department of the treasury certified taxpayer_identification_number person to contact fax employee id number tel refer reply to in re exempt status tax years uil index internal_revenue_service tege appeals programs n los angeles street los angeles ca number release number date hay redaction legend a c i i dear this is a final adverse determination as to your application_for exempt status under sec_501 a as an organization described under sec_501 c of the internal_revenue_code our adverse determination was made for the following reason s you have not demonstrated that you are organized and operated exclusively for charitable educational or other purposes and that no part of your net_earnings inure to the benefit of private shareholders or individuals as required by sec_501 c of the internal_revenue_code sec_1_501_c_3_-1 you appear to be operated primarily for the purpose of carrying_on_a_trade_or_business of buying rehabilitating and selling or leasing real_property sec_1 c -1 e your proposed customers are not limited to any charitable_class further you have not established that your operations serve public rather than private interests sec_1 c - d ii contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed before the 5t ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call1-877-777-4778 and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_61 c if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter cc sincerely nan shimizu appeals t earn manager department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date may legend corporation service dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code i r c sec_501 based on the information provided we have concluded that you do not qualify for exemption under sec_501 c the basis for our conclusion is set forth below facts you incorporated as a non-profit corporation under your state laws your articles of incorporation provide that your specific and primary purpose is to assist governmental agencies lessen the burden of government reduce vacant abandoned blighted and poorly maintained homes and to assist people to obtain housing and to erect maintain and rebuild public buildings monuments or works specifically you intend to partner with banks state and local_government entities and home owners associations hoas to help reduce blighted properties stabilize communities and aid in the foreclosure process activities you state that you will perform the following activities purchase of real_property rehabilitation of real_property sale of real_property lease of real_property lien negotiation community liaison and education you state that you will spend percent of your time and money buying rehabilitating selling and leasing properties you will hire independent contractors to rehabilitate your properties then you will either sell or lease your properties if you lease the properties you state that you will provide renters with a portable lease option you explain that under this option the renter can transfer their accumulated 'hard equity' extra payments above rent but not property appreciation during the course of a lease to the lease or purchase of any of your other properties you state that you will impose no restrictions on who may rent your properties but that you will give preference to low and moderate income families first-time homebuyers and veterans you state that the maximum allowable rent for these individuals will be percent of gross_income or percent of net_income and non-taxable income will be grossed up by percent in calculating eligibility otherwise you state that you will set rental rates using a capitalization rate formula with an percent maximum cap rate and a brokers price option to determine market_value if you sell the properties you do not state whether you will sell at above or below market_value however you state that all of your income is derived from appreciated values received from the sale or rent of rehabilitated properties furthermore you state that you will spend percent of your time and money negotiating liens on your properties you state that you can foreclose on approved vacant properties while negotiating priority lienholder forgiveness and beginning the process of blight resolution specifically you state that you will work with local code enforcement officials to develop a plan to bring the property into compliance and to reach an agreement on the mitigation of code enforcement liens on candidate properties finally you state that will spend percent of your time and money educating the public however you also state that you will not offer hoa's educational program s you describe no other educational activities relationships with other organizations you state that you are an affinity partner with the corporation the corporation identifies properties for purchase and then provides you with a customized list of vacant and foreclosed properties additionally you leverage the corporation's banking relationships to help acquire bank owned properties in exchange you encourage municipalities to use the corporation's services including service you describe your relationship with the corporation as being arm's length but failed to provide a copy of your partnership_agreement or contract with the corporation you describe yourself as a highly marketable solution and potentially a very profitable opportunity for the corporation additionally you state that you will grow the corporation model and increase the corporation's scope of services further distancing the corporation from potential competition and assisting the corporation in its marketing of new sales opportunities finally you state that if you fail to acquire a property at auction then the corporation will still make a small profit via the passed on research and preparation document costs additionally you state that you anticipate having relationships with other organizations and government entities but that no such relationships currently exist law sec_501 a provides that an organization described in sec_501 c shall be exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 sec_501 c describes corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1 c -1 a provides that in order to be exempt as an organization described in sec_501 c an organization must be both organized and operated exclusively for one or more of the purposes specified in that section if an organization fails to meet either the organizational or operational_test it is not exempt sec_1 c -1 c provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -1 c provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1 c -1 d ii provides that an organization is not organized or operated exclusively for one or more of exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1 c -1 d provides that the term charitable is used in sec_501 c in its generally accepted legal sense and includes among other things lessening the burdens of government relief of the poor and distressed or of the underprivileged advancement of education or science erection or maintenance of public buildings monuments or works and promotion of social welfare by organizations designed to accomplish any of the above purposes or to defend human and civil rights secured_by law revrul_68_17 1968_1_cb_247 held that an organization formed to conduct a model demonstration housing program for low-income families and disseminate information about the results of the program qualified for recognition under sec_501 c the organization's membership consisted of other nonprofit institutions neighborhood groups and individuals the object of the demonstration program was to test the feasibility cost procedural and financial aspect of providing housing for low-income families through the acquisition rehabilitation and resale or lease of residential structures in a deteriorating neighborhood local_government officials and departments cooperated in the program by preparing renewal plans and transferring properties taken through tax foreclosure to the organization at cost the organization sold or leased homes rehabilitated by the organization in the model demonstration program to low-income or displaced families on a nonprofit basis the organization did no new_construction a grant from the department of housing and urban development hud provided part of the financing for the organization's project the organization obtained supplemental financing from public contributions and the sale of interest-bearing obligations the ruling held that the organization performed charitable activities because its demonstration program combated community deterioration revrul_70_585 c b held generally that an organization formed for charitable purposes and accomplishing those purposes through a program of providing housing for low and in certain circumstances moderate income families qualifies for recognition under sec_501 c situation involved an organization formed to provide new home construction and the renovation of existing homes for sale to low income families on long-term low-payment plans it purchases homes for renovation and lots for building new homes throughout the city in which it is located it builds new homes for sale to low income families who qualify for loans under a federal housing program and who cannot obtain financing through conventional channels it also aids financially those families eligible for the loans that do not have the necessary down payment rehabilitated homes are made available to families who cannot qualify for any kind of mortgage loan the cost of these homes is recovered if possible through very small periodic_payments the organization derives its operating funds through federal loans and contributions from the general_public where possible renovations are made with volunteer help the organization performed charitable activities because it relieved the poor and distressed by providing homes for low income families who otherwise could not afford them situation involved an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open occupancy basis housing units were sold at or below cost to low_or_moderate_income families or rented with options to purchase to families who could not afford to purchase preference was given to families previously located in ghetto areas the organization was financed by contributions from the general_public and by funds obtained under federal and state housing programs the ruling held that the organization engaged in charitable activities because its activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions situation involved an organization formed to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community studies of the area showed that the median income levels in the area were lower than in other sections of the city and the housing located in the area is generally old and badly deteriorated the organization's membership was composed of the residents businesses and community organizations in the area the organization cooperated with the local redevelopment authority in providing residents of the area with decent safe and sanitary housing without relocating them outside the area the organization is supported by federal funds membership fees and contributions the ruling held that the organization engaged in charitable activities because its activities combated community deterioration by assisting in the rehabilitation of an old and run-down residential area situation involved an organization formed to build new housing facilities for the purpose of helping families to secure decent safe and sanitary housing at prices they can afford its membership is composed of community organizations that are concerned with the growing housing shortage in the community a study of the area shows that because of the high cost of land increased interest rates and the growing population there is a shortage of housing for moderate income families in the community the organization planed to erect housing that would be rented at cost to moderate income families the organization is financed by mortgage money obtained under federal and state programs and by contributions from the general_public the ruling held that the organization did not perform charitable activities because the organization's program was not designed to provide relief to the poor or to carry out any other charitable purpose revproc_96_32 c b sets forth a safe_harbor under which organizations that provide low-income_housing will be considered charitable under sec_501 for relieving the poor and distressed and describes the facts_and_circumstances_test that will apply to determine whether organizations that fall outside the safe_harbor relieve the poor and distressed it also clarifies that housing organizations may rely on other charitable purposes to qualify for recognition of exemption the safe_harbor requires that the housing be affordable to the charitable beneficiaries in the case of rental housing this requirement will ordinarily be satisfied by the adoption of a rental policy that complies with government-imposed rental restrictions or otherwise provides for the limitation of the tenant's portion of the rent charged to ensure that the housing is affordable to low-income and very low-income residents in the case of homeownership programs this requirement will ordinarily be satisfied by the adoption of a mortgage policy that complies with government-imposed mortgage limitations or otherwise makes the initial and continuing costs of purchasing a home affordable to low and very low income residents facts and circumstances that demonstrate relief of the poor may include but are not limited to the following a substantially greater percentage of residents than required by the safe_harbor with incomes up to percent of the area's very low-income limit limited degree of deviation from the safe_harbor percentages limitation of a resident's portion of rent or mortgage payment to ensure that the housing is affordable to low-income and very tow-income residents participation in a government housing program designed to provide affordable housing operation through a community-based board_of directors particularly if the selection process demonstrates that community groups have input into the organization's operations the provision of additional social services affordable to the poor residents relationship with an existing sec_501 c organization active in low-income_housing for at least five years if the existing organization demonstrates control acceptance of residents who when considered individually have unusual burdens such as extremely high medical costs which cause them to be in a condition similar to persons within the qualifying_income limits in spite of their higher incomes participation in a homeownership program designed to provide homeownership opportunities for families that cannot otherwise afford to purchase safe and decent housing existence of affordability covenants or restrictions running with the property in 326_us_279 the supreme court held that the presence of private benefit if substantial in nature will destroy an organization's tax-exempt status regardless of the organization's other charitable purposes or activities in 92_tc_1053 the tax_court determined that the american campaign academy a training program for political campaign professionals operated for the private benefit of the republican party because the its curriculum was tailored to republican interests the tax_court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests private benefits included advantage profit fruit privilege gain or interest however o ccasional economic benefits flowing to persons as an incidental consequence of an organization pursing exempt charitable purposes will not generally constitute prohibited private benefit analysis an organization seeking tax-exempt status under sec_501 c must be organized and operated exclusively for charitable or other exempt purposes with no part of its net_earnings inuring to the benefit of any private_shareholder_or_individual sec_1 c -1 a the presence of a single non-exempt purpose if substantial in nature will destroy exemption under sec_501 c regardless of the number or importance of any other exempt purposes 326_us_279 see sec_1 c -1 c based on the information and supporting documentation you do not qualify for recognition under sec_501 c because you operate for one or more substantial nonexempt purpose your primary activity is buying rehabilitating selling and leasing properties in certain circumstances this activity may be a charitable activity within the meaning of sec_501 c see sec_1 c -1 d revrul_70_585 situation sec_1 through revrul_68_17 however your housing rehabilitation program fails to combat community deterioration eliminate prejudice and discrimination lessen neighborhood tensions or provide relief to the poor and distressed or underprivileged first you do not target any specific areas in your state for rehabilitation including areas with actual or potential deterioration or in which prejudice and discrimination exist second you do not intend to use volunteers to rehabilitate your properties third you intend to sell your properties at market rates market rates may be at or below cost but you provide no information about your anticipated purchase prices or rehabilitation costs whether you will profit from the sale your rehabilitated properties is unknown fourth you do not intend to provide financial assistance finally your primary source_of_income will be from the sale of properties furthermore the facts and circumstances do not establish that your activities relieve the poor and distressed see revproc_96_32 first you do not indicate how you will choose purchasers for your rehabilitated properties second you indicate that you will only limit some not all renters' monthly payments the individuals receiving discounted rent do not necessarily comply with definition of low-income or very low-income describe in revproc_96_32 third you do not indicate whether purchasers' mortgage payments will be limited in order to ensure that the housing is affordable to low-income residents or whether you will impose any affordability covenants or restrictions that will run with the land fourth you do not participate in any government housing programs designed to provide affordable housing or homeownership programs designed to provide homeownership opportunities for families that cannot otherwise afford to purchase safe and decent housing fifth you failed to establish that you operate through a community-based board_of directors finally you do not have any relationships with existing sec_501 c organizations active in low-income_housing for at least five years for these reasons your housing rehabilitation activity is not a charitable activity within the meaning of sec_501 c you spend of your time and money conducting your housing rehabilitation activities accordingly you are not operated exclusively for one or more exempt_purpose additionally an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals or if it serves a public rather than private interest sec_1 c -1 c d ii the organization seeking recognition bears the burden of establishing that it is not operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 the courts also define private benefit as nonincidental benefits conferred on disinterested persons that service private interests 92_tc_1053 prohibited private benefit may include an 'advantage profit fruit privilege gain or interest ' 1ft you failed to establish that you are not operated for the benefit of private interests you describe your relationship with the corporation as being arm's length but the facts and circumstances indicate otherwise you appear to operate for the corporation's benefit by increase ing the corporation's scope of services further distancing the corporation from potential competition and assisting the corporation in its marketing of new sales opportunities furthermore the corporation may profit from your operations accordingly your operations may benefit private interests conclusion based on the above we have determined that you fail to meet the requirements necessary to be recognized as a tax-exempt_organization under sec_501 c you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury i declare that i have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely michael seto manager eo technical


