internal_revenue_service number release date index no department of the treasury p o box ben franklin station washington dc in re person to contact telephone number refer reply to cc psi - plr-111908-02 date date legend decedent daughter granddaughter granddaughter trust year year date court dear this responds to your letter dated date and prior correspondence requesting rulings regarding the generation-skipping_transfer gst tax consequences of the proposed division of and modifications to trust facts the facts submitted and representations made are as follows decedent died in year article sixth of decedent’s will created a residuary_trust for the benefit of her issue article sixth a directed the trustee to pay the entire net_income to decedent’s daughter daughter for her life daughter died in year as provided in article sixth b from and after the death of daughter the trustee has paid income in equal shares to the children of decedent’s daughter granddaughter and granddaughter upon the death of either granddaughter or granddaughter her share of income will be paid to her issue per stirpes until such time as trust terminates article sixth d controls distributions of principal and provides as follows plr-111908-02 the trustee is authorized in its sole discretion with respect to any beneficiary during the time when such beneficiary is entitled to net_income from a share of the trust estate to pay any part or all of the principal of such share to meet expenses in excess of normal requirements for reasonable comfort support maintenance and education of said beneficiary or his or her dependents to date the cumulative amount of principal distributions to granddaughter is approximately greater than similar distributions made to granddaughter under article sixth c trust will terminate twenty-one years after the death of the survivor of granddaughter and granddaughter upon termination principal will be payable to the then current income beneficiaries the parties petitioned court to divide trust into two separate and unequal trusts to account for the disproportionate distributions to granddaughter and to make certain other modifications to trust on date court issued an order to reform trust to divide trust into two separate trusts one trust for the benefit of granddaughter and her descendants and the other for the benefit of granddaughter and her descendants effect an unequal division of trust to account for prior distributions to granddaughter prevent the income beneficiaries from becoming co-advisors of each other’s separate trusts and allow the trustee to receive commissions in accordance with its published fee schedule the court’s order is conditioned on the receipt of a favorable private_letter_ruling from the internal_revenue_service you represent that no additions actual or constructive have been made to any of the trusts since date we have been asked to rule as follows the proposed division of trust into separate trusts for granddaughter and granddaughter will not subject the trusts to the gst tax under sec_2601 of the internal_revenue_code the proposed division of trust on an unequal basis to reflect previous distributions of principal and the judicial clarification that future distributions of principal be paid only out of an income beneficiary’s separate trust will not subject the trusts to the gst tax under sec_2601 the proposed amendment to trust whereby each income_beneficiary will serve as advisor only to her own separate trust will not subject the trusts to the gst tax under sec_2601 plr-111908-02 the proposed amendment to trust whereby the trustee’s compensation will be determined according to the fee schedule approved by court will not subject the trusts to the gst tax under sec_2601 law and analysis sec_2601 imposes a tax on every generation-skipping_transfer under a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject_to the provisions of chapter if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer sec_26_2601-1 example illustrates a situation where a_trust that is otherwise exempt from the gst tax authorizes the trustee to distribute income and principal at the trustee’s discretion for the benefit of a and b and their respective issue on the death of the last to die of a and b the corpus is to be distributed to the issue of a and b per stirpes pursuant to a court order the trust is divided equally into two trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the example concludes that under the facts presented the division of the trust plr-111908-02 into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust accordingly the two partitioned trusts will not be subject_to the provisions of chapter sec_26_2601-1 example considers a situation where a_trust is modified by decreasing the number of trustees the modification pertains to the administration of the trust and does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the modification will not subject the trust to the provisions of chapter in the present case trust was irrevocable on date and it is represented that no additions actual or constructive have been made to trust after that date the proposed division and modifications will not result in a shift of any beneficial_interest to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the proposed division in addition the proposed division and modifications will not extend the time for vesting of any beneficial_interest beyond the period provided for in the trust instrument further the proposed division and modifications will