motion with this court setting forth a sufficient fact-specific basis for anonymity rule a the petition and subsequent filings are temporarily sealed pending a ruling by the court on the motion to proceed anonymously id a whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interests in knowing the whistleblower’s identity see 137_tc_183 see also does i thru xxiii f 3d pincite the decision whether to allow a party to proceed anonymously rests within the sound discretion of the trial_court anonymous v commissioner t c pincite see 6_f3d_233 4th cir see also sec_7461 this court has granted a motion to proceed anonymously where the taxpayer faced a risk of severe physical harm if the taxpayer’s identity was revealed see anonymous v commissioner t c pincite holding that risk of severe physical harm to taxpayer and family outweighed the general_public interest in knowing taxpayer’s identity moreover this court has granted a whistleblower’s request to proceed anonymously where the whistleblower was susceptible to professional stigma retaliation and economic duress see whistleblower 14016-10w v commissioner t c pincite the court’s decisions are consistent with the irs whistleblower office general administrative practice of keeping whistleblowers’ identities confidential see id pincite the whistleblower has satisfied the whistleblower’s factual burden to proceed anonymously the facts alleged in the petition and the affidavit attached to the motion to proceed anonymously demonstrate that disclosure of the whistleblower’s identity could result in the risk of retaliation social and professional stigma and economic duress most importantly disclosure of the whistleblower’s identity would place the whistleblower and the whistleblower’s family at risk of physical harm targets are alleged to have ties to terrorist organizations and have already used armed men to raid the whistleblower’s offices moreover targets previously threatened the whistleblower’s life the government’s concern over the individuals and entities involved prompted it to offer the whistleblower placement in the witness protection program there is no better evidence of the credibility of the death threat and the real risk that the whistleblower faces if the whistleblower’s identity is revealed in short the nature and severity of potential harm that could befall the whistleblower outweighs the societal interest in knowing the whistleblower’s identity for the foregoing reasons we will grant the whistleblower’s motion to seal and the whistleblower’s motion to proceed anonymously an appropriate order will be issued revealing the whistleblower’s identity although a secondary consideration here could adversely affect the whistleblower’s professional reputation current employment and future employment opportunities


internal_revenue_service number release date index no department of the treasury washington dc person to contact telephone number refer reply to cc ita - plr-117367-02 date date legend b c d dear this letter is in response to your request for a private_letter_ruling requesting permission to revoke an election out of the installment_method for the sale of certain stock under sec_453 of the internal_revenue_code and sec_15a_453-1 of the temporary income_tax regulations in year b you and your spouse sold certain stock to an unrelated third party under a note that required the principal_amount to be paid in year d through inadvertence the entire gain on the sale of the stock was reported on your year b income_tax return that was prepared by your accountant in year c you first became aware of the error you subsequently requested this ruling sec_453 provides that income from an installment_sale shall be taken into account under the installment_method sec_453 provides that sec_453 shall not apply to any sale if the taxpayer elects not to have sec_453 apply to the sale sec_453 provides that except as otherwise provided by regulations an election under sec_453 with respect to a sale may be made only on or before the due_date prescribed by law including extensions for filing the taxpayer’s return for the taxable_year in which the sale occurs such an election shall be made in the manner prescribed by the regulations plr-117367-02 sec_453 provides that an election under sec_453 with respect to any sale may be revoked only with consent of the secretary sec_15a_453-1 states the general_rule that an election out of the installment_method is irrevocable an election may be revoked only with consent of the internal_revenue_service a revocation will not be permitted when one of its purposes is the avoidance of federal taxes or when the taxable_year in which any payment was received is closed in this case the information submitted indicates that your desire to revoke your election out of the installment_method is due to inadvertence rather than hindsight or a purpose of avoiding federal taxes accordingly based on the information submitted you may revoke your election out of the installment_method of reporting under sec_453 in accordance with a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely michael j montemurro senior technician reviewer office of associate chief_counsel income_tax accounting enclosures copy for sec_6110 purposes cc


department of the treasury internal_revenue_service tax_exempt_and_government_entities_division number release date date date tax_year ending taxpayer_identification_number person to contact employee identification_number employee telephone number uil certified mail - return receipt dear this is a final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in code sec_501 effective january 20xx your determination_letter dated is revoked the revocation of your exempt status was made for the following reason s organizations described in sec_501 of the internal_revenue_code and exempt from tax under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to produce documents or otherwise establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inure to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by sec_6001 and sec_6033 and the regulations thereunder visit www irs gov organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns and pay tax where applicable for further instructions forms and information please contributions to your organization are no longer deductible under sec_170 after january 20xx if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely director eo examinations enclosure publication department of the treasury internal_revenue_service date taxpayer_identification_number date tax exempt and government entities irs exempt_organizations examinations form tax_year s ended person to contact id number contact numbers telephone fax manager's name id number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree ifyou agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you ff you don't respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation letter rev catalog number 34809f if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance f you prefer you may contact your local taxpayer_advocate at for city for city internal_revenue_service office_of_the_taxpayer_advocate internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information ff you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call ifwe need to contact you thank you for your cooperation sincerely director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended 20xx explanations of items whether the organization continues to qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code issues facts the organization filed application form_1023 for exemption on april 20xx they were granted exemption as a 501_c_3_organization on june 20xx with an effective date of exemption of an organization exempt under c needs to be organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and to foster national and amateur sports competition the organization was selected for audit to ensure that the examined organization’s activities and operations align with its approved exempt status the organization failed to respond to the internal_revenue_service attempts to obtain information to perform an audit of form 990-n for tax period ending december 20xx e correspondence for the audit was as follows o o letter rev with attachments were mailed to the organization on december 20xx with a response date of december 20xx the attachments consisted of form_4564 information_document_request and publication your rights as a taxpayer letter 3844-a rev with attachments were mailed to the organization on december 20xx with a response date of january 20xx the attachments were a copy of the original letter and its enclosures e telephone contact for the audit was as follows o _at december 20xx agent called the phone number listed on application form_1023 for has power_of_attorney only for form said he was no longer on the board but the via form_2848 current board chairman is listed on the return confirmed the address listed on form 990-n for dollar_figures address too mailed letter with attachments form_4564 and publication to the address listed on form 990-n for year ending december 20xx response due is current and confirmed form 886-a catalognumber20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended 20xx explanations of items o o o o o december 20xx december 20xx call to a current telephone number for board officer and left message after unable to locate called december 20xx call to number as was mailed is correct explained the reason for the audit and explained the items requested reminded 20xx at and efax telephone numbers telephone secured and he confirmed the address letter request agent left voice mail message providing agent's office of the response due_date december to determine whether the august 20xx cail to board president organization provided a response to prior letters since our record showed no said they documents received explained the reason for case delay did receive the letters and he agreed to fax items by the next day august 20xx since no documents received left a voice mail august 20xx call to message requesting the items again and for a status of the items august 20xx call to mail message since no documents received left voice law sec_501 provides tax exemption for corporations and foundations that are operated exclusively for religious charitable scientific testing for public safety literary or educational purpose no part of the net_earnings of which inures to the benefit of any private shareholder of individual sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 an organization must be organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or the operational_test it is not exempt sec_511 imposes a tax at corporate rates under sec_511 on unrelated_business_taxable_income of certain tax-exempt organizations including those described in sec_501 sec_6001 provides that every person liable for any_tax imposed by this title or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title sec_1_6001-1 of the code provides that such permanent books_and_records as are required by paragraph a of this section with respect to the tax imposed by sec_511 on unrelated_business_income of certain exempt_organizations every organization exempt from tax under sec_501 shail keep such permanent books of account or records including form 886-a catalognumber20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended 20xx explanations of items inventories as are sufficient to show specifically the items of gross_income receipts and disbursements such organizations shall also keep such books_and_records as are required to substantiate the information required by sec_6033 see sec_6033 and sec_1_6033-1 through sec_1_6001-1 provides that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe federal tax regulation sec_1_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 federal tax regulations sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 provides that an organization will not be regarded as operated exclusively for one or more exempt purposes described in sec_501 of the code if more than an insubstantial part of its activities is not in furtherance of a c purpose accordingly the organization does not qualify for exemption under sec_501 of the code revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status form 886-a catalognumber20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended 20xx explanations of items organization’s position the organization acknowledge receipt of letter and letter 3844-a with all enclosures for both letters however they failed to provide any of the documents requested government’s position based on the above facts the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in sec_501 if an organization fails to meet either the organizational_test or the operational_test it is not exempt in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax sec_1_6033-1 of the regulations specifically state that exempt_organizations shall submit additional information for the purpose on enabling the internal_revenue_service to inquire further into its exempt status using the rationale that was developed in revrul_59_95 the organization’s failure to provide requested information should result in the termination of exempt status conclusion based on the foregoing reasons it is the government's position that the organization's exempt status should be revoked due its’ failure to substantiate the organization’s operational_test required by sec_501 accordingly the organization's exempt status should be revoked effective january 20xx form_1120 us corporation income_tax return should be filed for the tax periods ending on and after january 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service