department of the treasury internal_revenue_service washington d c date cc dom it a gl-500720-99 number release date uilc internal_revenue_service national_office advice memorandum for district_counsel cc ner uny buf from acting assistant chief_counsel income_tax and accounting cc dom it a subject filing delinquent returns directly with revenue officers this responds to your request for advice dated date in connection with a question posed by the chief special procedures upstate new york district issue s whether a revenue_officer has delegated authority from the district_director to request and receive hand-carried delinquent income_tax returns whether a revenue_officer can require a taxpayer to file delinquent returns directly with the revenue_officer rather than mailing the returns to the appropriate service_center conclusion revenue officers have the authority to request and received hand-carried delinquent returns revenue officers may request taxpayers to file delinquent returns directly with the revenue_officer however there is no penalty specifically applicable if a taxpayer ignores the request of the revenue_officer and chooses to file the gl-500720-99 delinquent_return by mailing the return to the appropriate service_center instead of with the revenue_officer facts revenue officers frequently demand that taxpayers file delinquent returns with them a local practitioner challenges this procedure claiming the returns must be filed by mailing the returns to the appropriate service_center the practitioner also contends that a revenue_officer has no authority to receive the delinquent returns the practitioner proposes to give the revenue_officer a copy of the signed delinquent_return a copy of the envelope the return was mailed to the service_center in a copy of the certified mailing receipt and an affidavit of mailing from a responsible_person at the firm stating that the return was mailed by the firm to the service_center the local special procedures function has advised that a revenue_officer cannot make a prompt assessment from anything other than an original return and that the delinquent_return filing procedure suggested would cause great delay to revenue officers law and analysis sec_6091 of the internal_revenue_code provides that for a person other than a corporation a return shall be made to the secretary i in the internal_revenue_district in which is located the legal residence or principal_place_of_business of the person making the return or ii at a service_center serving the internal_revenue_district referred to in clause i as the secretary may by regulations designate sec_6091 provides that a return of a person other than a corporation that is made by hand carrying shall under regulations prescribed by the secretary be made in the internal_revenue_district referred to in paragraph a i sec_1_6091-2 of the income_tax regulations provides that except as provided in paragraph c of this section income_tax returns of individuals shall be filed with the district_director for the internal_revenue_district in which is located the legal residence or principal_place_of_business of the person required to make the return sec_1_6091-2 provides that notwithstanding paragraphs a and b of this section whenever instructions applicable to income_tax returns provide that the returns be filed with a service_center the returns must be so filed in accordance with the instructions sec_1_6091-2 provides that notwithstanding paragraphs and of gl-500720-99 sec_6091 and paragraph c of this section that returns for persons other than corporations which are filed by hand carrying shall be filed with the district_director or with any person assigned the administrative supervision of an area zone or local office constituting a permanent post of duty within the internal_revenue_district of such director as provided by paragraph a of this section the instructions to the form_1040 provide that taxpayers are to mail their returns to the internal_revenue_service center for the place where they live issue the pertinent code and regulation sections provide individual_income_tax_return filers with two methods of filing their return sec_1 they can either file their returns by mailing it to the appropriate service_center or by hand carrying the return to the district_director of the internal_revenue_district in which they live neither the code nor the regulations specifically provide for filing returns directly with revenue officers furthermore the service has not issued a delegation_order granting authority to the revenue officers to directly receive returns for filing however delegations of authority may take many forms including functional statements in position descriptions i r m sec_1222 a functional statement constitutes a delegation of authority to the responsible official who is the incumbent of the position or head of the organizational entity to which the assignment is made this includes the authority to perform whatever official acts are necessary to exercise such functions i r m sec_1222 the position descriptions for a revenue_officer at the gs-11 and gs-12 level provides that the revenue officer’s duties and responsibilities include preparing and or receiving delinquent returns the position description for a revenue_officer at the gs-9 level states that the revenue_officer conducts interviews with taxpayers and or their representatives as part of the investigation necessary to collect delinquent taxes and secure delinquent returns all three position descriptions state that the revenue officers are to prepare and process delinquent returns under sec_6020 of the code or substitute for return furthermore the position descriptions state in several places that the purpose of the work is to collect delinquent taxes and to secure delinquent returns from taxpayers the provisions in the position descriptions are consistent with the procedures set forth in i r m for securing and processing delinquent returns moreover these provisions are consistent with the regulations as the revenue officers are acting on behalf of and under the authority of the district_director 1the code regulations and instructions of the form_1040 do not make any reference to delinquent returns gl-500720-99 based on the position descriptions for revenue officers and the delinquent_return procedures set forth in the i r m revenue officers have the authority to secure delinquent returns directly from the taxpayer and process them in accordance with applicable procedures accordingly we disagree with the local practitioner’s argument that revenue officers cannot receive delinquent returns issue as discussed above revenue officers have the delegated authority to receive delinquent returns furthermore revenue officers in the performance of their assigned duties can request that taxpayers file their delinquent returns with the revenue_officer instead of mailing the delinquent_return to the applicable service_center however even with delegated authority to receive delinquent returns under current law a revenue_officer still could not require taxpayers to file directly with the revenue_officer as the code and the regulations also provide that taxpayers can file by mailing the return to the appropriate service center2 a revenue_officer has no means by which to compel the taxpayer to satisfy the demand for the delinquent_return there is no penalty specifically applicable to the taxpayer for failing to provide the requested return to the revenue_officer however one or more practical adverse consequences may result if the taxpayer files with the service_center rather than the revenue_officer for example interest and penalties may accrue to a later date if receipt of payment is delayed because filing with the service_center by mail takes longer than filing with the revenue_officer further a revenue_officer will not enter into an installment_agreement until all returns have been filed and the filing verified by the revenue_officer therefore it is generally in the taxpayer’s best interests to file the delinquent_return directly with the revenue_officer instead of mailing it to the appropriate service_center if you have any further questions please call charles a hall at 2the legislative_history to sec_6091 while silent on the issue of delinquent returns provides a rationale for having delinquent returns filed with revenue officers the section was amended in to allow for filing with the service centers the principal purpose in providing for direct filing with the service centers was that it was economically cost effective see p l s rep no u s code cong admin news p however having delinquent returns filed with the service centers increases the costs of processing rather than producing cost efficiencies nonetheless since the code and regulations do not differentiate between timely filed and delinquent returns taxpayers may file their delinquent returns either with the applicable service_center or with a revenue_officer gl-500720-99 by heather c maloy judith m wall chief branch cc national director customer service compliance accounts quality t c a attn elaine leach national director submissions processing t s attn lisa johnson barbara a johnson tss supervisor cc dom fs