not constitute an addition to trust within the meaning of b a of the act based on the facts submitted and the representations made we conclude that the proposed division of trust into separate trusts for granddaughter and granddaughter will not subject the trusts to the gst tax under sec_2601 the proposed division of trust on an unequal basis to reflect previous distributions of principal and the judicial clarification that future distributions of principal be paid only out of an income beneficiary’s separate trust will not subject the trusts to the gst tax under sec_2601 the proposed amendment to trust whereby each income_beneficiary will serve as advisor only to her own separate trust will not subject the trusts to the gst tax under sec_2601 the proposed amendment to trust whereby the trustee’s compensation will be determined according to the fee schedule approved by court will not subject the trusts to the gst tax under sec_2601 plr-111908-02 accordingly after the proposed division and modifications the two separate trusts will continue to be exempt from the gst tax imposed under sec_2601 provided there are no additions to the trusts after date except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours senior counsel branch office of the associate chief_counsel passthroughs and special industries by_________________________ lorraine e gardner enclosure copy for sec_6110 purposes


internal_revenue_service cc psi b01-cor-114411-00 number info release date date uilc we are responding to your correspondence requesting relief in order to establish date as the effective date for your s_corporation_election the information submitted explains that your form_2553 was filed late although we are unable to respond to your request as submitted this letter provides useful information announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2000_1 copy enclosed in addition revproc_2000_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible under the reduced fee provision please include a statement certifying your gross_income otherwise you will be billed the higher fee please review appendix b for a private_letter_ruling sample format if you decide to submit a formal request for a private_letter_ruling please provide documents supporting your intention to be an s_corporation from inception and refer your request to our office by adding the following to the address attn cc p a p o box ben franklin station washington dc direct to cc psi room please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2000_1


t c summary opinion united_states tax_court gary w and regina g steele petitioners v commissioner of internal revenue respondent docket no 1344-06s filed date gary w and regina g steele pro sese john m tkacik jr for respondent ruwe judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax the issues we must decide are whether petitioners are entitled to certain deductions and credits for including a a deduction for alleged contributions to separate individual_retirement_accounts iras b a deduction for student_loan interest_paid c a credit for the payment of qualified_educational_expenses and d a deduction for claimed itemized_deductions whether petitioners have correctly reported all their income specifically whether they included a a state_income_tax refund and b distributions from petitioners’ separate ira accounts whether petitioners are liable for the sec_72 percent additional tax for early distributions from their iras whether petitioners are entitled to deductions for certain expenses made on behalf of and transactions entered into with the estate of janice m steele the estate including a a payment made to prevent foreclosure on real_property held by the estate b expenses paid to maintain and to allegedly convert the real_property into rental real_property c a capital_loss deduction on the sale of the real_property held by the estate d a theft_loss and related legal fees paid to investigate and settle disputes concerning the estate and e a deduction for a nonbusiness_bad_debt for an alleged loan made to the estate and whether petitioners are entitled to a dependency_exemption deduction for petitioner regina g steele’s minor sister background there are no written or oral stipulations by the parties the exhibits received into evidence are incorporated by this reference when the petition was filed petitioners resided in ohio petitioners are husband and wife petitioners timely filed their form_1040 u s individual_income_tax_return tax_return on which they reported wages of dollar_figure taxable interest of dollar_figure a capital_loss of dollar_figure and aggregate ira_distributions of dollar_figure on schedule a itemized_deductions petitioners reported only dollar_figure of the ira_distributions as taxable petitioners claimed expenses of dollar_figure for medical and or dental expenses dollar_figure for taxes paid dollar_figure for qualified_residence_interest paid and dollar_figure for charitable_contributions petitioners’ claimed itemized_deductions totaled dollar_figure for petitioners also claimed a dollar_figure deduction for ira contributions and a dollar_figure deduction for student_loan interest_paid on date respondent issued to petitioners a notice_of_deficiency notice in the notice respondent disallowed most of petitioners’ claimed deductions for lack of substantiation and further adjusted petitioners’ income for erroneously reported ira_distributions and an unreported state_income_tax refund respondent’s adjustments are as follows