t c memo united_states tax_court the manchester group and subsidiaries formerly torrey enterprises inc and subsidiaries formerly torrey development_corporation and subsidiaries petitioners v commissioner of internal revenue respondent docket no filed date j clancy wilson for petitioners william h quealy jr and alice m harbutte for respondent memorandum opinion dawson judge this case was assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a of the internal_revenue_code_of_1986 as amended and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge this case is before the court on petitioners' motion for leave of court to file motion to vacate or revise decision to seek litigation costs under code sec_7430 petitioners' motion for leave on date the court entered a decision in this case pursuant to the agreement of the parties ninety-four days later on date the court filed petitioners' motion for leave and lodged two additional motions submitted by petitioners namely motion to vacate or revise decision to seek litigation costs under code sec_7430 petitioners' motion to vacate and motion for reasonable_litigation_costs petitioners' motion for litigation costs the issues for decision are as follows unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the court_of_appeals for the ninth circuit has held that petitioners' motion for leave was timely filed because it was mailed within days after the decision in the case was entered 113_f3d_1087 9th cir revg tcmemo_1994_604 whether we should exercise our discretion and grant petitioners' motion for leave and thereby file petitioners' motion to vacate and if so whether we should grant petitioners' motion to vacate neither party requested an evidentiary hearing and the court concludes that such a hearing is not necessary for the proper disposition of petitioners' motion for leave and motion to vacate we therefore decide the matter before us based on the record that has been developed to date petitioners' principal_place_of_business was in san diego california at the time that the petition was filed with the court background in date respondent sent petitioners a notice_of_deficiency in the notice respondent determined the following deficiency and additions to tax in petitioners' consolidated income_tax for the taxable_year ended date additions to tax_deficiency sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure dollar_figure of the interest due on dollar_figure although only petitioner's motion for leave is presently before the court petitioners' motion to vacate is essentially identical to petitioners' motion for leave respondent also determined in the notice that petitioners were liable for additional interest under sec_6621 by virtue of a substantial_underpayment of tax attributable to a tax-motivated transaction the deficiency in income was essentially attributable to respondent's determination that petitioners derived substantial gain in a complex transaction involving the disposition of an indirect interest in an office building in date petitioners filed a timely petition contesting respondent's determinations at the same time petitioners designated san diego california as the place of trial the petition was subscribed by j clancy wilson the attorney who has continued to represent petitioners throughout these proceedings petitioners' counsel was formerly an attorney for the tax_division of the u s department of justice he is also certified by the state of california as a specialist in taxation law and is an experienced tax litigator in date an answer was filed by respondent's district_counsel office in san diego shortly thereafter in date the case was referred to respondent's appeals_office in san diego for settlement consideration because of the amounts in controversy and the complexity of the issues the case was assigned to a senior appeals officer on date while negotiations between the parties were ongoing the court served the parties with notice that this case would be called for trial at the court's trial session scheduled to commence on date in san diego in late september or early date respondent's appeals_office after a period of consultation with respondent's attorneys in both san diego and washington d c decided to concede the deficiency additions to tax and additional interest as determined in the notice_of_deficiency and so notified petitioners' counsel sometime thereafter respondent sent a settlement document to petitioners' counsel for his review and signature the settlement document was a standard stipulated decision consisting of a form of decision which embodied respondent's concession of the deficiency additions to tax and additional interest and a stipulation to be signed by counsel for the parties agreeing to entry of the form of decision by the court the stipulated decision was silent regarding litigation costs petitioners' counsel reviewed the stipulated decision and revised its language in revising the language petitioners' counsel did not introduce the issue of litigation costs the nature of the revision made by petitioners' counsel appears to relate to the description of the additions to tax and additional interest addressed in the stipulated decision petitioners' counsel executed the stipulated decision in date nevertheless petitioners' counsel did not intend the stipulated decision to be conclusive as to litigation costs in date respondent's counsel executed the stipulated decision and forwarded it to the court on date the court received the stipulated decision the portion consisting of the form of decision recited that pursuant to the agreement of the parties in this case petitioners were not liable for any deficiency additions to tax or additional interest for the taxable_year in issue the portion consisting of the stipulation recited that it is hereby stipulated that the court may enter the foregoing decision in the above-entitled case and was executed by counsel for the parties as previously indicated the stipulated decision was silent regarding litigation costs on date the court executed the form of decision and formally entered decision pursuant to the agreement of the parties the decision also on date the court served conformed copies of the decision on the parties thereafter the court struck petitioners' case from the date trial session in san diego in date respondent closed the administrative and litigation files related to this case and discarded certain handwritten notes and other such informal materials that had been generated prior to the entry of the decision on date the 89th day after the decision was entered petitioners mailed their motion for leave motion to vacate and motion for litigation costs to the court all three motions were received by the court on date the 94th day after the decision was entered on the same day date the court filed petitioners' motion for leave and lodged petitioners' motion to vacate and petitioners' motion for litigation costs prior to date petitioners had not disclosed their intention of seeking litigation costs however at the time that he executed the stipulated decision in date petitioners' counsel fully contemplated that petitioners would seek litigation costs nevertheless petitioners' counsel did not mail petitioners' three motions to the court until date petitioners' counsel intentionally delayed submitting the motions for two reasons first petitioners' counsel was concerned that claiming litigation costs might cause respondent to withhold concession of the amounts in issue in the present case second petitioners' counsel was concerned that claiming litigation costs might negatively influence the resolution of another dispute between petitioners and respondent that was also under consideration by respondent's appeals_office in san diego therefore in an effort to avoid burning bridges petitioners' counsel intentionally delayed submitting a motion for litigation costs until the eve of the expiration of the 90-day period that typically leads to the finality of a stipulated decision see sec_7481 sec_7483 discussion a time and manner of making a claim for litigation costs petitioners advance arguments in support of their view that they are entitled without first filing a motion to vacate decision to file a motion for litigation costs at any time before the decision becomes final thus petitioners contend that we must consider the merits of their motion for litigation costs without regard to their motion for leave we disagree for the reasons discussed in our prior opinion manchester group v commissioner tcmemo_1994_604 revd on another issue 113_f3d_1087 9th cir we hold as before that we will not consider the merits of petitioners' motion for litigation cost sec_5 the other dispute apparently involved another taxable_year in respect of which a 30-day_letter had been issued unless and until we first grant petitioners' motion for leave and then grant petitioners' motion to vacate the reasoning that supports our holding is set forth in our prior opinion and will not be repeated herein see manchester group v commissioner tcmemo_1994_604 however we make mention of several cases that petitioners cite in support of their argument that a motion for litigation costs may be filed at any time before a decision becomes final we do not think that these cases support such proposition in each case it appears that a motion to vacate the decision or for litigation costs was mailed or delivered to the court within days after the entry of the decision and in no case was there anything to suggest that the taxpayer intentionally delayed submitting an appropriate motion see comer v commissioner 958_f2d_136 6th cir 93_tc_256 affd in part revd in part and remanded 936_f2d_736 2d cir in 113_f3d_1087 9th cir the court_of_appeals did not take issue with our holding that petitioners' motion for litigation costs was not separately reviewable rather the court_of_appeals reversed our dismissal for lack of jurisdiction and remanded this case to decide the motion for leave on the merits in reaching its conclusion the court_of_appeals appeared to agree that petitioners' motion to vacate cannot be considered without first granting petitioners' motion for leave thus as the tax_court held the motion to vacate could not be considered without first granting the motion for leave because more than thirty days had passed id pincite 88_tc_492 bouterie v commissioner tcmemo_1993_510 revd and remanded 36_f3d_1361 5th cir b the interests of justice in the alternative to their argument that their motion for litigation costs is separately reviewable petitioners argue that we should grant their motion for leave in this regard petitioners argue that the inadvertent actions of petitioners' counsel should be viewed in light of the lack of specific guidance in the tax_court rules as to when a party should move for litigation costs therefore according to petitioners justice would be served by granting their motion for leave we disagree with both the premise and the conclusion of petitioners' argument whether to grant or deny a motion for leave is a matter that lies within the sound discretion of the court 872_f2d_245 