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 corp plr-124446-15 date date legend parent date date ------------------------------------------------------------------------------- ------------------------------------------------------ ------------------ -------------------- company official ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------------------------------- tax professional ------------------------------------------------------------------------------- ------------------------------------------------- tax professional ------------------------------------------------------------------------------- -------------------------------------------------- dear ------------------ we respond to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to make an election the extension is being requested for parent to make an election under sec_1_1502-21 to relinquish the entire carryback period for the parent consolidated group’s consolidated_net_operating_loss cnol for the tax_year ending date the election additional information was submitted in a letter dated date the material information submitted for consideration is summarized below plr-124446-15 parent is the common parent of a consolidated_group parent group parent group sustained a cnol in the tax_year ending date the election was required to be made by date the date that the return for the tax_year ending date was due with extension however for various reasons a valid election was not filed after date it was discovered that a valid election had not been filed subsequently this request was submitted for an extension of time to file a valid election parent has represented that parent group has not and will not carry any portion of the cnol to a prior consolidated_return_year of parent group parent has also represented that no member of the consolidated_group of which parent was the common parent for the tax_year ending date had a separate_return_year within the meaning of sec_1_1502-1 at any time during the carryback period parent has further represented that parent group is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time of the request for relief and the new position requires or permits a regulatory election for which relief is requested sec_1_1502-21 provides that a consolidated_group may make an irrevocable election under sec_172 to relinquish the entire carryback period with respect to a cnol for any consolidated_return_year the election is made in a separate statement entitled this is an election under sec_1_1502-21 to waive the entire carryback period pursuant to sec_172 for the insert consolidated_return_year cnols of the consolidated_group of which insert name and employer_identification_number of common parent is the common parent sec_1_1502-21 also provides that the statement must be filed with the group’s income_tax return for the consolidated_return_year in which the loss arises under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 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 in this case the time for filing the election is fixed by the regulations ie sec_1_1502-21 therefore the commissioner has discretionary authority under plr-124446-15 sec_301_9100-1 to grant an extension of time for parent to file the election provided parent establishes it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official tax professional and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to timely make the election was discovered by the internal_revenue_service see sec_301_9100-3 and iv based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for parent to file the election with respect to the relinquishment of the entire carryback period for the cnol for the tax_year ending date as described above the above extension of time is conditioned on the taxpayers’ parent and the members of its consolidated_group tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved parent must file the election in accordance with sec_1_1502-21 parent group’s return for the tax_year ending date must be amended to attach the election statement required by sec_1_1502-21 a copy of this letter must be attached to the election statement alternatively if the parent group files its returns electronically parent may satisfy this latter requirement by attaching a statement to its return that provides the date and control number of this letter_ruling we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by parent company official tax professional and tax professional however the director should verify all essential facts moreover plr-124446-15 notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in the office copies of this letter are being sent to your authorized representatives sincerely ken cohen ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


significant index no department of the treasury internal_revenue_service washington d c tax exempt and government entities pmsien jun -ep ra t2 t ep number release date re company this letter constitutes notice that your request for a waiver of the minimum_funding_standard for the plan for the plan_year ending subject_to the following conditions has been granted by the later of a days from the date of the ruling letter or b the earlier of i the date the pension_benefit_guaranty_corporation pbgc’ notifies the service in writing that this condition has not been met or ii days from the date of the ruling letter the company provides collateral to the plan in a form acceptable to the pbgc starting with the quarterly contribution due on makes required quarterly contributions to the plan in a timely fashion while the plan is subject_to a waiver of the minimum_funding_standard the company makes contributions to the plan in amounts sufficient to meet the minimum_funding requirements for the plan for the plan years ending the company through by through respectively without applying for a waiver of the minimum_funding_standard and the company provides the pbgc a copy of any ruling requests it makes under sec_412 of the code you agreed to these conditions in an e-mail sent to us on the conditions is not met the waiver for the plan_year ending retroactively null and void if any one of is this conditional waiver has been granted in accordance with sec_412 of the internal_revenue_code code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which this conditional waiver has been granted is equal to the contributions that would otherwise be required to reduce the balance in the funding_standard_account to zero as of the company is a developer and manufacturer of precision-engineered synthetic rubber compound products used in the automotive