tax_year income_tax examination changes adjustments to per per income return exam adjustment ira deduction dollar_figure -- dollar_figure ira_distributions big_number dollar_figure big_number state refunds credits or offset sec_386 -- after application of the 5-percent floor in accordance with sec_213 petitioners claimed a dollar_figure itemized_deduction for medical and or dental expenses on brief respondent concedes that in petitioners paid dollar_figure for deductible medical_expenses dollar_figure for taxes and dollar_figure for qualified_residence_interest respondent further concedes that petitioners made charitable_contributions of dollar_figure student_loan_interest_deduction big_number -- big_number capital_gain or loss big_number -- big_number itemized_deductions big_number big_number big_number total adjustments to income -- -- big_number taxable_income per return -- -- big_number corrected taxable_income -- -- big_number tax joint filing_status -- -- big_number plus other taxes tax on qualified_plans -- -- total corrected tax_liability -- -- big_number after filing the tax_return petitioners submitted two form sec_1040x amended u s individual_income_tax_return amended returns dated date and date respectively respondent received the amended returns but did not accept or process them on the first amended_return petitioners claimed a rental loss of dollar_figure on schedule e supplemental income and loss reduced their taxable ira distribution from dollar_figure to dollar_figure claimed income of dollar_figure for fiduciary fees eliminated the dollar_figure deduction for ira contributions and reduced their claim for a student_loan_interest_deduction from dollar_figure to dollar_figure on the second amended_return petitioners included a state_income_tax refund of dollar_figure eliminated the capital_loss eliminated the student_loan_interest_deduction reduced the schedule e rental loss from dollar_figure as reported on the first amended_return to dollar_figure and claimed an additional dependency_exemption deduction for petitioner regina g steele’s mrs steele’s minor sister rmw the schedule e rental losses reported on petitioners’ amended returns relate to real_property located on warrendale road in south euclid ohio warrendale property the warrendale property was owned by janice m steele the mother of petitioner gary w steele mr steele janice m steele died on date after her death the warrendale property was listed in the name of the estate of janice m steele the inventory and appraisal form filed on date with the probate_court of cuyahoga county ohio listed the value of the warrendale property at dollar_figure on date the estate sold the warrendale property for dollar_figure mr steele was both a beneficiary and the executor of the estate discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to the deductions claimed rule a indopco inc v the court refers to minor children by their initials see rule a commissioner 503_us_79 292_us_435 sec_6001 requires taxpayers to maintain records statements and returns and to comply with such rules and regulations as the secretary prescribes individual taxpayers are to keep permanent books_and_records sufficient to verify income deductions or other matters required to be shown on any information or tax_return sec_1_6001-1 income_tax regs in accordance with sec_7491 the burden_of_proof may be shifted to the commissioner where a taxpayer has introduced credible_evidence regarding factual issues relevant to ascertaining his tax_liability rule a in order for a taxpayer to shift the burden_of_proof to the commissioner he must produce credible_evidence evincing that he has complied with the substantiation requirements of the code maintained all records required by the code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 petitioners have not asserted nor do we find that they have met these requirements thus the burden_of_proof remains with petitioners i certain deductions claimed on the tax_return a ira contribution deduction sec_219 provides in the case of an individual there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable_year for the maximum deduction allowed is the lesser_of dollar_figure or an amount equal to the compensation includable in the individual’s gross_income for the taxable_year sec_219 the deduction may be further limited if an individual or the individual’s spouse is an active_participant in a retirement_plan maintained by his employer sec_219 on the tax_return petitioners claimed a dollar_figure ira contribution deduction in the notice respondent determined that petitioners were not entitled to an ira contribution deduction on both of the amended returns petitioners eliminated the claim for an ira contribution deduction furthermore petitioners have neither offered any documentary or testimonial evidence to substantiate any portion of the alleged ira contributions nor established whether they were active participants in an employer-provided retirement_plan see sec_219 because they failed to produce evidence to establish their eligibility for an ira contribution deduction we hold that petitioners are not entitled to deduct any amounts contributed to iras for tax_year b student_loan_interest_deduction sec_221 provides in the case of an individual there shall be allowed as a deduction for the taxable_year an amount equal to the interest_paid by the taxpayer during the taxable_year on any qualified_education_loan for the maximum allowable deduction for interest_paid on a qualified_education_loan