8th cir affg tcmemo_1987_1 92_tc_1079 in deciding what action to take we are guided primarily by whether it would be in the interest of justice to vacate the prior decision but we also recognize that litigation must end at sometime estate of egger v commissioner supra citation omitted see also 304_f2d_136 9th cir in the present case justice does not demand that we grant petitioners' motion for leave first we disagree with the assertion that the actions of petitioners' counsel were inadvertent rather the record clearly demonstrates that petitioners' counsel intentionally delayed submitting petitioners' various motions until the eve of the expiration of the 90-day period that typically leads to the finality of a stipulated decision petitioners' counsel intentionally delayed submitting the motions for what he regarded as strategic reasons thus it cannot be said that the actions of petitioners' counsel were inadvertent second we disagree that our rules lack specific guidance regarding the time when a claim for litigation costs should be made we have previously discussed at length the provisions of our rules regarding the time and manner of making a claim for litigation costs see manchester group v commissioner tcmemo_1994_604 and we will not repeat that discussion herein suffice it to say that petitioners' counsel should not have waited to file the instant motions until the 89th day after the entry of the stipulated decision if he did not intend it to be conclusive as to litigation costs rather when respondent cf 859_f2d_115 9th cir holding that a taxpayer's misunderstanding of the tax court's rules is insufficient to overcome the doctrine_of finality mailed the settlement document to petitioners' counsel for his review and signature if not sooner petitioners' counsel should have alerted respondent to petitioners' claim for litigation costs at that point either the proposed stipulated decision could have been revised to reflect petitioners' entitlement to litigation costs see rule a or the parties could have executed a stipulation of settled issues see rule a c b and c thereby preserving the issue of litigation costs for subsequent disposition by the court petitioners could then have filed their motion for litigation costs accompanied by the stipulation of settled issues see rule c alternatively petitioners' counsel having executed the stipulated decision in date but not intending that it be conclusive as to litigation costs could have filed the motion to vacate within the 30-day period provided by rule see rule a however petitioners' counsel did not pursue either of these alternatives because they did not comport with his litigation strategy c public policy petitioners assert that they incurred substantial costs in defending against what they regard as respondent's unreasonable position petitioners then argue that because sec_7430 was enacted by congress to deter the commissioner from taking unreasonable positions public policy would be served by granting their motion for leave we agree that sec_7430 was enacted by congress to deter unreasonable conduct by the commissioner indeed the legislative_history of sec_7430 sets forth some guidelines for determining whether the commissioner's conduct was unreasonable the committee intends that the determination by the court on this issue is to be made on the basis of the facts and legal precedents relating to the case as revealed in the record other factors the committee believes might be taken into account in making this determination include whether the government used the costs and expenses of litigation against its position to extract concessions from the taxpayer that were not justified under the circumstances of the case whether the government pursued the litigation against the taxpayer for purposes of harassment or embarrassment or out of political motivation and such other factors as the court finds relevant h rept pincite petitioners' counsel intentionally delayed submitting petitioners' three motions because of his concern that a claim for litigation costs might cause respondent to withhold concession of the amounts in issue in the present case and might negatively influence the resolution of a dispute in a collateral matter neither of these reasons constitutes good cause and in the absence of good cause we are unwilling to allow petitioners to ignore the orderly procedures of this court as embodied in rule in short the public policy of sec_7430 to which we give expression through our rules simply does not justify a waiver of rule in this instance d impact on the judicial process we think that the court has an interest in this matter that petitioners do not recognize the court has an interest in fostering respect for the judicial process and accomplishing orderly disposition of its workload in part the court seeks to foster respect for the judicial process through the evenhanded enforcement of its rules which are designed to secure the just speedy and inexpensive determination of every case see rule b see also sec_7453 if a party in the pursuit of its own agenda is permitted to disregard the procedures established by this court unfairness to others and disruption of the court's processes occur see estate we note that sec_7430 precludes an award of litigation costs with respect to any portion of the court_proceeding during which the prevailing_party has unreasonably protracted such proceeding it is apparent therefore that the statute itself does not excuse intentional delay by a taxpayer cf 304_f2d_136 9th cir quoting and adopting 167_f2d_71 3d cir the tax_court is authorized to determine whether its rules are complied with and where its decision of such questions is not shown to be clearly wrong it should not be disturbed of quirk v commissioner 60_tc_520 dollar_figure this is particularly true if the party has disregarded those procedures intentionally as we have already stated petitioners' counsel should not have executed the stipulated decision and waited to file the instant motions until days after its entry if he did not intend the stipulated decision to be conclusive as to litigation costs however by so doing he signaled to the court as well as respondent that all of the issues in the case specifically including the issue of litigation costs had been resolved by the parties as a consequence the court struck this case from the date trial session in san diego in contrast if a stipulation of settled issues had been filed the court would have known that the issue of litigation costs remained in the case and might have been able to entertain that issue at the san diego trial session regardless the fact remains that the integrity of the court's rules was compromised through the rules of this court were adopted for serious reasons and are not to be taken lightly time limitations for example are necessary to ensure the speedy and efficient disposition of cases so that evidence and witnesses will not grow stale litigation before this court would be significantly slowed if we routinely countenanced violations of the time limitations set by our rules and of course respondent must be held to the same strict observance of the rules that we require of taxpayers 60_tc_520 petitioners' stratagem of buying time by intentionally waiting until the 11th hour to submit the motion for litigation costs e conclusion whether to grant or deny a motion for leave is a matter that lies within the sound discretion of the court in ruling on such a motion we are guided primarily by whether it would be in the interest of justice to vacate the prior decision justice does not require us to vacate the prior decision in this case petitioners' counsel intentionally delayed mailing the motion for leave to the court until the 89th day after the decision had been entered significantly there was no good cause for such delay further respect for the judicial system is compromised when a party in pursuit of its own litigation strategy is permitted to disregard the procedures established by this court for the orderly disposition of disputes in view of the foregoing we will deny petitioners' motion for leave accordingly we need not address petitioners' motion to vacate to reflect the foregoing an appropriate order will be issued


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-116519-05 date date --------------------- --------------------- --------------------------- ---------------------------- legend x -------------------------------------------------- a b --------------------------------------------------- trust -------------------------------------------------- state d1 d2 d3 dear ------------- requesting inadvertent termination relief under sec_1362 of the internal_revenue_code this responds to a letter dated date submitted on behalf of x ------------------------- ------------------- ------------------ ---------- facts according to the information submitted x was incorporated on d1 pursuant to the laws of state x elected to be an s_corporation effective on d1 plr-116519-05 a a shareholder of x died on d2 and a’s shares of x stock were transferred to trust pursuant to the terms of a’s will it was intended that trust be treated as a qualified_subchapter_s_trust qsst as defined in sec_1361 however due to an oversight b the beneficiary of trust did not make a timely qsst election under sec_1361 thereby terminating x’s s_corporation_election on d2 on d3 x’s counsel discovered that b had not made a qsst election for trust subsequently x submitted a qsst election effective d2 and this ruling_request for inadvertent termination relief under sec_1362 x and b represent that the transfer of stock to trust and the subsequent failure_to_file the qsst election were not motivated by tax_avoidance furthermore x and its shareholders represent that from d2 until the present x b and the other shareholders have all filed returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make any adjustments that the commissioner may require consistent wit the treatment of x as an s_corporation law and analysis sec_1361 provides that a_trust all of which is treated under subpart sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides in part that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1362 who is not an individual e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a subchapter_s_corporation shareholder beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1362 and the qsst’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1361 applies sec_1361 provides