t c memo united_states tax_court michael and marla sklar petitioners v commissioner of internal revenue respondent docket no filed date michael sklar pro_se mark a weiner for respondent memorandum opinion nameroff special_trial_judge respondent determined a deficiency in petitioners’ federal_income_tax for the taxable_year of dollar_figure plus an addition_to_tax under sec_6651 of dollar_figure in the notice_of_deficiency respondent disallowed petitioners’ claimed charitable_contribution deductions of dollar_figure the explanation in the notice of all section references are to the internal_revenue_code in effect for the year at issue deficiency stated since these costs are personal tuition expenses they are not deductible ina timely filed petition petitioners contend that they are entitled to the claimed charitable_contribution deductions on the grounds that the amounts in question are similar to those paid for auditing to the church of scientology which petitioners allege the internal_revenue_service irs has allowed as charitable_contributions thus petitioners contend that respondent’s position is a violation of the establishment clause of the first amendment to the constitution of the united_states background some of the facts have been stipulated and are so found petitioners resided in north hollywood california at the time of the filing of their petition the following facts are not in dispute on their joint federal_income_tax return which was filed on date petitioners claimed a deduction for charitable_contributions in the amount of dollar_figure petitioners’ return was examined by respondent and the charitable_contribution_deduction was questioned during the examination petitioners provided copies of checks totaling dollar_figure that qualified as charitable_contributions and this amount was not disallowed in addition petitioners provided copies of checks totaling dollar_figure paid as tuition to the yeshiva rav isacsohn torath emeth academy yeshiva rav isacsohn petitioners also provided checks totaling dollar_figure in tuition payments to the emek hebrew academy emek yeshiva rav isacsohn and emek are collectively referred to as the schools the amounts paid to the schools in total dollar_figure in date during the examination of their return petitioners presented letters from each school which acknowledge receipt of the amounts paid and state unequivocally that the payments were applied toward the tuition of petitioners’ children for their religious and secular education each letter also states that the school estimates that the total education comprised percent religious education and percent secular education according to petitioners they calculated their claimed religious education deduction in the amount of dollar_figure by multiplying by percent the total tuition payments to the schools ’ efmek and yeshiva rav isacsohn are organizations recognized to be exempt from federal_income_tax under sec_501 they are classified for federal_income_tax purposes as organizations that are not private_foundations as defined in there is a dollar_figure unexplained discrepancy sec_509 because they are organizations described in sec_170 a in short they are orthodox jewish day schools and their students receive a complete dual curriculum in religious and secular studies both schools issue academic grades in their secular and religious education programs during three of petitioners’ minor children attended emek and one minor child attended yeshiva rav isacsohn the schools establish annually the amount of tuition for each student payment of which is mandatory there are also other mandatory payments for inter alia special events and application processing partial scholarships are provided for students with financial needs tuition payments are recorded as such in the schools’ books and charitable_contributions to the schools are recorded as donations in the petition petitioners makes no allegations in connection with the addition_to_tax for delinquency in petitioners’ response to a motion for summary_judgment filed by respondent and subsequently denied petitioners state the primary reason for filing after date was lack of sufficient time to correctly prepare the return due to high work-related volume petitioner michael sklar who is the petitioner knowledgeable in the taxable affairs of petitioners and regularly prepares petitioners’ returns the reason this was not stated in the original petition is that petitioners felt that it was a moot point as in the opinion of petitioners there is no deficiency petitioners presented no further evidence on this issue discussion the law is well settled that tuition paid for the education of the children of the taxpayer is a family expense not a charitable_contribution to the educating institution see 309_f2d_373 9th cir affg 36_tc_896 a tuition payment to a parochial school is generally not considered a charitable_contribution because the taxpayer making the payment receives something of economic value i1 e educational benefits in return see 468_f2d_778 2d cir affg tcmemo_1971_290 the payment proceeds primarily from the incentive of anticipated benefits to the payor beyond the satisfaction which flows from the performance of a generous act see dejong v commissioner supra pincite the court_of_appeals for the ninth circuit further stated the value of a gift may be excluded from gross_income only if the gift proceeds from a detached and disinterested generosity or out of affection admiration charity or like impulses and must be included if the claimed gift proceeds primarily from the constraining force of any moral or legal duty or from the incentive of anticipated benefit of an economic nature we must conclude that such criteria are clearly applicable to a charitable deduction under sdollar_figure id pincite it is clear in this case that petitioners’ payments to the schools were not made out of detached and disinterested generosity or out of affection admiration charity or like impulses they were intended as payment in the nature of tuition for petitioners’ children a personal_expense these mandatory payments were received as payments for tuition by the schools therefore they do not qualify as charitable_contribution deductions in 490_us_680 the supreme court held on the record presented that payments for auditing to the church of scientology were not deductible as charitable_contributions because they represented a guid pro quo i1 e the payor was receiving goods or services in return for the payment the taxpayer in hernandez had argued inter alia that the disallowance of the auditing payments represented an impermissible failure by the irs to consistently enforce sec_170 relying on various revenue rulings such as revrul_70_47 1970_1_cb_49 pertaining to such things as pew rents building fund assessments and periodic dues see id pincite however the supreme court rejected this contention because the record therein did not support it petitioners contend that the terms of a closing_agreement between the commissioner and the church of scientology are relevant and will show that the commissioner has agreed to allow charitable_contributions for all or a percentage of auditing payments and that the disallowance of the charitable_contribution deductions herein in light of the settlement with the church of scientology is in violation of the first amendment petitioners have made a proffer of evidence tending to conform to their allegations in her dissenting opinion in hernandez v commissioner supra pincite justice o’connor stated it must be emphasized that the irs’ position here is not based upon the contention that a portion of the knowledge received from auditing or training is of a secular commercial nonreligious value thus the denial of a deduction in these cases bears no resemblance to the denial of a deduction for a religious-school tuition up to the market_value of the secularly useful education received see 468_f2d_1000 lst cir 468_f2d_778 2d cir 309_f2d_373 9th cir there is nothing in the record to show that petitioners’ situation is analogous to that of the members of the church of scientology the church of scientology and the schools involved in this case are not identical in their organization structure or purpose auditing as defined in hernandez v commissioner supra is not the same as a general education which may include some percentage for religious education thus we perceive no denominational preference to reguire any inquiry into a purported violation of the establishment clause as stated earlier petitioners offered into evidence documents with respect to their contentions respondent objected to these documents on various grounds and we took the objections under advisement we have determined that the documents are not admissible because they are irrelevant to this case deductions have