internal_revenue_service number release date index number ------------------------------- ----------------------------------------- ------------------------------------ -------------------- ----------------------------- - - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-158108-04 date date re ------------------------------------- re ------------------------------------- legend decedent - ------------------------ - --------------------------------------------------- - ----------------- - ---------------------- trust ------------------------------------------------------- date a a's spouse - ------------------------- b - ------------------------- executor - ---------------------------------------------- trustee - ---------------------------------------------- state crut foundation date - ---------------------- court date x y z - --------------------------------------------------------- - --------------------------- - ---------- - ---------- - ---------------------------------------------------- - -------- - ----------------------------------------------------------------- - ---------------------------------------- dear ---------------- this is in response to your date letter and subsequent correspondence submitted by your authorized representative in which you requested rulings regarding the reformation of a_trust under sec_2055 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent died on date a resident of state under article three of decedent's will decedent bequeathed the residue of her estate to a testamentary_trust trust for the lifetime plr-158108-04 benefit of three individuals and for charitable purposes pursuant to the terms of trust under article three of decedent's will income of trust is to be divided into two equal shares one to be distributed to or for the benefit of a or to a's spouse if she survives a and the other to be distributed to b if both a and a's spouse pre-decease b b will receive the entire trust income for her lifetime if a survives b a will receive the entire trust income for his lifetime if a's spouse survives both a and b she will receive the entire trust income for her lifetime upon the death of the survivor of a a's spouse and b the trust income is to be distributed annually to a class of charitable beneficiaries trust does not qualify for the estate_tax charitable deduction under sec_2055 because trust is not a charitable_remainder_annuity_trust crat or a charitable_remainder_unitrust crut within the meaning of sec_664 or d in order to qualify trust for the estate_tax charitable deduction on date which is within days after the last date including extensions for filing the decedent's_estate tax_return the executor of decedent's_estate who is also the trustee of trust filed a petition in court to reform the trust provisions in decedent's will in order to qualify trust as a charitable_remainder_unitrust no objection was filed by the unitrust beneficiaries or by any governmental entity on behalf of the charitable_remainder beneficiaries on date pursuant to court's order article three of decedent's will was reformed to create a charitable_remainder_unitrust crut the unitrust_amount will be equal to percent of the net fair_market_value of the assets of trust valued as of the first day of each taxable_year of trust in each taxable_year of trust during the unitrust period the trustee shall distribute x percent of the unitrust_amount in equal shares i to b for her lifetime and ii to a for his lifetime or if a should predecease his spouse to a's spouse for her lifetime a and a's spouse being deemed to be a single beneficiary for this purpose upon the death of one beneficiary a and a's spouse being deemed to be a single beneficiary for this purpose trustee shall distribute the entire x percent of the unitrust_amount to the survivor for his or her lifetime in each taxable_year of trust during the unitrust period the remaining y percent of the unitrust_amount is to be paid to one or more organizations described in sec_170 and sec_2055 of the internal_revenue_code as the trustee shall select in the trustee's sole discretion under the reformation the first day of the unitrust period is the date of decedent's death and the last day of the unitrust period is the date of the survivor beneficiary's death the unitrust_amount is to be paid in equal quarterly installments at the end of each calendar_quarter and shall be paid from income or to the extent income is not sufficient from principal any income of trust for a taxable_year in excess of the unitrust_amount shall be added to principal if for any year the net fair_market_value of the trust assets is incorrectly determined then within a reasonable period after the correct value is finally determined the trustee shall pay to the unitrust recipients in the case of an under valuation or receive from the unitrust recipients in the case of an over plr-158108-04 valuation an amount equal to the difference between the unitrust amounts properly payable and the unitrust amounts actually paid at the termination of the unitrust period the trustee is to distribute the trust estate to a separate charitable_trust foundation and to cause such charitable_trust to obtain a determination_letter from the internal_revenue_service recognizing it as a charitable foundation described in sec_501 of the code the executor of decedent's_estate requests the following rulings that the reformation is a qualified_reformation under sec_2055 and that as a result of the qualified_reformation the decedent's_estate will be entitled to an estate_tax charitable deduction under sec_2055 for the present_value of the remainder_interest passing to charity in addition a request is made for the present_value factor for determining the present_value of the remainder_interest subject_to the three measuring lives sec_664 provides in relevant part that a crut is a_trust a from which a fixed percentage which is not less than percent nor more than percent of the initial net fair_market_value of all property placed in trust is to be paid not less frequently than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2055 provides that for purposes of the federal estate_tax the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises and transfers to or for_the_use_of charitable religious scientific literary or educational organizations described in sec_2055 through a sec_2055 provides that where an interest in property other than an interest described in sec_170 passes or has passed_from_the_decedent to a person or for a use described in sec_2055 and an interest other than an interest plr-158108-04 which is extinguished upon the decedent's death in the same property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to a person or for a use not described in sec_2055 no deduction shall be allowed under sec_2055 for the interest that passes or has passed to the person or for a use described in sec_2055 unless -- a in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest other than a remainder_interest such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly sec_2055 provides for the reformation of interests to comply with the requirements of sec_2055 sec_2055 provides that a deduction shall be allowed under sec_2055 in respect of any qualified_reformation sec_2055 defines the term qualified_reformation to mean a change_of a governing instrument by reformation amendment construction or otherwise that changes a reformable_interest into a qualified_interest but only if -- i any difference between i the actuarial value determined as of the date of the decedent's death of the qualified_interest and ii the actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest ii in the case of i a charitable_remainder interest the nonremainder interest before and after the qualified_reformation terminated at the same time or ii any other interest the reformable_interest and the qualified_interest are for the same period and iii the change is effective as of the date of the decedent's death sec_2055 defines the term reformable_interest to mean