was dollar_figure sec_221 the allowable deduction is further limited by the taxpayer’s modified_adjusted_gross_income sec_221 on the tax_return petitioners claimed a dollar_figure student_loan_interest_deduction in the notice respondent determined that petitioners were not eligible for that deduction on the first amended_return petitioners reduced their student_loan_interest_deduction claim to dollar_figure on the second amended_return however petitioners eliminated their claim for a student_loan_interest_deduction at trial petitioners again asserted that they had paid student_loan interest and were entitled to a corresponding deduction petitioners stated that they had consolidated their student_loan in and had dollar_figure worth of accrued interest in an attempt to substantiate their claim petitioners provided a statement dated date from sallie mae the sallie mae statement was addressed to mrs steele but the payment history shows only the last five payments made all of which were made in and does not show what portion of the payments was attributable to the payment of student_loan interest in any event other than vague self-serving testimony petitioners have failed to proffer any evidence establishing that they actually paid student_loan interest during accordingly we hold that petitioners are not entitled to a student_loan_interest_deduction in c education credits sec_25a provides in the case of an individual there shall be allowed as a credit against the tax imposed by this chapter for the taxable_year the amount equal to the sum of -- the hope scholarship credit plus the lifetime_learning_credit petitioners first claimed a credit for qualified_education_expenses paid in at trial when they asserted we qualify for the hope_credit and lifetime credit to substantiate their eligibility petitioners submitted a copy of a receipt showing that they paid dollar_figure to cuyahoga community college in at trial and on brief respondent has acknowledged and conceded that petitioners substantiated dollar_figure of qualified_education_expenses for on brief respondent states the amount allowable as a credit if any is a computational adjustment based on petitioners’ modified_adjusted_gross_income see sec_25a c and d accordingly we find that petitioners have substantiated that they paid dollar_figure of qualified_education_expenses in and therefore are entitled to a corresponding educational credit subject_to the limitation provided in sec_25a d itemized_deductions on schedule a of the tax_return petitioners claimed dollar_figure of itemized_deductions which included dollar_figure of medical and or dental expenses dollar_figure of real_property_taxes dollar_figure of state_and_local_income_taxes dollar_figure of personal_property_taxes dollar_figure of qualified_residence_interest and dollar_figure of charitable_contributions petitioners’ first amended_return increased their claimed itemized_deductions to dollar_figure petitioners’ second amended_return reduced their claimed itemized_deductions to dollar_figure in the notice respondent reduced petitioners’ itemized_deductions to dollar_figure not only have petitioners failed to explain the reasons for the changes made from their initial tax_return but they have also failed to produce any evidence establishing entitlement to any of the claimed itemized_deductions on brief however respondent concedes that petitioners are entitled to itemized_deductions as follows dollar_figure for medical and or dental expenses dollar_figure for taxes paid dollar_figure for qualified_residence_interest paid and dollar_figure for charitable_contributions accordingly we hold that petitioners are entitled to itemized_deductions in the amounts respondent conceded ii unreported and underreported income gross_income includes all income from whatever source derived including accessions to wealth clearly realized and over which the taxpayers have complete dominion sec_61 348_us_426 a state_income_tax refund in the notice respondent determined that petitioners had unreported income because of their failure to report a dollar_figure state_income_tax refund at trial mrs steele stated right after we’d mailed our federal_income_tax return we got a statement in the mail saying that we had a tax_refund of dollar_figure from the state inexplicably however petitioners did not include the state_income_tax refund on the first amended_return they did however finally report it on the second amended_return we interpret petitioners’ statements actions and failure to contend otherwise as conceding that their dollar_figure state_income_tax refund is includable in gross_income and so find b ira_distributions a distribution from an ira is includable in gross_income in the manner provided in sec_72 unless rolled over within days after the distribution is received into another ira or an eligible_retirement_plan see sec_72 sec_408 both petitioners received forms 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc for mr and mrs steele received ira_distributions of dollar_figure and dollar_figure respectively on the tax_return petitioners reported dollar_figure of ira_distributions but claimed only dollar_figure as taxable on the amended returns petitioners reported dollar_figure of ira_distributions but claimed only dollar_figure as taxable in the notice respondent determined that petitioners had failed to adequately establish that any portion of the dollar_figure of ira_distributions was rolled over and therefore the entire amount is includable in