been generally disallowed for payments made in exchange for educational benefits regardless of faith see 468_f2d_1000 1st cir affg tcmemo_1971_273 winters v commissioner supra dejong v commissioner supra the taxpayers in those cases were similarly situated with petitioners and petitioners have not established that they are similarly situated with the members of the church of scientology who make payments for auditing petitioners’ reliance on hernandez and the concept of consistent interpretation and enforcement is rejected we now turn to the question of whether petitioners are liable for the addition_to_tax for delinquency under sec_6651 unless shown to be for reasonable_cause and not due to willful neglect failure_to_file a return on the due_date generally results in an addition_to_tax of percent for each month during which such failure continues but not exceeding percent in the aggregate see sec_6651 petitioners contend that petitioner michael sklar was simply too busy to timely file their tax_return for after extensions their tax_return was due on date but was not filed until date accordingly in the notice_of_deficiency respondent determined the delinquency addition_to_tax based on percent of the deficiency on the tax_return petitioner michael sklar is identified as a c p a while petitioner marla sklar is identified as a teacher petitioner’s argument that he was simply too busy to file his federal_income_tax return for by date does not constitute reasonable_cause for his failure_to_file see 53_tc_491 affd 467_f2d_47 9th cir olsen v commissioner tcmemo_1993_432 to reflect the above decision will be entered for respondent


internal_revenue_service number release date index number --------------------------------------- ------------------------ --------------------------------- -------------- --------------------------- ----------------------------- -------------------------------------- ----------------------------------------------- ------------------------------------ ------------- legend department of the treasury washington dc third party communication date of communication person to contact -------------------- id no ------------------ telephone number ---------------------- refer reply to cc ita b01 plr-126710-18 date april ----- --------------------------------------- taxpayer taxable_year --------------------------------------------------------------- a ------------------------- b --------------------------------------------------------------- c d ---------------- director date ------------------- date ----------------------- date ------------------ dollar_figurea ---------------- -------------------------------------- dear ----------------- this letter responds to your correspondence dated date requesting an extension of time to make the safe_harbor election for success-based fees described in revproc_2011_29 2011_18_irb_746 taxpayer failed to attach the required election statement to its previously filed return in order to make the safe_harbor election to allocate success-based fees between facilitative and non-facilitative amounts therefore taxpayer requests an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to attach the required election statement to its return facts taxpayer is a domestic_corporation incorporated under the laws of state a on date and a member_of_an_affiliated_group that files a consolidated federal_income_tax return plr-126710-18 taxpayer has a fiscal tax_year and uses an accrual_method as its overall_method_of_accounting on date taxpayer acquired b in a reorganization under sec_368 of the internal_revenue_code the transaction taxpayer engaged c to perform services in the process of investigating or otherwise pursuing the transaction as part of its acquisition of b taxpayer incurred dollar_figurea in success-based fees for the services performed by c taxpayer paid the dollar_figurea in success-based fees to c upon the successful closing of the transaction taxpayer engaged d a third-party tax professional to perform an analysis of the success-based fees incurred and paid in connection with taxpayer’s acquisition of b and to prepare any documentation to establish that portion of the success-based fees allocable to activities that did not facilitate the transaction taxpayer and d discussed and documented the necessity of making an election to allocate the success-based fees pursuant to revproc_2011_29 taxpayer self-prepared its original return for its taxable_year return reflecting a deduction of seventy percent of its success-based fees as allocable to activities that do not facilitate the transaction and reflecting capitalization of thirty percent as allocable to activities that facilitate the transaction however taxpayer and director who oversees tax compliance for taxpayer inadvertently failed to attach the statement required by sec_4 or notice the absence of the statement when taxpayer filed its return electronically with the internal_revenue_service service taxpayer also engaged d to review and sign the return as preparer nonetheless d failed to include or notice the absence of the statement before taxpayer timely filed its return electronically on date in the second tax_year immediately following the taxable_year taxpayer made another acquisition involving success-based fees taxpayer engaged d to perform a review of the transaction costs incurred in the acquisition director and d discussed making the election for success-based fees incurred in the acquisition pursuant to revproc_2011_29 as taxpayer did for taxable_year in the course of this discussion director inquired with d about the election statement for taxable_year and d discovered that the election statement had not been included with the return d then advised director of the procedures under sec_301_9100-1 and sec_301_9100-3 to obtain an extension of time to attach the required statement to the return shortly after taxpayer filed this private_letter_ruling requesting an extension of time to add the required statement under sec_4 of revproc_2011_29 to its return law analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 plr-126710-18 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 in general an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 sec_1_263_a_-5 provides that an amount_paid that is contingent on the successful closing of a transaction described in sec_1 a - a success-based_fee is presumed to facilitate the transaction a taxpayer may rebut this presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction a taxpayer’s method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate a transaction is a method_of_accounting under sec_446 see section dollar_figure of revproc_2011_29 revproc_2011_29 provides a safe_harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction described in sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat seventy percent of the success-based_fee as an amount that does not facilitate the transaction and may be deducted and the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 provides that the service will not challenge a taxpayer’s allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer satisfies three requirements first the taxpayer must treat seventy percent of the amount of the success-based_fee as an amount that does not facilitate the transaction second the taxpayer must capitalize the remaining amount of the success- based fee as an amount which does facilitate the transaction third the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred this statement must a state that the taxpayer is electing the safe_harbor b identify the transaction and c state the success-based_fee amounts deducted and capitalized it is the third requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission to amend its return by attaching to it the completed statement required by sec_4 of revproc_2011_29 sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation plr-126710-18 published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i ii iii iv v requests relief before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return at issue the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if the taxpayer i ii iii seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested was informed in all material respects of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief sec_301_9100-3 provides that an extension of time to make a regulatory election will be granted only when the interests of the government are not prejudiced by the granting of relief the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 plr-126710-18 the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section sec_301_9100-3 sec_301_9100-3 provides special rules for accounting_method regulatory elections the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting_method regulatory election