medical irrigation and office equipment industries the company operates one domestic manufacturing subsidiary one of this subsidiary’s manufacturing plants was shut down in termination of over half of the company’s employees the company also operates four foreign subsidiaries nearly half of the company's sales are through its foreign subsidiaries the plan is sponsored only by the company and its domestic subsidiary resulting in the the company's financial hardship is the result of cash-flow problems that arose at the end of the cash-flow problem arose as a consequence of a number of factors the company discovered that certain solvents had leaked into the in ground around one of its manufacturing plants the company tried to enter a voluntary remediation program in the state where the plant was located but was prevented from doing so because a number of property owners near the manufacturing_facility brought a lawsuit against the company in company settled with these landowners for dollar_figure settlement the company agreed to work with the epa to receive a remedial action plan to complete the clean-up of the property as acondition of the the the company was forced to close this facility resulting in the loss of almost half of the company’s workforce cost associated with the closing exceeded dollar_figure dollar_figure estimates that an additional dollar_figure clean-up through the end of the company has spent almost associated with the clean-up of this manufacturing plant and will be necessary to complete the the company's health-care costs increased from to peaking at annually current healthcare costs are over dollar_figure even though the company has reduced its workforce by nearly annually the company's pension funding requirements have increased almost from dollar_figure to dollar_figure for in in gross_sales at the company’s domestic operations have decreased from dollar_figure from the company's traditional u s customer base the reduction in demand is the effect of low economic activity in the u s fierce international competition in the company’s industry and job movement to as a result of reductions in demand to dollar_figure in the company's weakened condition has restricted its ability to borrow in the open equity market and has increased its interest costs as a result of failing to meet the covenants on its existing financing arrangements in out of the years from the company's balance_sheet was adjusted to reflect new accounting rules for decline in pension liabilities and deferred tax assets resulting in a dollar_figure equity through globally the company is doing well financially however foreign laws restrict the amount of dividends that can be-returned from foreign subsidiaries to the company these profits were the result of while the company generated profits in profits at the four foreign subsidiaries domestically the company continues to operate at a loss the company is also operating domestically with a negative cash_flow and it is clear from our analysis of the information submitted with the requests that the company has suffered a substantial business hardship the company on a whole fiscal years suffered losses of dollar_figure domestically the company continued to suffer losses for there do appear to be prospects for recovery however for the and dollar_figure and and product sales from its closed facility have been moved overseas health care plans have been merged and employee premiums and deductibles have been increased to save costs lean manufacturing technology is being implemented throughout the company operations have been established in the far east to address changes in the global marketplace the company is aggressively pursuing recovery_of environmental costs from its insurers the company is actively diversifying its customer base outside its core automotive market furthermore a cash_flow analysis that shows that the company can meet the minimum_funding requirements for the plan for the duration of the amortization period of the funding waiver this analysis shows evidence of a turnaround in the company's financial situation using conservative estimates moreover the company has demonstrated its commitment to maintain the plan by making the first three required the four required quarterly contributions for the plan_year ending _ and the first quarterly contributions for the plan_year ending required quarterly contribution for the plan_year ending while it is not clear that the projected financial turnaround will take place it is clear that plan the company will not be able to meet the minimum_funding_standard for the year without compromising its ability to maintain ongoing operations because the ona company's financial recovery is not certain and because the plan is only current_liability basis the request for a waiver of the minimum_funding_standard for the plan for the plan_year ending conditions described above _ has been granted subject_to the your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to a profit sharing plan or any other retirement plans covering employees covered by the plan maintained by the company to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa similarly the establishment of a new profit sharing plan or any other retirement_plan by the company covering employees covered by the plan would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent the date of this when filing form_5500 for the plan_year ending letter should be entered on schedule b actuarial information for this reason we suggest that you furnish a copy of this letter to the enrolled_actuary who is responsible for the completion of the schedule b we have sent a copy of this letter to the manager ep classification in and to the manager ep compliance unit in lf you require further assistance in this matter please contact sincerely yours joseph h grant director - employee_plans