internal_revenue_service number release date index number ------------------------ ------------------- -------------------------- -------------------------- ------------------------- ------------------------ - dear ----- ------------- dear ----- ------------- department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc ita - plr-144046-03 date date this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above-named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending september to an annual_accounting_period ending december effective for the short_period beginning date and ending date the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations section of revproc_2002_38 2002_1_cb_1037 provides that a taxpayer must file a form_1128 no earlier than the day following the end of the first effective year and no later than the due_date including extensions of the federal_income_tax return for the first effective tax_year according to the information submitted the taxpayer did not file an extension for the first effective tax_year thus the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending december was due_date but was not timely filed however this application_for sec_301_9100-3 relief was filed within days of the return's due_date the information furnished also indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner’s consent to a change in annual_accounting_period the taxpayer must file an application on form_1128 with the commissioner within such time and in such manner as is provided in administrative procedures published by the commissioner but for a timely filing the taxpayer’s form_1128 should be subject_to the automatic consent procedures of revproc_2002_38 2002_1_cb_1037 and due on or before the due_date of the return of tax required for the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the present situation must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer's late filed form_1128 requesting permission to change to a taxable_year ending december effective for the short_period of date through date is considered timely filed the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and is limited to the filing of form_1128 except as specifically addressed herein no opinion is expressed regarding the tax treatment of the subject transaction under the provisions of any other sections of the code or regulations that may be applicable thereto this office has not verified any of the material submitted in support of the requested ruling verification of factual information representations and other data is within the examination jurisdiction of the taxpayer's local irs director a copy of this letter_ruling and taxpayer's form_1128 are being forwarded to the service_center where the taxpayer files its federal_income_tax returns with instructions that the form_1128 be considered timely filed and processed in accordance with established procedures under revproc_2002_38 the taxpayer must file a federal_income_tax return for the short_period necessary to effect the change within days of the date of this ruling a copy of this ruling should be attached to that return in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this letter_ruling to the taxpayers’ authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely yours s william a jackson william a jackson branch chief branch office of associate chief_counsel income_tax accounting


internal_revenue_service number release date index numbers ----------------------------- ------------------------------------------------------------ ------------------------------------------------------------ ------- ------------------------ ------------------------------------------------------------ ------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-112153-09 date date legend x ------------------------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------------------- d1 d2 country -------------------- ------------------- --------- dear --------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-112153-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-112153-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


ur sec_3 s revenoy k c i v s i n l - a q department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date u i l codes legend foundation contact person identification_number telephone number employer_identification_number d i d - o r a e s c c e i o e dear this letter is in reference to a letter dated date in which foundation requests a ruling that the construction ownership and operation of a community activity center as described below will not adversely affect its exempt status under sec_501 of the internal_revenue_code the code or result in unrelated_business_income_tax under sec_511 of the code facts foundation is an organization recognized by the internal_revenue_service the irs as exempt from federal_income_tax under sec_501 of the code foundation was incorporated on date to provide disaster relief throughout the united_states and to operate exclusively for charitable and educational_purposes on date foundation amended its articles of incorporation to include the following purpose to acquire and or construct own and operate community activity centers in communities throughout the united_states offering a broad range of programs services and activities designed to serve community members of all ages to develop the physical social and intellectual well being of the community with membership open to all members of the community and affordable to a broad segment of the community under the terms of foundation’s bylaws each director of foundation’s board_of directors is appointed by and may be removed by the executive committee of society society is a fraternal beneficiary society recognized by the irs as exempt from federal_income_tax under sec_501 of the code foundation states that society has more than x lodges throughout the united_states whose members conduct volunteer charitable and patriotic projects benefiting individuals families and communities throughout the country foundation states that it desires to expand its exempt_purpose activities by acquiring and or constructing owning and operating a community activity center located in city and county the center the center will be built on land acquired from an independent third party in an arm’s length transaction for a purchase_price that reflects fair_market_value the center will be financed from the proceeds of long-term bonds and contributions from city and county the center will offer a broad range of programs services and activities designed to serve community members of all ages to develop the physical social intellectual and emotional well being of the community the programs services and activities to be provided include without limitation the following e facilities for exercise and fitness along with related group programs and classes focusing on community health and wellness education ea variety of other educational programs for all age groups including individual and group exercise and fitness programs health risk lifestyle assessments youth fitness programs and diet and nutrition education programs that promote and encourage health lifestyles and lifetime wellness e youth day camps sports camps and other educational camps for youth ea range of charitable services to the community including meals-on-wheels programs food bank drives and blood drives e space for charity events and disaster relief activities such as red cross blood drives community emergency response team meetings and red cross emergency shelters e space that can be used for community activities including nonprofit organization fundraising events and activities community social activities and local school activities such as swim meets and other local school sporting events that can be accommodated at the center e after-school and tutoring programs for children and e sports leagues including youth baseball softball indoor soccer and volleyball leagues foundation states that membership in the center will be open to all residents of the community with a wide range of activities available depending on a member's level of membership foundation anticipates that memberships will be offered on a month-to-month basis although different levels of membership will be available at different costs there will be no membership level that offers exclusive services that would be affordable to only a limited number of members of the community each membership level will generally give members access to a broad range of particular services within that membership class eg one membership level may provide access to the fitness center gymnasium and youth sport camps while another level may provide access to the fitness center gymnasium and swimming pool foundation states that all members of the community will pay the same membership fee for a particular membership level regardless of their affiliation with a society lodge resulting in consistent membership fees for all members that will be more affordable to the community as a whole foundation states that because membership fees at each level will be determined based on cost and not on profitability with the necessity of achieving a specified return on investment foundation will charge the lowest feasible membership fees possible taking into account only the actual cost of the services provided city will make available a limited number of scholarships to members of the community who are otherwise unable to afford the center's membership fees according to city representatives scholarship eligibility requirements will be similar to the eligibility requirements for the free lunch program within city’s public school system in addition foundation intends to provide financial assistance to members of the community to the extent it has the financial capability to do so taking into account expenses related to the operation of the center foundation