petitioners’ gross_income the documentary_evidence consisted of a letter prepared for respondent wherein petitioners alleged that they rolled over mrs steele’s ira distribution into a qualified savings account plan at dollar bank and that mr steele’s ira distribution was used to pay for medical premiums and a photocopy of a check payable to dollar bank for the benefit of mrs steele at trial mrs steele testified that they did not believe the ira_distributions were taxable because as she stated we used the funds to pay for medical_expenses on brief petitioners continue to assert that they rolled over mrs steele’s ira distribution and mr steele’s ira distribution was used to cover documented medical_expenses while a determination of whether the funds from the ira_distributions were used to pay eligible medical_expenses is relevant for determining whether the sec_72 10-percent additional tax applies it has no bearing on whether the distributions are includable in petitioners’ gross_income see sec_72 petitioners have failed to adequately establish that any portion of the ira_distributions was rolled over into either an ira or some other eligible_retirement_plan see sec_408 although petitioners provided a copy of mrs steele’s distribution check which indicated that the funds were payable to dollar bank for her benefit other than their self-serving testimony petitioners have offered nothing to substantiate that the account the money was allegedly deposited into at dollar bank was either an ira or an eligible_retirement_plan account accordingly we hold that in accordance with sec_72 petitioners’ ira_distributions of dollar_figure are includable in their gross_income for iii 10-percent additional tax on premature distributions sec_72 provides imposition of additional tax --if any taxpayer receives any amount from a qualified_retirement_plan as defined in sec_4974 the taxpayer’s tax under this chapter for the taxable_year in which such amount is received shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income exceptions to this rule are found in sec_72 applicable to petitioners’ contention that they used a portion of their ira_distributions to pay for medical_expenses is sec_72 which provides b medical_expenses --distributions made to the employee to the extent such distributions do not exceed the amount allowable as a deduction under sec_213 to the employee for amounts paid during the taxable_year for medical_care determined without regard to whether the employee itemizes deductions for such taxable_year in the notice respondent determined that petitioners were not eligible for an exception to the sec_72 10-percent additional tax and adjusted petitioners’ tax_liability to include an additional dollar_figure at trial mrs steele testified that the funds from both ira_distributions were used to pay medical sec_4974 defines the term qualified_retirement_plan to include inter alia an ira see sec_4974 sec_213 allows as a deduction the expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer his spouse or a dependent to the extent that such expenses exceed percent of adjusted_gross_income the record is not clear as to how respondent determined that percent of the dollar_figure distributed from petitioners’ iras is dollar_figure expenses and therefore petitioners are not liable for the percent additional tax see sec_72 while petitioners have failed to substantiate any medical_expenses paid on brief respondent concedes that petitioners are entitled to a dollar_figure deduction for medical_expenses paid in respondent’s concession leads us to the conclusion that this amount represents the portion of paid medical_expenses that exceeds percent of petitioners’ adjusted_gross_income see sec_213 thus we conclude that the portion of petitioners’ ira_distributions that does not exceed the deduction allowed under sec_213 is excepted from the 10-percent additional tax under sec_72 see sec_72 iv expenses paid on behalf of the estate a dollar_figure payment to prevent foreclosure on the warrendale property petitioners assert they are entitled to a dollar_figure deduction in for funds allegedly paid to aurora loan service in to prevent foreclosure of the warrendale property petitioners raised this issue for the first time at trial neither petitioners’ tax_return the amended returns nor the notice addresses this alleged payment at trial petitioners asserted that the dollar_figure payment should qualify either as a real_property_taxes paid deduction or a qualified_residence_interest deduction the scant documentary_evidence petitioners proffered does not establish that they actually paid dollar_figure to prevent foreclosure on the warrendale property the only evidence they provided consisted of a letter dated date addressed to mr mrs gary steele at what purports to be the warrendale property address confirming that the amount to reinstate the loan through date is dollar_figure and a photocopy of the customer’s copy of a dollar_figure cashier’s check dated date payable to aurora loan service both the letter and the photocopy of the cashier’s check refer to the same loan number but neither document establishes that this loan number pertains to the warrendale property furthermore even assuming that this loan number pertains to the warrendale property petitioners have not established that the dollar_figure cashier’s check was drawn on their personal account as opposed to the estate’s account or that aurora loan service received the funds in fact the partial accounting of the fiduciary’s