t c memo united_states tax_court eliana farias petitioner v commissioner of internal revenue respondent docket no filed date eliana farias pro_se priscilla a parrett for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax and an accuracy-related_penalty of dollar_figure for after concessions by both parties the issues remaining for decision are whether petitioner is entitled to additional itemized_deductions beyond those conceded by respondent and whether petitioner is liable for the accuracy-related_penalty under sec_6662 unless otherwise indicated 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 procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in california at the time she filed her petition during petitioner’s primary employment was as an elementary_school teacher with the los angeles unified school district lausd where she taught classes including health nutrition and fitness during under lausd’s policy teachers were provided with basic supplies for classroom use and purchases of anything beyond basic supplies were left to the teacher’s discretion petitioner was not reimbursed by lausd for any items that she purchased for her classroom lausd did not have a continuing education requirement that applied to petitioner in petitioner also had two part-time jobs in aerobics instructor and personal trainer at spectrum club holding co spectrum and workshop facilitator and liaison for schools at the educare foundation educare educare’s reimbursement policy for outlined that mileage would be reimbursed at a rate of cents per mile and that employees would be reimbursed for very basic office supplies if they presented receipts petitioner received forms w-2 wage and tax statement for reporting earnings from educare of dollar_figure and from spectrum of dollar_figure in date petitioner went on a 10-night cruise sailing from venice italy to various locations in the mediterranean including airfare spa visits and other onboard expenses and a passport and a visa the total cost was dollar_figure petitioner did not take classes related to her employment while on the cruise petitioner’s tax_return was prepared by a return preparer who received from petitioner the total expenses to claim as deductions on the return without receipts and or other supporting documents on the tax_return petitioner claimed itemized_deductions including unreimbursed employee_expenses of dollar_figure consisting of qualified educator expenses of dollar_figure including the cost of her date trip union and professional dues of dollar_figure tax preparation fees of dollar_figure and other education expenses of dollar_figure in the notice_of_deficiency dated date the internal_revenue_service irs disallowed these claimed deductions thereafter petitioner supplied to the irs documents including numerous receipts that were separated into the following categories clothing personal wellness food travel classes field trips and supplies petitioner has conceded that she is not entitled to claim deductions for the expenses in the categories identified as clothing personal wellness and food items respondent has conceded that petitioner is entitled to deductions for some of the claimed expenses including the union and professional dues fees and the tax preparation fees opinion the deductions petitioner claimed on her tax_return for that remain at issue are unreimbursed employee_expenses consisting of dollar_figure for classes education dollar_figure for travel and dollar_figure for field trips and dollar_figure for supplies a taxpayer bears the burden of proving that he or she is entitled to any deductions claimed see 292_us_435 512_f2d_882 9th cir affg tcmemo_1972_133 generally a taxpayer must keep records sufficient to establish the amounts of the items reported on his or her federal_income_tax return sec_6001 sec_1_6001-1 e income_tax regs personal expenses are not deductible sec_262 a taxpayer may deduct unreimbursed employee_expenses as an ordinary and necessary business_expense under sec_162 79_tc_1 the expenses must be directly or proximately related to the taxpayer’s trade_or_business 308_us_488 sec_1_162-1 income_tax regs an employee’s trade_or_business is earning his or her compensation and generally only those expenses that are related to the continuation of employment are deductible 269_f2d_108 4th cir affg tcmemo_1958_60 a trade_or_business expense deduction is not allowable to an employee to the extent that the employee is entitled to reimbursement from an employer 788_f2d_1406 9th cir affg tcmemo_1984_533 along with other miscellaneous_itemized_deductions unreimbursed employee_expenses are subject_to the percent limitation of sec_67 claimed classes education expenses education expenses are considered ordinary and necessary business_expenses if the education maintains or improves skills required by the taxpayer in his or her employment or meets the express requirements of an employer imposed as a condition for the taxpayer’s continued employment status or rate of compensation sec_1_162-5 income_tax regs petitioner produced one receipt that showed that she paid dollar_figure to morter health systems new for a professional b e s t program in date petitioner testified that this was a health course but supplied no other evidence regarding this program or how it related to her employment petitioner also produced a receipt showing that she paid dollar_figure for a beach volleyball course that met on mondays from april to date petitioner did not show that she was required to teach beach volleyball or acquire these skills as a condition of her employment because petitioner has failed to fulfill the burden of proving that she is entitled to these purported education expenses we