that the term qsst means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such sec_1361 provides that in the case of a qsst with respect to which a d provides that an election under sec_1362 shall be terminated sec_1_1361-1 provides that if a corporation’s s election terminates plr-116519-05 beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states under sec_1361 a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply under d d an election under sec_1361 will be effective up to days and months before the date of the election whenever at any time on or after the 1st day of the 1st taxable for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation because of a late qsst election the corporation may request inadvertent termination relief under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary sec_1362 provides in relevant part that if an election under sec_1362 conclusion based solely upon the facts presented and the representations made we conclude that x’s s_corporation_election terminated on d2 because b failed to make a timely qsst election under sec_1361 we also conclude that the termination was inadvertent within the meaning of sec_1362 therefore under sec_1362 x will be treated as an s_corporation from d2 and thereafter assuming x’s s_corporation_election is valid and is not otherwise terminated under sec_1362 however this ruling is contingent upon b filing a qsst election with an effective date of d2 with the appropriate service_center within days of the date of this ruling a copy of this letter must be attached to the qsst election federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed on whether x’s original election to be an s except as specifically set fort above no opinion is expressed concerning the this ruling is directed only to the taxpayer who requested it sec_6110 plr-116519-05 corporation was a valid election under sec_1362 or whether trust is a qsst within the meaning of sec_1361 provides that it may not be used or cited as precedent s david r haglund sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


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-104225-15 date date x ---------------------------------------------------------------------------------------------------------------------------- state -------------- date1 ------------------- a ------------------------- trust ---------------------------------------------------------------------------------------------------------------------------- year ------- dear --------------- this responds to a letter dated date and subsequent information submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts the information submitted states that x was formed on date as a state limited_liability_company classified as a partnership for federal tax purposes a’s grantor_trust was a partner in x a died during year x relied on its advisor to file an election under sec_754 however the advisor failed to make an election under sec_754 for year law and analysis sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of plr-104225-15 a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 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 the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and 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 make an election under sec_754 effective for its year taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with x’s year tax_return a copy of this letter should be attached to the sec_754 election except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this plr-104225-15 letter specifically we express or imply no opinion as to whether x is a partnership for federal tax purposes pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries by david r haglund david r haglund chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


date cor-115905-00 internal_revenue_service number info release date uil the honorable mark foley u s house of representatives washington d c dear mr foley thank you for your letter of date signed by you and a number of your colleagues encouraging the internal_revenue_service to immediately readjust the business standard mileage rate to reflect the recent increase in gasoline prices you note that the increased cost has particularly burdened self-employed taxpayers who use automobiles for business purposes gasoline prices we realize increased gasoline prices are an economic burden however the cost of gasoline is only one part of the business standard mileage rate which includes fixed and operating automobile costs these costs include depreciation or lease payments maintenance and repairs insurance and license and registration fees in addition to gasoline and oil less than one-third of the cents per mile rate comes from the cost of gasoline and oil thus an immediate adjustment in the rate taking into account the recent increase in gasoline prices might not be significant setting the business standard mileage rate the rate is a national average amount determined by an annual study performed by an independent_contractor who is an expert in the cost analysis of business use of automobiles the contractor uses recent data from each state on the component costs of operating the most popular automobiles the contractor then combines this data to achieve a national composite cents-per-mile rate advantages of using the business standard mileage rate reducing a taxpayer’s record-keeping burden is the principal advantage of using the rate gasoline prices rise and fall during the year but taxpayers may continue to use the same rate without having to keep records of actual expenses although rising gasoline prices can be a disadvantage for taxpayers who use the rate falling prices can work to their advantage for example although gasoline prices fell in for all of and through date taxpayers were able to use the rate that reflected the earlier higher prices taxpayer’s options to deduct the ordinary and necessary expenses of using an automobile for business purposes a taxpayer must substantiate the cost date place and business_purpose of each use of the automobile by adequate_records for the cost the taxpayer has two options substantiate actual cost by keeping records or by other_sufficient_evidence use the business standard mileage rate using the rate gives approximate not actual costs taxpayers can deduct the actual business_expenses of using a personally-owned automobile and this may be advantageous when automobile costs are rising publication travel entertainment gift and car expenses contains further information on how taxpayers should substantiate expenses i have enclosed the relevant pages from that publication i am sending a similar letter to your colleagues i hope this information is helpful please call me at or robert a berkovsky at if you have any questions sincerely charles o rossotti enclosure


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date contact person identification_number telephone number employer_identification_number vil legend husband trust date wife foundation date trust a_trust b foundation a foundation b dear we have considered your ruling_request dated date concerning the federal income and excise_tax consequences under sec_507 sec_4941 and sec_4945 of the internal_revenue_code related to a proposed transfer of assets in the manner and for the purposes described below facts husband created trust a charitable_remainder_unitrust within the meaning of sec_664 of the internal_revenue_code_of_1986 as amended hereafter code on date trust is irrevocable_trust provides generally that in each taxable_year of the trust the trustee shall pay a unitrust_amount equal to to husband during his lifetime and after his death to wife for such time as she survives upon the death of the survivor of husband and wife of the then remaining principal and income of trust to the trustee shall distribute all exempt charitable organizations described in sec_170 sec_2055 and sec_2522 of the code as designated by husband in the absence of such designation by husband of the then remaining principal and income of trust to trustee shall is not foundation if so described then to one or more exempt charities described in sec_170 sec_2055 and sec_2522 as the trustee shall determine is described under sec_170 sec_2055 and sec_2522 and if distribute all it it husband and wife entered into a marriage separation agreement on date to their marriage separation agreement provided settle their ‘marital and property rights that trust would be divided into two separate and equal trusts known as trust a and is intended to qualify as a charitable_remainder_unitrust under trust b sec_664 of the code as proposed the assets of trust will be divided equally in_kind between trust a and trust b each trust retain a survivorship interest in_the other's trust a and trust b will be identical to trust except that i husband will be the ii unitrust beneficiary of trust a and wife will be the unitrust beneficiary of trust b unitrust_amount iii each spouse will husband will have the right to designate the charitable beneficiaries of trust a and wife iv the surviving will have the right to designate the charitable beneficiaries of trust b spouse will not be permitted to appoint or change the charitable beneficiaries of the private other spouse's foundation as the charitable_remainder beneficiary of trust a and wife will designate foundation b a private_foundation as the charitable_remainder beneficiary of trust b unless husband and wife designate an alternate charity as the remainder beneficiary and vi husband will appoint an independent_trustee of trust a and wife will appoint an independent_trustee of trust b foundation a husband will new trust designate v a the trustee of trust has tentatively approved the division of trust into trust a and trust b however the final dissolution of trust and its division into trust a and trust b is contingent upon a favorable private_letter_ruling you have requested the following rulings the division of trust will not result in tax under sec_507 of the code that applies upon the termination of a charitable_remainder trust's status as a private_foundation the division of trust will not be an act of self-dealing under sec_4941 of the code furthermore the distributions of unitrust amounts from trust a to husband and the distributions of unitrust amounts from trust b to wife will not be acts of self-dealing under sec_4941 of the code the division of trust will not be a taxable_expenditure under sec_4945 of the code