states that it will provide meeting space to local nonprofit_organizations such as local chapters of the american red cross the united way and its affiliated agencies local chambers_of_commerce boy scouts and local historical associations to the extent space is available foundation will charge these organizations the actual cost of providing the space foundation will also lease the center's banquet room to individuals and groups for private functions but will provide no services to the lessees foundation has entered into a written_agreement with city the agreement under which city will be responsible for the hiring supervision and direction of all personnel working at the center and any other persons performing city’s duties under the agreement city will be responsible for complying with city personnel guidelines and all applicable laws in performing its duties under the agreement foundation will have the right to provide input to city regarding employment of the center’s manager programmer and director of marketing city will relocate its recreation department's administrative offices to space in the center under the agreement city will make a one-time payment to foundation in the amount of sy foundation represents that the city’s administrative offices will occupy less than fifteen percent of the total area of the center in addition to the foregoing activities foundation states that it may lease a limited amount of office space within the center to employees and or independent contractors of society employees are employees of society while independent contractors enter into independent_contractor arrangements with society any lease with employees or independent contractors will be for space only and will not include any personal_property foundation represents that no more than percent in the aggregate of the total usable square footage of any center will be used for such purpose the terms and conditions of each lease would reflect fair_market_value and foundation would obtain confirmation of fair_market_value rental rates for the lease of such office space from qualified and independent third parties who have knowledge of the local rental market rulings requested foundation requests the following rulings foundation’s expansion of its activities to include the acquisition and or construction financing ownership and operation of a community activity center in city that will be available to all members of the community and affordable to a broad segment of the members of the community as described above will not adversely affect foundation’s exempt status under sec_501 of the code the income derived by foundation from its ownership and operation of the community activity center as described above will not be subject_to the unrelated_business_income_tax imposed by sec_511 of the code law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for religious charitable educational and other specified exempt purposes so long as no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code provides that except as otherwise provided in this subsection the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the deductions allowed by this chapter which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in subsection b sec_512 of the code provides that there shall be excluded from the definition of unrelated_business_taxable_income all rents_from_real_property sec_512 of the code provides in part that notwithstanding sec_512 in the case of debt-financed_property as defined in sec_514 there shall be included as an item_of_gross_income derived from an unrelated_trade_or_business the amount ascertained under sec_514 sec_513 of the code 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 of the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_514 of the code provides in general that for purposes of sec_514 the term debt-financed_property means any property which is held to produce income and with respect to which there is an acquisition_indebtedness at any time during the taxable_year except that such term does not include-- a i any property substantially_all of the use of which is substantially related aside from the need of the organization for income or funds to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 or ii any property to which clause i does not apply to the extent that its use is so substantially related sec_514 of the code provides that for purposes of applying sec_514 the use of any property by an exempt_organization which is related to an organization shall be treated as use by such organization sec_514 of the code defines the term acquisition_indebtedness with respect to any debt-financed_property as the unpaid amount of the indebtedness incurred by the organization in acquiring or improving such property sec_1_501_c_3_-1 of the income_tax regulations the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if specified in sec_501 of the code it engages primarily in activities which accomplish one or more of such exempt purposes sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions sec_1_501_c_3_-1 of the regulations provides in part that the term educational as used in sec_501 of the code relates to the instruction or training of the individual for the purpose of improving or developing his capabilities one example is an organization whose activities consist of presenting public discussion groups forums panels lectures or other similar programs sec_1_512_b_-1 of the regulations provides in part that all rents_from_real_property and the deductions directly connected therewith shall be excluded in computing unrelated_business_taxable_income however certain rents from and certain deductions in connection with debt-financed_property as defined in sec_514 of the code shall be included in computing unrelated_business_taxable_income sec_1_512_b_-1 of the regulations defines control for purposes of section in the case of a nonstock organization the term control means that pincite b -1 c ii b _ least percent of the directors or trustees of such organization are either representatives of or directly or indirectly controlled by an exempt_organization a trustee or director is a representative of an exempt_organization if he is a trustee director agent or employee of such exempt_organization a trustee or director is controlled by an exempt_organization if such organization has the power to remove such trustee or director and designate a new trustee or director sec_512 of the code was subsequently revised to define control a sec_50 percent of the beneficial interests in an entity sec_1_513-1 of the regulations provides that gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business sec_1_513-1 of the regulations provides that gross_income derived from charges for the performance of exempt functions does not constitute gross_income from the conduct of unrelated_trade_or_business sec_1_514_b_-1 of the regulations provides that to the extent that the use of any property is substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by an organization of its charitable educational or other purpose or function constituting its basis for exemption under sec_501 of the code such property shall not be treated as debt-financed_property sec_1_514_b_-1 of the regulations provides that if substantially_all of any property is used in a manner described in sec_1_514_b_-1 such property shall not be treated as debt financed property in general the preceding sentence shall apply if percent or more of the use of such property is devoted to the organization’s exempt_purpose the extent to which property is used for a particular purpose shall be determined on the basis of all the facts and circumstances these may include where appropriate - a acomparison of the portion of time such property is used for exempt purposes with the total time such property is used a comparison of the portion of such property that is used for exempt purposes with the portion of such property that is used for all purposes or both the comparisons described in a and b of this subdivision b c sec_1_514_b_-1 of the regulations provides that property owned by an exempt_organization and used by a related exempt_organization or by an exempt_organization related to such related exempt_organization shall not be treated as debt-financed_property to the extent such property is used by either organization in furtherance of the purpose constituting the basis for its exemption under sec_501 of the code sec_1_514_b_-1 of the regulations provides that for purposes of sec_1_514_b_-1 an exempt_organization is related to another exempt_organization if one organization has control of the other organization within the meaning of paragraph i of sec_1_512_b_-1 again sec_512 of the code subsequently amended the definition of control sec_1_514_c_-1 of the regulations defines acquisition_indebtedness with respect to debt-financed_property as the outstanding amount of i the principal indebtedness incurred by the organization in acquiring or improving such property ii the principal indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and iii the principal indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonable foreseeable at the time of such acquisition or improvement revrul_59_310 1959_2_cb_146 describes an organization organized for the purpose of establishing maintaining and operating a public swimming pool playground and other recreation facilities for the children and other residents of a particular community residents of the community making use of such facilities consist principally of low-income