internal_revenue_service number release date ------------------------------------ ------------------------------------ ------------------------------------------------- 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 plr-132253-17 date february legend x -------------------------------------------------- --------------------------------------- country -------------- date ------- date ---------------------------- dear -------------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x by x's representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country on date as of date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity however x did not timely file form_8832 entity classification election electing to treat x as a disregarded_entity for federal tax purposes plr-132253-17 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that for purposes of sec_301_7701-3 a foreign eligible entity's classification is relevant when its classification affects the liability of any person for federal tax or information purposes the date that the classification of a foreign eligible_entity is relevant is the date an event occurs that creates an obligation to file a federal tax_return information_return or statement for which the classification of the entity must be determined thus the classification of a foreign_entity is relevant for example on the date that an interest in the entity is acquired which will require a u_s_person to file an information_return on form_5471 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government plr-132253-17 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of x filing within days of the date of this letter all required returns or amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations and ii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representatives sincerely associate chief_counsel passthroughs special industries david r haglund by david r haglund branch chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court peter j chapman and julia l chapman petitioners v commissioner of internal revenue respondent docket no filed date christina m passard for petitioners melanie e senick for respondent memorandum findings_of_fact and opinion goeke judge respondent determined a dollar_figure deficiency in petitioners’ income_tax and a dollar_figure sec_6662 accuracy-related_penalty for after concessions by petitioners the issues for decision are all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and continued whether petitioners are entitled to a dollar_figure contract labor expense deduction for we hold that they are whether petitioners are entitled to a dollar_figure interest_expense_deduction for we hold that they are entitled to a reduced_amount whether petitioners are entitled to a dollar_figure bad_debt deduction for we hold that they are not and whether petitioners are liable for accuracy-related_penalties under sec_6662 we hold that they are but the penalties must be adjusted for consistency with this opinion findings_of_fact petitioners are a married couple who lived in alaska when they filed their petition petitioners filed a joint form_1040 u s individual_income_tax_return for in mr chapman engaged in real_estate maintenance services through a wholly owned llc tundra mountain services llc tms and real_estate investment through another wholly owned llc tundra mountain investment llc tmi mr chapman formed tms in and tmi in in continued procedure unless otherwise indicated mrs chapman was the sole shareholder of alaska inland car rental inc aicr a subchapter_s_corporation petitioners reported business income and expenses from tundra mountain enterprises encompassing tmi and tms on schedules c profit or loss from business of their returns under the cash_basis accounting_method they reported the activity from tms on schedule c of their return under the cash_basis method and reported the activity from tmi on schedule c of their return under the accrual basis accounting_method aicr and tms were seasonal businesses with opposing busy seasons tms provided services including lawn care snow removal rekeying general maintenance winterizations and plumbing repairs the winter months were its busiest season aicr provided car rental services and had its busiest season in the summer tms occasionally contracted with aicr for its employees to perform labor on tms’ behalf in particular the aicr employees performed routine winterization on properties that tms had contracted to service or maintain as payment for these services tms paid aicr dollar_figure in tms had no direct relationship with aicr’s employees petitioners deducted tms’ payments to aicr on their schedule c as part of tms’ contract labor expense petitioners deducted dollar_figure on their schedule c as interest tmi paid to two classes of lenders credit card companies for credit accounts in the name of bonnie chapman mr chapman’s mother and lenders who provided funds under promissory notes on tmi’s behalf mr chapman executed a document dated date which stated that bonnie chapman assigned nine of her credit card accounts for tmi’s use assignment the assignment document stated that the transfer of credit lines is considered a loan by bonnie chapman to tmi for the net available credit of the items transferred and that the sum of account balances on the credit lines at the date of transfer will be repaid by tmi to the creditor on behalf of bonnie chapman and will be treated as an interest payment to bonnie chapman by tmi mr chapman was the only signatory to the assignment document credit card statements and bank statements show the cashflow between the credit card accounts and tmi’s bank account each credit card statement from the date billing cycle showed a balance transfer for approximately the amount shown on the assignment document tmi issued promissory notes between date and date each note had different terms regarding principal amounts interest rates and payment terms caitlyn isch bonnie chapman and gary isch each held one of the notes issued by tmi tmi’ sec_2010 bank statements show aggregate payments of dollar_figure to caitlyn isch dollar_figure to bonnie chapman and dollar_figure to gary isch respectively tmi’ sec_2010 bank statements do not reflect any payments to any of the lenders for the other promissory notes before tmi invested money in several real_estate projects with adam rust and his limited_liability_company acuity enterprises llc acuity as evidence of tmi’s investment mr rust executed promissory notes between date and date ten of the notes had an annual interest rate of more than all of the notes provided that principal and interest would be due as a balloon payment at maturity the parties earmarked all of the notes for specific real_estate projects but did not secure the notes with any of the underlying real_estate mr chapman would meet with contractors real_estate agents and developers during the course of the development of each of the projects mr rust filed a bankruptcy petition on date the u s bankruptcy court for the district of oregon discharged mr rust’s debts petitioners deducted principal and interest on their schedule c because of mr rust’s bankruptcy discharge respondent issued a notice_of_deficiency to petitioners in date reflecting his disallowance of petitioners’ deductions for contract labor expenses interest_expenses and a