for which relief is requested i ii iii iv is subject_to the procedure set forth in sec_1_446-1 of this chapter requiring advance written consent of the commissioner requires an adjustment under sec_481 or would require an adjustment under sec_481 if the taxpayer changed to the method_of_accounting for which relief is requested in a taxable_year subsequent to the taxable_year in which the election should have been made would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination an appeals_office or a federal court and the change would provide a more favorable method or more favorable terms and conditions than if the change were made as part of an examination or provides a more favorable method_of_accounting or more favorable terms and conditions if the election is made by a certain date or taxable_year the election taxpayer wants to make is a regulatory election as defined in sec_301 b because the due_date of the election is prescribed in sec_1_263_a_-5 of the income_tax regulations the commissioner has the authority under sec_301_9100-1 and sec_301_9100-3 to grant an extension of time to file a late regulatory election conclusion based solely on the information provided and representations made we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government accordingly taxpayer has met the requirements of sec_301_9100-1 and sec_301_9100-3 taxpayer is granted an extension of sixty days from the date of this ruling to amend its return to attach the statement required under sec_4 of revproc_2011_29 the statement must set forth that taxpayer is electing the safe_harbor treatment for success- based fees identify the transaction and set forth the amount of the success-based fees that are deducted and capitalized for taxable_year the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by plr-126710-18 an appropriate party although this office has not verified any of the material submitted in support of the request for the ruling it is subject_to verification on examination except as expressly set forth herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether taxpayer properly included the correct costs as success-based fees subject_to the retroactive election or whether taxpayer’s transaction was within the scope of revproc_2011_29 a copy of this ruling should be attached to taxpayer’s federal tax returns for the tax years affected alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter_ruling 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 code this ruling is directed only to taxpayer that is requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the provisions of the power_of_attorney currently on file with this office we are sending a copy of this letter_ruling to your two authorized representatives ------------------------------------------------------- we are also sending a copy of this letter to the appropriate operating division director sincerely norma c rotunno chief branch office of associate chief_counsel income_tax accounting division enclosure copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c number release date cc dom fs p si uilc date internal_revenue_service national_office field_service_advice memorandum for assistant regional_counsel lc from assistant chief_counsel field service cc dom fs subject amortization of intangibles this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer year year act section subsection paragraph paragraph tam issues whether the intangibles at issue in particular taxpayer’s favorable financing are assets that may be amortized under sec_167 assuming the intangibles are amortizable assets whether the amount subject_to amortization is the adjusted cost_basis of such assets on january year the date taxpayer became a taxable entity pursuant to act or the fair_market_value of such assets on that date assuming amortization is otherwise permissible under sec_167 and under the act whether taxpayer is entitled under sec_263 concepts to current deductions with respect to similar items acquired after january year conclusion sec_1 favorable financing is not a valuable asset used in taxpayer’s trade_or_business or for the production_of_income for purposes of sec_167 the basis of the intangible items identified by taxpayer is their cost if sec_167 entitles taxpayer to amortize its intangible items the cost_basis of the items is the amount capitalized pursuant to sec_263 and taxpayer is not entitled to current deductions with respect to similar items acquired after january year facts a detailed exposition of the facts surrounding taxpayer’s operations is set forth in a previously-rendered tam for our purposes those facts are summarized here taxpayer was created by congress in year from its inception until year it was exempt from all federal state and local_taxes other than real_property_taxes it was made subject_to federal_income_tax effective january year by act the issues presented herein revolve around that transition in operation taxpayer links residential mortgages meeting specific guidelines from a designated group of lenders with the financial capital markets it accomplishes this objective by buying mortgages from lenders originators pooling these obligations and issuing securities identified with specific pools to the investing public taxpayer does not actually originate loans for tax purposes taxpayer contends that certain of its intangible assets acquired before qualify for amortization and that the basis on which amortization is to be computed is fair_market_value as opposed to the usual rule_of adjusted cost_basis under sec_167 taxpayer’s adjusted cost_basis in the disputed intangible assets as of january year would appear to be zero or certainly a good deal less than the fair market values asserted among the intangible assets for which taxpayer has claimed amortization is its favorable financing the favorable financing issue pertains to taxpayer’s loan obligations where it’s cost of funds for the remainder of the loan term as of the date taxpayer became taxable is below market according to taxpayer the below-market borrowings are in four categories notes and bonds payable subordinated debt capital debentures and zero coupon bonds collateralized mortgage obligations cmos and guaranteed mortgage certificates gmcs taxpayer claims to have arrived at its valuations of favorable financing with a discounted cash_flow approach at the present time we express no opinion regarding the manner of valuation law and analysis issue sec_167 of the internal_revenue_code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property used in a trade_or_business or of property_held_for_the_production_of_income the act does not make any reference to intangible assets however the regulations under sec_167 discuss the depreciation of intangible assets sec_1_167_a_-3 of the income_tax regulations provides that if an intangible asset is known from experience or other factors to be of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation allowance examples are patents and copyrights an intangible asset the useful_life of which is not limited is not subject_to the allowance for depreciation no deduction for depreciation is allowable with respect to goodwill taxpayer argues that its below-market financing is a valuable intangible asset having a limited useful_life ascertainable with reasonable accuracy the earlier tam set forth the position that favorable financing is not able to be amortized under sec_167 because favorable financing is not a valuable asset used in taxpayer’s trade_or_business or for the production_of_income favorable financing represents taxpayer’s obligation to pay interest at rates lower than those it could obtain as of january year the tam reasoned that an obligation to pay money is not a valuable asset sec_197 of the internal_revenue_code as enacted under obra ’93 which allows a 15-year amortization for goodwill and certain other intangibles acquired after date is inapplicable under the facts of this case taxpayer relies on 91_tc_463 aff’d per curiam 900_f2d_266 11th cir and 97_tc_496 both concerning the amortization of core deposit intangibles for the proposition that value attributable to below-market use of money is property for purposes of sec_167 core_deposits are customer-based intangibles representing stable deposits that banks expect to retain for extensive lengths of time in citizens and southern the tax_court concluded that although core_deposits are a liability deposit_base is an asset until depositors withdraw their funds the bank will be able to invest these funds the benefit that flowed from the continued use of the funds was the asset the court allowed to be set up and depreciated although the deposits appeared on the liability side of the balance_sheet they created value as a depositor relationship to the extent that their cost was