groups who are unable to pay the cost of privately sponsored recreation facilities for themselves and their children the revenue_ruling concludes that since the property and its uses are dedicated to members of the general_public of the community and are charitable in that they serve a generally recognized public purpose which tends to lessen the burdens of government the organization is entitled to exemption under sec_501 of the code revrul_79_360 1979_2_cb_236 describes an organization whose purpose is to provide for the welfare of young people by the conduct of charitable activities and maintenance of services and facilities that will contribute to their physical social mental and spiritual health at a minimum cost to them membership in and the services and facilities of the organization are available upon payment of nominal annual dues the organization has recreational facilities that are used in its general physical fitness programs members use these facilities as often as they wish however the organization has also organized a health club program that its members may join for an advance annual fee that is sufficiently high to restrict participation to a limited number of the members of the community the annual fee is comparable to fees charged by similar local commercial health clubs the advance fee is in addition to the nominal annual dues for membership in the organization in addition those who are not health club members pay admission fees comparable to fees charged by similar local commercial health club facilities each time they use any of the health club facilities the ruling states that because the commercially comparable annual dues or daily fees charged are sufficiently high to restrict the health club’s use to a limited number of the members of the community the operation of the health club program does not contribute importantly to the accomplishment of the organization's exempt purposes consequently the operation of the health club facilities is unrelated_trade_or_business within the meaning of sec_513 of the code in isabel 21_tc_55 the tax_court held that providing convenient swimming and recreation facilities for all persons residing in the particular school district and especially for those who could not afford to acquire and maintain such facilities was charitable as defined under sec_501 of the code since it promoted the social welfare of the community analysis foundation intends to embark on a broad range of programs as described above through its center in city programs such as exercise and fitness programs diet and nutrition education programs sports leagues after-school tutoring programs meals-on-wheels programs and others further charitable and educational_purposes within the meaning of sec_501 of the code and sec_1_501_c_3_-1 and of the regulations membership is required for use of the center fees will be charged and different levels of membership will be available at different fees an exempt_organization operating community recreational facilities may qualify for exemption under sec_501 of the code on the grounds that its activities are charitable so long as all members of the community are eligible to use the facilities see revrul_59_310 and isabel peters above however the operation of a community activity center would not be substantially related within the meaning of sec_1_513-1 of the regulations to the exercise or performance of charitable functions if the facility charges fees sufficiently high to restrict usage of the facility to a limited number of members of the community see revrul_79_360 above the center is intended to be a true community center available to all members of the community as demonstrated by the fact that the center will be staffed and operated by employees of the city and will host the offices of the city’s recreation department although the center will have different levels of membership available at different costs there will be no membership level that offers exclusive services that will be affordable to only a limited number of members of the community each membership level will give members access to a broad range of services within that membership class membership fees at each level will be determined based on the actual cost of making the facility and the specific range of services available at a particular membership level some financial assistance and scholarships will be offered to community members who are unable to afford the membership fee thus the center memberships will benefit a significant segment of the local population since the activities to be conducted at the center will accomplish foundation’s charitable and educational_purposes within the meaning of sec_1 c -1 c of the regulations the operation of the center will not adversely affect foundation’s exempt status under sec_501 of the code further since those activities will contribute importantly to the accomplishment of foundation’s exempt purposes they will be substantially related within the meaning of sec_513 of the code and sec_1_513-1 of the regulations to foundation’s exempt purposes therefore membership income and other income derived from charitable and educational programs conducted at the center being income derived from the performance of exempt functions under sec_1_513-1 i of the regulations will not be considered income from the conduct of an unrelated_trade_or_business under sec_512 foundation will lease a limited amount of office space in the center to employees and or independent contractors of society foundation will also lease meeting space to community nonprofit_organizations foundation will lease its banquet room to individuals and groups for private purposes although rents_from_real_property are generally excluded from unrelated_business_income_tax by sec_512 of the code when rents are derived from debt- financed property a portion of such rents in an amount determined under sec_514 must be included under sec_512 as an item_of_gross_income derived from an unrelated_trade_or_business the center will be financed in large part with the proceeds of long-term bonds since such proceeds constitute acquisition_indebtedness under sec_514 of the code the center would be considered debt-financed_property under sec_514 unless an exception applied under sec_514 of the code the term debt-financed_property does not include any property substantially_all of the use of which is substantially related to the exercise or performance by an organization of its exempt_purpose sec_1_514_b_-1 of the regulations provides that substantially_all of the use of a property is substantially related to exempt purposes if percent or more of the property is devoted to the organization’s exempt_purpose and under sec_1_514_b_-1 property owned by an exempt_organization and used by a related exempt_organization is not treated as debt-financed_property to the extent such property is used by either organization in furtherance of its exempt_purpose foundation’s use of the center will be substantially related to foundation’s exempt purposes society’s use of its leased space in the center will be substantially related to society's exempt purposes foundation and society are related exempt_organizations within the meaning of sec_1_514_b_-1 and sec_1_512_b_-1 of the regulations and sec_512 of the code because society controls foundation by its power to appoint and remove foundation’s directors thus between foundation and society substantially_all of the use of the center will be substantially related to the exempt purposes of foundation and society by reason of sec_1_514_b_-1 and sec_1_514_b_-1 even though the hosting of the offices of city’s recreation department the lease of meeting space to local nonprofit_organizations or the occasional lease of the banquet room to private parties is not considered a use of the center that is devoted to exempt purposes the extent of such nonexempt use whether viewed in terms of time or space as described in sec_1_514_b_-1 of the regulations would when compared with the exempt use of the center constitute less than percent of the total use of the center consequently the center will not be considered debt- financed property within the meaning of sec_514 of the code and rents derived from the lease of space within the center are excludable from unrelated_business_taxable_income by sec_512 of the code rulings accordingly based on the facts and circumstances we rule that eoundation's expansion of its activities to include the acquisition and or construction financing ownership and operation of a community activity center in city that will be available to all members of the community and affordable to a broad segment of the members of the community as described above will not adversely affect foundation’s exempt status under sec_501 of the code the income derived by foundation from its ownership and operation of the community activity center in city as described above will not be considered unrelated_business_taxable_income under sec_512 of the code or be subject_to the unrelated_business_income_tax imposed by sec_511 these rulings are based on the facts as they were presented and on the understanding that there will be no material changes in these facts any changes that may have a bearing upon foundation’s tax status should be reported to the irs because it could help resolve questions concerning foundation’s federal_income_tax status these rulings should be kept in foundation’s permanent records pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to foundation’s authorized representative except as we have specifically ruled herein we express no opinion as to the consequences of this transaction under the cited provisions or under any other provision of the code these rulings will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of these rulings with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice these rulings are directed only to the organization that requested it sec_6110 of the code provides that they may not be used or cited as precedent if there are any questions about these rulings please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice sincerely yours manager exempt_organizations technical group