account filed with the probate_court of cuyahoga county ohio shows the estate rather than petitioners paid mortgage payments of dollar_figure on date even if petitioners had established that they actually paid dollar_figure to prevent foreclosure on the warrendale property petitioners have not established their eligibility for either a real_property_taxes paid deduction or a qualified_residence_interest paid deduction in for the alleged payment sec_164 generally allows a deduction for the payment of real_property_taxes for the taxable_year within which paid it is well established that in general taxes paid on real_property may be deducted as such only by the person on whom the tax obligation is imposed 55_tc_1125 sec_1_164-1 income_tax regs petitioners have not established that it was their obligation as opposed to the decedent’s or the estate’s to pay any real_property_taxes to prevent foreclosure on the warrendale property moreover petitioners have not substantiated what portion if any of the alleged dollar_figure payment was for real_property_taxes sec_163 allows as a deduction all interest_paid within the taxable_year on indebtedness sec_163 however provides in the case of a taxpayer other than a corporation no deduction shall be allowed under this chapter for personal_interest paid during the taxable_year for this purpose personal_interest does not include any qualified_residence_interest sec_163 sec_1_163-1 income_tax regs provides interest_paid by the taxpayer on a mortgage upon real_estate of which he is the legal or equitable owner may be deducted as interest on his indebtedness however we need not determine whether petitioners were either legal or equitable owners of the warrendale property because they have likewise failed to substantiate what portion if any of the alleged dollar_figure payment was attributable to the payment of qualified_residence_interest furthermore sec_461 provides that deductions shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income since petitioners are cash_method calendar_year taxpayers they may not claim as a deduction on the tax_return an expense they allegedly paid in see id sec_1_461-1 income_tax regs accordingly we hold that petitioners are not entitled to a deduction for the alleged dollar_figure payment made to prevent foreclosure on the warrendale property b expenses paid for the maintenance and conversion of the warrendale property on the amended returns petitioners claimed entitlement to deductions for various schedule e expenses related to the maintenance and conversion of the warrendale property into rental property on the first amended_return petitioners claimed schedule e expenses totaling dollar_figure including dollar_figure for depreciation or depletion expenses on the second amended_return petitioners reduced their schedule e expenses to dollar_figure in part by eliminating depreciation or depletion expenses at trial and on brief petitioners argued that as beneficiaries of the estate they were entitled to a deduction for maintenance and conversion costs because the estate which would have been eligible to claim it did not petitioners however have failed to adequately substantiate that either they or the estate paid the expenses reported on schedule e petitioners have not submitted any receipts or other documentary_evidence that establishes that they paid the expenses listed on the respective schedules e petitioners’ failure to substantiate their claimed schedule e expenses necessarily leads to our conclusion that they are not entitled to deduct any of the claimed schedule e expenses in therefore it is unnecessary to consider whether petitioners could qualify for any deduction of the claimed expenses under sec_642 c capital_loss deduction on their initial schedule d capital_gains_and_losses petitioners reported both a dollar_figure short-term_capital_loss carryover and a dollar_figure long-term_capital_loss carryover in the notice respondent disallowed the entire capital_loss deduction for lack of substantiation on the schedule d attached to the first amended_return petitioners reported a short-term_capital_loss carryover of dollar_figure and a long-term_capital_loss carryover of dollar_figure but limited the deductible loss to dollar_figure in accordance with sec_1211 on the schedule d attached to the second amended_return petitioners reported zero short-term_capital_losses and left blank the line for long-term_capital_gains and losses at trial and on brief however petitioners asserted entitlement to a capital_loss deduction for the sale of the warrendale property despite the fact that the property was sold by the estate petitioners assert that as beneficiaries of the estate they are entitled to deduct a capital_loss on capital assets sold by the estate on date the estate sold the warrendale property for dollar_figure petitioners however have failed to establish the estate’s basis in the warrendale property sec_1014 provides the basis_of_property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall be-- the fair_market_value of the property at the date of the decedent’s death in an attempt to establish the basis of the warrendale property petitioners offered a letter written by an attorney which states in part my check of the pertinent records indicates that the valuation of the property will be in the neighborhood of dollar_figure to complete my appraisal of this property you need to forward the original inventory petitioners contend that the sale of the warrendale property resulted in