and consequently there will be no obligation on trust to exercise expenditure_responsibility under sec_4945 and h of the code with respect to the legal fees and filing fees incurred in the preparation of this ruling_request payment by the trustee of trust of a portion of such fees that reasonably represents the portion of this ruling_request that is intended to protect the trustees of trust trust a and trust b will not be an act of self- dealing under sec_4941 of the code and will not be taxable_expenditures under sec_4945 of the code statement of the law under sec_4947 sec_507 sec_4941 and sec_4945 apply to certain split interest trusts trusts with both charitable and non-charitable beneficiaries as if they were private_foundations sec_507 a provides that except as provided in sec_507 a private_foundation may terminate its private_foundation_status only under the specific rules set forth in sec_507 sec_507 b provides that in the case of the transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 imposes a termination_tax equal to certain defined amounts which are generally the lower_of the aggregate tax_benefit resulting from the tax exempt status or the fair_market_value of the assets sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 imposes an excise_tax on the participation of a foundation_manager in an act of self-dealing between a disqualified_person and a private_foundation sec_4941 provides that the term self-dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4945 imposes an excise_tax on a private foundation's making of any taxable_expenditure under sec_4945 sec_4945 provides the term taxable_expenditure includes a grant to a private_foundation unless the grantor exercises expenditure_responsibility in accordance with sec_4945 sec_4946 provides the term disqualified_person with respect to a private_foundation includes a substantial_contributor to the foundation including the creator of a_trust anda foundation_manager including a trustee sec_4947 provides generally that split-interest_trusts are subject_to the provisions of sec_507 sec_4941 and sec_4945 in the same manner as if such trusts were private_foundations but under sec_4947 not with respect to any amounts payable under the terms of such trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 sec_1_507-3 provides that unless a private_foundation voluntarily gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute a termination of the transferor’s private_foundation_status under sec_507 sec_1_507-1 provides that if a private_foundation transfers all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 such transferor foundation will not have terminated its foundation status under sec_507 sec_1_507-3 provides that as used in sec_507 the term other adjustment organization or reorganization shall include any partial_liquidation or any - other significant disposition of assets to one or more private_foundations sec_1_507-3 provides that the term significant disposition of assets means the transfer of or more of the net assets of the foundation at the beginning of the year which disposition may be made in a single year or in a series of related dispositions over more than one year sec_1_507-3 and sec_3 provide that in the transfer of assets from one private_foundation to one or more private_foundations in a sec_507 transfer each transferee private_foundation shall not be treated as a newly created organization but shall succeed to the transferor's aggregate tax_benefit within the meaning of sec_507 in proportion to the assets transferred to each sec_1_507-3 provides that if a private_foundation transfers all of its net assets to one or more private_foundations that are effectively controlled directly or indirectly by the same person or persons that effectively controlled the transferor it were the transferor foundation such transferee private_foundation shall be treated as if private_foundation for purposes of sec_4940 through and sec_507 through sec_1_507-3 provides in pertinent part that a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization to an organization that is treated as described in sec_501 by virtue of sec_4947 is not a taxable_expenditure under sec_4945 sec_53_4945-6 of the foundation and similar excise_taxes regulations provides that expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence sec_53_4947-1 provides that under sec_4947 sec_4941 does not apply to any amounts payable under the terms of a split-interest trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 with respect to the income_interest of any such beneficiary revrul_2002_28 2002_1_cb_941 provides that when a private_foundation transfers all of its assets to other foundations in expenditure_responsibility requirements under sec_4945 or h with respect to the transfers because the transferee foundations are treated as the transferor a sec_507 transfer there are no analysis ruling the division of trust will not result in a termination_tax under sec_507 of the trust is a charitable_remainder_unitrust under sec_664 a charitable code remainder unitrust is a split-interest trust described in sec_4947 and therefore it were a private_foundation and subject_to sec_507 termination treated generally as if rules although split interest trusts are not sec_501 or sec_4947 private_foundations that are exclusively charitable they are subject_to sec_507 termination rules that are appropriate the proposed transfer of percent of trust's assets under the prevailing divorce proceedings to trust a and trust b will qualify as transfers meeting the requirements of a significant disposition of assets under sec_4 c and ii accordingly under sec_1_507-3 the proposed transfer will not result in trust a and trust b being treated as newly created private_foundations furthermore there will not be an imposition of an excise_tax under sec_507 because the transferor trust trust has not given notice of its intent to terminate code that applies upon the termination of a charitable_remainder trust’s status as a private_foundation therefore the division of trust will not result in tax under sec_507 of the ruling the division of trust will not be an act of self-dealing under sec_4941 of the code furthermore the distributions of unitrust amounts from trust a to husband and the distributions of unitrust amounts from trust b to wife will not be acts of self-dealing under sec_4941 of the code generally under sec_4946 husband and wife are disqualified persons with respect to trust sec_4941 imposes a tax on acts of self dealing by disqualified persons however the only interest that either husband or wife have in trust is the payment of the unitrust_amount under the provisions of sec_664 husband and wife have exchanged a unitrust and a contingent survivor's unitrust_interest payment in trust for a full unitrust payment in trust a and trust b respectively having fewer assets namely percent of the assets of trust prior to its division thus they are in the aggregate likely to receive the same unitrust payment as before under sec_53_4947-1 the amounts payable under charitable_remainder split-interest_trusts to income beneficiaries are not subject_to sec_4941 thus the disqualified persons are insulated from self-dealing as far as each of their income interests in trust are concerned based on the fact that the unitrust payment is the same before and after the division of trust because none of the disqualified persons receive any interest in trust principal no self-dealing transaction has occurred within the meaning of sec_4941 d therefore the division of trust and distributions of unitrust amounts from trust a to husband and from trust b to wife will not be acts of self-dealing under sec_4941 of the code the division of trust will not be a taxable_expenditure under sec_4945 of the ruling code and consequently there will be no obligation on trust to exercise expenditure_responsibility under sec_4945 and h of the code as described more fully in ruling a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization to an organization that is treated as described in sec_501 by virtue of sec_4947 is nota taxable_expenditure under sec_4945 because trust a and trust b are treated as trust there are no expenditure_responsibility requirements that must be exercised by trust under sec_4945 or h with respect to the transfers see also revrul_2002_28 therefore the division of trust will not be a taxable_expenditure and will not result in the exercise of expenditure_responsibility ruling with respect to the legal fees and filing fees incurred in the preparation of this ruling_request payment by the trustee of trust of a portion of such fees that reasonably represent the portion of this ruling_request that is intended to protect the trustees of trust trust a and trust b will not be an act of self-dealing under sec_4941 of the code and will not be taxable_expenditures under sec_4945 of the code under sec_53_4945-6 legal fees and other expenses_incurred by a_trust in a good_faith belief that they are reasonable and consistent with ordinary care and prudence will not constitute taxable_expenditures no act of self-dealing or taxable_expenditure will occur within the meaning of sec_4941 and sec_4945 respectively to the extent that the expenses are reasonable and proportionate to the trust's tax risk herein trust principal remains preserved for charitable interests there has not been an increase in the unitrust_amount at the expense of the charitable interest there are no other transactions with the income beneficiaries that affect the trust principal any expenses paid pursuant to the division of trust assuming such expenses are reasonable are justified as necessary to carry out trust purpose to facilitate the smooth functioning and operation of trust which was likely not possible under the prevailing divorce proceedings therefore if reasonable in amount payment from trust assets of legal fees and other expenditures incurred by trust to effectuate the division of trust to trust a and trust b will not constitute an act of self-dealing under sec_4941 nor will it constitute taxable_expenditures under sec_4945 accordingly based upon the information submitted in your ruling_request we rule as follows the division of trust will not result in tax under sec_507 of the code that applies upon the termination of a charitable_remainder trust’s status as a private_foundation the division of trust will not be an act of self-dealing under sec_4941 of the code furthermore the distributions of unitrust amounts from trust a to husband and the distributions of unitrust amounts from trust b to wife will not be acts of self-dealing under sec_4941 of the code the division of trust will not be a taxable_expenditure under sec_4945 of the code and consequently there will be no obligation on trust to exercise expenditure_responsibility under sec_4945 and h of the code with respect to the legal fees and filing fees incurred in the preparation of this ruling_request payment by the trustee of trust of a portion of such fees that reasonably represents the portion of this ruling_request that is intended to protect the trustees of trust trust a and trust b will not be an act of self- dealing under sec_4941 of the code and will not be taxable_expenditures under sec_4945 of the code this ruling 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 this ruling 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 this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice


t c memo united_states tax_court albert j miller petitioner v commissioner of internal revenue respondent docket no filed date lawrence v brookes for petitioner ewan d purkiss and andrew p crousore for respondent memorandum opinion körner judge this case is before the court on petitioner's motion for summary_judgment as supplemented under rule respondent determined that petitioner acting as general_partner of certain limited_partnerships was personally all statutory references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure except as otherwise noted liable under sec_1461 for his failure to withhold tax due under sec_881 as required by sec_1442 on payments made by such limited_partnerships to a-alphatronics hong kong limited a-alpha a hong kong corporation for research_and_development services to the extent that such payments were u s source income respondent does not contend that any of the partnerships are shams nor that any adjustments are required under sec_482 the notice_of_deficiency provides that petitioner's failure to withhold gave rise to the following deficiencies year deficiency dollar_figure big_number big_number big_number big_number on a motion for summary_judgment the moving party must show the absence of dispute as to any material fact and that a decision may be rendered as a matter of law rule b 477_us_317 98_tc_518 affd 17_f3d_965 7th cir the facts will be viewed in the light most favorable to the nonmoving party 100_tc_510 85_tc_527 the party opposing the motion must set forth specific facts showing there is a genuine issue for trial and cannot rest upon mere allegations or denials rule d o'neal v commissi102_tc_666 a genuine factual issue will be material only if its determination one way or the other would affect the outcome 477_us_242 ultimately if there exists any reasonable doubt as to the facts at issue the motion must be denied o'neal v commissioner supra pincite sundstrand corp v commissioner supra pincite we set forth a summary of facts relevant to our discussion that do not appear to be in dispute the facts are stated solely for purposes of deciding the motion and are not findings_of_fact for this case fed r civ p a sundstrand corp v commissioner supra pincite background information beginning in petitioner researched and developed inventions the inventions were placed into limited_partnerships the partnerships then paid a-alpha to perform research_and_development the hong kong corporation then subcontracted all of its research_and_development contracts in varying proportions to wholly owned u s and hong kong corporations and to independent subcontractors respondent asserts that pursuant to sec_881 of the amounts paid_by the limited_partnerships a flat percent is due on that portion of the funds which reentered the united_states under a subcontract further respondent determined that petitioner a sec_2 there is no tax_treaty between the united_states and hong continued general_partner of each limited_partnership was personally liable for the withholding_tax due because he was a withholding_agent under sec_1442 sec_1461 each limited_partnership was formed under the laws of a state of the united_states and operated using a calendar_year once an idea was selected and assigned to a limited_partnership petitioner acting as the general_partner of each limited_partnership negotiated a research_and_development contract with a-alpha a hong kong limited_liability_company formed under the laws of hong kong capital was raised from investors by selling limited_partnerships interests which represented percent of the limited_partnerships the interests sold varied in amount but were typically between dollar_figure and dollar_figure additionally each investor agreed to become personally liable for percent of the investor's cash investment once the capital was raised the limited_partnerships obtained loans from wells fargo bank the total amount of capital raised ranged from dollar_figure to dollar_figure this amount was then paid less attorney's_fees and other expenses to a-alpha continued kong petitioner contends that he was not the general_partner of certain of the limited_partnerships formed in this is a factual dispute and we resolve it in favor of respondent the nonmoving party 100_tc_510 shortly after the formation of the limited_partnerships those partnerships each granted an option to engineering systems corp esc for the purchase of all rights to the invention involved exercisable upon its becoming market-ready in consideration of the option esc secured the loans of the limited_partnerships with time deposits made with wells fargo and agreed to pay the partnerships quarterly payments until the option was exercised the quarterly payments for the option were equal to the interest that became due on the loans the minimum exercise price of the option was equal to the principal_amount of the loan pursuant to a collateral_agreement the partnerships agreed to pay interest and principal as it became due on the loan not to make any disbursements until the loan was liquidated or the pledged assets were returned and to cause the pledged assets to be released as the partnerships received royalties during the years in issue petitioner was the chairman5 of the board_of directors of a-alpha but at no time owned any stock of a-alpha the shareholders of a-alpha were outside investors whose interests were held by nominees and whose identities were the offering memorandum indicated that the option agreement provided sufficient income to cover loan interest chairmanship of a hong kong limited_liability_company is the equivalent of being an executive officer of a u s_corporation allegedly unknown to petitioner a-alpha was a holding_company which owned both u s and hong kong corporations in the united_states a-alpha had direct and indirect subsidiaries capable of performing research_and_development work esc and ferrite manufacturing co ferrite esc ferrite or alphatronics mfg ltd alpha mfg a hong kong corporation was a wholly owned subsidiary of a-alphatronics a- alpha petitioner was a director of alpha mfg from date alphanetics co ltd alphanet a hong kong limited_liability_company was a wholly owned subsidiary of a-alpha petitioner was a director of alphanet from date on date alphanet was sold to atlas indus ltd atlas alphanet had three subsidiaries alphanetics mfg co ltd alphanet co a hong kong limited_liability corporation alphanetics mfg alphanet mfg a california corporation and ferrite mfg corp ferrite a california corporation petitioner was a director of alphanet co and a secretary of ferrite data magnetics ltd data a hong kong limited_liability_company was a wholly owned subsidiary of a-alpha on date hong kong shanghai bank sold assets of data to a- alpha ferromagnetics corp ferro a nevada corporation was a wholly owned subsidiary of data acquired on date data magnetics corp data corp a california corporation was a wholly owned subsidiary of data petitioner was data corp 's secretary administronics inc admin a california corporation was wholly owned by a-alpha it was never active intermart international inc intermart a california corporation was wholly owned by data on date it changed its name to a-alphatronics international inc a-alpha intl petitioner was a director for all relevant periods national elec corp a california corporation was a wholly owned subsidiary of a-alpha which was merged into intermart on date atlas indus atlas was a publicly traded hong kong limited_liability_company after reorganization a-alpha owned dollar_figure percent of atlas petitioner was chairman of the board_of atlas after atlas electronics international inc atlas intl a california corporation was a wholly owned subsidiary of atlas it was formed on apr and was inactive during the years in issue atlas elec corp atlas elec was a wholly owned subsidiary of atlas and was inactive in the years in issue no statements or allegations were made as to where atlas elec was incorporated their independent third-party subcontractors performed services with respect to some of the inventions engineering systems corp esc was formed under the laws of california on date although esc was initially owned by petitioner during the years in issue it was a wholly owned subsidiary of a-alpha esc received all of its revenue during the years in issue from a- alpha or a-alpha's subsidiaries esc billed a-alpha at cost plu sec_5 percent petitioner was the chairman of esc's board_of directors the limited_partnerships reported income on the cash_basis of accounting using a calendar_year a-alpha and all of its subsidiaries used a fiscal_year ending march a-alpha and its hong kong subsidiaries used the hong kong completed_contract_method of accounting which recognized income and expenses in the year in which the contractor concluded it had completed the contract esc filed federal_income_tax returns during the years in issue and reported its income using an accrual_method of accounting esc's financial statements indicate that it incurred net losses of dollar_figure dollar_figure and dollar_figure during the years through respectively and dollar_figure for the period beginning date and ending date a-alpha subcontracted all of the research_and_development to its hong kong and u s subsidiaries and to independent such determination was without regard to whether other parties to the contract considered the contract fully performed contractors in contracts that were more than year in duration the decision as to what portion of the overall contract