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip postf-157677-01 uil date date to associate area_counsel lmsb area - nashville attn kirk s chaberski from associate chief_counsel financial institutions products branch subject request for field_service_advice non-docketed large case legend parent taxpayer state x year year year year this responds to your date memorandum requesting our advice regarding the proper calculation of the reduction for tax-exempt_interest under sec_832 of the internal_revenue_code in arriving at taxpayer’s deduction for losses_incurred on insurance contracts during the taxable_year as provided by sec_832 issues page is the amount of tax-exempt_interest included in the reduction of the deduction for losses_incurred as required by sec_832 the gross amount of the tax-exempt_interest or the amount of tax-exempt_interest net of any amortizable_bond_premium attributable to the instruments paying the tax-exempt_interest if the amount of tax-exempt_interest properly taken into account in calculating the reduction of the deduction for losses_incurred as required by sec_832 is the amount of tax-exempt_interest net of any amortizable_bond_premium does taxpayer’s utilization of this amount in computing the reduction under sec_832 for year and subsequent years constitute a change in method_of_accounting to which the provisions of sec_446 apply should taxpayer be allowed to adjust the amount of tax- exempted interest used in calculating the sec_832 reduction of the deduction for losses_incurred based on the ratio of taxpayer’s loss_reserves attributable to transactions with parent which do not constitute an insurance contracts for tax purposes answer sec_1 the amount of tax-exempt_interest to be included in calculating the reduction of the deduction for losses_incurred under sec_832 should be tax-exempt_interest net of any amortizable premium paid for the bond s generating the tax- exempt_interest taxpayer’s utilization of tax-exempt_interest net of amortizable_bond_premium in computing the reduction of the deduction for losses_incurred under sec_832 beginning with year does not constitute a change in method_of_accounting the administrative position of the service is that a captive insurance subsidiary is treated as the owner of the assets transferred by its parent_corporation even if the parent’s deduction for the related insurance premiums is disallowed because the arrangement does not constitute an insurance_contract for tax purposes accordingly the adjustment made by taxpayer in calculating the amount of tax- exempt_interest subject_to the reduction under sec_832 for the portion attributable to parent should be disallowed discussion page facts taxpayer is organized as a captive_insurance_company under the laws of state x taxpayer is a wholly owned subsidiary of parent and joins with parent and certain other operating subsidiaries of parent collectively the subsidiaries in filing a consolidated federal_income_tax return on a calendar_year basis taxpayer has filed its returns as an insurance_company taxable under sec_831 taxpayer’s principal business is to provide indemnification for losses sustained by parent and subsidiaries for purposes of this memorandum we have assumed that the contracts between taxpayer and subsidiaries are insurance contracts for tax purposes whereas the contract between taxpayer and parent is not an insurance_contract for which the premiums_paid by parent were deductible under sec_162 see eg 881_f2d_247 6th one source_of_income for taxpayer is tax-exempt_interest we assume for purposes of this memorandum that the income from these bonds is fully tax-exempt under sec_103 for some of these bonds taxpayer paid a premium ie paid more than the face_amount of the bond in computing its insurance_company_taxable_income taxpayer is required under sec_832 to reduce the deduction losses for incurred under sec_832 by percent of inter alia the amount of tax-exempt_interest received or accrued during the year on its original federal_income_tax returns for year and year taxpayer computed the percent reduction of its allowed losses_incurred by reference to the gross amount of tax-exempt_interest that it received or accrued during each year however taxpayer now seeks to change the computation of the reduction of its allowed losses_incurred taxpayer submits that the amount of tax-exempt_interest implicated in the computation should be that net of amortizable_bond_premium and on its original federal_income_tax returns for year and year taxpayer has computed the reduction of its allowed losses in this manner in addition for each year taxpayer makes a modification to its computation under sec_832 for a portion attributable to parent taxpayer’s rationale for this adjustment is that it is consistent with the distinction drawn in humana and certain other cases in which the courts have found that an arrangement between a captive insurance subsidiary and its parent_corporation does not constitute insurance although insurance may exist between the captive and other affiliated corporations taxpayer calculates the adjustment to tax-exempt page interest for the portion attributable to parent by applying a fraction to the amount otherwise computed under sec_832 the numerator of this fraction is an amount deemed parent company reserves and the denominator is the total_reserves of taxpayer the fraction thus created is then applied to the sec_832 reduction of the allowable losses_incurred the resulting product is then deemed the final sec_832 reduction and is subtracted from the amount of losses_incurred under sec_832 in arriving at taxpayer’s taxable_income the effect of this adjustment is similar to treating parent as the owner of a pro_rata share of the securities producing the tax-exempt_income law and analysis issue taxpayer is an insurance_company other than a life_insurance_company sec_831 imposes the tax provided in sec_11 on the taxable_income of such a company sec_832 of the code defines the taxable_income of a non-life insurance_company as the gross_income of the company less certain allowed deductions sec_832 defines the gross_income as the sum of certain items including the gross amount of underwriting_income sec_832 underwriting_income in turn is defined as the premiums earned on insurance contracts during the taxable_year less losses_incurred sec_832 sec_832 defines losses_incurred as inter alia losses paid during the taxable_year however sec_832 imposes a limitation on the amount of losses_incurred the amount of losses to be deducted from premiums earned is reduced by of inter alia tax- exempt_interest received or accrued during such taxable_year sec_832 neither the code nor the applicable regulations specifically define tax-exempt_interest for purposes of sec_832 the question therefore posed is whether tax- exempt_interest for purposes of sec_832 is simply the gross amount of interest received or accrued during the year that is exempt from tax or whether it is the amount received or accrued during the year net of the amortization of any premium paid for the instrument s as the house committee pointed out during consideration of sec_832 t he deduction for losses_incurred reflects losses page paid during the year as well as the increase in reserves for losses_incurred but not paid h_r rep no 99th cong 1st sess to the extent a non-life insurance_company was able to fund losses_incurred with income exempt from tax that company would obtain a double tax_benefit by deducting losses which were paid with income that had not been taxed in enacting sec_832 congress was of the mind that it is not appropriate to fund loss_reserves on a fully deductible basis out of income which may be in whole or in part exempt from tax id see also general explanation of the tax_reform_act_of_1986 staff of joint_committee on taxation 100th cong 1st sess in order to accomplish this congress intended that t he amount of the addition to reserves that is deductible should be reduced by a portion of such tax- exempt_income to reflect the fact that reserves are generally funded in part from tax-exempt_interest therefore the bill includes a proration provision h_r rep no pincite congress drew a parallel to the treatment of life_insurance_companies taxable under sec_801 life_insurance_companies are required to reduce their increase in reserves by inter alia the amount of the policyholder’s_share of tax-exempt_interest sec_807 as the general explanation points out for non-life insurance_companies n o reduction in the loss reserve deduction was required under prior_law to take account of the fact that deductible additions to reserves could come out of income not subject_to tax unlike life_insurance_companies property and casualty insurance_companies were not required to allocate or prorate investment_income including tax-exempt investment_income so as to take account of the possibility of a double deduction where deductible additions to