sustain respondent’s disallowance petitioner also contends that she is entitled to the deduction that she claimed for a warriorsage inc illumination intensive seminar that she paid for and attended in because this expense was not incurred in it was properly disallowed by respondent claimed travel_expenses under sec_274 no deduction is allowed for expenses for travel as a form of education however taxpayers may deduct expenses_incurred while traveling away from home if the trip is primarily to obtain education that has the requisite relation to the taxpayer’s business sec_1_162-5 income_tax regs if as an incident of such trip the taxpayer engages in some personal activity such as sightseeing social visiting or entertaining or other recreation the portion of the expenses attributable to such personal activities is not deductible pursuant to sec_262 id to deduct expenses_incurred for travel meals_and_lodging while away from home on job-related education a taxpayer must satisfy the strict substantiation requirements of sec_274 sec_274 disallows deductions for traveling expenses including meals_and_lodging unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of such expense the time and place such expense was incurred and the business_purpose for which such expense was incurred see sec_1_274-5t temporary income_tax regs fed reg date adequate_records generally must be written and must be prepared or maintained such that a record of each element of an expenditure or use that must be substantiated is made at or near the time of the expenditure or use when the taxpayer has full present knowledge of each element see sec_1 5t c ii c temporary income_tax regs fed reg date in the alternative each element of an expenditure or use must be established by the taxpayer’s own written or oral statement containing specific information in detail as to such element combined with corroborative evidence to establish such element sec_1_274-5t temporary income_tax regs fed reg date neither a taxpayer nor the court may estimate permissible deductions that do not satisfy the strict substantiation requirements of sec_274 see 50_tc_823 affd per curiam 412_f2d_201 2d cir petitioner produced receipts for the 10-day mediterranean cruise including receipts for airfare to and from italy onboard expenses and the costs of obtaining a passport and a visa the cruise involved sightseeing spa visits and other recreation the receipts do not show any business_purpose behind the expenses and do not satisfy the strict substantiation requirements of sec_274 we conclude that the cruise and the associated expenses are nondeductible personal expenses petitioner produced receipts that she claims are for weekend field trips that served as incentives for her students the receipts are primarily for gasoline purchases and recreational activities such as movie tickets and two disneyland admission tickets another receipt from imax california sciencenter lists the recipient as hooper avenue elementary_school the receipt shows the payment was made by check but no information about the payor is listed petitioner has neither shown that the expenses for field trips were an ordinary_and_necessary_expense for any of her employers nor submitted evidence sufficient to substantiate these claimed expenses as required by sec_274 claimed expenses for supplies the first dollar_figure of deductions for expenses paid_or_incurred in connection with books supplies computer equipment other equipment and supplementary materials used by an eligible_educator in the classroom is subtracted from gross_income to determine the taxpayer’s adjusted_gross_income sec_62 any substantiated expenses after the first dollar_figure that relate to a taxpayer’s employment as a teacher will be allowed as unreimbursed employee_expenses id to claim a deduction for teaching supplies it is not enough that the supplies be helpful to the students and appropriate for use in the classroom they must also be directly related to the taxpayer’s job as a teacher and a necessary expense of being a teacher see 290_us_111 wheatland v commissioner tcmemo_1964_95 petitioner produced receipts for supplies totaling dollar_figure respondent has conceded that petitioner is entitled to claim dollar_figure of these expenses some of the receipts were dated in years other than and are not relevant for petitioner’s tax_return the remaining claimed expenses totaling dollar_figure are divided into the following categories student incentives computer classroom improvement and maintenance specialty chair and related items and fitness items claimed student incentives expenses petitioner claimed that as a teacher she occasionally used candy and sugar as student incentives a number of the receipts she offered to substantiate these expenses also include other food items and household goods petitioner also testified that she purchased a u s savings bond that was presented to a student in recognition of community service provided to the school there is no evidence that the school required the purchase of the candy or the savings bond for petitioner’s students these expenses were not necessary to petitioner’s job and no matter how well intentioned gifts to students are not deductible as business_expenses see patterson v commissioner tcmemo_1971_234 petitioner also produced receipts for purchases of several audio players and testified that they related to her fifth- grade classes however petitioner did not explain how the purchase of the audio players for her students was related to the classes she was teaching whether they were used in the classroom or whether they were given as gifts to the students accordingly we sustain respondent’s determination that petitioner is