more attractive than higher-cost deposits citizens and southern t c pincite the instant case is distinguishable from core deposit intangibles in that no asset is created by virtue of taxpayer’s obligations under the debt instruments when taxpayer issued the debt instruments it presumably issued them at the market rate of interest between the time taxpayer incurred the obligations and the time of the act interest rates fluctuated taxpayer identified a portion of its debt obligations which bore a lower rate of interest than market on january year such an identification however does not create an asset taxpayer is attempting to adjust the asset side of its balance_sheet to account for an overstatement in fair_market_value terms of its liabilities this type of adjustment has been previously denied by the tax_court in r m smith inc v commissione591_f2d_248 3rd ci69_tc_317 ce444_us_828 in calculating the total purchase_price for capital stock partially paid_by a promissory note under the residual_method the court disallowed adjustments to the face value of the note when it was apparent that because of the low interest rate the face value did not equal the note's fair_market_value moreover the tax law generally does not recognize the present_value of debt for purposes of determining basis see also 47_tc_340 acq 1969_1_cb_21 when a taxpayer can establish that it has acquired an intangible asset with a determinable basis and a reasonably ascertainable_useful_life and sec_167 is applicable the taxpayer is entitled to amortize the asset 507_us_546 however in this case taxpayer has mischaracterized the difference between the face_amount of the obligations and their current market_value as of january year as a separate and distinct asset 2the unstated_interest rules under sec_483 of the code did not apply even if favorable financing is an asset it is not an asset that qualifies for fair_market_value basis under section of act the favorable financing at issue is a component of debt instruments issued by taxpayer congress enacted specific provisions for taxpayers to claim deductions associated with debt instruments see eg sec_163 and sections of the code therefore if a deduction may be claimed for favorable financing it should be claimed under these specific provisions not under general recovery provisions such as sec_167 when congress passed section of act to make taxpayer taxable it generally required taxpayer to restate the basis of all of its assets to their fair_market_value but did not require taxpayer to restate the adjusted_issue_price of all outstanding debt to the fair_market_value of the burden represented by the debt for debt that had been originally issued in a lower interest rate environment the debt for which taxpayer is claiming the existence of a favorable financing asset restating the adjusted_issue_price would have given taxpayer additional deductions under sec_163 to the extent that the stated principal on the debt exceeded the new adjusted_issue_price see sec_163 by restating bases but not adjusted issue prices however congress effectively denied these sec_163 deductions taxpayer’s claimed sec_167 deductions are an attempt to avoid the consequences of that congressional decision the fact that congress chose not to extend these adjustments to taxpayer’s outstanding debt should be respected in another context taxpayer has claimed amortization deductions under sec_167 for favorable financing to effect an end-run around congressional action that prevented deductions under sec_163 for essentially the same item usually amortization of favorable financing is claimed by a taxpayer that has assumed debt as part of the purchase of a business when the stated_interest rate on the assumed debt was sufficiently lower than market interest rates the debt might have been treated as having been reissued for an amount less than the stated principal_amount thus producing original_issue_discount deductions under sec_163 for the assuming party the enactment of sec_1274 however barred these deductions by treating the taxpayer as assuming the full stated principal of the debt regardless of whether market interest rates had increased since the debt was originally issued taxpayer sought to avoid this consequence by pointing to the increase in rates asserting the existence of a favorable financing asset and claiming deductions under sec_167 as a substitute for the barred deductions under sec_163 allowing taxpayer to claim deductions under sec_167 for a favorable financing asset would circumvent the code’s general proscription against allowing sec_163 deductions in these circumstances as such taxpayer’s claims should be denied issue you ask whether the conclusion of the tam with regard to the proper basis of taxpayer’s intangible assets remains the same we continue to agree that the position set forth therein is correct the act which subjected taxpayer to federal_income_tax provided special basis rules to be used in determining gain_or_loss and to be used in depreciating tangible_property as follows adjusted_basis of assets - a in general -except as otherwise provided in subparagraph b the adjusted_basis of any asset of the taxpayer held on january year shall- i for purposes of determining any loss be equal to the lesser_of the adjusted_basis of such asset or the fair_market_value of such asset as of such date and ii for purposes of determining any gain be equal to the higher of the adjusted_basis of such asset or the fair_market_value of such asset as of such date b special rule for tangible depreciable_property -in the case of any tangible depreciable_property which- i is of a character subject_to the allowance for depreciation provided by sec_167 of the internal_revenue_code of and ii is held by the taxpayer on january year the adjusted_basis of such property shall be equal to the lesser_of the basis of such property or the fair_market_value of such property as of such date section subsection paragraph of act sets forth the rules for calculating adjusted_basis only for purposes of determining gain_or_loss and a special rule for purposes of determining gain_or_loss on tangible depreciable_property this section does not provide any guidance for determining the proper adjusted_basis in depreciating intangible_property section subsection paragraph of act further provides adjusted_basis -for purposes of this subsection the adjusted_basis of any asset shall be determined under part ii of subchapter_o of the internal_revenue_code of part ii of subchapter_o of the internal_revenue_code code sets forth basis rules of general application as section subsection of act provides no rule or guidance for calculating the adjusted_basis for purposes of depreciating intangible_property the adjusted_basis must be determined under existing provisions of the code sec_167 provides that the basis for depreciation shall be the adjusted_basis provided in sec_1011 for the purpose of determining the gain on the sale_or_other_disposition of the property sec_1011 provides that the adjusted_basis for determining gain_or_loss shall be the basis as determined under sec_1012 or other applicable sections of the subchapter3 and adjusted as provided in sec_1016 sec_1011 sec_1012 and sec_1016 are found in part ii of subchapter_o the same part and subchapter referred to in section subsection paragraph of act under sec_1012 of the code the basis_of_property is the cost of such property the cost_basis is then adjusted under sec_1016 as it relates to depreciation sec_1016 provides that the cost_basis of property shall be decreased for exhaustion wear_and_tear obsolescence amortization and depletion by the greater of two amounts the amount allowed as deductions in computing taxable_income to the extent resulting in a reduction of the taxpayer’s income taxes or the amount allowable for the years involved if the taxpayer has not taken a depreciation deduction in any prior taxable_year the adjustment to the basis of the property for depreciation allowable is to be determined by using the straight-line method_of_depreciation sec_1_1016-3 thus if the cost of an intangible asset is capitalized and added to basis under sec_1012 under the plain language of sec_1016 taxpayer must adjust the basis of any intangible_property it seeks to depreciate by the amount of depreciation allowable for that asset since acquisition_date this is true regardless of the fact that taxpayer did not actually claim any deductions for depreciation in sec_1011 provides in its entirety the adjusted_basis for determining the gain_or_loss from the sale_or_other_disposition of property whenever acquired shall be the basis determined under sec_1012 or other applicable sections of this subchapter and subchapters c relating to corporate_distributions and adjustments k relating to partners and partnerships and p