a long-term_capital_loss of dollar_figure dollar_figure price minus the alleged dollar_figure fair_market_value on date however the u s department of housing and urban development settlement statement shows that the estate sold the property for dollar_figure not dollar_figure sec_7701 provides the term ‘person’ shall be construed to mean and include an estate and appraisal form to my attention for me to affix my appraisal evaluation of the property the attached inventory and appraisal form shows the value of the warrendale property as dollar_figure but the accompanying appraiser’s certificate is unsigned and there is no indication as to whether dollar_figure is the alleged fair_market_value on date or some other datedollar_figure because petitioners have failed to establish the fair_market_value of the warrendale property on the date of the decedent’s death we are unable to determine whether a capital_loss occurred upon the sale of the warrendale property we note again that even if we were to assume the date of death fair_market_value of the warrendale property was dollar_figure petitioners have not established that any resulting loss was theirs as opposed to the estate’s petitioners may not deduct on the tax_return losses or expenses_incurred by the estate accordingly we hold that petitioners are not entitled to a capital_loss deduction in from the sale of the warrendale property by the estate d theft_loss deduction and related legal fees petitioners did not claim deductions for a theft_loss and the related legal fees on either the tax_return or the amended returns petitioners first claimed these deductions at trial the inventory and appraisal form filed with the probate_court of cuyahoga county ohio is stamped filed on date the other random dates that appear on the form are apr and and date on brief petitioners continue to assert that they are entitled to both a theft_loss deduction and a deduction for the payment of legal fees incurred in their attempt to recover the allegedly stolen funds on brief respondent asserts that there is no evidence in the record as to the amount of the funds withdrawn or that a theft occurred the limitation on deductions for losses under sec_165 generally allows an individual a deduction for a loss arising from theft see sec_165 a loss that arises from theft is treated as sustained during the taxable_year in which the taxpayer discovers such loss see sec_165 for this purpose theft is generally defined as larceny embezzlement or robbery sec_1_165-8 income_tax regs for tax purposes whether a theft_loss has occurred depends upon the law of the jurisdiction wherein the particular loss occurred 34_tc_688 the statutory definition of theft in ohio is as follows a no person with purpose to deprive the owner of property or services shall knowingly obtain or exert control_over either the property or services in any of the following ways without the consent of the owner or person authorized to give consent beyond the scope of the express or implied consent of the owner or person authorized to give consent by deception by threat by intimidation b whoever violates this section is guilty of theft ohio rev code ann sec dollar_figure lexis nexis two days before her death mr steele’s mother signed and executed a form adding both her minor son ds and ds’s grandmother ms gillum to her accounts maintained at key bank after her death the joint bank accounts were allegedly liquidated by ms gillum and ds petitioners contend that ms gillum and ds did not have the proper authority to withdraw the funds from the bank accounts mr steele filed complaints with both key bank and the beachwood police department alleging that ms gillum either deceived his mother into signing or forged her signature on the forms that added both ms gillum and ds to the joint bank accounts other than their allegation petitioners have failed to produce any evidence establishing that mr steele’s mother was deceived threatened or intimidated into executing the form which added ds and ms gillum to the joint bank accounts see id thus we hold that petitioners have not met their burden of proving that they are entitled to a theft_loss deduction additionally petitioners contend that they are entitled to a deduction for legal fees paid in an attempt to recover the allegedly stolen funds petitioners hired an attorney to assist in recovering the allegedly stolen funds while no charges for theft were ever filed petitioners’ efforts resulted in a settlement agreement between ds and mr steele as administrator of the estate the record indicates that the estate rather than petitioners paid the attorney dollar_figure although a photocopy of the dollar_figure check payable to the attorney was entered into evidence there is no indication as to whether it was drawn on petitioners’ bank account the final and distributive account form filed with the cuyahoga county ohio probate_court indicates that the estate paid the attorney dollar_figure for legal services petitioners have failed to substantiate that they actually paid legal fees to recover the allegedly stolen funds during again petitioners are claiming entitlement to a deduction for an expense paid_by the estate to which they have not established entitlement as beneficiaries accordingly we hold that petitioners are not entitled to a deduction for legal fees paid to recover the alleged theft_loss e nonbusiness_bad_debt deduction petitioners did not claim a nonbusiness_bad_debt deduction on either the tax_return or the amended returns