not entitled to claim deductions for these expenses see tesar v commissioner tcmemo_1997_207 wheatland v commissioner supra claimed computer expense petitioner produced a receipt for the purchase of a laptop computer petitioner testified that she used it both at home and at work sec_274 requires substantiation of any expense incurred or paid with respect to certain listed_property listed_property includes computers sec_280f petitioner did not provide adequate substantiation of the business use of the computer accordingly we sustain respondent’s disallowance of the deduction for the claimed computer expense claimed classroom improvement and maintenance_expenses petitioner produced receipts purportedly for various improvements to and maintenance of her classroom petitioner testified that items listed on the receipts from home improvement stores were for supplies to post materials in the classroom and that we had a sink issue in the classroom that the school was taking too long to fix so then i had to do something about it these receipts list items such as batteries a vacuum switch plates door locks and floor tiles such purchases are not ordinary or necessary expenses for teaching for lausd see deputy v du pont u s pincite welch v helvering supra pincite petitioner’s testimony as to these items was vague and uncorroborated she has not shown that the expenses are related to the continuation of her employment see noland v commissioner f 2d pincite thus we agree with respondent’s determination that these claimed expenses are disallowed claimed cost of specialty chair and related items petitioner produced a receipt from relax the back store for dollar_figure for items including a specialty chair an adjustable headrest a pillow and ice heat pads petitioner testified that these items were purchased because of a back injury that she sustained when relocating her classroom from one room to another these expenses were not an ordinary_and_necessary_expense of her job see deputy v du pont supra pincite sec_1_162-1 income_tax regs even if the cost of these items qualified as a medical expense reportable on schedule a itemized_deductions the total expense is not enough to overcome the 5-percent adjusted_gross_income limitation see sec_213 claimed expenses for fitness items petitioner produced receipts from sports and dance stores and testified that these expenses were specifically related to the fitness classes that she taught some of the receipts do not describe the item purchased and petitioner did not explain these items in her testimony other receipts identify clothing items for the cost of clothing and maintaining such clothing to be deductible as an ordinary and necessary business_expense it must be required or essential in the taxpayer’s employment not be suitable for general or personal wear and not be so worn 30_tc_757 petitioner testified that she purchased the fitness clothing for work but she never stated and there is no evidence that the clothing was unsuitable for general or personal wear or that it was not used away from work we conclude that petitioner is not entitled to deduct the expenses claimed for fitness items accuracy-related_penalty sec_6662 and b and imposes a 20-percent accuracy-related_penalty on any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and defines disregard as any careless reckless or intentional disregard disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax exists if the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties see 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority see rule a higbee v commissioner supra pincite because of respondent’s concessions petitioner’s deficiency will not be a substantial_understatement however respondent asserts that the penalty is applicable because of petitioner’s negligence and disregard of rules and regulations respondent has met the burden of production that petitioner’s underpayment_of_tax is attributable to negligence or disregard of rules or regulations claiming personal expenses as business_expenses and failing to maintain records substantiating any valid deductions constitute negligence for purposes of sec_6662 and b see higbee v commissioner supra pincite sec_1_6662-3 income_tax regs the accuracy-related_penalty under sec_6662 is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner supra pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances see sec_1_6664-4 income_tax regs reliance on professional advice may constitute reasonable_cause and good_faith but only if under all the circumstances such reliance was reasonable 471_f3d_1021 9th cir affg tcmemo_2004_269 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 sec_1_6664-4 income_tax regs petitioner testified that she relied on a medical professional and information presented at an lausd meeting with respect to expenses that she claimed as unreimbursed employee_expenses petitioner has failed to provide evidence that those whom she relied on were competent professionals with sufficient expertise or that it was reasonable for her to rely on their purported advice see 115_tc_43 affd 299_f3d_221 3d cir further any reliance upon petitioner’s tax_return_preparer was not reasonable because petitioner provided the return preparer with only the total expenses to be claimed on her return not the receipts and or other supporting documents we sustain the application of the accuracy-related_penalty under sec_6662 to reflect concessions and the foregoing decision will be entered under rule