relating to capital_gains_and_losses adjusted as provided in sec_1016 the years when taxpayer was not subject_to tax taxpayers are not required to receive a tax_benefit before basis is adjusted for allowable but not taken depreciation the legislative_history of sec_1016 supports the foregoing proposition in the predecessor to sec_1016 was amended in order to correct a supreme court interpretation of an earlier amendment added by the revenue act of the intended purpose of the amendment was to prevent a taxpayer from claiming a double deduction by requiring any excessive_depreciation claimed and subsequently allowed to reduce the basis of the property however in 319_us_523 the supreme court construed the amendment to mean that even in the case of a taxpayer who had received no tax_benefit from mistakenly claiming excessive_depreciation in earlier years now closed the taxpayer was required to reduce his basis in the depreciable_property by that amount the amendment in relevant part corrected the seemingly unjust interpretation in virginian hotel corp by providing that the adjusted_basis of property is to be reduced by excessive_depreciation shown in a return only to the extent that such excessive_depreciation resulted in a reduction in the taxpayer’s taxes the determination of whether a deduction resulted in a tax_benefit is only necessary when excessive_depreciation is claimed when a taxpayer claims an appropriate deduction for depreciation for basis_adjustment purposes it is immaterial whether the deduction results in a tax_benefit to the taxpayer consistent with this proposition is the fact that a taxpayer is required to adjust basis in an asset by the amount of depreciation allowable even in the case where a taxpayer did not claim any deduction the legislative_history illustrates this point the committee continues the provisions of existing law also included in the house bill which require that the basis_of_property shall be reduced in any case by amounts allowable whether or not any_tax benefit is derived therefrom s rep no pincite h_r amendment makes no change in the law with reference to the deduction of allowable_depreciation the law has been and will remain that depreciation which was allowable in a prior year must be deducted in computing basis even though in the light of later events it develops that the depreciation in such prior year was actually less than it was then properly estimated to be and this is true regardless of whether depreciation allowable in such prior year had any effect on tax_liability in the prior year such depreciation must be deducted even though there was no income against which it could be offset cong rec statement of mr camp thus in the instant case the fact that taxpayer did not receive a tax_benefit from amortization in previous years is not relevant depreciation represents the decline in value of property that occurs over time due to wear_and_tear obsolescence amortization exhaustion etc depreciation is centered on the concept that property has a limited useful_life the supreme court has noted that the primary purpose of an annual depreciation deduction is to further the integrity of periodic_income statements by making a meaningful allocation of the cost entailed in the use excluding maintenance expense of the asset to the periods to which it contributes 507_us_546 quoting 364_us_92 assuming taxpayer has any amortizable intangible_property the decline in the value of such assets in taxpayer’s hands began at the time of acquisition not at the time taxpayer became taxable thus taxpayer is required under sec_1016 to calculate the allowable_depreciation for its intangible assets from the year acquired and adjust the basis of these assets accordingly in order to meaningfully allocate the cost entailed in the use of the asset to the period to which it contributes specifically in regard to the amortizable_basis of the claimed favorable financing asset we note that even if favorable financing is deemed an asset it is not an asset that qualifies for fair_market_value basis under section of act again section of act provides that except as otherwise provided in subparagraph b relating to a special rule for tangible depreciable_property the adjusted_basis of any asset of taxpayer shall for purposes of determining any gain be equal to the higher of the adjusted_basis of such asset or the fair_market_value of such asset as of such date emphasis added this provision of the act was to ensure that any pre-year appreciation in the value of taxpayer’s assets would not be taken into account for tax purposes even if taxpayer’s favorable financing constitutes an asset however it could never produce gain since a taxpayer’s transactions in debt that it has issued can produce only cancellation of indebtedness cod income or additional interest deductions since there is no way that favorable financing could ever produce gain_or_loss section of act arguably doesn’t apply to favorable financing issue as you requested we have reviewed the position taken in the tam and asked that the it a branch of field service do the same in both cases we believe the position set forth therein that in the event amortization of taxpayer’s intangible assets is allowed any expenditures in later years that create or enhance the intangible assets must be capitalized and not currently deducted is correct in substance if an item eg a customer relationship created in or earlier rose to the level of an asset under section of act then there is little reason to question whether a similar item created in a later year is also an asset thus the costs of creating or enhancing that asset should also be capitalized into basis the taxpayer’s argument that the alternative position is somehow based on some sort of capitalization election misses the point the duty_of_consistency called for under the alternative position relates to the treatment of the item as a separately identifiable asset-not to the capitalization of the expenditures attributable to that item as stated above the position stated in the tam stands case development hazards and other considerations please call if you have any further questions by harve m lewis chief passthroughs and special industries branch field service division


t c memo united_states tax_court michael v domulewicz and mary ann domulewicz petitioners v commissioner of internal revenue respondent daniel j desmet and linda k desmet petitioners v commissioner of internal revenue respondent docket nos filed date ps commenced these tefra partner-level cases to challenge affected items notices of deficiency ps used a partnership d an s_corporation s u s treasury notes and publicly traded stock to create an artificial loss by way of a son-of-boss transaction j a copromoter of the transaction billed s for j’s legal fees related to the transaction s paid and claimed a deduction for the bill a portion of the deduction passed through to each p who claimed it as an ordinary_loss on his federal_income_tax return in a previous partnership-level proceeding involving d r determined as a partnership_item that d was a sham this opinion supplements 129_tc_11 affd in part and remanded sub nom 581_f3d_297 6th cir whose existence was disregarded that partnership-item determination became final when no partners timely contested it ps dispute that the fees that s paid j are affected items held the fees are affected items subject_to the deficiency procedures of subch b of ch i r c because the disallowance of their deductibility flows from r’s partnership-item determination that d was a disregarded sham but the disallowance of the deduction required a further partner-level determination as to the extent to which the claimed deduction was related to the partnership and to the transaction paul l b mckenney for petitioners meso t hammoud for respondent supplemental memorandum opinion laro judge these consolidated cases are before this court on remand from the court_of_appeals for the sixth circuit see 581_f3d_297 6th cir affg in part and remanding 129_tc_11 the court_of_appeals remanded these cases to this court to decide whether the jenkens gilchrist fees fees were nonpartnership_items subject_to the statute_of_limitations in sec_6501 or whether they were affected items subject_to tefra id pincite the parties agree that we can decide thi sec_1unless otherwise indicated section and subchapter references are to the applicable versions of the internal_revenue_code tefra references are to the tax equity and fiscal responsibility act of publaw_97_248 stat continued issue without a trial on the basis of the evidence in the record and their joint statement of facts we hold that the fees were affected items subject_to the deficiency procedures of subchapter_b of chapter deficiency procedures background michael v domulewicz and daniel j