reserves were funded with tax-exempt_income general explanation pincite in order to address this double benefit and to provide a proration rule for non-life insurance_companies similar to the life_insurance_company tax rule congress utilized a proxy approach by requiring that the amount of losses_incurred deductible by a non-life insurance_company to be reduced by a specified portion of the insurer’s tax-exempt_interest h_r rep no 99th cong 2d sess ii-356-57 by page requiring the deduction to be reduced by a specified portion less than congress affirmatively allowed non-life insurance_companies to obtain a degree of a double benefit from being able to deduct losses_incurred which were paid with income exempt from tax neither sec_832 nor the regulations thereunder define what constitutes tax-exempt_interest received or accrued during such taxable_year the conference committee report indicates that f or this purpose tax-exempt_interest includes interest_income excludable under sec_103 or deductible under sec_832 the portion of interest_income excludable under sec_1331 and other similar items sec_832 provides merely that the amount of interest earned during the taxable_year which under sec_103 is excluded from gross_income is deductible sec_1_832-5 does not elaborate on this item sec_103 provides that subject_to certain exceptions gross_income does not include interest on any state_or_local_bond sec_103 where a premium is paid for a tax-exempt_bond the premium must be amortized sec_1_171-1 income_tax regulations while the premium so amortized cannot be deducted from gross_income sec_171 it does reduce the taxpayer’s basis in the bond sec_1016 moreover the amortizable premium serves to reduce the amount of tax-exempt_interest income sec_1_171-2 ex income_tax regulations it is noteworthy that life_insurance_companies the treatment of which sec_832 is intended to parallel compute items net of amortizable premiums sec_811 and of perhaps greater significance in computing sec_832 gross_investment_income sec_834 requires that a non-life insurance_company include t he amount of interest which under sec_103 is excluded for the taxable_year from gross_income this provision whose language is similar to that in sec_832 has been interpreted to be net of amortizable premium sec_1_822-10 income_tax regulations finally we think that including amortizable_bond_premium in the computation under sec_832 provides a clear reflection of the economic_effect perhaps this can best be illustrated by example assume a non-life insurance_company purchases a bond that generates tax-exempt_interest of dollar_figure per sec_133 has since been repealed page year assume further that this bond was purchased at a premium and that for the year in question the amortizable portion of the premium is dollar_figure finally assume that the company uses the dollar_figure tax-exempt_interest to fund losses because bond_premium can be thought of as a return of the company’s investment the company effectively only funded losses to the extent of dollar_figure from the interest on the bond the excess of the dollar_figure of tax-exempt_interest received or accrued during the year over the amount of tax-exempt_interest adjusted by the amortizable_bond_premium is treated as a recovery_of taxpayer’s basis in the underlying_security accordingly to allow a non-life insurance_company to compute the reduction of the deduction for losses_incurred as required by sec_832 by determining tax-exempt_interest to be net of the bond_premium amortizable thereto seems to us to be appropriate issue you ask if taxpayer’s switch to computing tax-exempt_interest net of amortizable_bond_premium constitutes a change in method_of_accounting if so then taxpayer must secure the consent of the commissioner prior to doing so sec_1_446-1 defines the term method_of_accounting to include both the overall_method_of_accounting and the accounting treatment of any item in an effort to clarify what constitutes a change in method_of_accounting t d 1970_2_cb_98 amended sec_1_446-1 regarding the requirements for adopting or changing accounting methods sec_1_446-1 as amended provides in part that a change in method_of_accounting includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in the overall plan although a method_of_accounting may exist without the necessity of a pattern of consistent treatment of an item in most instances a method_of_accounting is not established for an item without consistent treatment a material_item is any item which involves the proper time for the inclusion of an item in income or the taking of a deduction conversely sec_1_446-1 provides that an adjustment of any item_of_income or deduction not involving the proper timing of an item’s inclusion or deduction is not a change in method_of_accounting further a change in method_of_accounting does not include correction of errors in the computation of tax_liability page initially in question is whether the taxpayer’s initial computation of not accounting for amortizable_bond_premium when computing its tax-exempt_interest under sec_832 is a method_of_accounting if it is not then taxpayer does not have an accounting_method that could have been changed to be an accounting_method taxpayer’s initial computation of not accounting for amortizable_bond_premium in computing its sec_832 tax-exempt_interest must involve the accounting treatment of an item sec_1 a an item is any recurring element of income or expense for example an insurance dividend is an item 292_f2d_225 3rd cir cert_denied 368_us_898 we understand that taxpayer is computing an income amount ie underwriting_income and thus its computation does involve the treatment of an item additionally for taxpayer’s initial computation of not accounting for amortizable_bond_premium in computing its sec_832 tax-exempt_interest to be an accounting_method it must have been consistently used sec_1_446-1 contra revrul_90_38 1990_1_cb_57 consistent treatment is not required to adopt a method_of_accounting when an item is treated properly on the first tax_return that reflects the item taxpayer used its initial computation for at least two years thus even though this computation was contrary to the the appropriate computation under sec_832 taxpayer satisfies the consistent use standard of sec_1_446-1 lastly for taxpayer’s initial computation to qualify as a method_of_accounting the computation must involve the treatment of a material_item sec_1_446-1 taxpayer’s initial practice of not accounting for amortizable_bond_premium in computing its sec_832 tax- exempt_interest does not involve the treatment of a material_item because it does not involve the proper time for the inclusion of the underwriting_income in gross_income sec_832 requires taxpayer to compute underwriting_income by a mathematical formula taxpayer made an error in using this formula it consistently but incorrectly failed to account for its amortizable_bond_premium in computing its tax- exempt_interest for purposes of sec_832 this error will result in a cumulative amount of lifetime taxable_income being recognized by taxpayer which is greater than the page amount of taxable_income which would have been determined if taxpayer had always included amortizable_bond_premium in the computation of tax-exempt_interest subject_to the percent reduction of sec_832 the effect is that taxpayer previously used a formula that resulted in lesser deductions for losses_incurred under sec_832 and those higher taxable_income under sec_832 for each of the taxable years in which the amortization of premium was excluded from the computation of tax-exempt_interest this error was not corrected when taxpayer began to account for its amortizable_bond_premium this only resulted in taxpayer using the correct formula to determine the reduction for tax-exempt_interest as required by sec_832 for the year s involved thus the correction of taxpayer’s mistake is a correction_of_an_error not a change in accounting_method_issue in computing the reduction of the amount of its allowed losses_incurred under sec_832 taxpayer adjusts the amount of tax-exempt_interest received or accrued during the taxable_year net of amortizable_bond_premium by a portion attributable to parent this portion is the result of prorating the amount of tax-exempt_interest subject_to the percent reduction under sec_832 between an amount attributable to taxpayer’s deductible loss_reserves and an attributable to losses reserves attributable to transactions with parent which do not constitute insurance contracts for tax purposes and therefore are excluded from taxpayer’s deduction for losses_incurred under sec_832 the fraction is essentially the ratio of what taxpayer deems to be parent’s share of the tax-exempt_interest the effect of this adjustment is to treat parent as the owner of a pro-rata share of the underlying securities generating the tax-exempt_income taxpayer claims this adjustment is consistent with the holding of humana and other court decisions that the arrangement under which it indemnified parent’s losses does not constitute an insurance_contract for tax purposes and therefore must be excluded from the calculation of taxpayer’s deductible losses_incurred under sec_832 it is our position that the characterization of taxpayer’s arrangement with parent as other than an insurance_contract for tax purposes is not relevant to the determination of taxpayer’s adjustment for tax-exempt_interest under sec_832 and that so long as taxpayer qualifies as an insurance_company under sec_831 on the basis of its overall activities