would be performed in the united_states was always made after the end of the first year of the limited_partnership a-alpha treated the cash paid in the year of the contract as a deposit with it to be paid later for services to be performed by others petitioner expected that both a-alpha and esc would make a profit from their respective activities in fact they did not discussion respondent has asserted that the limited partnerships' payments to a-alpha for research_and_development are subject_to the 30-percent withholding_tax under sec_881 and that petitioner as general_partner of the limited_partnerships is a withholding_agent for purposes of sec_1442 and personally liable under sec_1461 because we conclude that the payments by the limited_partnerships are not subject_to the 30-percent withholding_tax of sec_881 we do not address whether petitioner was a withholding_agent there are two taxing regimes that can apply to a foreign taxpayer first where a foreign corporation8 is engaged in a u s trade_or_business its effectively_connected_income from that trade_or_business eci is subject_to taxation on a net although we refer to foreign_corporations we note that there are similar provisions which apply to nonresident_alien individuals see secs basis at the same rates as other u s taxpayers sec_882 a second amounts received by a foreign_corporation that are fixed or determinable annual or periodic fdap from sources within the united_states u s source and not effectively connected with the conduct of a u s trade_or_business non-eci are subject_to a flat 30-percent tax sec_881 fdap includes interest dividends rents salaries wages premiums annuities compensations remunerations and emoluments sec_881 if a u s trade_or_business is a subsidiary of a foreign_corporation fc distributions by the subsidiary to the foreign_corporation such as dividends or interest generally are subject_to the 30-percent withholding_tax imposed by sec_881 also the commissioner has broad powers to distribute apportion or allocate gross_income deductions credits or allowances between organizations controlled or owned by the same interests if it is determined that such action is necessary to prevent the evasion of tax or to clearly reflect income sec_482 81_tc_520 thus if a u s_corporation transfers earnings_and_profits offshore through improperly valued intercompany_transactions sec_482 provides a means whereby the commissioner may recharacterize the sec_882 provides in general --a foreign_corporation engaged in trade_or_business_within_the_united_states during the taxable_year shall be taxable as provided in sec_11 or sec_1201 on its taxable_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states transfers to properly reflect income and prevent the avoidance of the withholding_tax see 102_tc_515 if the u s trade_or_business is in the form of a branch of a foreign_corporation earnings_and_profits of the u s trade_or_business that are not reinvested in that trade_or_business are subject_to the 30-percent branch_profits_tax sec_884 see also kuntz peroni u s international_taxation par c1 a although the mechanism of taxing the withdrawn earnings_and_profits under sec_884 is different from the withholding_tax of sec_881 the result is the same namely that transfer of profits to a foreign_person is subject_to 30-percent withholding sec_884 was intended to provide parity between foreign taxpayers doing business in the united_states through branches and domestic subsidiaries tax_reform_act_of_1986 publaw_99_514 100_stat_2576 staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite j comm print generally if services are performed in the united_states they give rise to u s source income sec_861 and services performed outside the united_states give rise to foreign_source_income sec_862 income from services is sourced where the services are performed without regard to the location of the payor the residence of the taxpayer the place of contracting or the place of payment sec_861 56_tc_228 sec_1_861-4 income_tax regs u s source income petitioner insists that the amounts paid_by the partnerships are not u s source fdap to a-alpha we agree when the payment for services was made by the limited_partnerships it was made to a-alpha a hong kong limited_liability corporation at the time of payment no part of it was u s source income of a-alpha for no part of the contract had been performed in the united_states until a-alpha performed some of the services in the united_states there could not be any u s sourced income attributable to a-alpha respondent argues that the issue revolves around the research_and_development activities performed in the united_states by esc accordingly respondent contends that the u s sourcing requirement of sec_881 is satisfied we disagree while it is true that amounts received in exchange for services are sourced at the place of performance of those services such performance gives rise to income to the performer of those services the performer of the services in this case was esc the fact that a lower tier corporation performs some services in the united_states is insufficient to support a conclusion that its higher tier parent_corporation also performs services in the united_states the two corporations are and should be treated as separate persons unless one corporate form is a sham furthermore if one who performs services in the united_states later remits some of its gross_income to a higher tier corporation such amounts lose their character as eci or business income from the performance of the services and generally would be considered the investment_income of the higher tier parent corporationdollar_figure although it is true that esc was a wholly owned subsidiary of a-alpha engaged in a u s trade_or_business it was doing business under its own name as a separate and distinct entity the services performed by esc did not give rise to u s source business income of a-alpha in order for a- alpha to be considered as having u s source income by virtue of the performance of services a-alpha itself would have to perform the services through agents or employees of its owndollar_figure because respondent did not determine that any sec_482 adjustments were necessary respondent also did not determine that esc was an instrumentality of a-alpha or otherwise controlled by a-alpha in a way that would require us to disregard the corporate form of esc in the absence of evidence or an such investment_income may be fixed or determinable annual or periodic depending on the form of payment if a-alpha did perform services it is possible that it could be considered as carrying_on_a_trade_or_business in the united_states and accordingly would not be taxed under sec_881 but rather would fall under sec_882 and be taxed on its effectively_connected_income argument by respondent to the contrary we treat all transactions between esc and a-alpha as being conducted at arm's lengthdollar_figure the relationship between a-alpha and esc is essentially no different for our purposes than a contract between esc and an unrelated independent_contractor esc was capable of making payments that constituted fdap taxable under sec_881 but in order for liability to attach there must have been a distribution of fdap_income by esc to a-alpha whether actual or deemed respondent has not determined that a reallocation or recharacterization of intercompany_transactions between esc and a-alpha is necessary pursuant to sec_482 and respondent does not allege that esc made any actual payments to a-alpha we conclude that a-alpha did not receive any u s source income from the u s limited_partnerships and therefore the payments made by the various u s limited_partnerships are not subject_to tax under sec_881 fixed or determinable annual or periodic gains profits or income furthermore even if a portion of the payments made by the limited_partnerships were u s source it was not fdap because it was unascertainable during the year of payment what portion of esc billed a-alpha for the work it performed at cost plu sec_5 percent if this was below fair_market_value for the type of services performed an avenue of attack by respondent is sec_482 the contract would be performed in the united_states respondent argues that under the regulations income is fixed when it is to be paid in amounts definitely predetermined and determinable whenever there is a basis of calculation by which the amount may be ascertained sec_1_1441-2 and income_tax regs see also sec_1_881-2 income_tax regs the decision here to allocate the contract for research_and_development was consistently made by a-alpha during a tax_year of the limited_partnerships that was later than the year of payment by the limited_partnerships respondent argues that in instances like the present case where it is not yet determinable what portion of a payment is subject_to_withholding the regulations provide that the withholding_agent should withhold on the entire amount and the payee can then apply for a refunddollar_figure specifically sec_1_1441-3 income_tax regs provides that where the withholding_agent does not know the amount of recognized gain he is required to deduct and withhold an amount sufficient to ensure that not less than percent of the recognized gain is taxed this treatment is limited to amounts described in sec_1 b income_tax regs which enumerates certain income items subject_to the 30-percent withholding none of the categories of this argument is at odds with respondent's argument that withholding was only required in the portion of the contract performed in the united_states income enumerated therein apply to the payments at issuedollar_figure respondent's argument that withholding was due on the total must fail in light of these conclusions we do not reach whether petitioner was a withholding_agent for purposes of sec_1442 because we decide the law as we do there are no facts which if proved at trial would alter our result accordingly petitioner's motion for summary_judgment as supplemented will be granted an appropriate order and decision will be entered those income items are gains described in sec_402 relating to distributions from employee trusts sec_403 relating to treatment of certain employee annuities sec_631 or c relating to treatment of gain on the disposal of timber coal or domestic_iron_ore with a retained economic_interest gains relating to contingent payments from the sale_or_exchange of patents copyrights and similar intangible_property sec_1_1441-2 income_tax regs