desmet petitioners implemented a son-of-boss transaction transaction promoted by bdo seidman and jenkens gilchrist the transaction was designed to create an artifical multimillion dollar loss that petitioners could report as an offset to unrelated multimillion dollar gains that petitioners were required to report for the loss was reportedly generated by using a newly formed partnership a newly formed s_corporation u s treasury notes and publicly traded stock petitioners formed the s_corporation on date and they formed the partnership on date each petitioner’s interests in the partnership and in the s_corporation were held by his grantor_trust trust each trust reported on form_1041 u s income_tax return for estates and continued as amended 2the s_corporation and the partnership were both passthrough entities that did not pay income taxes themselves but instead passed their income_tax attributes on to their owners a third individual who is not a party to these proceedings also participated in the formation of the entities trusts that the trust’s federal tax_attributes passed through to the grantor the partnership was dissolved in date when its partners contributed their partnership interests to the s_corporation for the partnership reported as to the transaction that the partnership realized a short-term_capital_loss and was entitled to deduct interest jenkens gilchrist billed the s_corporation dollar_figure for legal fees related to the transaction the s_corporation paid that bill in date and claimed a deduction for the payment on its form_1120s u s income_tax return for an s_corporation the s_corporation issued each trust a schedule_k-1 form_1120s shareholder’s share of income credits deductions etc reporting that the trust’s share of the dollar_figure deduction in the form of a dollar_figure ordinary_loss passed through to the trust as a shareholder of the s_corporation each trust reported on its return that its share of the ordinary_loss which each trust reported as a nonpassive loss passed through to the petitioner who was the trust’s grantor each petitioner reported his share of the passthrough nonpassive loss as an ordinary_loss on his federal_income_tax return 3as to the transaction the s_corporation also reported on its tax_return that it realized an approximately dollar_figure million long-term_capital_loss from the sale of publicly traded stock the s_corporation reported that portions of this loss passed through to each trust which in turn reported that the item passed through to the petitioner who was the grantor of the continued respondent issued a notice of final_partnership_administrative_adjustment fpaa as to the partnership in date in the fpaa respondent determined that the partnership was a sham whose existence was disregarded disregarded sham and that the partnership therefore was not entitled to claim the short-term_capital_loss or the interest_expense the fpaa was not timely contested by a partner of the partnership and the fpaa became final respondent then assessed the tax and penalties attributable to the disallowance of the short-term_capital_loss and the interest_expense in date respondent issued to each petitioner an affected items notice_of_deficiency for disallowing the passthrough losses from the s_corporation ie the long-term_capital_loss and the ordinary_loss and determining penalties as stated supra note the parties agree that petitioners may not deduct any of the long-term_capital_loss the notices of deficiency stated that the ordinary losses were disallowed because no deduction is allowed for any legal accounting continued trust each petitioner reported the passthrough long-term_capital_loss on his tax_return as an offset to his unrelated multimillion dollar gain we previously held that this long-term_capital_loss was an affected_item subject_to the deficiency procedures and the court_of_appeals for the sixth circuit agreed with us upon appeal see 129_tc_11 affd on that issue and remanded to decide the issue at hand sub nom 581_f3d_297 6th cir the parties agree that petitioners may not deduct any of the long-term_capital_loss consulting and advisory fees claimed since petitioners failed to establish that such expenditures were incurred and if incurred are deductible under any provision of the internal_revenue_code including but not limited to sec_183 and sec_212 the parties agree that this determination is correct if the fees are affected items subject_to the deficiency procedures discussion we decide whether the fees were affected items subject_to the deficiency procedures if the fees were not affected items then any federal_income_tax on the disallowance of their deductibility must be assessed within years of the later of the filing or the due_date of petitioners’ federal_income_tax returns see sec_6501 those periods of limitation appear to have expired if the fees were affected items then the period for assessing federal_income_tax attributable to the fees would be no shorter than the period prescribed by section a ie within years of the later of the filing or the due_date of the partnership’s federal tax_return that period if applicable was suspended upon respondent’s issuance of the fpaa as to the partnership see sec d and remains suspended until days after the decisions in these cases become final see sec_6503 the period for assessing tax attributable to the fees therefore remains open if the fees are affected items petitioners argue that the fees were not affected items and hence that the applicable limitation periods for assessment have expired pursuant to sec_6501 to that end petitioners assert the fees were unrelated to the partnership because they were not billed to the partnership they were not paid_by the partnership and they were not deducted on the partnership return respondent argues that the fees were affected items and hence that the applicable limitation periods for assessment remain open to that end respondent asserts his disallowance of petitioners’ passthrough deductions of the fees claimed on their personal returns as ordinary losses is affected by his partnership-level determination that the partnership was a disregarded sham we agree with respondent the tefra procedures determine the proper treatment of partnership items at the partnership level in a single unified_audit and judicial proceeding see domulewicz v commissioner t c pincite the term partnership_item includes any item_of_income gain loss deduction or credit that the secretary has determined is more appropriately determined at the partnership level than at the partner level sec_6231 see also sec_301_6231_a_3_-1 proced admin regs after a partnership-level adjustment has been made to a partnership_item in a unified partnership proceeding a corresponding computational adjustment must be made to the tax_liability of the partners see sec_6231 defining the term computational adjustment where an increase in a partner’s tax_liability is attributable to an affected_item that flows strictly from a computational adjustment no notice_of_deficiency need be sent to the partner and any error in the computational adjustment must be challenged in a refund_suit see sec c domulewicz v commissioner supra pincite see also sec_6231 defining affected_item as any item to the extent such item is affected by a partnership_item 87_tc_783 stating that an affected_item is an item whose existence or amount is dependent on any partnership_item if an increased liability stemming from an affected_item requires a factual determination at the partner level however the deficiency procedures apply and the commissioner must issue an affected items notice_of_deficiency to the partner in order to assess tax attributable to the affected_item see sec a a i domulewicz v commissioner supra pincite in the fpaa respondent determined that the partnership was a disregarded sham such a determination implicates a partnership_item see 551_f3d_1358 fed cir 491_f3d_732 8th cir see also 591_f3d_649 d c cir affg on this issue 131_tc_84 respondent’s partnership-item determination that the partnership was a disregarded sham became final when none of the partners timely contested the determination see n c f energy partners v commissio89_tc_741 to the extent that the fees were related to the partnership and to the transaction the fees and the s corporation’s claimed deduction of the fees were affected by the partnership-item determination in that the fees were nondeductible given the lack of an income profit or business-related motive encompassed in and then flowing from the partnership-level determination see 166_f3d_825 6th cir and cases cited thereat cf 435_us_561 holding that a transaction characterized as a sham is imbued solely with tax-avoidance features 132_tc_161 disallowing a taxpayer’s deduction for fees that it paid to jenkins gilchrist to