any interest for which a deduction would be allowable under sec_2055 at the time of the decedent's death but for sec_2055 sec_2055 provides that the term reformable_interest does not include any interest unless before the remainder vests in possession all payments to persons other than an organization described in sec_2055 are expressed either in specified dollar amounts or a fixed percentage of the fair_market_value of the property sec_2055 provides in part that sec_2055 does not apply to any interest if not later than days after the last date including extensions for filing an estate_tax_return if an estate_tax_return is required to be filed a judicial proceeding is commenced to change the interest into a qualified_interest plr-158108-04 sec_2055 defines the term qualified_interest to mean an interest for which a deduction is allowable under sec_2055 in this case the charitable_remainder interests constitute reformable interests under sec_2055 because as originally drafted trust provided for charitable_remainder interests that were presently ascertainable and hence severable from the noncharitable interests prior to the enactment of sec_2055 such interests would have been deductible under sec_2055 see -2 a of the estate_tax regulations although the payments to a or a's spouse and b were not expressed in specified dollar amounts or a fixed percentage of the fair_market_value of the property as required by sec_2055 a judicial proceeding was commenced as provided under sec_2055 before the 90th day after the last date including extensions for filing decedent's_estate tax_return further the reformation satisfies the requirement of sec_2055 because the difference between the actuarial value determined as of the date of the decedent's death of the qualified_interest and the actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest the nonremainder interest terminates at the same time both before and after the reformation and the reformation is effective as of the date of decedent's death accordingly based on the information submitted and representations made we conclude that the reformation of trust as described above will be a qualified_reformation within the meaning of sec_2055 provided the reformation is effective under local law therefore an estate_tax charitable deduction will be allowable under sec_2055 for the present_value of the charitable_remainder interests in reformed trust determined under sec_20_2055-2 the present_value factor for determining the present_value of the remainder_interest subject_to the three measuring lives is z except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this plr-158108-04 letter is being sent to your authorized representative enclosures copy for purpose cc sincerely katherine a mellody senior technician reviewer branch passthroughs and special industries


t c memo united_states tax_court richard clarke randall petitioner v commissioner of internal revenue respondent docket no filed date richard clarke randall pro_se steven i josephy for respondent memorandum findings_of_fact and opinion laro judge petitioner petitioned the court to redetermine a dollar_figure deficiency in his federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 following a trial that was held on date we must decide whether section references are to the applicable versions of the internal_revenue_code petitioner’s taxable_income includes nonemployee compensation not otherwise reported by him in that taxable_income we hold that it does we also must decide whether petitioner is liable for the sec_6662 accuracy-related_penalty we hold that he is findings_of_fact some facts are stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioner resided in colorado when his petition was filed in petitioner received dollar_figure in nonemployee compensation from national quality assurance usa inc dollar_figure in nonemployee compensation from labtest international inc dollar_figure in nonemployee compensation from due com inc dollar_figure in interest_income from firstbank of arapahoe county and dollar_figure in taxable dividends from the southern company services inc after receiving petitioner’s form 1040ez income_tax return for single and joint filers with no dependents respondent issued to petitioner a notice of proposed changes cp-2000 thereafter petitioner filed a form 1040x amended u s individual_income_tax_return for on this amended_return petitioner reported that his adjusted_gross_income for was dollar_figure this amount consisted of dollar_figure of interest_income and dollar_figure and dollar_figure in dividends he reported total_tax of zero petitioner attached to this amended_return forms 1099-misc miscellaneous income from national quality assurance usa inc and labtest international inc on each petitioner had crossed out the amounts listed in the box labeled nonemployee compensation and written in he included at the bottom of each of the forms 1099-misc the following statement this corrected form 1099-misc is submitted to rebut a document known to have been submitted by the party identified above as payer which erroneously alleges a payment to the party identified above as the recipient of gains profit or income made in the course of a trade_or_business under penalties of perjury i declare that i have examined this statement and to the best of my knowledge and belief it is true correct and complete respondent issued to petitioner the notice_of_deficiency on date and petitioner timely filed a petition in this court in the petition petitioner stated the following i have submitted an amended tax_return 1040x to the irs addressing errors in my previous tax_return 1040ez i have also submitted an affidavit explaining how two 1099-misc forms identified in the notice cp2000 are incorrect one was from national quality assurance usa inc and the other from labtest international inc both 1099-misc forms erroneously allege a payment to the party identified as he sic recipient of gains profit or income made in the course of a trade_or_business i rebutted both of these documents in attachments to my amended tax_return dated date my amended tax_return did not indicate any greater tax_liability than my original tax_return in the referenced affidavit which was dated date petitioner stated that the forms 1099-misc from national quality assurance usa inc and labtest international inc erroneously allege a payment to the party identified as the ‘recipient’ of ‘gains profit or income’ made in the course of a ‘trade or business’ and that he had rebutted both of these documents in attachments to his amended return opinion sec_61 provides that gross_income means all income from whatever source derived gross_income is an inclusive term with broad scope designed by congress to exert ‘the full measure of its taxing power’ 348_us_426 quoting 309_us_331 compensation_for services is enumerated among the items of income included under sec_61 sec_61 petitioner agrees that he has in fact received the amounts reportedly paid to him he simply argues that the amounts are not taxable petitioner’s argument is clearly without merit and we hold that the amounts of nonemployee compensation received by petitioner are includible in his taxable_income for respondent also determined that petitioner is liable for an accuracy-related_penalty under sec_6662 in relevant part sec_6662 and b imposes an accuracy-related_penalty if any portion of an underpayment is attributable to either negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code an understatement is the excess of the amount of tax required to be shown on the return for the taxable_year over the amount of tax imposed which is shown on the return reduced by any rebate sec_6662 a substantial_understatement_of_income_tax exists for any taxable_year for purposes of sec_6662 if the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 respondent bears the burden of production under sec_7491 and must come forward with sufficient evidence indicating that it is appropriate to impose an accuracy-related_penalty 116_tc_438 once respondent has met this burden the taxpayer must come forward with persuasive evidence that the accuracy-related_penalty does not apply id pincite the taxpayer may establish for example that part or all of the accuracy-related_penalty is inapplicable because it is attributable to an understatement with respect to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 whether a taxpayer acted as such is a factual determination sec_1_6664-4 income_tax regs in regard to which the taxpayer’s effort to assess the proper tax_liability is a very important consideration here we conclude that respondent has met his burden of production with respect to the accuracy-related_penalty petitioner’s amended_return for shows total_tax due of zero thus the deficiency in this case which is greater than dollar_figure is a substantial_understatement within the meaning of sec_6662 in addition the deficiency in this case is attributable to negligence as defined in sec_6662 as petitioner has failed to make any reasonable attempt to comply with the provisions of the internal_revenue_code in that petitioner has introduced no evidence to support a finding of reasonable_cause we sustain respondent’s determination as to the accuracy-related_penalty to reflect the foregoing decision will be entered for respondent


internal fewer ise service deparment of the treasury ulill washingtan do contact parana telaphone number ia reterence to tjep ra t feb 20uu attn legend statute p statute q statute r statute s state a plan x employer m resolution n group n employees t o a t o h t r a e w e b o l dear this is in response to a ruling_request dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative concerning the federal_income_tax treatment under sec_414 of the internal_revenue_code code of certain contributions to plan x the following facts and representations have been submitted by your authorized representative the board_of trustees of employer m established and created plan x in accordance with statute p and statute q for the benefit of the group n employees you represent that pian x meets the qualification requirements set forth under sec_401 of the code the foregoing statutes permit government employers such as employer m to reduce the current salaries paid to group n employees and pay these mandatory employee contributions directly to plan x in lieu of such contributions by the group n employees pursuant to statute r the group n employees are required to contribute nine percent of their respective salaries to plan x statute s provides that a municipality such as employer m may pick up the group n employees’ contributions required by statute r statute s further provides that if a municipality decides to pick up the contributions they shall be treated as employer op page -2- contributions in determining tax treatment under the code statute s also provides thata municipality shall continue to withhold federal and state income taxes based on these contributions until the internal_revenue_service or the federal courts rule that pursuant to sec_414 of the code these contributions shail not be included as gross_income of the group n employees until such time as they are distributed or made available employer m may pick up these contributions by a reduction in the cash salary of the group n employees or by an offset against a future salary increase or by a combination of both to effectuate the pickup as provided for in statute s employer m on date passed resolution n resolution n provides that employer m will pick up the group n employees contributions to plan x in accordance with statute r and statute s the group n employees salaries will be reduced by an amount equal to the amount picked up by employer m employer m will cease to withhold federal and state income taxes on the picked-up contributions and the group n employees participating in plan x will not be given the option to receive cash directly in lieu of having such contributions paid to plan x based on the aforementioned facts you request the following rulings that the mandatory employee contributions picked up by employer m shall be excluded from the current gross_income of the group n employees until distributed or otherwise made available that the picked up contributions paid_by employer m are not wages for federal_income_tax withholding purposes and federal income taxes need not be withheld on the picked up contributions sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan determined to be qualified under sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the schoo district's picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 a a of the code the school district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees' salaries with respect to such picked-up contributions op page -3- the issue of whether contributions have been picked up by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the empioyer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate contributions paid to plan xx accordingly we conclude with respect to ruling requests number sec_1 and that the amounts picked up by employer m on behalf of the group n employees who participate in plan x shall be treated as employer contributions and will not be includible in the group n employees’ gross_income in the year in which such amounts are contributed for federal_income_tax treatment these amounts will be includible in the gross_income of the group n employees or their beneficiaries only in the taxable_year in which they are distributed to the extent that the amounts represent contributions made by employer m because we have determined that the picked-up amounts are to be treated as employer contributions they are excepted from wages as defined in sec_3401 a a of the code for federal_income_tax withholding purposes in addition no part of the amounts picked up by employer m will constitute wages for federal_income_tax withholding purposes in the taxable_year in which they are contributed to plan x these rulings apply only if the effective date for the commencement of the pick-up is no earlier than the later of the date resolution n was signed or the date the pick-up is put into effect for purposes of the application of sec_414 of the code it is immaterial whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both of3 page these rulings are based on the assumption that plan x will be qualified under sec_401 of the code at the time of the proposed contributions and distributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 these rulings are directed only to the taxpayer who requested them sec_6110 of the code provides that they may not be used or cited by others as precedent a copy of this letter has been sent to your authorized representative in accordance with the power_of_attorney on file with this office ‘ sincerely yours signed jock b plotd joyce e floyd manager empioyee plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of this letter and notice ke


tcmemo_2012_249 united_states tax_court ronald moore and debra j clayton-moore petitioners v commissioner of internal revenue respondent docket no filed date ronald moore and debra j clayton-moore pro sese richard j hassebrock robert d kaiser and louis h hill for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and a penalty of dollar_figure under sec_6662 respondent conceded at trial that petitioners are not liable for the penalty the issue for decision is whether petitioners are liable for tax on the full amount of debra clayton-moore’s social_security disability benefits before offset for worker’s compensation payments that reduced the actual amount of social_security payments received all section references are to the internal_revenue_code in effect for the year in issue findings_of_fact petitioners resided in ohio at the time they filed their petition during debra clayton-moore petitioner received social_security disability benefits and ohio worker’s compensation benefits as reported to the internal_revenue_service by the social_security administration petitioner’s disability benefits for were dollar_figure of which dollar_figure was paid_by check dollar_figure was deducted for medicare part b premiums and dollar_figure was offset for worker’s compensation petitioners filed a joint federal_income_tax return for petitioners reported only dollar_figure in social_security_benefits on that return respondent determined that the full amount of dollar_figure should have been reported of which is taxable and made computational adjustments as a result of increasing petitioners’ gross_income the taxable_amount of petitioner’s social_security disability benefits for was an issue in a prior case at docket no which was resolved by a stipulated decision without an opinion of the court on the merits of the parties’ positions opinion petitioners contend that including the amount of petitioner’s ohio worker’s compensation benefits in their taxable social_security disability benefits is unfair because worker’s compensation benefits are otherwise not taxable see sec_104 thus they excluded the amount_paid by ohio from the social_security_benefits reported on their return for they have not explained why they also excluded the medicare premiums from the total benefits reported by the social_security administration and they do not contest that adjustment or any other aspects of the computation of the deficiency sec_86 provides for the inclusion of social_security_benefits in gross_income and defines such benefits as any amount received by the taxpayer by reason of entitlement to a monthly benefit under the social_security act sec_86 sec_86 provides for purposes of this section if by reason of sec_224 of the social_security act or by reason of sec_3 of the railroad retirement act of any social_security_benefit is reduced by reason of the receipt of a benefit under a workmen’s compensation act the term social_security_benefit includes that portion of such benefit received under the workmen’s compensation act which equals such reduction thus taxable social_security_benefits include the amount of the worker’s compensation payments to the extent that they reduce or offset the total social_security_benefits to which the recipient is entitled such offsets do not reduce the taxable_amount of social_security_benefits even though they have not been paid to taxpayers by the social_security administration see mikalonis v commissioner tcmemo_2000_281 willis v commissioner tcmemo_1997_290 see also h_r rept no pincite u s c c a n indicating that congress specifically anticipated this result including amounts received through a state worker’s compensation program in taxable social_security income is consistent with including social_security disability benefits as taxable under sec_86 see seaver v commissioner tcmemo_2009_270 thomas v commissioner tcmemo_2001_120 the statute simply does not allow worker’s compensation benefits paid_by a state and that offset social_security_benefits to be excluded from the taxable_amount of social_security_benefits petitioners contend that a different result was suggested by the judge in their prior case that case was settled and no opinion on the merits was issued any comments made before the case was resolved would at most be relevant to petitioners’ defense to the sec_6662 penalty which respondent has conceded for the reasons herein stated decision will be entered for respondent as to the deficiency and for petitioners as to the sec_6662 penalty


internal_revenue_service number release date index number - ----------------------------------------------- ---------------------------------------------------- ------------------------------------------------------- --------------------------------------- ------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-142830-06 date date dear ------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the projects described in appendix a attached hereto are qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ----------------- -------------------------------------------------------------------------------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure--------------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the projects described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- ---------or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter presp-142830-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-142830-06 appendix a borrower name ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ project type solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility ---------------------------------- ---------------------------------- ------------------------------ solar_energy_facility solar_energy_facility ---------------------------------- solar ---------------------------------- ---------------------------------- ------------------------------ amount allocated dollar_figure--------- project location dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- -------------------------- ------------------ -------------------------- -------------------- -------------------------- -------------------------- --------------------- -------------------------- ------------------- -------------------------- ------------- -------------------------- ----------------------- -------------------------- -------------------- -------------------------- ------------------- -------------------------- ---------------------- -------------------------- -------------------------- ---- -------------------------- ------------------------ -------------------------- -------------- -------------------------- dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- dollar_figure----------- presp-142830-06 ---------------------------------- ------------------------------ energy facility ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ ---------------------------------- ---------------------------------- ------------------------------ solar_energy_facility solar_energy_facility solar_energy_facility solar_energy_facility -------------------------- --------- -------------------------- ------------------------ -------------------------- --------------------- -------------------------- -------------------------- -------------- -------------------------- ----------------- total dollar_figure----------- dollar_figure------------- dollar_figure------------- dollar_figure------------- dollar_figure-------------------


seven w enterprises inc subsidiaries petitioners v commissioner of internal revenue respondent highland supply corporation subsidiaries petitioners v commissioner of internal revenue respondent docket nos filed date from date until date m worked as a consultant for p1 and p2 collectively ps during this period m prepared p1’s tax_return and p2’ sec_2001 tax_return in date ps hired m as their vice president of taxes as ps’ vice president of taxes m prepared and signed on behalf of ps p1’ sec_2001 sec_2002 and tax returns and p2’ sec_2002 and tax returns in through ps incor- rectly concluded that they were not liable for personal_holding_company taxes and as a result understated their tax liabil- ities relating to those years r issued p1 a notice_of_deficiency relating to through and p2 a notice_of_deficiency relating to and in the notices r determined that ps were liable for accuracy-related_penalties ps contend that they had reasonable_cause for their underpayments and acted in good_faith alternatively ps contend that they reasonably relied on the advice of m in when m served as a consult- verdate 0ct date jkt po frm fmt sfmt v files seven sheila united_states tax_court reports ant and in through when he served as vice presi- dent of taxes held pursuant to sec_1_6664-4 and c income_tax regs p1 is not liable for an accuracy-related_penalty relating to because it reasonably relied on m to prepare its tax_return held further m does not qualify as a person other than the taxpayer pursuant to sec_1_6664-4 income_tax regs with respect to the returns which he signed on behalf of ps and therefore the aforementioned regulation is not applicable to ps’ underpayments of taxes relating to through held further ps are liable for accuracy-related_penalties relating to through patrick b mathis william j niehoff and philip d speicher for petitioners merkle for respondent james m cascino david b flassing and william g foley judge the issue for decision is whether petitioners are liable for sec_6662 accuracy-related_penalties relating to tax years ending in and years in issue findings_of_fact the weder family controlled two closely held businesses highland supply corporation hsc and seven w enter- prises inc 7w hsc was the parent of a group of corpora- tions collectively hsc group which filed a consolidated fed- eral income_tax return and manufactured floral packaging and industrial wire products hsc group included highland southern wire inc and weder investment inc wi 7w a corporation principally engaged in leasing nonresidential buildings was the parent of a group of entities collectively 7w group which filed a consolidated federal_income_tax return 7w owned an 89-percent interest in weder agricul- tural limited wal a limited_partnership in hsc group and 7w group collectively peti- tioners hired william mues a certified_public_accountant to unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the years in issue the years in issue are the tax years ending date and with respect to 7w group and the tax years ending date and with respect to hsc group wi is wholly owned by highland southern wire inc which is wholly owned by hsc verdate 0ct date jkt po frm fmt sfmt v files seven sheila seven w enters inc v commissioner serve as their tax manager mues had experience relating to personal_holding_company_tax matters and had previously worked at deloitte haskins sells preparing tax returns for individuals corporations partnerships and trusts and at peabody coal co preparing consolidated_returns in petitioners promoted mues to vice president of taxes while employed by petitioners mues drafted documents performed general legal work and prepared returns for petitioners and petitioners’ shareholders petitioners provided mues with full access to all resources necessary to handle petitioners’ tax matters ie access to corporate and accounting personnel corporate records research databases and outside profes- sionals in addition petitioners authorized mues to sign on their behalf internal_revenue_service irs documents on date southpac trust international inc as trustee of the family_trust sti an entity unrelated to petitioners executed a dollar_figure interest-bearing promis- sory note the promissory note for the benefit of hsc in hsc assigned the promissory note to wi in the irs began auditing hsc group’s return and eventually expanded the audit to include hsc group’s and returns on date the irs and hsc group reached a settlement with respect to the audit relating to hsc group’s and returns the agreed adjustments were in excess of dollar_figure million and included the disallowance of more than dollar_figure of deductions relating to hsc’s president’s personal expenses these adjustments were set forth on form cg-4549 income_tax examination changes which required hsc group’s signature mues signed his name on the line labeled signature of taxpayer the irs and petitioners also reached settlements relating to hsc group’s and 7w group’s and returns hsc group had recurring adjustments relating to research and develop- ment expenses while an employee of petitioners and prior to mues obtained a master’s degree in business administration and began law school as a part-time student in date mues resigned as vice president of taxes and continued his legal studies as a full-time_student after resigning mues pursuant to an agreement provided petitioners with con- sulting services concerning tax matters and was not subject_to petitioners’ supervision or direction as a consultant mues verdate 0ct date jkt po frm fmt sfmt v files seven sheila united_states tax_court reports prepared 7w group’s return and hsc group’ sec_2001 return in date after mues completed law school petitioners hired him to serve as their vice president of taxes in accordance with his responsibilities mues prepared and signed on behalf of petitioners 7w group’ sec_2001 sec_2002 and returns and hsc group’ sec_2002 and returns with respect to the years in issue mues incorrectly characterized petitioners’ income and concluded that peti- tioners were not liable for personal_holding_company taxes the personal_holding_company_tax is a penalty tax on undis- tributed income and is designed to discourage individuals from using closely held corporations to defer taxation on divi- dends interest rents and other forms of passive_income see sec_541 sec_543 434_us_528 h rept 73d cong 2d sess c b part s rept 73d cong 2d sess c b part on hsc group’s and returns mues incorrectly concluded that interest_income relating to the promissory note held by wi was income from a source within hsc group and that wi was not liable for the personal_holding_company_tax as a result hsc group whose consolidated_return included wi understated its and tax_liabilities on 7w group’s and returns mues made a similar mistake with respect to interest_income received by wal during and wal received interest_income relating to an installment note issued by an entity outside 7w group and each year 7w in determining its income took into account a portion of that interest_income equal to 7w’s distributive_share for purposes of calculating the personal_holding_company_tax however mues did not take this income into account in addition mues misapplied the personal_holding_company_tax rules relating to rental income and in doing so incorrectly concluded that 7w’s rental income was not subject_to the personal holding com- pany tax as a result 7w group understated its through tax_liabilities on date respondent issued 7w group a notice_of_deficiency relating to and and hsc group a notice_of_deficiency relating to and collec- tively notices in the notices respondent determined that petitioners were liable for sec_6662 accuracy-related verdate 0ct date jkt po frm fmt sfmt v files seven sheila seven w enters inc v commissioner penalties on date petitioners whose principal_place_of_business was highland illinois timely filed petitions with the court seeking redetermination of the penalties set forth in the notices opinion sec_6662 and b imposes a 20-percent penalty on the portion of an underpayment_of_tax attributable to any substantial_understatement_of_income_tax the parties agree that petitioners’ incorrect reporting of personal holding com- pany tax on their returns relating to the years in issue resulted in substantial understatements of income_tax as defined in sec_6662 see sec_7491 116_tc_438 sec_6664 however provides that no penalty shall be imposed if a taxpayer demonstrates that there was reason- able cause for the underpayment and that the taxpayer acted in good_faith see also sec_7491 higbee v commissioner supra the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability experience knowledge and education and reliance on the advice of a professional tax advisor sec_1_6664-4 income_tax regs i 7w group’s return with respect to its return 7w group contends that it is entitled to relief from the accuracy-related_penalty because it relied in good_faith on the advice of mues an inde- pendent competent tax advisor indeed when he prepared 7w group’s return mues having resigned from his position as petitioners’ vice president of taxes was working for petitioners pursuant to a consulting agreement respondent emphasizes that mues continued to perform the same activities before and after his resignation requests in essence that we ignore the consulting agreement and urges us to hold that mues was not sufficiently independent for petitioners to avail themselves of relief pursuant to sec_6664 we reject respondent’s contention mues resigned signed a valid consulting agreement and served as petitioners’ inde- verdate 0ct date jkt po frm fmt sfmt v files seven sheila united_states tax_court reports pendent contractor see 503_us_318 weber v commissioner 103_tc_378 delineating factors to be considered when determining an employment relationship between par- ties affd 60_f3d_1104 4th cir in addition mues signed 7w group’s return as a paid preparer and the consulting agreement specifically provided that he was not subject_to petitioners’ supervision 7w group provided mues an experienced and knowledgeable tax professional with all of the relevant information necessary to prepare the return and relied in good_faith on mues to accurately and correctly prepare 7w group’s return therefore it was reason- able for 7w group to rely on mues to prepare its return see sec_6664 127_tc_43 stating that it is reasonable to rely on an advisor’s professional judgment if the taxpayer selects a competent tax adviser and supplies him or her with all rel- evant information and that a taxpayer who seeks the advice of an adviser does not have to challenge the adviser’s conclusions seek a second opinion or try to check the advice by reviewing the tax code himself or herself citing 469_us_241 sec_1 b c income_tax regs accordingly 7w group is not liable for the sec_6662 accuracy-related_penalty relating to ii petitioners’ through returns petitioners contend that they exercised ordinary business care and prudence relating to their through returns we disagree it is unclear whether petitioners’ myriad of mistakes was the result of confusion inattention to detail or pure laziness but we are convinced that peti- tioners and mues failed to exercise the requisite due care see united_states v boyle supra pincite 115_tc_43 affd 299_f3d_221 3d cir petitioners are sophisticated taxpayers see 134_tc_20 sec_1_6664-4 income_tax regs indeed mues was a well-educated and experienced tax professional with full access to petitioners’ records and personnel petitioners readily acknowledge that verdate 0ct date jkt po frm fmt sfmt v files seven sheila seven w enters inc v commissioner mues was familiar with the personal_holding_company_tax rules yet emphasize that these rules are complex and that mues’ mistakes were reasonable the personal holding com- pany tax rules certainly are complex but mues failed to apply some of the most basic provisions of those rules in fact mues conceded that in applying the sec_543 test he truncated the test and misapplied the second prong he simply did not read the entire test moreover he did not understand or do the requisite work to ascertain the basic facts relating to petitioners’ income items for example the applicability of the personal_holding_company_tax rules to hsc group or any member of the affiliated_group depended in part on the determination of whether income items were from inside or outside the affiliated_group see sec_542 mues failed to recognize that sti ie the debtor on the note held by wi was an entity outside the hsc group mues was petitioners’ vice president of taxes both when the note was executed and when it was assigned furthermore mues testi- fied that he knew at the time he prepared hsc group’s returns that the note’s debtor was outside the group yet he inexplicably treated the interest_income as if it was derived from within hsc group and not subject_to the personal_holding_company_tax when asked by the court whether this was reasonable mues stated it seemed reasonable at the time it seems less reasonable now in hindsight petitioners’ repeated audit adjustments relating to multiple irs audits coupled with mues’ experience expertise and education fur- ther bolster our conclusion that petitioners failed to exercise ordinary business care and prudence as to the disputed items see 77_tc_1096 affd without published opinion 680_f2d_1388 5th cir petitioners further contend that the accuracy-related pen- alties should not apply because they relied on the advice of mues-a competent tax advisor again we disagree as pre- viously discussed good-faith reliance on the advice of an independent competent tax advisor may constitute reason- able cause and good_faith sec_1_6664-4 c income_tax regs see also neonatology associates p a v commis- sioner supra pincite the right to rely on professional tax_advice however is subject_to certain restrictions see united_states v boyle supra pincite sec_1_6664-4 c verdate 0ct date jkt po frm fmt sfmt v files seven sheila united_states tax_court reports income_tax regs pursuant to sec_1_6664-4 income_tax regs advice is any communication setting forth the analysis or conclusion of a person other than the taxpayer emphasis added petitioners contend that pursuant to sec_7701 and the definition of a taxpayer is limited to peti- tioners ie the persons subject_to the tax and does not include mues-petitioners’ employee a corporation can act eg sign the corporation’s return only through its officers see sec_6062 96_tc_858 affd 959_f2d_16 2d cir petitioners author- ized mues to act as both the vice president of taxes and the taxpayer indeed unlike the return which mues signed as a paid preparer the through returns were signed by mues on petitioners’ behalf simply put mues does not qualify as a person other than the taxpayer with respect to the returns which he signed on behalf of the tax- payer ie petitioners thus petitioners did not have reasonable_cause for the through underpay- ments see sec_1_6664-4 and c income_tax regs we need not and do not opine as to whether reliance on an in- house professional tax advisor may establish reasonable_cause in other circumstances contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing appropriate decisions will be entered f we note that petitioners citing several regulations contend that respondent’s position is con- trary to regulations providing that reasonable_cause includes reliance on the advice of house counsel the cited regulations simply are not applicable sec_53_4941_a_-1 sec_53 a vi b and d iii a foundation excise_tax regs relate to prohibited_transactions and the application of excise_taxes sec_1_856-7 income_tax regs relates to the determination of whether an entity qualifies pursuant to sec_856 as a real_estate_investment_trust these regulations are distinguishable because they explicitly pro- vide that legal counsel includes house counsel and that the advice of counsel must be in a reasoned written opinion furthermore while sec_1_6664-4 income_tax regs provides a standard for determining whether a taxpayer has acted in good_faith the cited regulations re- late to whether a taxpayer has acted willfully verdate 0ct date jkt po frm fmt sfmt v files seven sheila


internal_revenue_service number info release date conex-115389-03 cc ita uil dear this letter is in response to your inquiry dated date on behalf of a constituent we have discussed inquiry with larry lemon of your office and with son attended the united_states air force academy beginning in upon entry to the academy all fourthclass members are allowed to charge items such as uniforms computers personal services and membership fees the charges are covered by a loan from the federal government and a repayment plan is established under which the amount borrowed is deducted from the cadet’s base pay after left the academy in a form_w-2 wage and tax statement was issued to him the form_w-2 included in taxable_income the amount of outstanding loan balance on the date of his separation from the air force the academy informed the that this was done according to established department of defense procedures has repaid a portion of the debt and expects to repay the full amount under sec_61 of the internal_revenue_code gross_income includes all income from whatever source derived including compensation_for services merely receiving loan proceeds does not result in gross_income however an advance of compensation by an employer to an employee may be includible in gross_income whether an advance of funds from an employer to an employee is a loan or advance compensation_for services to be rendered in the future depends on the specific facts and circumstances involved we do not have sufficient facts to determine whether the academy’s treatment of this situation was correct assuming however that an employee receives advance compensation that must be repaid to the employer how the advance is treated depends on whether repayment occurs in the same year as the advance or in a later year if the repayment occurs in the same year as the advance the advance is excluded from gross_income if the advance is repaid in a later year the advance is included in the employee's gross_income for the year in which it was originally paid to the employee and the employee is entitled to a miscellaneous itemized_deduction for the amount repaid in addition if the amount of the deduction exceeds dollar_figure the benefits of sec_1341 are available the application of sec_1341 is explained in the attached page from publication taxable and nontaxable income we have contacted ms linda etter of the defense finance and accounting service dfas regarding the generalities of situation if requested to do so by your office or the ms etter will research this issue from dfas’s perspective and furnish a response also we would be pleased to assist ms etter in assuring that this matter has been properly handled from the perspective of the internal_revenue_service ms etter can be contacted at dfas-dgd de east irvington place denver co i hope this information is helpful please call if you have any questions sincerely lewis j fernandez deputy associate chief_counsel income_tax accounting


internal_revenue_service number release date index number - ----------------------------- ------------------------------------------------------------ ---------------- ------------------ ------------------------ - department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-132692-06 date october --------------------------------------------------------------------------------------------------- legend x ------------------------------------------ decedent ------------------------------------------- a -------------------- --------------- ------------------------- --------------------------------------------------------------- ----------------------- ---------- ----------------- ------------------------- ---------------------- trust state d1 d2 d3 dear ----------- this letter responds to a letter dated date submitted by x's authorized representative on behalf of x requesting inadvertent termination relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated under the laws of state on d1 and elected to be an s_corporation effective d1 on d2 decedent one of x’s shareholders died pursuant to decedent’s will decedent’s shares in x were distributed as of d3 to trust x represents that trust is eligible to be a qualified_subchapter_s_trust qsst however due to inadvertence a the beneficiary of trust plr-132692-06 failed to elect to treat trust as a qsst because of this failure to make the qsst election trust was an ineligible s_corporation shareholder as a result x’s s_corporation_election terminated x represents that the transfer of stock to trust and the subsequent failure_to_file the qsst election were not motivated by tax_avoidance furthermore x and all its shareholders represent that from d3 until the present x and the shareholders have all filed returns consistent with x’s status as an s_corporation x and all its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a subchapter_s_corporation shareholder sec_1361 provides that a qsst with respect to which a beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the qsst’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1361 applies under sec_1361 a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply under sec_1361 an election under sec_1361 will be effective up to days and months before the date of the election sec_1361 provides that the term qsst means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or plr-132692-06 resident_of_the_united_states sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1_1361-1 of the income_tax regulations provides that if a corporation's s election terminates because of a late qsst election the corporation may request inadvertent termination relief under sec_1362 sec_1362 provides that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusions based solely on the facts presented and the representations made we conclude that x's s_corporation_election was terminated on d3 because a failed to make a timely qsst election under sec_1361 for trust we also conclude that the termination was inadvertent within the meaning of sec_1362 therefore under sec_1362 x will be treated as an s_corporation from d3 and thereafter assuming that x’s s_corporation_election is valid and is not otherwise terminated under sec_1362 however this ruling is contingent upon a filing a qsst election for trust with an effective date of d3 with the appropriate service_center within days of the date of this ruling a copy of this letter must be attached to the qsst election except as specifically ruled above we express no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed on whether x’s original election to be an s_corporation was a valid election under sec_1362 or whether trust qualifies as a qsst within the meaning of sec_1361 plr-132692-06 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your first and second authorized representatives this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely beverly katz senior technician reviewer branch office of the associate chief_counsel passthroughs special industries


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release dates date date uil code contact person identification_number contact number employer_identification_number required to be filed tax years all dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely tamera ripperda director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number vil tax_exempt_and_government_entities_division date date legend b name c website name n company name o state p date q date t device x number y dollars amount dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do you qualify for exemption under sec_501 of the code no for the reasons described below facts prior to your formation your founder and only director b discovered a new development in current hydroponics technology in which he has a patent pending called letter cg catalog number 47630w the t system the t system is a soilless growing process which can run without conventional power and can aid in growing food in impoverished regions of the world you demonstrated the t technology to a where fertile soil and clean water is scarce horticulture expert who advised you that global starvation cannot be solved in one lifetime but the use of your technology can prove it is possible the expert suggested you shrink the system into a commercially viable stand-alone system and use the proceeds to fund the larger system b formed you to further the research_and_development of the t system and to obtain benefactors to invest in his invention you were incorporated in the state of o on p your articles of incorporation state the specific purpose of this corporation is to eliminate world hunger after review of o's secretary of state website it was found that you are not in good standing since your formation of your time has been dedicated to prototyping and working with the manufacturer to bring the stand-alone t to market you have been working closely with an engineer and marketing agent to stand alone t which is being manufactured overseas b has a for-profit company n which markets and distributes the t stand- alone system you currently use the website c and have a link to n’s website for purchasing the t stand-alone system you stated that you do not want the public to make any distinctions between you and n and that you want the general_public to look at the entities as being symbiotic because you want people to know that when they purchase the t stand-alone system from n the proceeds are going directly to building food machines to feed the starving the website also states that for every x systems sold n will donate a stand-alone system to you to get it to the places that need it most in addition n will donate x of its sales to you for the development of the t farm system the web site c further states n has the best tool in the world and but b needs your help in getting there donating you help in the packaging and shipping of t to regions of the world that can use t to grow their own food by once a prototype of the t farm system is completed it will be tested in a hostile region of the world two expert scientists horticulturists have committed verbally to getting the machine working at its optimal ability the t stand-alone systems are publicized through the website c wholesale vendors and home and garden shows besides using his personal resources b has borrowed funds from private investors to finish the stand-alone t system through n and has spent about y dollars for injection molds website design engineering and legal fees catalog number 47630w letter cg you wrote you have had zero income for the past years and have not filed any annual returns you subsequently were automatically revoked for not filing your annual returns for a consecutive three-year period law sec_501 of the code provides in part for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that 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 sec_1_501_c_3_-1 of the income_tax regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that scientific research will be regarded as in the public interest a b c if the results of such research including any patents copyrights processes or formulas resulting from such research are made available to the public on a nondiscriminatory basis if such research is performed for the united_states or any of its agencies or instrumentalities or for a state or political_subdivision there of if such research is directed toward benefiting the public in revrul_65_1 1965_1_cb_226 the service considered an organization which promotes and fosters the development and design of machinery in connection with a commercial operation and in connection therewith has the power to sell assign and grant licenses with respect to its copyrights trademarks trade names or patent rights letter cg catalog number 47630w the service concluded that the organization does not qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code of revrul_69_632 1969_1_cb_120 a nonprofit composed of members of a particular industry to develop new and improved uses of existing products of the industry is not exempt under sec_501 of the code the association’s members select research projects in order to increase their sales by creating new uses and markets for their product the primary purpose of the association's research is to serve the private interests of its creators rather than the public interest in p l l scholarshi82_tc_196 an organization which operated a bingo at a bar for the avowed purpose of raising money for scholarships was denied exemption under sec_501 because it was operating for private interests the board included the bar owners the bar’s accountant also a director of the bar as well as two players a realistic look at the operations of these two entities however shows that the activities of the organization and the bar were so interrelated as to be functionally inseparable in 765_f2d_1387 cg cir cert_denied 497_us_1005 the court held that when a for-profit organization benefits substantially from the manner in which the activities of a related_organization are carried on the organization is not operated exclusively for exempt purposes within the meaning of sec_501 even if it furthers other exempt purposes application of law you are not as described in sec_501 of the code because you are not exclusively operated for charitable or educational_purposes you are not as described in sec_1_501_c_3_-1 of the regulations because you fail the operational_test you do not meet the provisions of sec_1_501_c_3_-1 of the regulations because more than an insubstantial part of your activities is not in furtherance of an exempt_purpose providing funding to develop b’s patented technology into marketable devices to be marketed distributed and sold by n serves a substantial private purpose as described in sec_1_501_c_3_-1 of the regulations you are not operated exclusively for exempt purposes because your net_earnings inure to the benefit of b for example you were formed to fund the research_and_development of marketable devices using b’s patented technology which will be sold by b’s for profit business n addition your board consists of one person b who controls all aspects of your operations and has a for profit business n who will benefit from your operations in letter cg catalog number 47630w you are not as defined in sec_1_501_c_3_-1 of the regulations because you are operating for the private interests of band n you are operating to confer the advantages of tax-exempt status to b as shown by the fact that your tax exemption will enable b to apply for grants to develop his inventions which are marketed and distributed through n furthermore you stated you want the general_public to make no distinctions between you and n this also demonstrates you are primarily serving private interests you do not meet the provisions of sec_1_501_c_3_-1 of the regulations any scientific research you are carrying on is not primarily conducted in the public interest your activities of funding the research_and_development of b’s patented technology into marketable products serves private interests you are like the organization in revrul_65_1 your activities of funding the research_and_development of b’s ideas into products do not constitute scientific research within the meaning of sec_1_501_c_3_-1 of the regulations in addition your purpose of obtaining grant money to develop b's ideas is directed to benefit b and n and any public purpose is incidental you are comparable to the organization in revrul_69_632 because you were formed to serve the private interests of your creator b although your activities may result in new processes that benefit the public this benefit does not overcome the benefit to b and n which violates the absolute inurement prohibition you are also similar to the organization described in p l l scholarship fund you and n are controlled by the same individual b interrelated with n that you are functionally inseparable from n because without you n is not able to obtain funding your functions and management are so you are comparable to the organization in church by mail because you and n are controlled by the same person moreover n benefits substantially from your operations conclusion you do not qualify for exemption under sec_501 of the internal_revenue_code because you do not meet the operational_test of reg c -1 c you are not operating exclusively for exempt purposes your net_earnings inure to the benefit of b directly as well as through n you are also operated for the purpose of benefiting n a private related business and you serve a private rather than a public interest you have the right to file a protest if you believe this determination is incorrect to protest you must submit a protest statement explaining your views and reasoning you letter cg catalog number 47630w must submit the protest statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your protest statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication types of information that should be included in your protest statement can be found in publication the protest statement must be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your protest will be considered incomplete without this statement if an organization’s representative submits the protest a substitute declaration must be included stating that the representative prepared the protest and accompanying documents and whether the representative knows personally that the statements of facts contained in the protest and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse letter cg catalog number 47630w please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely tamera ripperda director exempt_organizations enclosure publication catalog number 47630w letter cg