taxpayer is required by sec_832 to reduce its deduction for losses_incurred by percent of the amount of tax- page exempt_interest received or accrued during the taxable_year in revrul_77_316 1977_2_cb_53 the service noted that the payment of funds from a parent to its captive subsidiary is merely the movement of an asset from the parent to the subsidiary because the captive insurance subsidiary is an independent corporate entity it is the owner of the funds transferred by the parent_corporation in this regard revrul_77_316 states that when a parent transfers funds to its captives follows amounts paid as so-called insurance premiums by x y and z and their domestic subsidiaries with respect to risks remaining with sec_1 sec_2 and sec_3 respectively will not constitute taxable_income to sec_1 sec_2 and sec_3 under sec_61 of the code as nothing has occurred other than a movement of an asset cash within each family or related corporations instead such amounts will be considered contributions of capital under sec_118 in revrul_2001_31 the service indicated that in analyzing the tax consequences of a captive insurance arrangement it would no longer rely on the economic family theory set forth in revrul_77_316 accordingly revrul_77_316 is obsoleted insofar as it relied on a theory that there can be no risk shifting or risk_distribution within an economic family of corporations revrul_2001_31 explains that the service will no longer assert the economic family theory as the basis to disregard a captive insurance arrangement because the courts have failed to adopt this theory even in situations where they have agreed that the parent’s deduction of the so-called insurance premiums should be disallowed accordingly because revrul_2001_31 did not modify the service’s administrative position with respect to ownership of funds transferred to a captive insurance subsidiary the modification made by taxpayer in computing the amount of tax-exempt_interest subject_to the sec_832 reduction with respect to the portion attributable to parent should be disallowed case development hazards and other considerations inasmuch as we agree with the taxpayer no hazards are presented with respect to our conclusion on issue with respect to our conclusion with respect to issue the government faces the hazard that a court will determine that this adjustment either individually or in concert with other page adjustments does adequately implement the humana decision cf 184_f3d_786 8th cir the escrowed amounts are held for the benefit of the taxpayers either for payment directly to them or for the discharge of their obligations money earned by these amounts should follow the same path for tax purposes s gary geisler assistant chief branch office of associate chief_counsel financial institutions products


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc p si 7-plr-116281-00 date date re sec_29 request for a ruling credit for producing fuel from a nonconventional source legend p x y a b c d e f location state date date date date date date date dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representative requesting rulings under sec_29 of the internal_revenue_code the facts as represented by p and p’s authorized representative are as follows on date p received plr which rules on similar issues addressed by this letter p seeks a confirmation of the rulings in light of the purchase of the interests in p by x and y a change in the chemical reagent used to produce synthetic_fuel and relocation of p’s synthetic_fuel facility the facility to e’s site in location the site as plr-116281-00 described in the ruling_request and subsequent correspondence from p’s authorized representative p is a delaware limited_liability_company taxable as a partnership p constructed owns and operates the facility for producing a solid synthetic_fuel from coal the product using the process described below the facility is a secondary coal recovery system designed by a the facility consists of three production lines each of which consists of a briquetter which is fed by its associated mixer and each of which is capable of being operated independently because each production line is capable of being operated independently and can independently produce synthetic_fuel each independent production line may be treated as a separate facility the facility was constructed pursuant to a written contract entered into by a and b on date a assigned to p all of its rights and obligations under the construction_contract with respect to one facility on date b subcontracted with c to perform the procurement assembly and installation services under the construction_contract p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract on date p received a determination_letter from the district_director for the state district that the facility was placed_in_service prior to date on date x purchased an interest in p from d pursuant to a purchase agreement as amended on date y purchased the remaining interest in p from a on date pursuant to a purchase agreement p relocated the facility to the site p has represented that following the relocation the fair_market_value of the original property is more than percent of the facility’s total value the cost of the new property plus the value of the original property p has entered into a sales agency agreement for synthetic_fuel with f an affiliate of e for the sale of the product to unrelated purchasers p has represented that all sales of synthetic_fuel will be to unrelated persons p has supplied a detailed description of the process employed at the facility as described in p’s letter_ruling request the facility and the process implemented in the facility including the chemical reagent used to produce the synthetic_fuel meet the requirements of revproc_2001_34 2001_22_irb_1293 a recognized expert in coal combustion chemistry has performed numerous tests on the coal used at the facility and the product produced at the facility including the changed reagent and has submitted reports in which the expert concludes that significant chemical changes take place with the application of the process to the coal the rulings issued in plr which you wish to be reconfirmed in this private plr-116281-00 letter_ruling are as follows p with use of the process will produce a qualified_fuel within the meaning of sec_29 the production of qualified_fuel from the facility will be attributable solely to p entitling p to the sec_29 credit for qualified_fuel sold to unrelated persons the contract for the construction of the facility constitutes a binding written contract within the meaning of sec_29 the sec_29 credit attributable to p may be allocated to the members of p in accordance with the members’ interests in p when the credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons because the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date will not result in a new placed_in_service_date for the facility for purposes sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation the changes in facts since the issuance of plr are the purchase of interests in p by x and y the change in chemical reagent used to produce the synthetic_fuel and relocation of the facility as described in the ruling_request and subsequent correspondence by p’s authorized representative the above rulings are not affected by the purchase of interests in p by x and y the change in chemical reagent used to produce the synthetic_fuel or relocation of the facility as described in the ruling_request and subsequent correspondence by p’s authorized representative accordingly we re-issue the rulings given in plr thus in summary p with use of the process will produce a qualified_fuel within the meaning of sec_29 the production of qualified_fuel from the facility will be attributable solely to p entitling p to the sec_29 credit for qualified_fuel sold to unrelated persons the contract for the construction of the facility constitutes a binding written contract within the meaning of sec_29 plr-116281-00 the sec_29 credit attributable to p may be allocated to the members of p in accordance with the members’ interests in p when the credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons because the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new placed_in_service_date for the facility for purposes sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_2001_1 2001_1_irb_1 however when the criteria in section dollar_figure of revproc_2001_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances sincerely yours joseph h makurath senior technician reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes cc