implement a variant of a son-of-boss transaction and to provide a written tax opinion letter because the transaction lacked economic_substance in other words the partnership-level determination that the partnership was a disregarded sham means that petitioners as ultimate passthrough owners of both the partnership and the s_corporation and the s_corporation as payee of the fees lacked as to the transaction and as to the payment of the fees which were related thereto the requisite business-related profit or income motive that served as a precondition to deducting the fees under sec_162 sec_183 or sec_212 respectively the only statutory provisions that would have permitted such a deduction see sec_162 deductions allowed for ordinary and necessary business_expenses sec_183 and b deductions allowed to the extent of income in the case of an activity_not_engaged_in_for_profit sec_212 and an individual may deduct the ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income to the extent that the fees were unrelated either to the partnership or to the transaction the fees were not necessarily items affected by the partnership-item determination that the partnership was a disregarded sham petitioners note that the fees were neither incurred nor deducted by the partnership and argue that the fees were 4for example the fees would not be affected items to the extent that the fees related to services provided directly to petitioners or to the s_corporation as to matters other than the formation or the conduct of the partnership therefore not affected items petitioners rely erroneously upon that fact in seeking their desired result the mere fact that the fees were neither incurred nor deducted by the partnership does not necessarily remove the fees from a characterization as affected items the fees to the extent related to the partnership and to the transaction were affected items because as discussed above petitioners were ultimate owners of both the partnership and the s_corporation and the disallowance of the s corporation’s deduction of the fees was directly affected by the partnership-level determination that the partnership is a disregarded sham the parties essentially ask the court to decide the characterization of the fees as affected items on an all or nothing basis because the parties agree that all of the fees were related to the transaction and we find on the record before us that the fees were related to the partnership in that they were paid at least in part to form the partnership and to effect the transaction as it related to the partnership we hold that all of the fees were affected items affected items may be one of two types the first type is immediately assessable see domulewicz v commissioner t c 5in this regard the parties stipulated that respondent’s disallowance of petitioners’ deductions of the ordinary_loss should be sustained in full if the applicable periods of limitation remain open pincite the second type is assessable only through the deficiency procedures id the fees are affected items of the second type in that they required partner-level determinations to ascertain the portion if not all of the fees that were nondeductible in that that portion related to the partnership and to the transaction see sec a a i providing that the deficiency procedures apply to any deficiency attributable to affected items which require partner level determinations other than penalties additions to tax and additional_amounts that relate to adjustments to partnership items petitioners through the trusts were both the ultimate partners of the partnership and the ultimate shareholders of the s_corporation the partnership’s federal tax_return however did not reveal that the partnership and the s_corporation were commonly owned or that those two entities were integral parts of the son-of-boss transaction underlying the s corporation’s payment of the fees nor did the partnership’s tax_return indicate that petitioners were indirect owners of the s_corporation the relationship between the partnership on the one hand and the fees the s_corporation and petitioners on the other hand could not readily have been ascertained at the partnership level but had to be ascertained in a partner-level proceeding based on the relevant facts concerning petitioners and the s_corporation and the relationship between them a partner-level determination also was required to ascertain the amount of the fees deducted on the s corporation’s return that related to the transaction and to ascertain that the nonpassive losses reported on the returns of the trusts and the ordinary losses deducted on petitioners’ returns derived from the deduction of the fees on the s corporation’s return in sum we hold that all of the fees were affected items subject_to the deficiency procedures the parties agree that a holding to that effect requires entry of decisions for respondent thus we shall reenter the stipulated decisions that upheld respondent’s disallowance of the fees and were appealed to the court_of_appeals for the sixth circuit we have considered all of the parties’ arguments and we have found it unnecessary to reach those arguments not discussed herein or have otherwise rejected those arguments as without merit accordingly appropriate orders and decisions will be entered


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date genin-100687-16 uil --------------------- ------------------------------------------------ ------------------------- ------------------------ dear -------------- i am responding to your inquiry dated date regarding the treatment of tricare coverage for purposes of the affordable_care_act you have indicated that the county government provides additional taxable compensation_for employees with other health coverage who forego the coverage under the group_health_plan provided by the government you expressed concern whether this would be compliant with various provisions governing group_health_plans often referred to as the group market reforms see sec_9815 of the internal_revenue_code which applies the provision of part a of title xxvii of the public service act to group_health_plans if the other health coverage was coverage under tricare for retired military veterans although payments to reimburse premiums for certain other health coverage that is not group_health_plan coverage raises certain issues with respect to compliance with the group market reforms the design you describe - a payment of taxable additional compensation unrelated to the cost of other coverage of the employee -- does not result in a health plan subject_to the group market reforms while such an arrangement does have implications for the amount of the employee contribution for the group_health_plan for affordability purposes under sec_4980h and sec_36b of the internal_revenue_code the payment does not result in an employer payment plan or health_reimbursement_arrangement for further information on potential implications under sec_4980h and sec_36b we have enclosed a copy of recently issued guidance notice_2015_87 genin-100687-16 irb which discusses these issues in the context of these types of arrangements i hope this information is helpful if you have any questions please call me at -------------- ------ sincerely kevin knopf senior technician reviewer health and welfare branch office of associate chief_counsel tax exempt and government entities enclosure


internal_revenue_service appeals release number release date date uniform issue list eee department of the treasury address any reply to kek employer_identification_number form number kkk person to contact keke contact telephone number fax number last day to file a petition with the united_states tax_court certified mail dear this is our final adverse determination as to your exempt status under sec_501 of the internal_revenue_code code it is determined that your exemption from federal_income_tax under sec_501 is revoked effective received sec_501 exempt status in the organization’s only reported source of revenue is providing a service for a fee the organization primarily operates a debt management plan for individuals by having customers sign an agreement pay an application and monthly fees and receive a payment plan with a due_date for payments the organization involved another entity to handle the customer sign-ups after the sale of the debt management plan was transacted the organization operates a debt management program for debtors by providing contracting with a back-end processor and receiving payments for the referral of customers to the contracted debt management program processing company the 30-day_letter proposing revocation was issued and the organization protested a rebuttal was issued the organization had indicated a lack of interest in debt management plans the lack of interest was attributable to the ability for consumers to obtain home the organization had not had many inquiries in recent years and those received were concerning bankruptcies and other programs which were not handled by the organization our adverse determination was made because the organization is not organized and operated exclusively for an exempt_purpose within the meaning of code sec_501 you are not operated exclusively for charitable educational or other exempt purposes required in s01 e you did not engage primarily in activities which accomplish one or more of the exempt purposes specified in sec_501 sec_1 dollar_figure -1 e u1 more than an insubstantial part of your activities were in furtherance of a nonexempt purpose contributions to your organization are not deductible under code sec_170 you are required to file federal_income_tax returns on form_1120 for any years which are still open under the statute_of_limitations based on the information you furnished it appears that returns should be filed beginning with the year ending june due for these years or later years with the internal_revenue_service center cincinnati oh processing of income_tax returns will not be delayed because you have filed a petition for a declaratory_judgment under code sec_7428 you should file any returns you are required to file converted forms u s_corporation income_tax return for any years which are still open under the statute_of_limitations returns for tax_year ending should be sent to forms for tax periods beginning on and after should be filed with the cincinnati service_center cincinnati oh if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed within days from the date this determination was mailed to you contact the clerk of the appropriate court for rules - for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to - united_states tax_court second street n w washington dc we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate is not able to reverse legally correct_tax determinations nor extend the time fixed by law that you have to file a petition in the u s tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter see the enclosed notice helpful contacts for your notice_of_deficiency for taxpayer_advocate telephone numbers and addresses if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours kk appeals team manager enclosure notice helpful contacts for your notice_of_deficiency department of the treasuf internal_revenue_service tax exempt ano government entities otvision date taxpayer_identification_number form tax_year s ended person to contact iid number rich walk ’ contact numbers telephone fax _ certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter cutaipng number you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal proceaures for unagreed issues determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if a if we do not hear from you within days from the date of this letter we if you accept our findings please sjgn and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter s670 catlaiog numer thank you for your cooperation enclosures publication publication form_6018 report of examination envelope sincerely rich walk revenue_agent letter catgiog number sarc form 886a desens explanation of name of taxpayer june 20x org legend org organization name xx date pm pm cc-1 i co please note that this is not a final report this report is subject_to review by our mandatory review staff who my modify it issue whether the organization should be revoked under sec_501 of the internal_revenue_code for failure to show any activity in the furtherance of an exempt_purpose brief explanation of facts the organization is recognized as a sec_501 tax exempt_organization the definitive ruling on foundation classification was issued on 1-7-20xx as a a the organization was recognized as exempt in august of 20xx the purpose of org is to in part help consumers pay their unsecured debts and bills on an accelerated and more efficient basis to help and educate consumers with debt management and debt counseling to increase customer awareness about the benefits of reducing debts and becoming debt free pm is the program manager of the eo and its only counselor he is currently employed by co- pm states that his responsibilities are to counsel clients to resolve their financial and debt issues he answers questions and provides budgeting tools to be used by the clients he provides information to the clients such as lines to the national credit bureaus and the ftc and links to financially related books he collects information and assesses the client’s needs and abilities to become debt free the organization has had only one paying client since the operation began pm states that he still takes calls from prospective customers but they mostly want to know about bankruptcy and loans he is not involved in these issues law sec_501 -1 operational test- primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose form avrev page - department of the treasurv - internal_revenue_service ‘ form sec_86a department ofthe weer - ee aeon fer explanation of items name of taxpayer schecine ne or exhion year period ended june 2cxk ' org sec_501 -1 e organizations carrying on trade or business- in general an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's xempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 sec_501 q special rules for credit counseling organizations - in general -an organization with respect to which the provision of credit_counseling_services is a substantial purpose shall not be exempt from tax under subsection a unless such organization is described in paragraph or of subsection c and such organization is organized and operated in accordance with the following requirements a the organization- provides credit_counseling_services tailored to the specific needs and circumstances of consumers ii makes no loans to debtors other than loans with no fees or interest and does not negotiate the making of loans on behalf of debtors iii provides services for the purpose of improving a consumer’s credit record credit history or credit rating only to the extent that such services are incidental to providing credit_counseling_services and iv does not charge any separately_stated fee for services for the purpose of improving any consumer’s credit record credit history or credit rating taxpayer’s position in a letter to revenue_agent dated july 20xx pm made the following statements our focus has always been on educating and providing help to our clients and to prospective participants into our debt management program we feel that educating our clients and any consumers that inquire about our services is the starting point and most important focus of our process we offer services to participants where there is a need and we can help ti understand that we have not been receiving many requests for help as evidenced by our revenue but our focus is to help people not solicit consumers for signing up with our dmp government’s position based on the facts of the examination the organization does not satisfy the requirements of sec_501 of the intemal revenue code the organization does not engage primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 the main form acrev department of the treasury - internal_revenue_service page -2- form 886a name of taxpayer org departmen of ik are ses sec_2venel explanation of items year’ penod ended ry june 20xx ar an issue of this organization is that it has little or no activity as such there is no education offered the organization has been in operation approximately years and there has been no furtherance of an exempt activity the organizations appeal taxpayers letter dated april 20xx stated that they had counseled approximately potential clients and approximately clients were processed and accounts were set up for a debt management plan the eo has indicated in its appeal letter that there has been a lack of interest in debt management plans attributable to the ability for consumers to obtain home loans and roll their unsecured debt into their mortgages this has adversely effected the number of new clients and has resulted in very low numbers in the last years however agent has verified during the audit year that the eo had no activities that demonstrated that it meet the requirements of ir sec_501 c when asked about the activity of future years the president stated during the interview that he did not have many inquiries and those he had were concerning bankruptcies and other programs which he did not handle conclusion based on the foregoing reasons the organization does not qualify for exemption under section c of the internal_revenue_code and its tax exempt status should be revoked taxpayer was offered a closing conference on august 20xx form arrev page -3- department of the treasury - internal_revenue_service