bad_debt additionally respondent imposed an accuracy-related_penalty petitioners timely petitioned this court i burden_of_proof opinion generally taxpayers bear the burden of proving by a preponderance_of_the_evidence that the determinations of the commissioner in a notice_of_deficiency are incorrect rule a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving entitlement to any claimed deductions rule a 503_us_79 to satisfy this burden taxpayers must present sufficient records to substantiate their deductions see sec_6001 65_tc_87 aff’d 540_f2d_821 5th cir gorokhovsky v commissioner tcmemo_2012_206 aff’d __ fed appx __ wl 7th cir date sec_1_6001-1 income_tax regs ii contract labor deduction tms contracted out labor to aicr employees in and tms paid aicr dollar_figure for_the_use_of its employees petitioners deducted the dollar_figure payment on their schedule c as a contract labor expense sec_162 provides a deduction for certain ordinary and necessary business-related expenses an expense is ordinary if it is normal customary or usual within the relevant business see 308_us_488 an expense is necessary if it is appropriate and helpful for the business 320_us_467 290_us_111 see also sec_1_162-7 income_tax regs the transaction at issue here is between mr chapman’s wholly owned llc tms and mrs chapman’s wholly owned corporation aicr transactions between related parties warrant particular scrutiny for tax characterization see 532_f2d_1204 8th cir pepsico puerto rico inc v commissioner tcmemo_2012_269 however it is one thing to say that transactions between related parties should be carefully scrutinized and quite another to say that a genuine transaction should be disregarded for tax purposes simply because it occurred between related parties respondent argues that petitioners failed to prove this dollar_figure payment was an ordinary and necessary business_expense respondent’s argument is premised entirely on his assertions that neither aicr nor its employees provided any actual services to tms we do not agree mr chapman testified that tms is in the business of providing services such as lawn care snow removal rekeying general maintenance winterizations and plumbing repairs he also testified that the labor aicr provided included routine winterizations during aicr’s slow season we find mr chapman’s testimony credible in addition tms’ business required the labor reflected by this expense accordingly we are convinced that tms paid aicr dollar_figure in exchange for its employees to perform tms’ services and that this expense was ordinary and necessary for tms to carry out its business operations respondent also argues that the dollar_figure payment was in substance a contribution_to_capital however because the payment was compensation_for services the aicr employees performed we do not agree that this payment was a capital_contribution accordingly petitioners have satisfied their burden of proving the dollar_figure payment to aicr met the requirements for deductibility of a trade_or_business expense iii interest_expense_deduction sec_163 allows a deduction for all interest_paid or accrued on indebtedness within the taxable_year as an exception sec_163 generally disallows a deduction for personal_interest petitioners claimed a deductible interest_expense of dollar_figure for as a result of two types of obligations interest mr chapman purportedly paid on a number of credit lines in the name of bonnie chapman but assigned to tmi and interest accrued on notes tmi and mr chapman issued a assignment of credit lines under sec_163 taxpayers may deduct interest_expenses only if they arose from the taxpayers’ own indebtedness they cannot deduct interest_expenses that arose from another’s indebtedness 604_f2d_34 9th cir aff’g tcmemo_1976_150 in the absence of an obligation of the taxpayer to pay interest the taxpayer is barred from deducting interest notwithstanding the taxpayer’s characterization of payments as interest payments 340_f2d_445 2d cir aff’g tcmemo_1963_174 petitioners argue that tmi may deduct the interest_paid on the credit lines bonnie chapman assigned to tmi under sec_163 to support their argument petitioners provided a copy of the assignment document the creditors’ records showing balance transfers at the time of the assignment and the creditors’ records showing the payments towards interest in each of the credit card statements from the assignment year shows a balance transfer but does not show the origin or purpose of the balance transfer interest_expenses and their underlying debt are allocated according to the use of the debt proceeds see 119_tc_44 sec_1_163-8t temporary income_tax regs fed reg date although petitioners assert that the balance transfers were a means of raising funds for mr chapman’s real_estate investment business petitioners failed to show the use of the debt proceeds for a business_purpose we note that the debt was incurred in the name of mr chapman’s mother bonnie chapman mr chapman testified that he relied upon her credit in the business however his vague and general testimony does not provide a sufficient basis to trace the debt to business_expenses accordingly petitioners have failed to satisfy their burden of proving that the interest was properly allocable to their trade_or_business in robinson v commissioner t c pincite we found that such a tracing regime is in conformity with the disallowance_of_interest_expenses under sec_163 additionally petitioners provided a number of bank statements and credit card statements showing payments from tmi’s bank account to a number of credit lines including the credit lines covered by the assignment although the statements show tmi made payments on the credit lines the statements again fail to show the nature of the expenditures that generated the debt carried on the credit lines because petitioners have failed to meet their burden of proving the interest payments were not bonnie chapman’s personal obligation or that the underlying debt was an ordinary and necessary obligation of the business petitioners are not entitled to an interest_expense_deduction for interest on the assigned credit lines b promissory notes whether a particular accounting_method clearly reflects income is a factual question 37_tc_1063 a taxpayer’s labeling of his tax_return as accrual is not determinative of the designation see 282_us_92 taxpayers may adopt any permissible method_of_accounting in connection with each separate and distinct trade_or_business the income of which is reported for the first time sec_1_446-1 income_tax regs without the commissioner’s approval a taxpayer must report income in accordance with the method_of_accounting the taxpayer used for previous years sec_446 115_tc_554 see also 45_fsupp_711 n d cal mr chapman formed tmi in from to petitioners reported their tmi income and claimed deductions on their personal income_tax returns petitioners changed their tmi accounting_method in from the cash_basis method to the accrual basis method however petitioners have not shown any reason tmi’s items of income and deduction should be calculated under the accrual basis method although they were free to adopt the accrual basis method if it clearly reflected income they had to do so for the first taxable_year tmi was in operation see sec_1_446-1 income_tax regs or secure the consent of the commissioner before changing methods see sec_1_446-1 income_tax regs petitioners are not entitled to switch to the accrual basis method absent the commissioner’s approval petitioners contend that the distinction between cash_basis and accrual basis is insignificant because they actually paid their interest obligations under the notes as they came due in petitioners have substantiated this claim only to a very limited extent petitioners provided evidence of tmi’s interest payments on only of the promissory notes for example tmi’s bank statements show that petitioners made payments totaling dollar_figure to bonnie chapman gary isch and caitlyn isch in petitioners have not shown that the interest on the remaining notes was actually paid during petitioners assert that tmi’s dollar_figure interest payments were on debts incurred for nonpersonal purposes see sec_163 mr chapman credibly testified that the funds were used in tmi’s real_estate business accordingly petitioners are entitled to an interest_expense_deduction for only the dollar_figure they properly substantiated iv bad_debt deduction petitioners contend that the promissory notes mr rust issued constitute bona_fide debts acquired in connection with a trade_or_business that became wholly worthless in respondent contends that these debts are not bona_fide debts because they did not arise from a debtor-creditor relationship we agree with respondent sec_166 allows taxpayers to deduct bona_fide business_debts that have become wholly worthless within a taxable_year a bona_fide debt arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable amount of money 91_tc_575 sec_1_166-1 income_tax regs a gift or contribution_to_capital may not be considered a debt for purposes of sec_166 sec_1_166-1 income_tax regs a contribution_to_capital in this instance would be in the form of a joint_venture a joint_venture is ‘an association of persons to carry out a single business_enterprise for profit’ 27_tc_840 quoting c j s joint adventures sec_1 and citing 14_tc_1406 and 22_bta_935 gurtman v commissioner tcmemo_1975_96 whether a joint_venture was formed for tax purposes presents a question of fact gurtman v commissioner tcmemo_1975_96 the fundamental question is whether the parties intended to and did in fact join together for the accomplishment or conduct of an undertaking or enterprise 42_tc_1067 there is sufficient evidence showing that mr chapman and mr rust intended to work together in a joint_venture in real_estate investment the record establishes that the promissory notes formalizing the arrangement represented a capital_investment by mr chapman with interest set at unusually high rates to account for mr chapman’s personal involvement in the projects the debt was not secured_by the real_estate or any other collateral and mr chapman provided services on the projects mr chapman would meet with contractors real_estate agents and developers the evidence of the actual transfer to mr rust of funds in the amounts of the alleged notes is insufficient and the high level of risk and involvement by mr chapman is indicative of a capital_contribution to a joint_venture not a credit arrangement in any event the notes were earmarked as investments in specific parcels of real_property but as stated previously none of the notes was secured_by any of the underlying properties mr rust defaulted on the principal payments as they came due under the notes yet tmi allegedly provided additional funds to mr rust petitioners contend that the notes represent bona_fide debt because the notes are binding obligations for fixed amounts and terms but the terms meant nothing in practice petitioners further argue that the interest they received from mr rust in previous tax years is evidence of a debtor-creditor relationship however the alleged interest payments do not prove a debt existed because among other reasons the payments were not consistent and regular these payments could well have been for services or return on investment in summary although the notes had stated terms the evidence indicates petitioners did not enforce payment at maturity the interest rates were well above market levels mr chapman maintained an active role in the development of the the first note in the series is dated date with a term of months acuity issued an additional four notes for a stated aggregate sum of dollar_figure after the first note matured projects the record establishes that the parties intended the notes to act both as an investment and as compensation_for mr chapman’s personal involvement in the projects on the basis of the foregoing we hold the notes do not support a bad_debt deduction for v accuracy-related_penalty sec_6662 and b imposes an accuracy-related_penalty if any part of an underpayment_of_tax resulted from a substantial_understatement_of_income_tax the penalty is of the portion of the underpayment to which the section applies sec_6662 the commissioner bears the burden of production on the liability for an accuracy-related_penalty in that he must come forward with sufficient evidence indicating that it is proper to impose the penalty see sec_7491 see also 116_tc_438 once the commissioner meets this burden the burden_of_proof remains with the taxpayer including the burden of proving that the penalty is inappropriate because of reasonable_cause and good_faith higbee v commissioner t c pincite respondent meets his burden of production by showing that petitioners’ understatement of income_tax is substantial bronstein v commissioner t c individuals substantially understate their income_tax when their understatement exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 petitioners bear the burden of proving that the accuracy-related_penalty is inappropriate because of reasonable_cause and good_faith see sec_6664 whether the taxpayer acted with reasonable_cause and good_faith is determined by the pertinent facts and circumstances brunsman v commissioner tcmemo_2003_291 sec_1 b income_tax regs petitioners have failed to provide evidence of their reasonable_cause or good_faith accordingly if the rule computation demonstrates that petitioners’ understatement exceeds the threshold the penalty will apply in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service te_ge technical_advice_memorandum number release date ay internal_revenue_service attn eo mandatory review mc4920 dal commerce street dallas tx taxpayer's name uil number taxpayer's address taxpayer's id no year s involved conference held legend tax a er year1 year2 year3 year4 year5 year6 year7 state this memorandum responds to a request dated date from tege exempt_organizations examinations for technical_advice on the issues as presented below our findings are set forth below issue sec_2 is taxpayer still an exempt_organization under sec_501 c if it still is exempt under sec_501 c is it a school another type of public charity or a private_foundation if it is a private_foundation is it a private_operating_foundation if it still is an exempt_organization does it have unrelated_debt-financed_income taxpayer is a non-profit corporation incorporated in state in year taxpayer was recognized as exempt from federal_income_tax under sec_501 c and as a public charity described in sec_170 at the time of application taxpayer operated a private school however its predominant activity became that of purchasing or leasing buildings renovating the buildings and leasing the buildings to unrelated non-exempt charter schools in year state enacted a statute allowing for the creation of charter schools thereafter taxpayer modified its organizing documents and changed its purposes to include the ability to own and lease school facilities in specified areas of state and other locations also taxpayer changed its activities instead of operating a private school taxpayer began assisting in the creation of charter schools first in state and later in additional states it formed new non-profit corporations and helped them to obtain charter school contracts it also began acquiring facilities and leasing them to these charter schools in year taxpayer was examined for fiscal_year year year was several years before the current exam period during that examination taxpayer was no longer operating a private school and instead was engaged primarily in leasing school facilities nonetheless taxpayer continued to claim public charity status as a school on its forms the examination of year was concluded with taxpayer's receiving a no_change_letter based on the documents submitted it appears that during the current exam period of year year and year taxpayer's primary activity was the purchase or lease of school buildings that it then renovated leased and sub-leased to the charter schools it served as landlord to non-profit organizations that it had created it charged rents based on the square footage of the property using a fee slightly below what other landlords charge for similar properties taxpayer in its capacity as lessor supplied nothing more than the usual and customary landlord services such as janitorial assistance also during the examination period none of the corporations that leased property from taxpayer had tax-exempt status subsequently at least one of these corporations received recognition of exemption although most of them remained not recognized as exempt taxpayer claimed public charity status as a school on its 990s during this time also during the exam period taxpayer operated an educational summer camp for nine weeks during the examination period it generated income totaling approximately one-tenth of one percent of taxpayer's total gross rental income taxpayer described its evolution from a single private elementary_school to a developer of school facilities its method of performing this mission has changed dramatically over time taxpayer once owned and administered schools in the local area serving several hundred students it now provides assistance in various forms to charter schools in six states serving ten thousand students another communication from taxpayer regarding its activities states taxpayer started as an organization conducting schools pursuant to its initial purposes in its articles of incorporation taxpayer also locates buildings suitable for schools and purchases and leases buildings to charter schools it is thus performing an activity indirectly that the charter schools could perform directly it supports the charter schools in this manner taxpayer's board was not composed of independent members during the first year of the audit there were two officers married to each other and one director the next year according to the form_990 filed by the taxpayer it had five directors two of whom shared the last name of the president and vice-president during the last year of the audit a business partner of the president and vice-president joined the board all directors were paid sec_170 defines an educational_organization as one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on sec_501 c provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable or educational or other recognized purposes sec_1_103-1 b provides the term political_subdivision denotes any division of any state_or_local_governmental_unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit sec_1 c -1 a provides that in order to be recognized as exempt from federal_income_tax under sec_501 c an organization must be both organized and operated exclusively for one or more of the purposes specified in such section sec_1 c -1 c 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 c 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 c -1 d i provides that the term educational means the instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community sec_1 c -1 d ii example lists the following as examples of educational organizations under sec_501 c a primary or secondary school a college or a professional or trade school which has a regularly scheduled curriculum a regular faculty and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on sec_1_502-1 b provides that a subsidiary_organization of a tax exempt_organization may be exempt on the ground that the activities of the subsidiary are an integral part of the exempt_activities of the parent organization however the subsidiary is not exempt from tax if it is operated for the primary purpose of carrying_on_a_trade_or_business which would be an unrelated_trade_or_business if regularly carried on by the parent organization in revrul_58_547 c b a charitable foundation built a school