t c memo united_states tax_court carl c poston iii and sherea a poston petitioners v commissioner of internal revenue respondent docket no filed date john l green for petitioners deborah swann and derek b matta for respondent memorandum opinion dawson judge this case was assigned to chief special_trial_judge peter j panuthos pursuant to the provisions of ' john l green filed an entry of appearance for petitioners after respondent filed the pending motion but before the hearing in this matter mr green did not respond to the pending motion or otherwise participate in the hearing on this matter sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge this case is before panuthos chief special_trial_judge the court on respondent's motion for partial summary_judgment filed pursuant to rule as discussed in greater detail below we will grant respondent's motion background respondent determined deficiencies in and additions to petitioners' federal income taxes for the years and in the amounts as follows additions and penalties sec sec sec sec sec year deficiency a b a b b b dollar_figure --- dollar_figure of interest --- --- on underpayment due to fraud big_number ---- ---- ---- dollar_figure ---- big_number dollar_figure ---- ---- ---- dollar_figure big_number big_number ---- ---- ---- big_number big_number big_number ---- ---- ---- big_number big_number big_number ---- ---- ---- big_number big_number ---t ---t --t ---t big_number timely petition for redetermination was filed petitioners resided in houston petitioners invoked the effect for the year in issue at the time texas tax_court rules_of_practice and procedure court's jurisdiction by filing a the petition all section references are to the internal_revenue_code in and all rule references are to the respondent filed an answer to the petition denying all substantive allegations of fact and error contained in the petition in addition respondent made affirmative allegations of fact in support of respondent's determination that petitioners are liable for additions to tax for fraud specifically respondent alleged that petitioners failed to file timely income_tax returns for the years through failed to cooperate with the revenue_agent conducting the audit of their tax_liability for through failed to maintain and or provide respondent with complete and accurate records concerning their income and expenses failed to provide the account numbers or bank names for all accounts that they maintained during tax years through fraudulently and with the intent to evade the payment of tax understated gross_receipts in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for tax years through respectively fraudulently and with the intent to evade the payment of tax failed to report dollar_figure and dollar_figure of other income received during tax years and respectively fraudulently and with intent to evade the payment of tax claimed false net_operating_loss carry forwards in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure on their income_tax returns for through respectively the correct_tax years with respect to this allegation are through fraudulently and with intent to evade tax understated their taxable_income in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years through respectively and fraudulently understated and failed to pay their income_tax liabilities in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years through respectively petitioners failed to file a reply to respondent's answer within the time permitted by rule a respondent moved pursuant to rule c for entry of an order that the undenied allegations in the answer be deemed admitted the court gave petitioners notice of respondent's motion and instructed petitioners to file a reply as required by rule a and b the court's notice was returned to the court marked unclaimed petitioners did not respond to respondent's motion accordingly the court granted respondent's motion and deemed admitted the undenied affirmative allegations of fact set forth in respondent's answer respondent subsequently filed a motion for partial summary_judgment respondent contends that the allegations in the answer that petitioners are deemed to have admitted provide a basis for entry of partial summary_judgment sustaining respondent's determination that petitioners are liable for additions to tax for fraud for the years in issue the court issued an order directing petitioners to file a response to respondent's motion for partial summary_judgment and setting the motion for hearing at the court's motions session in washington d c petitioners did not file a response to respondent's motion shortly before the scheduled hearing john l green filed an entry of appearance for petitioners counsel for respondent appeared at the hearing and offered argument in support of respondent's motion no appearance was entered at the hearing by or on petitioners' behalf discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials see 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b the party opposing the motion cannot rest upon the allegations or denials in the pleadings but must set forth specific facts showing that there is a genuine issue for trial rule d the moving party however bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read ina manner most favorable to the party opposing summary_judgment 85_tc_267 respondent determined that petitioners are liable for the additions to tax for fraud which requires respondent to establish by clear_and_convincing evidence that there is an underpayment_of_tax and that some portion of that underpayment is due to fraud see sec_7454 rule b 96_tc_858 affd 959_f2d_16 2d cir facts deemed admitted pursuant to rule c are considered conclusively established and may be relied upon by the government even in relation to issues where the government bears the burden_of_proof 29_f3d_1533 11th cir affg tcmemo_1992_198 see also 77_tc_334 holding that deemed admissions under rule c are sufficient to satisfy the government's burden_of_proof with respect to the issue of fraud fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing 92_tc_661 fraud will never be presumed see 55_tc_85 it may however be proved by circumstantial evidence see 53_tc_96 courts have relied on a number of indicia or badges_of_fraud in deciding whether to sustain the commissioner's determinations with respect to the additions to tax for fraud including understating income maintaining inadequate records failing to cooperate with tax authorities and failing to make estimated_tax payments see 91_tc_874 in the instant case the deemed admissions pursuant to rule c include petitioners' admission to a number of indicia of fraud specifically petitioners are deemed to have admitted that they failed to file timely income_tax returns for the years through failed to cooperate with the revenue_agent conducting the audit of their tax_liability for through failed to maintain and or provide respondent with complete and accurate records concerning their income and expenses failed to provide the account numbers or bank names for all accounts that they maintained during tax years through fraudulently and with the intent to evade the payment of tax understated gross_receipts in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for tax years through respectively fraudulently and with the intent to evade the payment of tax failed to report dollar_figure and dollar_figure of other income received during tax years and respectively fraudulently and with intent to evade the payment of tax claimed false net_operating_loss carry forwards in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure on their income_tax returns for through respectively fraudulently and with the intent to evade tax understated their taxable_income in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years through respectively and fraudulently understated and failed to pay their income_tax liabilities in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years through respectively based on the foregoing we conclude that respondent has satisfied the burden of proving by clear_and_convincing evidence that the entire underpayment_of_tax for each of the years in issue was due to fraud accordingly we sustain respondent's determination that petitioners are liable for additions to tax for fraud for the years in issue to reflect the foregoing an order granting respondent's motion for partial summary_judgment will be issued


internal_revenue_service appeals_office s gessner mc h-al houston tx number release date date date certified mail dear department of the treasury person to contact employee id number tel fax refer reply to in re form required to be filed tax period s ended uil this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc it is determined that you do not qualify as exempt from federal_income_tax under sec_501 effective date our adverse determination was made for the following reasons you are not operated exclusively for charitable educational or other exempt purposes you did not engage primarily in activities which accomplish one or more of the exempt purposes specified in sec_501 more than an insubstantial part of your activities were in furtherance of a non-exempt purpose contributions to your organization are not deductible under code sec_170 you are required to file federal_income_tax returns on the form indicated above you should file these returns within days from the date of this letter unless a request for an extension of time is granted file the returns in accordance with their instructions and do not send them to this office processing of income_tax returns and assessment of any taxes due will not be delayed because you have filed a petition for declaratory_judgment under code sec_7428 if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed within days from the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at taxpayer_advocate_service phone see the enclosed notice helpful contacts for your notice_of_deficiency for additional taxpayer_advocate telephone numbers and addresses sincerely karsr a pkiadirs karen a skinder team manager cc enclosures internal_revenue_service department of the treasury date org address te_ge eo examination commerce st mail code dal dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter rev catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely renee b wells acting director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f department of the treasury - intemal revenue service form_8 a explanation of items name of taxpayer org ein schedule no or exhibit year period ended 20xx02 legend org - organization name state - state issue xx - date address - address city - city whether exempt_organization qualifies for exemption under sec_501 of the internal_revenue_code facts org org was incorporated under the laws of the state of state on march 19xx in a determination_letter dated february 20xx org was determined to be exempt from federal_income_tax as an organization described in sec_501 org is located at address city state in its articles of incorporation org stated its mission was to improve the lives of individuals and families through better credit counseling financial management education including credit restoration and correction procedures in its application_for exempt status internal_revenue_service form_1023 org stated that its activities would consist of providing credit_counseling_services to low income and indigent individuals and the conducting of community seminars to assist individuals in restoring good credit according to the form_1023 volunteer staff would be utilized in these activities activity description the ceo of org conducts a radio broadcast which invites listeners to call in to ask questions about credit issues in addition a website under the org name provides information about the organization access to archived radio broadcasts and contact information according to the website org provides credit file restoration correction with settlement s education and credit file clean-up to access these services a fee is required currently dollar_figure for single persons and dollar_figure for married couples this fee will generate a professional credit evaluation the executive director indicated that occasionally these fees are waived in hardship cases at the discretion of the executive director ceo after the credit evaluation is prepared a fee schedule and contract is provided the client which details which credit services such as foreclosures student loans and late payments to creditors will be provided form acrev department of the treasury - internal_revenue_service page -1- form 886a department of the treasury - intemal revenue service explanation of items name of taxpayer org ein 20xx02 a review of the financials provided by the organization as well as the form_990 return of organization exempt from income_tax for the year under exam indicated that of the support provided org was derived from these fees schedule no or exhibit year period ended the credit counselors are not volunteers but are paid based ona percentage of fees collected from the clients a review of the job description for the credit counselors indicates that contrary to a response from the executive director as related by the poa in a memo dated october 20xx education is but a small part of the counselors’ responsibilties law sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_tax sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual the term charitable includes relief of the poor and distressed sec_1 c -1 d income_tax regulations the term educational includes a instruction or training of the individual for the purpose of improving or developing his capabilities and b instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 in other words the two components of education are public education and individual training sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that 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 the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 form acrev page -2- department of the treasury - intemal revenue service e orm 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein schedule no or exhibit year period ended 20xx02 educational_purposes include instruction or training of the individual for the purpose of improving or developing his capabilities and instruction of the public on useful and beneficial subjects in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university sec_1_501_c_3_-1 in 302_f2d_934 ct_cl the court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt the service has issued two rulings holding credit counseling organizations to be tax exempt revrul_65_299 1965_2_cb_165 granted exemption to a c organization whose purpose was to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy its primary activity appears to have been meeting with people in financial difficulties to analyze the specific problems involved and counsel on the payment of their debts the organization also advised applicants on proration and payment of debts negotiated with creditors and set up debt repayment plans it did not restrict its services to the needy it made no charge for the counseling services indicating they were separate from the debt repayment arrangements it made a nominal charge for monthly prorating services to cover postage and supplies for financial support it relied upon voluntary contributions from local businesses lending agencies and labor unions revrul_69_441 1969_2_cb_115 granted c status to an organization with two functions it educated the public on personal money management using films speakers and publications and provided individual counseling to low-income individuals and families as part of its counseling it established budget plans ie debt management plans for some of its clients the debt management services were provided without charge the organization was supported by contributions primarily from creditors by virtue of aiding low income people without charge as well as providing education to the public the organization qualified for sec_501 status form acrrev page -3- department of the treasury - internal_revenue_service e om 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein 20xx02 schedule no or exhibit year period ended the court found that the counseling programs in the case of consumer credit counseling service of alabama inc v u s a f t r 2d d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community sec_1 c - d i b for this it charged no fee were also educational and charitable the debt management and creditor intercession activities were an integral part of the agencies’ counseling function and thus were charitable and educational even if this were not the case the court viewed the debt management and creditor intercession activities as incidental to the agencies’ principal functions as only approximately percent of the counselors’ time was applied to debt management programs and the charge for the service was nominal considered the facts that the agency was publicly supported and that it had a board dominated by members of the general_public as factors indicating a charitable operation see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts and legal analysis were virtually identical to those in consumer credit counseling centers of alabama inc v united_states discussed