internal_revenue_service index nos number release date plr-111424-99 attention date ein dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however the form was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer’s late filed form_1128 requesting permission to change to a tax_year ending effective for the short_period of is considered timely filed pursuant to appendix a of revproc_99_1 1999_1_irb_6 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayer’s application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this letter_ruling to the taxpayer's authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s thomas a luxner by thomas a luxner acting deputy assistant chief_counsel enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court badri n abdi petitioner v commissioner of internal revenue respondent docket no 10077-10s filed date badri n abdi pro_se anna a long for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for the issues for decision are whether petitioner is entitled to a dependency_exemption deduction for his minor sister fm whether petitioner is entitled to an earned_income_tax_credit and whether petitioner is entitled to a child_tax_credit background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits at the time he filed his petition petitioner resided in california petitioner wa sec_21 in he lived with his mother and three siblings--his 11-year-old sister fm and two brothers each of whom was younger than fm petitioner’s mother did not claim petitioner as a dependent and the parties stipulated that petitioner’s mother filed a federal_income_tax return for on which she claimed petitioner’s two brothers as dependents during petitioner was a student at san diego state university and worked three jobs--as a cashier and jeweler pincitethe court refers to minors by their initials see rule a mervyns a retail store as a caretaker for his grandmother and as a telemarketer for the san diego state university foundation after cashing each paycheck petitioner would give most of the money to his mother petitioner paid for the family’s cable television and internet subscriptions and bought clothes and games for fm petitioner retained only a limited amount of money for himself to purchase some clothes to occasionally eat out and for entertainment petitioner did not own an automobile either his mother or his friends would drive him to school and to his workplaces petitioner timely filed his federal_income_tax return on the return petitioner claimed a dependency_exemption deduction with respect to fm an earned_income_tax_credit of dollar_figure and a child_tax_credit of dollar_figure i dependency_exemption deduction discussion sec_151 allows a taxpayer to deduct an additional exemption_amount for each individual who is a dependent as defined in sec_152 of the taxpayer for the taxable_year as pertinent hereto sec_152 defines a dependent as a qualifying_child sec_152 or a qualifying_relative 2petitioner’s grandmother received governmental assistance which enabled her to pay for an aide sec_152 subject_to certain exceptions found in sec_152 not herein applicable sec_152 defines the term qualifying_child to mean an individual the presumptive qualifying_child who a bears a relationship to the taxpayer as described in paragraph of sec_152 the relationship_test b who has the same principal_place_of_abode as the taxpayer for more than one- half of the taxable_year the principal_place_of_abode test c who meets the age requirement of paragraph of sec_152 the age_test and d who has not provided over one-half of his her own support for the calendar_year in which the taxable_year of the taxpayer begins the self-support test to satisfy the relationship_test sec_152 requires the relationship between the presumptive qualifying_child and the taxpayer to be that of either a the taxpayer’s child or a descendent of the taxpayer’s child or b a brother sister stepbrother or stepsister of the taxpayer or a descendant of any such relative one of the conditions satisfying the age_test is that the presumptive qualifying_child be under age as of the close of the calendar_year in which the taxable_year of the taxpayer begins fm meets all four requirements of sec_152 and therefore is petitioner’s qualifying_child first fm is petitioner’s sister thus satisfying the relationship_test second petitioner and fm had the same principal_place_of_abode throughout thus satisfying the principal_place_of_abode test third fm wa sec_11 years old in thus satisfying the age_test fourth and finally the record establishes that fm did not provide more than one-half of her own support for thus satisfying the self-support test even though fm is petitioner’s qualifying_child fm is also the qualifying_child of petitioner’s mother thus we are forced to consider the special rule set forth in sec_152 relating to two or more taxpayers claiming the same individual as a qualifying_child except as provided in subparagraph b if but for this paragraph an individual may be and is claimed as a qualifying_child by or more taxpayers for a taxable_year beginning in the same calendar_year such individual shall be treated as the qualifying_child of the taxpayer who is-- i a parent of the individual or ii if clause i does not apply the taxpayer with the highest adjusted_gross_income for such taxable_year thus in the case where a parent and another relative each claim an individual as a qualifying_child for the same tax_year 3for tax years beginning before date sec_152 provided that a dependent meant certain individuals including a taxpayer’s sister over half of whose support for the calendar_year in which the taxpayer’s taxable_year begins was received from the taxpayer this support requirement is not part of the statutory test for dependent when referring to a qualified child for 4a dependency_exemption for fm may be allowed to only one taxpayer sec_152 provides that the individual be treated as the qualifying_child of the parent however as herein pertinent this rule comes into play only if petitioner’s mother had claimed fm as her qualifying_child the record shows that petitioner and his mother carefully arranged their tax affairs petitioner’s mother claimed her other two sons as her qualifying children and petitioner claimed fm therefore we believe and thus find that petitioner’s mother did not claim fm as a dependent for because fm is petitioner’s qualifying_child for petitioner is entitled to the claimed dependency_exemption deduction for fm for ii earned_income_tax_credit sec_32 permits an eligible_individual to receive an earned_income_credit against his her tax_liability as pertinent here the term eligible_individual includes any individual who has a qualifying_child for the taxable_year sec_5for tax years beginning after date the statute was amended to provide that if an individual may be claimed as a qualifying_child by two or more taxpayers for a taxable_year beginning in the same calendar_year such individual shall be treated as the qualifying_child of the taxpayer who is the parent of the individual thus the statutory amendment removed the requirement that the child may be and is claimed by two or more taxpayers fostering connections to success and increasing adoptions act of publaw_110_351 122_stat_3980 6because fm is petitioner’s qualifying_child we need not determine whether fm is petitioner’s qualifying_relative c a i in general the term qualifying_child means a qualifying_child of the taxpayer as defined in sec_152 determined without regard to sec_152 regarding the amount of support and sec_152 regarding special rules for divorced parents sec_32 as found supra p fm is petitioner’s qualifying_child accordingly petitioner is entitled to an earned_income_tax_credit for iii child_tax_credit subject_to certain limitations based on adjusted_gross_income sec_24 allows a credit against his her tax_liability with respect to each qualifying_child of the taxpayer sec_24 defines the term qualifying_child as a qualifying_child of the taxpayer as defined in sec_152 who has not attained the age of fm is petitioner’s qualifying_child therefore petitioner is entitled to the sec_24 child_tax_credit with respect to fm to reflect the foregoing decision will be entered for petitioner


internal_revenue_service number release date index number ------------------------------ ---------------- --------------------------- -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-141702-05 date date -------------- --------------- --------------- --------------------------- legend x ------------------------------------ y ------------------------------------ a -------------------------------------- b -------------------------------------- d1 -------------------- d2 ---------------------- d3 ----------------- dear -------------- requesting relief under sec_1362 of the internal_revenue_code facts b transferred their membership interests in x to y a partnership for federal tax purposes resulting in the termination of the s election of x on d3 the membership interests in x held by y were transferred to a and b corporation and filed their tax returns accordingly x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 x made an election to be treated as an s_corporation effective d1 on d2 a and x represents that at all relevant times x and its shareholders treated x as an s this responds to the letter dated date submitted on behalf of x sec_1361 defines an s_corporation as a small_business_corporation for sec_1362 provides that if an election under sec_1362 by any sec_1361 defines a small_business_corporation as a domestic sec_1362 provides that an election under sec_1362 shall be plr-141702-05 law and analysis which an election under sec_1362 is in effect corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate and other than a_trust described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock terminated whenever the corporation ceases to be a small_business_corporation corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period of inadvertent termination of the s election agrees to makes such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representation made we conclude that x’s election to be treated as an s_corporation terminated on d2 we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided that x’s s_corporation_election is not otherwise terminated under sec_1362 except as expressly provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-141702-05 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes