depart meene of phe preasury internal_revenue_service attn mandatory review ic dal commerce street dallas tx date release number release date legend org organization name org address xx date address address person to contact id number contact numbers voice fax certified mail - return receipt requested dear in a determination_letter dated november 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights you are therefore required to file form_1120 u s_corporation income_tax return for the years ended december 20xx and 20xx with the ogden service_center for future periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return 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 contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations goveunment entities division org address department of the treasury internal_revenue_service tege eo examinations south elizabeth street independence mo date 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 an adjustment of your organization's exempt status is necessary lf you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process lf you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you enclosed for your convenience an envelope is if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v m h you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues ifa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number v thank you for your cooperation sincerely nanette m downing acting director eo examinations enclosures publication publication form_6018 report of examination envelope letter catalog number 34801v form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx legend org organization name bm-1 state state ra-4 g bb a 2np 6t companie sec_4 ra bm-2 xx date bm-3 co-1 co-2 address addre sec_2 co-3 bm co-4 city city ra-3 ra-2 co-5 co-6 ra-1 g issue whether org doing business as org has failed the sec_501 requirements to have at least percent of the members of which are past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows widowers ancestors or lineal_descendants of past or present member of the armed_forces ifso should org’s exemption under sec_501 as a organization described in sec_501 be revoked effective january 20xx whether the primary activity of org doing business as org is the operation of a commercial bar open to the general_public if so should co-1 exemption under sec_501 as a organization described in sec_501 should be revoked effective january 20xx whether org doing business as org records are inadequate under sec_6033 if so should org’s exemption under sec_501 a as an organization described in sec_501 be revoked effective january 20xx facts for issue sec_1 and according to the state of state’s secretary of state org doing business as org was incorporated february 20xx by bm-1 on july 20xx the annual report filed with the state of state shows bm-1 as the chairman and secretary and the board_of director members being bm-1 bm-2 and bm-3 the 20xx annual report filed with the state of state shows bm-1 as the owner see attachment one for the state filings the rest of the informational attachments were provided and sent in the revocation letter dated august 6' 20xx and are included in the body of these facts as they were presented in the original revocation letter of that date the attachment one of that revocation letter shows that bm-1 is the owner of org a review of the form_990 for the years ended december 20xx and 20xx shows that the returns do not have a year beginning date on the form 990s the organization operates using the cash_method under program service accomplishments for 20xx there are three exempt_purpose achievements gathering together fraternally of veterans and families participating in things of a platonic nature and helping needy veterans families for 20xx the total reported sales were dollar_figure with a reported cost_of_goods_sold being dollar_figure total reported revenue reported is dollar_figure and form 886-a rev department of the treasury - internal_revenue_service page -1- name of taxpayer department of the ‘l'reasury - internal_revenue_service explanation of items eye 886a org schedule no or exhibit year period ended 20xx 20xx total reported expenses of dollar_figure the form_990 for the year ended december 20xx was signed by bm-1 on may 20xx the form_990 for the year ended december 20xx had the same three exempt_purpose achievemnts as was stated on the form_990 for the year ended december 20xx the total reported sales were dollar_figure with a reported cost_of_goods_sold being dollar_figure total revenue reported is dollar_figure and total reported expenses of dollar_figure the form_990 for the year ended december 20xx was signed by bm-1 who identified herself as the owner on june 20xx according to the state of state’s division of alcohol and tobacco control the original mailing address for org was address city state the organization notified the state of state that they moved their location to address on march 20xx the managing officer is bm-1 see attachment two according to the city tip of the day dated january 20xx by description is the statement school is back in session and by wednesday night of the first week your probably needing to let off a little steam not to many places are and up anymore especially for the guys but org is one of them on wednesday night ladies and older are always admitted with a college id you'll get a discount admission its also industry night so if you’re a waitress who also goes to college you’re home free see attachment three according to the night life guide see attachment four org located at address is the following statement a crazy bright sign is now up at this club near the corner of address and state its 18-and-up which makes for a diverse crowd even in its farwestern location according to co-2 org located at address city state is a bar tavern see attachment five according to a co-3 ra-2 dated october 20xx see attachment six city attorney org is now problem property the ra-2 goes on with after several shooting incidents assaults and a stabbing city’s city attorney says one night club is now considered a problem property someone called police to org parking lot times this year that means police were at the club at least once every ten days the most recent call was lor a shooting early sunday that sent one man to the hospital police city staff and nearby businesses say the violence isn't uncommon and something may be done to change that ra-i is the education leader for the system co-4 on south state expressway ra- says have had the experience of walking into work with glass shattered ra-1 says her main concern is for the safety of the nearly people learning their trade at the school we ve had employees’ cars vandalized ra-1 said we've also had a couple of break-ins within the year org has been here form 886-a rev department of the treasury - internal_revenue_service page -2- poni 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx however it’s the violence in the parking lot that has police and nearby businesses concerned ra-1 says the violence is hard to coexist with as a daytime business trying to protect your customers city police officer ra-2 says we've had a disturbances to leaving the scene of an accident to noise complaints lot of calls from assaults to ‘thirty-four police calls complaints and concerns could cause the city to step in city attorney ra-3 says if problems persist the city could enforce the nuisance ordinance ayainst the club ra- says we've had contact with the owner i won't say what the response was but i will say our goal is to reestablish contact with the owner and express our continued concern co-3 called the owner bm-3 whose number was listed on org front door bm-1 told co-3 he did not want to comment police and city staff say only certain clubs require strict action ra-2 says we certainly do have fights at other bars but shootings are particularly a concern for us because innocent by standers can easily be pulled into those ra-3 says when you have a property that despite problems and serious criminal activity shows no response to your advice then we step in without someone stepping nearby businesses are taking their own precautions ra-1 says we will never leave the parking lot until everyone is picked up and gone the city attorney says he will likely decide if the city will take any_action sometime within the next week or so punishment could range from a warning up to closing the business for one year the victim and witnesses in sunday's shooting are not cooperating with police certified letters were sent to several addresses in an effort to contact the organization and determine if the organization is an exempt_organization described under internal_revenue_code sec_501 the letters were sent to address city state address city state and address city state and the owner’s address which according to internal_revenue_service records is address city state the notation return to sender attempted - not known unable to forward all the certified letters were returned from the post office with a postal tracer was sent on april 20xx and the post office responded on may 20xx in order to obtain the address for the organization from the u s post office according to the u s post office the organization receives their mail at address city state and is physically located at address city state because this is where the organization receives their mail and this is the owner’s address that is where mail was sent the co-5 was contacted for more information but the national organization had no records of any kind on any subsidiary so no information of any kind could be obtained from co-5 in a letter dated june 20xx from state’s division of alcohol and tobacco control org d b a org the organization notified the division of alcohol and tobacco control that they were placed in out of business status effective december 20xx see attachment seven form 886-acrrev department of the treasury - internal_revenue_service page -3- name of taxpayer department of the treasury - internal_revenue_service explanation of items ann 886a org schedule no or exhibit year period ended 20xx 20xx however the state of state’s secretary of state still shows that the organization is an active organization in all the information reviewed there is no reference to the organization being a veteran's organization and there is no reference to the organization not being open to the public in fact everything shows that the organization was open to the public the organization was asked to supply documentation and substantiation of expenses all efforts to obtain those documents failed internal_revenue_service records were reviewed in an effort to identify substantiated expenses according to those records the organization spent in 20xx dollar_figure for wages and dollar_figure for employment_taxes in 20xx the organization spent dollar_figure for wages and dollar_figure for employment_taxes the organization issued 1099s to ra-4 and bm-1 rentals in 20xx for dollar_figure and dollar_figure respectively the organization issued 1099s to ra-4 and bm-1 rentals in 20xx for dollar_figure and dollar_figure respectively see attachment eight according to the state secretary of state bm-1 co-6 is a partnership equally owned by bm-3 and bm-2 the address listed on the articles of organization is listed as being address city state see attachment nine in order to locate the form 1099s filed a search was made using internal_revenue_service records according to the form 1099s filed the address for bm-1 co-6 in 20xx was address city state the same address as org in 20xx bm-1 co-6’s address was the same as it was for 20xx bm-1 the owner of org and the information from state’s division of alcohol and tobacco control showing that bm-1 is the managing officer so bm-1 appears to be the person responsible for the organization according to bm-1’s 20xx and 20xx form_1040 bm-2 is bm-1’s husband from claimed form_1040 information bm-1 and bm-2 do not appear to have been paid either directly or indirectly by org law background prior to the enactment of sec_501 by public law 1972_2_cb_675 many veterans organizations qualified for exemption from federal_income_tax under sec_501 because most of ta service the traditional activities of these organizations were recognized by the internal irs as primarily promoting social welfare staff of joint comm on taxation 109' cong historical development and present law of the federal tax exemption for charities and other tax-exempt organizations jcx-29-05 no comm print 20xx the traditional activities of veterans organizations that were social welfare organizations included promoting patriotism preserving the memory of those who died in war and assisting veterans in need id a veterans organization whose primary activity consisted of operating social facilities for its members was not able to qualify for exemption as a sec_501 social_welfare_organization but it could qualify as a social_club under sec_501 revrul_66_150 form 886-a crev department of the treasury - internal_revenue_service page -4- form sec_86a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx 1966_1_cb_147 s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 ii r rep no 92d cong 2d sess in congress enacted sec_501 and sec_512 to address the concern that a veterans organization exempt under sec_501 or may be subject_to unrelated_business_income_tax on the provision of insurance to its members s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 ' sec_512 excludes amounts attributable to or set_aside by a sec_501 veterans organization for the payment of life sick accident_or_health_insurance benefits for their members and their members’ dependents public law 1972_2_cb_675 sec_501 exemption requirements general requirements of a c organization sec_501 provides for the exemption from federal_income_tax of a post or organization of past or present members of the united_states armed_forces if it is a organized in the united_states or any of its possessions b at least percent of its members are past or present members of the armed_forces_of_the_united_states c substantially_all of its other members are individuals who are cadets or are spouses widows widowers ancestors or lineal_descendants of past or present members of the armed_forces of the unites states or of cadets and d no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual can org be considered to be a veterans organization as described in internal_revenue_code sec_501 issue one law kk kk kek before the enactment of the tax reform act of there was no tax on the insurance activities of the veterans’ organizations since the unrelated_business_income did not apply to social welfare organizations and social clubs however the act extended the application of the unrelated_business_income_tax to virtually all exempt_organizations including social welfare organizations and social clubs s rep no 92d cong 2d sess reprinted in 1972_2_cb_713 form 886-a crev department of the treasury - internal_revenue_service page -5- fon 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year petiod ended 20xx 20xx internal_revenue_code sec_501 a post or organization of past or present members of the armed_forces_of_the_united_states or an auxiliary unit or society of or a_trust or foundation for any such post or organization organized in the united_states or any of its possessions at least percent of the members of which are past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows widowers ancestors or lineal_descendants of past or present members of the armed_forces_of_the_united_states or of cadets and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual tax regulation sec_1_501_c_19_-1 states that a war_veteran organization there are two requirements that must be met under this paragraph the first requirement is that at least percent of the members of the organization must be war veterans for purposes of this section the term war veterans means persons whether or not present members of the united_states armed_forces who have served in the armed_forces_of_the_united_states during a period of war including the korean and vietnam conflicts the second requirement of this paragraph is that at least percent of all members of the organization must be described in one or more of the following categories i war veterans ii present or former members of the united_states armed_forces iii cadets including only students in college or university rotc programs or at armed services academies or iv spouses widows or widowers of individuals referred to in paragraph b i or iii of this section tax regulation sec_1_501_c_19_-1 c states that in addition to having the proper members an organization must be operated exclusively for one or more of the following purposes to promote the social welfare of the community as defined to assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and the widows and orphans of deceased veterans to provide entertainment care and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states to carry on programs to perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors to conduct programs for religious charitable scientific literary or educational_purposes to sponsor or participate in activities of a patriotic nature to provide insurance benefits for their members or dependents of their members or both or to provide social and recreational activities for their members tax regulation sec_1_501_c_19_-1 d states that auxiliary units or societies for war veterans organizations may be exempt as an organization described in sec_501 if it is an auxiliary unit or society of a post_or_organization_of_war_veterans described in paragraph dollar_figure c a of this section a unit or society is an auxiliary unit or society of such a post or organization if it meets the following requirements it is affiliated with and organized in accordance with the bylaws and regulations formulated by an organization described in paragraph a of this section at least percent of its members are either war veterans or spouses of war veterans or are related to a war_veteran within two degrees of consanguinity e grandparent brother sister grandchild represent the most distant allowable relationships all form 886-arev department of the treasury - internal_revenue_service page -6- eee 886a name of taxpayer explanation of items department of the ‘ureasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx of its members are either members of an organization described in paragraph a of this section or spouses of a member of such an organization or are related to a member of such an organization within two degrees of consanguinity and no part of its net_earnings inures to the benefit of any private_shareholder_or_individual internal_revenue_code sec_501 defines a veteran as being a past or present member of the united_states armed_forces internal_revenue_code sec_7701 defines the term military_or_naval_forces_of_the_united_states and the term armed_forces_of_the_united_states each includes all regular and reserve components of the uniformed_services which are subject_to the jurisdiction of the secretary of defense the secretary of the army the secretary of the navy or the secretary of the air force and each term also includes the coast guard the members of such forces include commissioned officers and personnel below the grade of commissioned officers in such forces government position due to the lack of response by the organization and the information that was found it appears that org is an open bar that allows anyone to use the facilities since nothing could be found to show that the organization is a veteran’s organization there is no substantiation of the composition of the membership absent verification of the membership none of the membership is presumed to be veterans for that reason the org has failed the membership test and should have its exempt status revoked effective january 20xx organization position not known at the time of this revenue_agent report conclusion the organization made no response the governmental position will be accepted as the correct and final position can org retain its exempt status when it is operating in a commercial fashion law internal_revenue_code sec_513 defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or form 886-a rev department of the treasury - internal_revenue_service page -7- name of taxpayer department of the ‘lreasury - internal_revenue_service explanation of items ener 886a org schedule no or exhibit year period ended 20xx 20xx performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under internal_revenue_code sec_501 that term does not include any trade_or_business in which substantially_all the work in carrying on such trade_or_business is performed for the organization without compensation or which is carried on in the case of an organization primarily for the convenience of its members students patients officers or employees or in the case of a local association of employees which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines through food dispensing facilities or by snack bars for the convenience of its members at their usual places of employment which is the selling of merchandise substantially_all of which has been received by the organization as gifts or contributions treasury regulations sec_1_501_c_19_-1 states that in addition to the requirements of paragraphs a and b of this section in order to be described in sec_501 under paragraph a of this section an organization must be operated exclusively for one or more of the following purposes to promote the social welfare of the community as defined in sec_1_501_c_4_-1 to assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and the widows and orphans of deceased veterans to provide entertainment care and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states to carry on programs to perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors to conduct programs for religious charitable scientific literary or educational_purposes to sponsor or participate in activities of a patriotic nature to provide insurance benefits for their members or dependents of their members or both or to provide social and recreational activities for their members treas reg dollar_figure1 c does not address what it means to exclusively provide social and recreational activities for members there are no cases or revenue rulings regarding the operation of veterans organizations for the social and recreational activities of their members under sec_501 however the permitted purpose reflected in sec_1_501_c_19_-1 is similar to the exempt_purpose contained in sec_501 as both provisions permit an exempt_organization to operate social and recreational facilities for its members in fact prior to the enactment of sec_501 a veterans organization whose primary activity consisted of operating a bar or restaurant for the benefit of its members would have to qualify as sec_501 social_club to be tax-exempt see revrul_60_324 and revrul_69_219 in congress amended sec_501 replacing exclusively with substantially_all this change was effected to establish that social clubs will not jeopardize their exempt status if they receive of their gross_receipts from non-membership sources pub_l_no however only of their gross_receipts may be derived from nonmembers’ use of club facilities or services s rep cone 2d sess form 886-a rev department of the treasury - internal_revenue_service page -8- form 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx these organizations prior to were required to operate exclusively for the pleasure and recreation of its members see sec_501 thus the rulings and case law under sec_501 may be useful for determining whether a sec_501 veterans organization is providing social and recreational activities exclusively for its members treas reg dollar_figure c -1 b provides that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofit able purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes in 111_f2d_6 cir the second circuit upheld the board_of_tax_appeals determination that a social_club was not exempt because a substantial amount of its income was received from the general_public in that case the west side tennis club was organized to provide tennis facilities for the use and enjoyment of its members the facilities were only available to members for most of the year however the club hosted annual national championship tennis matches that were open to the general_public the club shared in the ticket proceeds from these matches the second circuit upheld the board_of_tax_appeals determination that the national championship matches were a substantial and profitable business which jeopardized the club’s exemption west side tennis club f 2d pincite in revrul_60_324 1960_2_cb_173 and revrul_69_219 1969_1_cb_153 the service held that a sec_501 social_club is not operated exclusively for the pleasure or recreation of its members if it makes its facilities available to the general_public to a substantial degree d however this does not mean that all dealings with the general_public are necessarily inconsistent with the club’s exempt purposes for instance in revrul_60_324 1960_2_cb_173 the service stated that w hile the regulations indicate that a club may lose its exempt status if it makes its facilities available to the general_public it does not mean that with outsiders will automatically cause a club to lose its any dealings exemption a club will not lose its exemption merely because it receives some income from the general_public that is persons other than members and their bona_fide guests or because the general_public may occasionally be permitted to participate in its affairs provided such kk kek vn the minnequa university club v commissioner t c memo the tax_court upheld the service’s determination that a income over a sec_501 organization was no longer exempt from federal_income_tax because at least percent of it sec_5 year period was derived from the general_public form 886-a mev department of the treasury - internal_revenue_service page -9- ‘orem 886a name of taxpayer explanation of items department of the treasury - internal revenuc service org schedule no or exhibit year period ended 20xx 20xx participation is incidental to and in furtherance of its general club purposes and the income therefrom does not inure to members in the service issued revproc_71_17 1971_1_cb_683 which contains guidelines for determining the impact of an organization’s nonmember gross_receipts on its exempt status under sec_501 the revenue_procedure provides that a significant factor reflecting the existence of a nonexempt purpose is the amount of gross_receipts derived from use of aclub’s facilities by the general_public the revenue_procedure went on to provide a safe_harbor for organizations serving the general_public as an audit_standard the gross_receipts derived from general_public alone will not be relied upon by the service if annual gross_receipts from the general_public for use of the club’s facility is dollar_figure or less or if more than dollar_figure where gross_receipts from the general_public for use is five percent or less of total gross_receipts of the organization id at sec_3 the term general_public is defined as persons other than members or their dependents or guests id at dollar_figure section dollar_figure of revproc_71_17 provides four instances in which nonmembers are assumed to be the guests of the members the assumptions include where a group of eight or fewer individuals at least one of whom is a member uses club facilities it will be assumed for audit purposes that the nonmembers are the guests of the member provided payment for such use is received by the club directly from the member or the member’s employer where percent or more of a group using club facilities are members it will likewise be assumed for audit purposes that the nonmembers in the group are guests of members provided payment for such use is received by the club directly from one or more of the members or the member’s employer in 615_f2d_600 cir the third circuit upheld the commissioner’s determination that a social_club failed to qualify for exemption from income_tax as a dollar_figure c organization because it was operated for business and not for the pleasure and recreation of its members the pittsburgh press club was organized for the purpose of providing a professional and social meeting place for its members however during the years under exam it hosted several functions for nonmember outside groups although each such group had been member sponsored based on the amount of nonmember revenues dollar_figure of nonmember receipts as well as the percentage of those revenues to percent of gross_receipts the third circuit upheld the revocation stating that the exemption from federal_income_tax for sec_501 organizations ‘is to be strictly construed pittsburgh press club f 2d pincite the court stated that such strict construction cannot be reconciled with the fact that a substantial amount of the club’s activities and income consisted of nonmember form 886-a rev department of the treasury - internal_revenue_service page -10- bonn 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx functions and nonmember income therefore the court held revocation of its exemption was proper d sec_1_501_c_4_-1 of the income_tax regulations provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated for the purpose of bringing about civic betterments and social improvements sec_1_501_c_4_-1 states that promotion of social welfare does not include any of the following a direct or indirect participation or intervention in a political campaign on behalf of or in opposition to any candidate for public_office b operating a social_club for the pleasure benefit or recreation of its members c carrying on a business with the general_public in a manner similar to organizations operated for profit tax regulations dollar_figure1 c -1 c limits the organizations social and recreational activities to its members the sponsorship of gaming activities to the extent of the members’ participation is an activity related to the exempt purposes of an sec_501 organization thus to the extent of member participation income derived from the gaming activities is not subject_to the tax on unrelated_business_income provided such participation is documented if the organization is unable to support the conclusion that such income was received from members based on the facts and circumstances the examiner may presume income to be from nonmembers participation by nonmembers in the sponsored gaming activities may be deemed unrelated to the sponsoring organization’s exempt purposes and may jeopardize the organization’s exemption or result in the imposition of unrelated_business_income_tax analyze revenue from gaming activities such as pull-tabs to determine whether it is considered unrelated income gaming activities involving nonmembers are generally not considered substantially related to the organization’s exempt_purpose s in 326_us_279 the supreme court held that the presence of a single nature will destroy the exemption regardless of the number or importance of truly purposes non-exempt purpose if substantial in exempt government position the operations of the organization can not be distinguished from the commercial operations of a for-profit bar the primary activity is the operation of a club that is available for everyone for the purpose of pleasure or recreation that benefits those who come to participate in its activities form 886-a rev department of the treasury - internal_revenue_service page -11- om 886a name of taxpayer explanation of items department of the preasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xnx the principle activity of the bar and organization is for non-members the principle activity appears to be the same as seen in for-profit bars and so there is a commercial hue and tone to the operations of the organization while the organization has refused to accept mail from the internal_revenue_service according to the u s post office they appear to accept other mail at two of the addresses that examiner mailed certified mail to therefore examiner will arrive at a conclusion based on the facts available because there is a taxable effect examiner will not terminate the status of the organization when it appears that the organization is still operating org is substantially operating for non-veterans and so has a substantial non-exempt purpose for that reason the organization should have its exempt status revoked effective january 20xx organization position not known at the time of this revenue_agent report conclusion the organization did not respond therefore the governmental position is accepted as the correct and final position whether org doing business as org records are inadequate under sec_6033 law sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 provides that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue_officer or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-2 states in part that every organization_exempt_from_taxation under sec_501 shall file an annual information_return specifically setting forth its items of gross form 886-a rev department of the treasury - internal_revenue_service page -12- ronn sec_86a name of taxpayer explanation of items department of the ‘preasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx income gross_receipts and disbursements and such tax regulation sec_1_6033-2 states in pertinent part that every organization_exempt_from_taxation under sec_501 a and required to file a return under sec_6033 and this section including for taxable years ending before date private_foundations as defined in sec_509 other than an organization described in sec_401 or sec_501 shall file its annual return on form_990 sec_1_6033-2 states that an organization which is exempt from taxation under sec_501 and is not required to file annually an information_return required by this section shall immediately notify in writing the district_director for the internal_revenue_district in which its principal office is located of any changes in its character operations or purpose for which it was originally created sec_1_6033-2 states that every organization which is exempt from tax whether or is required to file an annual information_return shall submit such additional information as not it may be required by the internal_revenue_service for the purpose of inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code sec_6033 and chapter of subtitle d of the code see sec_6001 and sec_1_6001-1 with respect to the authority of the district directors or directors of service centers to require such additional information and with respect to the books of accounts or records to be kept by such organizations revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of its exempt status government position in order to qualify for exemption under sec_501 of the code an organization must keep accurate books_and_records to determine the nature of the organization’s income and records of its exempt and non exempt_activities the organization did not accept the mail even though the u s post office states that the organization received their mail at the locations mail was sent to for that reason the examiner will not accept any expenses that are not substantiated further as covered in the facts section the organization appears to have been open to the general_public based on the information available the organization’s december 20xx and december 20xx form 990’s do not accurately reflect the organizations activities nature of income form 886-a ev department of the treasury - internal_revenue_service page -13- boia 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx expenses and amount of income expenses as required by sec_6001 and sec_6033 of the code and its regulations therefore since the organization’s records were not sufficient to accurately reflect the nature of their income expenses amount of income expenses and its exempt vs non exempt_activities such failures have risen to a level that would support revocation of exemption under sec_501 and sec_501 of the code as described in revrul_59_95 1959_1_cb_627 the exempt status of org doing business as org should be revoked effective january 20xx all non-substantiated expenses will be disallowed as expenses organizational position not known at the time of this revenue_agent report conclusion the organization did not respond therefore the governmental position is accepted as the correct and final position conversion of form_990 to form_1120 in the absence of a lease contract and considering the close relationship between the owners of the org and bm-1 co-6 the expense represented by the form 1099s to bm-1 rentals is not considered to be substantiated and so is not accepted as an expense of org the organization was asked to supply documentation and substantiation of expenses all efforts to obtain those documents failed internal_revenue_service records were reviewed in an effort to identify substantiated expenses according to those records the organization spent in 20xx dollar_figure for wages and dollar_figure for employment_taxes in 20xx the organization spent dollar_figure for wages and dollar_figure for employment_taxes the organization issued 1099s to ra-4 and bm-1 rentals in 20xx for dollar_figure and respectively the organization issued 1099s to ra-4 and bm-1 rentals in 20xx for dollar_figure and dollar_figure respectively see attachment eight according to the state secretary of state bm-1 co-6 is a partnership equally owned by bm-3 and bm-2 the address listed on the articles of organization is listed as being address city state see attachment nine in order to locate the form 1099s filed a search was made using internal_revenue_service records according to the form 1099s filed the address for bm-1 co-6 in 20xx was address city state the same address as org in 20xx bm-1 co-6’s address was the same as it was for 20xx form 886-a rrev department of the treasury - internal_revenue_service page -14- fea 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx 20xx bm-1 the owner of org and per the information from state’s division of alcohol and tobacco control shows that bm-1 is the managing officer so bm-1 appears to be the person responsible for the organization according to bm-1’s 20xx and 20xx form_1040 bm-2 is bm-1’s husband from claimed form_1040 information bm-1 and bm-2 do not appear to have been paid either directly or indirectly by org bm-1 rental did file a partnership return but no revenue was claimed as a result of that partnership on the bm-1’s joint_return because of the close relationship of the individuals involved and the absence of substantiation the form_1099 amounts are treated as a sham_transaction and considered to be the discrepancy adjustment amount for the owner’s form_1040 there does not appear to be a business_purpose for the bm-1 rental or the issuance of the form_1099 to bm-1 rental when org and or its owner bm-1 could just as easily have entered into the rental contract with the owner of the building because the certified mail was returned as undelerable then it appears that bm-1 rentals is not the building owner if they were then the partnership owners who were org board_of director members in 20xx would have known to accept the certified letters or they would have known what the correct address for the organization was according to the documents cited above bm-1 is the sole officer and owner of the organization as an officer of the organization she is a common_law_employee of the exempt_organization eo unless under sec_414 there is a leased employment agreement since the organization did not respond no substantiation was provided to demonstrate that bm-1 is under a lease agreement so bm-1 is a common_law_employee a review of the form 990s filed for 20xx and 20xx do not show org as owning any property the form 990s filed show bm-3 as the organizational manager as the owner bm-1 was entitled to receive of the net_income because the form_1099 does not appear to have a business_purpose but does appear to be for a sham activity and appears to have been made soley for the purpose of tax_avoidance because bm-1 is the owner of the organization was its president or chairman depending on which state annual report you are looking at and had unlimited control of the organization’s activities there is no reason to allocate the sham activity represented by the 20xx and 20xx form 1099s issued to bm-1 rentals to anyone other then bm-1 she bears sole responsibility for this activity as she represents herself as being the owner of org doing business as org in higgins v smith u s s ct the court stated that the government may not be required to acquiesce in a taxpayer's election of that form for doing business which is most advantageous to him but the government may look at actualities and upon determination that the form 886-a rrev department of the treasury - internal_revenue_service page -15- oren 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx form employed for doing business or carrying out a challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute internal_revenue_code sec_61 states that except as otherwise provided in this subtitle gross_income means all income from whatever source derived in revrul_79_9 1979_1_cb_125 stated that property or an economic benefit received by the controlling shareholders or their families as a result of the corporations charitable_contribution is a constructive_dividend revrul_73_605 1973_2_cb_109 jan states that sec_316 of the code defines a dividend as a distribution_of_property by a corporation to its shareholders out of its earnings_and_profits of the taxable_year or earnings_and_profits accumulated after date this definition has been considered by the courts to be broad enough to cover an amount_paid by a corporation under an agreement or contract in excess of its allocable share of the consolidated_tax_liability f 2d 3rd cir 392_f2d_241 ct_cl see also sec_1_1552-1 of the income_tax regulations it is not necessary that the see 18_tc_396 aff'd per curiam corporation to a third party for the benefit of a shareholder is be taxed as a dividend to the shareholder for whose benefit the distribution is made a constructive_dividend which will in baumer v united_states f 2d stated that for federal taxation purposes transactions between closely held corporations and its shareholders or relatives of shareholders are not entitled to the presumption that they are conducted at arms length the court further stated that the crucial determinate of whether or not there is a dividend or not is whether or not the distribution served a business_purpose or not and where corporation consummates transaction with favorable consequences for controlling shareholder's immediate_family only in most extraordinary circumstances would it be possible to conclude that shareholder had not exercised substantial influence in causing diversion of corporate assets thereby justifying constructive_dividend treatment internal_revenue_code sec_162 disallows as a corporate business_expense the payment of dividends the money represented by the form 1099s is considered to be a constructive_dividend received by bm-1 for that reason the dividend amount is not considered to be a valid business_expense of org in the absence of substantive documentation no liabilities will be considered as substantiated in the absence of substantive documentation no members will be considered to be veterans in the form 886-acrev department of the treasury - internal_revenue_service page -16- erin 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx absence of documentation to the contrary the organization will be treated as an organization that is not seperable from bm-1 the below information summarizes the form_990 information per return and per examination per return december- xx per exam december- xx change h g a a r a a h a ' t dollar_figure - dollar_figure - year part one line ja 1b ic id 6a 6b 6c 8a 8b 8c 8d 9a 9b 9c 10a 10b 10c direct public support indirect public support government contr total program rev membership dues interest on savings dividends gross rents less rental exp net rental income other inv income gross_sales less cogs gain_or_loss net gain special events less direct exp net_income gross inv sale less cogs gross_profit other revenue total revenue program services management general fundraising payments to affiliates total expenses excess or deficit net boy fund balance other changes in net assets net eoy fund balance part two grants form 886-arev department of the treasury - internal_revenue_service page -17- een 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx 43a 43b 43c 43d 43e specific assistance benefits paid to mbr officer comp other salaries pension_plan other emp benefits payroll_taxes prof fundraising fees accounting fees legal fees supplies telephone postage shipping occupancy equip rental maint printing pubs travel conf conv interest depreciation misc insurance taxes fees donations bank charges total dollar_figure dollar_figure dollar_figure - - for 20xx the form_990 information per return and per examination is summarized below year part one line 1a 1b 1c 1d 6a 6b 6c per return december- xx per exam december- xx change direct public support indirect public support government contr total program rev membership dues interest on savings dividends gross rents - dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure - - - - - dollar_figure dollar_figure dollar_figure less rental exp net rental income dollar_figure - - form 886-a rev department of the treasury - internal_revenue_service page -18- form 886a name of taxpayer explanation of items department of the ‘i'reasury - laternal revenue service org schedule no or exhibit year period ended 20xx 20xx 8a 8b 8c 8d 9a 9b 9c 10a 10b 10c part two 43a other inv income gross_sales less cogs gain_or_loss net gain special events less direct exp net_income gross inv sale less cogs gross_profit other revenue total revenue program services management general fundraising dollar_figure - _dollar_figure payments to affiliates total expenses excess or deficit net boy fund balance other changes in net assets net eoy fund balance grants specific assistance benefits paid to mbr officer comp other salaries pension_plan other emp benefits payroll_taxes prof fundraising fees accounting fees legal fees supplies telephone postage shipping occupancy equip rental maint printing pubs travel conf conv interest depreciation misc form 886-a rev department of the treasury - internal_revenue_service page -19- eee 886a department of the ‘l'rcasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx 43b 43c 43d 43e tax effect insurance taxes fees donations bank charges total _- _ because the revocation is deemed to be correct then the tax effect of converting from the form_990 to the form_1120 for the years ended december 20xx and 20xx should be completed by the organization because there was no response to the revocation letter a substitute for return was prepared by the internal_revenue_service examiner the information from the form 990s if it was transferred to the form_1120 for the applicable years would yield the following tax effect line line title 20kxx 20xx lc dollar_figure dollar_figure gross_receipts cost_of_goods_sold gross_profit total deductions taxable_income taxable_income total_tax dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure this tax does not include applicable_interest form 886-a rev department of the treasury - internal_revenue_service page -20-


t c memo united_states tax_court kevin a goon petitioner v commissioner of internal revenue respondent docket no filed date lowell e mann for petitioner david a breen for respondent memorandum opinion wells judge the instant matter is before the court on petitioner’s motion for reasonable administrative and litigation cost sec_1 pursuant to rule and sec_7430 the issue we must 1although petitioner titled the instant motion motion for award of reasonable_administrative_costs the attached list of continued decide is whether petitioner was the prevailing_party for the reasons stated below we deny petitioner’s motion for reasonable costs background at the time of filing the petition in the instant case petitioner resided in smyrna delaware vanya tyrrell mrs tyrrell prepared petitioner’s form_1040 u s individual_income_tax_return tax_return in the spring of respondent sent a letter to petitioner requesting that he submit documentation to support certain deductions claimed on his tax_return this was the initial contact letter and did not provide petitioner an opportunity for administrative review with respondent’s office of appeals petitioner did not respond with the requested documentation instead petitioner’s attorney lowell e mann mr mann sent a letter protesting respondent’s proposed continued costs includes both administrative and litigation costs we treat petitioner’s motion as a motion for both administrative and litigation costs 2unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code as amended 3petitioner’s tax_return was one of approximately tax returns that were prepared by vanya tyrrell and chosen for examination by respondent’s correspondence examination unit all such cases involve similar unsubstantiated deductions lowell e mann represents the petitioners in all such cases and has filed virtually identical petitions for each such case adjustments and requesting that the case be transferred to respondent’s appeals_office because petitioner failed to submit the requested documentation substantiating the disputed deductions respondent determined a deficiency of dollar_figure in income_tax for and sent petitioner a notice_of_deficiency on date mr mann sent a letter to respondent requesting that respondent rescind the notice_of_deficiency respondent did not rescind the notice_of_deficiency and petitioner timely filed his petition in this court on date respondent filed his answer on date by notice dated date the instant case was placed on the date calendar in philadelphia pennsylvania on date petitioner forwarded a portion of the requested documentation to respondent’s appeals officer at the call of the instant case from the philadelphia trial session calendar on date the parties filed a stipulation of settled issues which indicated respondent’s partial concession and a reduced deficiency of dollar_figure in the instant motion petitioner now seeks dollar_figure in administrative and litigation costs discussion the prevailing_party in a tax_court proceeding may be entitled to recover administrative and litigation costs see sec_7430 rule however a taxpayer will not be treated as the prevailing_party if the commissioner’s position was substantially justified sec_7430 see 487_us_552 the fact that commissioner concedes is not determinative of the reasonableness of commissioner’s position 86_tc_962 the taxpayer bears the burden of proving the elements in sec_7430 required for an award of costs except that the taxpayer will not be treated as the prevailing_party if the commissioner establishes that the position of the commissioner was substantially justified see rule e the court determines the reasonableness of respondent’s position as of the time respondent took respondent’s position sec_7430 in the administrative_proceeding here respondent took a position as of the date of the notice_of_deficiency sec_7430 in the judicial proceeding respondent took a position when respondent filed respondent’s answer sec_7430 huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part on other grounds and remanding tcmemo_1991_144 respondent’s administrative and litigation positions are substantially 4the elements of sec_7430 other than those relevant to whether petitioner was the prevailing_party are not discussed justified if they have a reasonable basis in both law and fact 108_tc_430 in the instant case we conclude that respondent’s position was both reasonable and substantially justified in both the administrative and judicial proceedings petitioner failed to provide the requisite documentation until after respondent issued the notice_of_deficiency and filed an answer deductions are a matter of legislative grace and petitioner must prove he is entitled to the deductions rule a 292_us_435 in the absence of any proof of entitlement to the disputed deductions respondent was reasonable to maintain his position that the disputed deductions were not allowed prouty v commissioner tcmemo_2002_175 it was not until date that petitioner sent the documentation relating to the disputed deductions to mr mann respondent conceded the propriety of the deductions upon receipt 5respondent also contends that petitioner protracted the instant proceedings and is therefore ineligible for cost_recovery sec_7430 although we do not address that issue since we have disposed of the instant motion on other grounds we note that petitioner did not provide the required_documentation to support his claimed deductions until less than a month before trial once in possession of the requested documentation respondent presumably would have conceded the deductions at any point in the administrative or litigation process as respondent ultimately did on the eve of trial after receiving the documentation consequently petitioner forced an administrative_proceeding and litigation instead of a brief exchange of correspondence of the documentation accordingly we hold that petitioner is not entitled to recover his administrative or litigation costs we have considered all of petitioner’s contentions and to the extent they are not addressed herein they are irrelevant moot or without merit to reflect the foregoing an appropriate order and decision will be entered 6this includes both arguments made in petitioner’s motion and subsequent memorandum of law


internal_revenue_service department of the treasury number release date index number washington dc re person to contact telephone number refer reply to cc psi b09-plr-102291-02 date date legend taxpayer date spouse state trust child child subtrust subtrust date dollar_figurex year date dollar_figurey dear this is in response to your letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an allocation of taxpayer’s generation-skipping_transfer gst tax exemption plr-102291-02 the facts and representations submitted are summarized as follows on date taxpayer and spouse both residents of state established trust for the benefit of child and child and their descendants sec_1 of trust provides that the trustee shall divide the property into two separate trusts equal in value with one trust known as subtrust to be held for the primary benefit of child and the other trust known as subtrust to be held for the primary benefit of child sec_1 provides that while either taxpayer or spouse is serving as trustee all of the net_income of subtrust and subtrust shall be accumulated in addition neither taxpayer or spouse while serving as trustee of trust shall have any power to distribute any income or principal of any trust created under trust to any beneficiary other than the withdrawals provided for in sec_1 and sec_1 provides that if at any time neither taxpayer nor spouse is serving as trustee the trustee in the exercise of discretion may distribute to the beneficiary of such trust and to such beneficiary’s descendants such amounts of income and principal as are necessary when added to the funds reasonably available to such beneficiary and such beneficiary’s descendants from all other sources known to the trustee to provide for their health support maintenance and education taxpayer and spouse particularly desire that each of their descendants be afforded every opportunity to obtain as complete an education including attendance at graduate and professional schools as he or she may reasonably desire and be qualified to obtain sec_1 provides that each beneficiary has the right to withdraw cash or other_property from such beneficiary’s trust at any time during the calendar_year in which a gift is made to such beneficiary’s trust in an amount not to exceed the lesser_of i the value at the time of transfer of any gift to or for the benefit of such beneficiary’s trust during any calendar_year or ii such sum as may be allowed as the annual_gift_tax_exclusion with regard to the gift by each donor reduced by the amount of any prior gifts to or for the benefit of such beneficiary which qualify for the annual exclusion in the same calendar_year by such donor provided however that for purposes of determining the maximum amount that qualifies for withdrawal if a donor is married at the time a gift is made the donor’s spouse shall be considered a donor for purposes of clause ii such withdrawal right shall be exercisable by acknowledged instrument delivered to the trustee no later than days after the date of the gift giving rise to the withdrawal right that indicates the amount of money or property such beneficiary desires to withdraw generally to the extent the beneficiary’s withdrawal right is not fully exercised it shall lapse to the extent of the greater of dollar_figure or percent of the aggregate value of the trust principal sec_1 of trust provides that if the total amount of all gifts made to or for the benefit of a beneficiary’s trust exceeds the largest amount that the beneficiary is entitled to withdraw pursuant to sec_1 then each of the beneficiary’s descendants may withdraw cash or property from the trust not to exceed the lesser_of i an amount plr-102291-02 determined by subtracting the total amount the beneficiary is entitled to withdraw from the total_amount_of_gifts made to or for the benefit of such trust in such calendar_year and dividing the result by the number of the beneficiary’s descendants who are then living or ii such sum as may be allowed by the annual_gift_tax_exclusion with regard to the gift by each donor reduced by the amount of any prior gifts to or for the benefit of such descendants which qualify for the annual exclusion amount by said donor provided however that for purposes of determining the maximum amount that qualifies for withdrawal if a donor is married at the time a gift is made the donor’s spouse shall be considered a donor for purposes of clause ii such withdrawal right shall be exercisable by acknowledged instrument delivered to the trustee no later than days after the date of the gift giving rise to the withdrawal right that indicates the amount of money or property such beneficiary desires to withdraw generally to the extent the beneficiary’s withdrawal right is not fully exercised it shall lapse to the extent of the greater of dollar_figure or of the aggregate value of the trust principal sec_1 provides that each trust created for a beneficiary who is a child of taxpayer and spouse shall continue for such child’s lifetime and shall terminate upon such child’s death every other trust shall terminate when the beneficiary thereof attains age or upon the death of the last to die of taxpayer and spouse whichever is later sec_1 provides that each beneficiary shall have a special testamentary power to appoint outright in trust or otherwise all or any part of the property remaining in such beneficiary’s trust to any one or more of the descendants of taxpayer and spouse provided however that this power shall not be exercisable in favor of such beneficiary such beneficiary’s estate or the creditors of such beneficiary’s estate section dollar_figure provides that if a beneficiary’s death terminates such beneficiary’s trust or if a beneficiary dies prior to the termination of such beneficiary’s trust then upon such beneficiary’s death all the remaining unappointed property of such trust shall be divided into shares and portions of shares among and distributed to the then living descendants of such beneficiary per stirpes on date taxpayer and spouse each made annual exclusion gifts of dollar_figurex to trust dollar_figurex was allocated to subtrust and dollar_figurex was allocated to subtrust on date the attorney who drafted trust mailed a letter to taxpayer and spouse advising them of the necessity of filing gift_tax returns for year to exempt the gifts to trust from the gst tax upon receiving this letter taxpayer and spouse consulted with their accountant of ten years the accountant advised taxpayer and spouse that no gift_tax returns were necessary for the annual exclusion gifts made in year to child and child acting upon the advice of taxpayer’s accountant taxpayer elected not to file a form_709 united_states gift and generation-skipping_transfer_tax return or a notice of allocation for year plr-102291-02 you now request an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file a form_709 and a notice of allocation for year on which taxpayer will allocate dollar_figurey of her gst_exemption to subtrust and dollar_figurey of her gst_exemption to subtrust sec_2601 imposes a tax on every generation-skipping_transfer made after date sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual’s gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- a first to property which is the subject of a direct_skip occurring at such individual’s death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual’s death sec_26_2632-1 of the gst regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than a direct_skip is made on form_709 the allocation must clearly identify the trust to which the allocation is being made the amount of gst_exemption being allocated to it and if the allocation is late or if an inclusion_ratio greater than zero is claimed the value of the trust assets at the effective date of allocation sec_2642 provides that if the allocation of gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c - a the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period plr-102291-02 sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and a election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 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 code except subtitles e g h and i sec_301_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute accordingly taxpayer may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the plr-102291-02 taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to file a form_709 and a notice of allocation for year on which taxpayer will allocate dollar_figurey of her gst_exemption to subtrust and dollar_figurey of her gst_exemption to subtrust the allocation will be effective as of date the date of the transfers to trust this ruling is directed only to the taxpayer requesting it sec_6110 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 authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely paul f kugler associate chief_counsel office of associate chief_counsel passthroughs and special industries enclosure copy of letter copy for purposes


internal_revenue_service number release date index number 468a ----------------------- --------------------------- ------------------------------------------- --------------------- ---------------------------------- - 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 b06 plr-140707-05 date december ------------------------------------- ------------------------------------------- ------------------------------------------------------------ in re revised schedule of ruling amounts legend taxpayer ----------------------------------------------------- parent ----------------------------------------------------- plant state location commission a -------------------------------------------- commission b ----------------------------------------------------- method order a b c d e f g h i j k --------------------- ------ ------- ------------------------------------- ---- -------------------------------------- ---------------- ---- ------- ---------------------------------------- ---------------------------------------- ------------------------------------------------------------ ---------- ---------------------------------- ---------------------------------------------------------- ------------------------------------------------------------ plr-140707-05 l dear ----------------- ------------ this letter responds to a letter dated date and subsequent submissions submitted by taxpayer's authorized representatives requesting a revised schedule of ruling amounts for plant pursuant to sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a schedule of ruling amounts on a information was submitted pursuant to sec_1_468a-3 we understand the facts as presented by taxpayer to be as follows taxpayer is an investor-owned electric utility incorporated in state and serving customers predominantly located in state taxpayer is owned by parent with whom it files a consolidated_return on a calendar_year basis using the accrual_method of accounting plant is situated in location taxpayer owns a b percent interest in plant the collection of decommissioning costs for plant from ratepayers with respect to taxpayer's interest in plant is subject_to the regulatory jurisdiction of commission a and commission b the method for decommissioning plant is the method the cost of which is based on a site-specific decommissioning study the regulatory percentage for commission a is c percent commission a and commission b have determined the amount of decommissioning costs for plant to be included in taxpayer's cost of service for ratemaking purposes there are no proceedings pending before the commissions that would may result in an increase or decrease in the amount of decommissioning costs to be included in taxpayer's cost of service this request for a revised schedule of ruling amounts applies only to ruling amounts under the jurisdiction of commission a in determining the decommissioning costs for plant in order commission a used an estimated base cost of dollar_figured commission a escalated these costs annually at a rate of e percent resulting in a future decommissioning cost of dollar_figuref in addition to the escalated base cost commission a also included in the future estimated cost of decommissioning dollar_figureg of pre-shutdown and post-shutdown interim spent fuel storage installation costs for taxpayer's interest in plant commission a also approved an assumed after-tax rate of return of h percent for the assets of the qualified nuclear decommissioning fund taxpayer represents that under the sec_468a regulations the defined level_funding limitation period and the defined funding_period extend through i the estimated period for which the fund will be in effect is j and the estimated_useful_life of plant is k therefore the qualifying percentage is l percent plr-140707-05 sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund however sec_468a limits the amount_paid into such fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the total nuclear power plant as the period for which the nuclear decommissioning fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year and is made within months after the close of the tax_year additionally a taxpayer that files for a schedule of ruling amounts and receives such schedule of ruling amounts after the month deadline for making a payment to a nuclear decommissioning fund must make such payment to the fund within days after the date that the taxpayer receives the schedule of ruling amounts for the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 of the regulations is a taxpayer that has a qualifying interest in among other things a direct ownership_interest including an interest as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such tax_year if the amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b the excess is not deductible by the electing taxpayer in addition under sec_1_468a-5 there are rules which provide that the internal_revenue_service may disqualify a nuclear decommissioning fund if the amount plr-140707-05 of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes under sec_1_468a-3 the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that in general the ruling_amount for any_tax year in the level_funding limitation period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 i and ii of the regulations provide that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or is deemed to be made to such nuclear decommissioning fund and ends the later of the last day of the taxable_year that includes the estimated date on which the decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's cost of service for ratemaking purposes or the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage plr-140707-05 sec_1_468a-3 of the regulations provides in part that the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to a fraction the numerator of which is the number of tax years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of tax years in the estimated_useful_life of the applicable plant sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be submitted by a taxpayer in order to receive a ruling_amount for any taxable_year we have examined the representations and the data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely upon these representations of the facts we reach the following conclusions plr-140707-05 the taxpayer has a qualifying interest in plant and is therefore an eligible_taxpayer under sec_1_468a-1 and of the regulations commission a has permitted an amount for decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations the taxpayer has calculated the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that under sec_1_468a-3 of the regulations l percent is the qualifying percentage for commission a the taxpayer has proposed a schedule of ruling amounts that meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission a and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts with regard to the commission satisfies the requirements of sec_468a of the code approved schedule of ruling amounts ----------------------------------------------------- --------------------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- plr-140707-05 -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- ------------------------------------------------------ approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code payments made to such fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter letter are being sent to your authorized representative we are also sending a copy of this letter_ruling to the industry director natural_resources and construction lm nrc in accordance with the power_of_attorney on file with this office copies of this except as expressly provided herein no opinion is expressed or implied plr-140707-05 pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries cc


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number info release date conex-109253-12 uil the honorable eddie bernice johnson u s house of representatives washington dc dear ms johnson this letter responds to your correspondence dated date you requested a clarification of the status of public charter schools as agencies or instrumentalities of a state for purposes of the definition of the term governmental_plan under sec_414 of the internal_revenue_code the code sec_414 of the code generally defines a governmental_plan as a plan that the government of the united_states the government of any state or its political subdivisions or any of their agencies or instrumentalities establishes or maintains for employees of the entity on date the treasury_department and the irs published an advance notice of proposed rulemaking anprm relating to the definition of a governmental_plan under sec_414 of the code copy enclosed an anprm which is typically issued early in the rulemaking process describes an anticipated regulatory approach and seeks input from the public about the guidance under consideration the anprm includes as an attachment draft proposed_regulations that in part define key terms in the definition of governmental_plan including the terms united_states states and political_subdivision of a state describe the multiple factors under consideration for determining whether an entity is an agency_or_instrumentality of the united_states or an agency_or_instrumentality of a state or a political_subdivision of a state provide rules for determining whether a governmental entity has established and maintained a plan for purposes of sec_414 of the code you wrote that the anprm provides that charter school employees would not be eligible to participate in a governmental_plan within the meaning of sec_414 of the code the anprm does not specifically exclude charter schools as governmental conex-109253-12 entities a facts_and_circumstances_test determines whether an entity is a governmental entity this test depends on all facts relating to the particular entity in question the preamble to the guidance under consideration specifically provides that no one factor will determine whether an entity is a governmental entity in addition the factors in the guidance under consideration are generally a compilation of factors from various revenue rulings and court cases dating back to in cooperation with the department of labor and pension_benefit_guaranty_corporation the treasury_department and the irs will review comments we received in response to the anprm as well as input from the general_public at the public hearings and town hall meetings the irs and the treasury_department as well as the department of education plan to meet with representatives from the charter school community to hear their concerns on the anprm this meeting has been scheduled for date after evaluating the comments the cooperative process for drafting a notice of proposed rulemaking nprm will begin after issuing the nprm the treasury_department and the irs will once again give the public an opportunity to submit comments recognizing that we have never issued regulations on the definition of governmental plans within the meaning of sec_414 of the code we anticipate that once issued the regulations will have transition_rules the anprm specifically requests comments on transitional relief we also anticipate that any regulations would not be effective any earlier than the plan_year beginning after the date of publication of the treasury_decision adopting the rules as final regulations i hope this information is helpful if you have any questions please call me at ------------- ------------ or -------------------------------------------- sincerely victoria a judson division counsel associate chief_counsel tax exempt government entities enclosure