immediately above the court also the organizations included in the above decision waived the monthly fees when the payments would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_179 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs revrul_70_640 1970_2_cb_117 free marriage counseling revrul_68_71 c b career planning education through free vocational counseling and publications sold at a nominal charge overwhelmingly the counseling activities described in these rulings were provided free and the organizations were supported by contributions from the public government's position the purpose of org’s activities differ substantially from those of the organizations in form acrev department of the treasury - internal_revenue_service page -4- department of the treasury - intemal revenue service eb orm 886a name of taxpayer org ein schedule no or exhibit year period ended explanation of items 20xx02 revrul_65_299 revrul_69_441 and consumer credit counseling service of alabama inc exempt_purpose in this case org engages in minimal activities which further an furthermore no public financial support is provided conclusion based upon the information noted above it is proposed the exempt status of the organization be revoked effective march 20xx form_1120 u s_corporation income_tax return should be obtained for the year ended february 20xx and for future tax years form acrev department of the treasury - internal_revenue_service page -5-


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date jul t eo b4 lit aghe oo c8 ein contact person identification_number telephone number dear sir or madam this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted shows that the grants will be administered by f a publicly_supported_organization under its b program organizations operating under the b program may elect the c and or the d option for purposes of the c scholarship awards option f selects individual scholarship recipients in the b program through a competition the initial phase of the competition is the x test which is given annually in participating high schools by high school officials after the test f identifies and honors students scoring in a group that represents the top two percent of graduating high school seniors nationwide and designates a number that represents less than one percent of the graduating high school seniors in each state as semifinalists the semifinalists then take a second test y to confirm their earlier performance those who repeat their prior performance who demonstrate high academic standing in high school and who meet other standard requirements are designated as finalists f's selection procedures in its d scholarship awards option generally parallel those applied in the c option however eligibility in the d option is limited to the top-scoring black students semifinalists in the d option are designated in at least four geographic regions each consisting of several states according to the distribution of the black population throughout the united_states you have entered into an agreement with f whereby you have agreed to sponsor a specific number of scholarships each year to be awarded to children and or relatives of employees of e under the b program f may award scholarships only to students who are designated as finalists the actual number of b scholarships to be supported by you will not exceed the number of employees’ children who qualify as finalists in their respective competitions after the list of finalists is obtained f reviews the finalist group to determine which students are eligible for grants under an employer related scholarship program no application is required from the students to enter the b program therefore neither you nor f can determine the number of eligible applicants if there is an insufficient number of employees' children who qualify as finalists the total number of scholarships to be awarded in a particular year is automatically reduced or some foundations may permit scholarships to be offered to finalists who are not children of employees f monitors participating employers to ensure a sufficiently large base of employees’ children from which at least one or more b finalists would ordinarily be expected to emerge this is necessary since fewer than one out of one hundred seventy-five students in a senior class achieves the b finalist level the selection of individual grant recipients is made by selection committees designated by f the members of the selection committee are totally independent and separate from you f confirms the individual scholarship recipient's enrollment at the educational_institution makes payment of the award through the appropriate financial aid office of the educational_institution and supervises and investigates the use of the grant funds by the recipients in their educational program the scholarships will not be used as a means of inducement to recruit employees nor will a grant be terminated if an employee parent leaves the company scholarships will only be awarded to students who plan to enroll in an institution that meets the requirements of sec_170 of the code and which may further be limited by f after the scholarship is awarded the recipient will not be restricted in his her course of study in rare cases sponsors may ask f to give preference in selection to individuals who propose to study in certain broad fields f will supply statistical information to you which will enable you to maintain the records required by rev_proc 1976_2_cb_670 sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 rc of sec_2001 e sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant subject_to the provisions of sec_117 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grant