building for a nursery school and leased the building to the nursery school both the charitable foundation and the nursery school were tax-exempt under sec_501 c the lease of property under ordinary commercial arrangements does not constitute the exercise of an educational or charitable function in and of itself the ruling held that a lease by an exempt_organization will not be considered substantially related to the exempt_purpose of the lessor solely because the lessee is an also an exempt_organization revrul_69_572 c b found that an entity organized to construct and maintain a building on city land to house member organizations of a local community chest with subsidy from the city that paid nominal rent to the city was operating for an exempt_purpose the construction was financed by contributions from the general_public and non-interest bearing obligations to other charitable organizations it distinguished revrul_58_547 because the building supported the community chest by improving communications facilitated coordination made more efficient use of voluntary labor and supported them with below cost rent and the exclusive use of the premises in revrul_72_369 c b an organization was formed to provide managerial and consulting services for nonprofit_organizations exempt under sec_501 c to improve the administration of their programs on a cost_basis an organization is not exempt merely because its primary activity and operations are not carried on for profit the fact that services are provided at cost solely to exempt_organizations is not sufficient to characterize an activity as charitable within the meaning of sec_501 c 144_f2d_998 2nd cir cert denied323 u s s ct 89_led_631 found that the new york port authority was a political_subdivision of the states of new york and new jersey because it was created by a contract between the two states and maintained many sovereign powers including the power of eminent_domain and police power the court defined power police as the preservation of the health morals or safety of the inhabitants of a community the organization's police power consisted of the power to subpoena the power to issue orders and enforce orders against persons within its jurisdiction and the power to maintain a uniformed police force 144_f2d_1019 2d cir found that the triborough bridge authority was a political_subdivision of the state of new york the authority was formed by state legislation this legislation also delegated to the authority powers to operate and maintain the toll bridges in 326_us_279 the supreme court held that the presence of a single non-educational exempt_purpose if substantial in nature will destroy the exemption under sec_501 c regardless of the number or importance of truly educational or other exempt purposes 38_tc_247 t c the court found the volunteer fire departments were not political subdivisions the court stated conceded that the fire departments perform ed a public function in the sense that they perform ed the same function that is generally carried on by municipal fire departments however in reaching its conclusion the court highlighted the relations between the fire companies and the municipalities they serve are purely voluntary no power of the state could compel them to render any services and the state or its political_subdivision the municipality could not be compelled to accept their services they are free associations created by the voluntary acts of their incorporators and not by any legislative action they can be dissolved at the will of the corporate members in 70_tc_352 the tax_court held that when considering whether an organization qualifies for exemption under sec_501 c citations omitted t he critical inquiry is whether petitioner's primary purpose for engaging in its sole activity is an exempt_purpose or whether its primary purpose is the nonexempt one of operating a commercial business producing net profits for petitioner factors such as the particular manner in which an organization's activities are conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits are relevant evidence of a forbidden predominant purpose an organization's activities further a substantial non-exempt purpose and are presumptively commercial when the organization competes directly with similar for profit businesses uses profit making formulas engages in substantial advertising has hours of operation are competitive with commercial enterprises and lacks a plan to solicit donations living faith inc v commissioner f 2d 7th cir 958_f2d_122 upheld decisions of the commissioner and the tax_court that an organization established to administer programs on behalf of eleven public school districts was not a political_subdivision first it argued that it was a political_subdivision on its own merits specifically that its power to administer curricula for school districts constituted sovereign police power and its power to collect fees from school districts for constituted a sovereign assessment power the court rejected this argument second the organization argued that it should be classified as a political_subdivision because it was an integral part of political subdivisions the court responded to bestow political_subdivision status on an entity merely because it is an integral part of a political_subdivision would bypass the requirement that a political_subdivision must be authorized to exercise some sovereign power we refuse to throw out the sovereign power requirement for political_subdivision status therefore we find the 'integral part' cases inapplicable to a determination of political_subdivision status q pincite council for bibliographic and info tech v commissioner 63_tcm_3186 involved an organization that provided solely bibliographic information and related computer support exclusively to its tax-exempt member libraries the organization's activities were necessary and indispensable to the operations of its tax-exempt members the court concluded that because the organization's activities bore a close and intimate relationship to the functioning of its tax-exempt members it qualified for exemption as an educational_institution under sec_501 c analysis congress has granted exemption from federal income_taxation under sec_501 c to certain organizations that are organized and operated exclusively for exempt purposes the presence of a single non-exempt purpose if substantial in nature will preclude exemption regardless of the number or importance of exempt purposes better bus bureau of washington d c u s pincite operating a school by maintaining a regular faculty and curriculum for a body of enrolled students is a well-recognized exempt_purpose see sec_1 c -1 d ii example although taxpayer operated a school in its initial years it did not do so during the exam years during this time taxpayer did not employ faculty design curriculum nor instruct students rather taxpayer's primary activity was financing purchasing renovating and leasing school buildings leasing property is not inherently an exempt_purpose even if the lessee is an exempt_organization and needs the leased property in order to operate revrul_58_547 leasing real_estate is generally a non-exempt trade_or_business carried on for profit leasing may be an exempt activity c mly under certain circumstances and none of these circumstances are present in taxpayer's situation a business can be regarded as exempt if it is an integral part of the exempt activity of a related exempt entity council for bibliographic and information_technology t c memo an organization may support a related exempt_organization by conducting a commercial activity that is integral to the function of the exempt_organization for example a subsidiary to a university may be recognized as exempt because it manages the university's power plant sec_1 b here during the examination years none of taxpayer's tenants were recognized as exempt_organizations thus taxpayer cannot assert that its rental activities were an integral part of related exempt_organizations also an organization may conduct a business in a charitable manner to promote the exempt_purpose of an unrelated exempt_organization in revrul_69_572 an entity that leased space to exempt_organizations at rents well below market levels was ruled as exempt in contrast taxpayer charges rents that are only slightly below market rate these payments cover taxpayer's costs and have allowed it to amass a substantial surplus leasing properties at these rates lacks the donative element necessary to classify the activity as charitable revrul_72_369 airlie foundation f_supp 2d pincite thus even if the schools that rent from taxpayer were exempt the activity of leasing space to them is not an exempt_purpose for taxpayer taxpayer's leasing activities are not only non-charitable but also commercial the manner in which a business is carried out indicates whether its purpose is exempt or commercial living faith f 2d at if an organization competes with commercial entities uses market pricing and other terms and accumulates a large surplus it will be deemed to operate for commercial purposes taxpayer provides normal property services to its tenants presumably in competition with for-profit landlords and has accumulated a very large surplus these factors lead to the conclusion that it is operating for commercial purpose see b s w group t c pincite living faith f 2d pincite therefore taxpayer's rental_activity during the examination years constitutes a substantial commercial purpose and this activity is fatal to taxpayer's exemption better bus bureau u s pincite taxpayer argues that it is exempt as an integral part of governmental entities this argument fails for the reason that the charter schools to which it provides services are not governmental entities under sec_1 b a governmental entity or political_subdivision is any division of the government that is a municipal corporation or has been delegated the right to exercise part of the sovereign power of the government see 958_f2d_122 in order to fit this definition an entity must have been in some way created by the state in 144_f2d_998 2nd cir and 144_f2d_1019 2d cir the transportation authorities found to be political subdivisions were formed by action of states governmental units created these authorities and determined their operations in contrast 38_tc_247 t c determined that volunteer fire departments were not political subdivisions the court said that the mere act of carrying out what is usually a governmental function does not render a corporation as a political_subdivision it highlighted that private individuals rather than the state create and had the power to dissolve these volunteer fire departments the charter schools to which taxpayer provides leasing services are akin to the volunteer fire departments in seagrave corp rather than the transportation authorities in sham berg's estate and white's estate they have charter school contracts with governmental units but they were created by action of private individuals namely the individuals who control taxpayer private individuals have the authority to change operations of these entities or dissolve them without seeking approval of any governmental_unit the charter schools' connections with the government are only pursuant to contract thus these charter schools are not political subdivisions or governmental units because the charter schools are not political subdivisions taxpayer cannot claim exempt status as an integral part of political subdivisions finally taxpayer claims to have conducted an educational summer program during some of the years under examination however taxpayer's operation of this camp constituted only a minor portion of its time and resources and thus this activity cannot be considered a substantial purpose or a basis for exemption see sec_1 c -1 a sec_1 c -1 c because we find that the taxpayer did not operate for an exempt_purpose we need not consider whether it is a school or another type of public charity what its foundation status would be or the effect of debt-financing on the taxability of its revenue conclusion based on the above analysis we recommend revocation of taxpayer's recognition of exemption sec_501 c i r m sec_4 states regarding the effective date of an organization's revocation the examiner must attempt to establish the date the organization first failed to qualify for exempt status based on the information before us taxpayer was not operating as an exempt_organization during its examination period accordingly we recommend revocation effective date the first date of the year of the examination which discovered its change in activities we are not making a recommendation on the matter of relief from retroactive application of revocation under sec_7805 the agent reviewing taxpayer is recommending revocation only as of the first day of the years under examination and taxpayer has not recommended any alternative date i r m sec_4 states that when revocation is due to a change in the facts of the organization there is no need to request application of sec_7805 relief thus there is no need to consider sec_7805 relief a copy of this memorandum is to be given to the organization sec_611 o k provides that it may not be used or cited as precedent