will be subject_to the provisions of sec_117 section dollar_figure of revproc_76_47 provides a percentage_test guideline it states that in the case of a program that awards grants to children of employees of a particular employer the program meets the percentage_test if the number of grants awarded under that program in any year to such children does not exceed percent of the number of employees’ children who i were eligible ii were applicants for such grants and iii were considered by the selection committee in selecting the recipients of grants in that year or percent of the number of employees’ children who can be shown to be eligible for grants whether or not they submitted an application in that year as stated in sec_4 of revproc_76_47 if a sponsor's program satisfies the seven conditions set forth in sections dollar_figure through but does not meet the percentage_test of section dollar_figure applicable to grants to employees' children the question whether the grants are scholarship or fellowship grants subject_to the provisions of sec_1 a of the code wiil be resolved on the basis of all the facts and circumstances in making this determination the service will consider as a substitute for the percentage_test of section dollar_figure all the relevant facts and circumstances to determine whether the primary purpose of the program is to provide extra compensation or other employment incentive or whether the primary purpose is to educate recipients in their individual capacities these facts and circumstances will be considered in the context of the probability that a grant will be available to any eligible applicant such relevant facts and circumstances could include the history of the program such as the source of the program's funding the courses of study for which the grants are available any eligibility requirements imposed by the program other than employment of the applicants or their parents and the age and grade level prerequisites for the studies for which the grants are available the publicity given the grant program the degree of independence of the selection committee the particular standards used for selection the specific means used to determine whether those standards have been met the precise nature of the employee limitation or preference the number of grants available the number of employees or their children who would be eligible for them the percentage of eligible employees or their children applying for grants who normally eg on an average basis receive grants under the program and whether and how many grants are awarded to individuals who do not qualify as employees or children of employees 27b y e s in this instance the following facts and circumstances are considered relevant aside from the employment preference f a public charity operates its private_foundation sponsored b program in a substantially_similar manner to its nationwide college scholarship program for academically talented high school students no application is required individuais must achieve finalist status in their respective competitions recipients are chosen by selection committees totally independent of the private_foundation or the employer involved no limitations are placed on the recipients’ choice of course of study after the grant is awarded the number of actual grants made may not exceed the number of employees’ children who qualify as finalists employees children in its programs in f provided an average of one scholarship for every big_number under the facts and circumstances as stated above there is only an insignificant probability that any particular employee's chiid will be selected and thus the grant's primary purpose is not one of providing extra compensation or other employment incentive and the facts_and_circumstances_test of revproc_76_47 sec_4 is met accordingly based upon the information presented and assuming your scholarship program will be conducted as proposed with a view to providing objectivity and non-discrimination in the awarding of scholarship grants we rule that your grants to f for the awarding of scholarship grants to children of employees of e comply with the requirements of sec_4945 of the code thus such expenditures made in accordance with those procedures wiil not constitute taxable_expenditures within the meaning of sec_4945 of the code the recipient of the scholarship is responsible for determining whether all or part of the scholarship is includible in gross_income under sec_117 of the code we understand that f will advise the recipient that amounts granted are taxable_income if the aggregate scholarship amounts received by the recipient exceed tuition and fees not including room and board required for enrollment or attendance at the educational_institution and fees books supplies and equipment required for courses of instruction this ruling will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of revproc_76_47 please note that this ruling is only applicable to grants awarded under the b program before you enter into any other scholarship or educational joan program you should submit a request for advance approval of that program your procedures for awarding grants under the b program are considered to satisfy the facts_and_circumstances_test of revproc_76_47 and therefore will not be counted in determining whether the percentage_test of revproc_76_47 is met with respect to any other such program for which prior approval has been granted we are informing the ohio te_ge office of this ruling please keep a copy of this ruling with your organization's permanent records of this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely beret v srck gerald v sack manager exempt_organizations technical group 1s