petitioners first claimed a nonbusiness_bad_debt deduction at trial on brief petitioners continue to assert that they are entitled to a nonbusiness_bad_debt deduction because they were not able to recover any of the money lent to the estate before its insolvency on brief respondent contends that petitioners have not established that the alleged funds were ever transferred to the estate or that a loan actually existed between petitioners and the estate sec_166 generally allows a deduction for any debt which becomes worthless within the taxable_year sec_166 provides sec_166 nonbusiness debts -- general_rule -- in the case of a taxpayer other than a corporation-- a subsection a shall not apply to any nonbusiness_debt and b where any nonbusiness_debt becomes worthless within the taxable_year the loss resulting therefrom shall be considered a loss from the sale_or_exchange during the taxable_year of a capital_asset held for not more than year petitioners allege that they wrote a dollar_figure check to the estate as a loan to be repaid by date petitioners assert that the dollar_figure check constituted a loan between petitioners and the estate that the debt became worthless in date and that they are entitled to a nonbusiness_bad_debt deduction respondent contends that the debt did not become worthless in date because petitioners’ bank statement shows the dollar_figure was not withdrawn from petitioners’ bank account until date and the record is devoid of any evidence that the dollar_figure check was ever deposited into an account owned by or transferred to the estate petitioners provided a photocopy of a dollar_figure check payable to the order of the estate of janice steele however there is no further evidence in the record to indicate that the estate received these funds the final and distributive account form filed with the probate_court of cuyahoga county neither lists petitioners as creditors of the estate nor indicates that the dollar_figure was received by the estate even assuming that a bona_fide loan existed between petitioners and the estate petitioners have failed to establish that the debt became worthless in the estate was not closed until date and any assets that remained in the estate would have been available to pay the debt until the estate’s termination thus we hold that petitioners have failed to establish entitlement to a nonbusiness_bad_debt deduction v dependency_exemption deduction for the purpose of computing taxable_income sec_151 allows an individual to claim an exemption deduction for a dependent a dependent is defined as follows sec_152 dependent defined a general definition --for purposes of this subtitle the term dependent means any of the following individuals over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer a brother sister stepbrother or stepsister of the taxpayer in determining whether an individual received over one-half of his or her support from the taxpayer the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources including support which the individual himself supplied must be considered sec_1_152-1 income_tax regs petitioners bear the burden of demonstrating the total amount of the child’s support furnished from all sources for the year at issue see 56_tc_512 if the total support is not shown and cannot be reasonably inferred from the competent evidence available then it is not possible to conclude that petitioners furnished more than one-half of rmw’s support see id pincite petitioners did not claim rmw as a dependent on the tax_return or on the first amended_return only on the second amended_return did petitioners claim rmw as a dependent although petitioners allege they provided over one-half of rmw’s support in they have failed to prove the total support furnished to rmw from all sources in the only evidence petitioners proffered was a summary of expenses estimating their dependent care expenses at dollar_figure and a statement allegedly made by rmw that she received her financial support from mrs steele in petitioners testified that rmw also resided with mrs steele’s brother in according to their summary of expenses petitioners claimed to have provided support for rmw for approximately months during however petitioners have not provided any substantiating documents such as receipts canceled checks copies of mortgage or rent payments or copies of utility bills of either their alleged expenses or the total expenses paid for rmw’s support in without adequate substantiation of both rmw’s total support in and the portion of that support furnished by petitioners we cannot conclude from the record that petitioners provided more than one-half of rmw’s support see manukainiu v commissioner tcmemo_1998_90 accordingly we find that petitioners are not entitled to a dependency_exemption deduction for rmw in to reflect the foregoing decision will be entered under rule


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-123910-15 date date legend ------------------------------------------------------------ -------------------------------- x a ------------------------------------------------------------- --------------------------------------- state date year trust ---------------------------- --------------------------- ------- -------------------- dear --------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its 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 x was formed as a limited_liability_company under the laws of state prior to date x was treated as a disregarded_entity for federal tax purposes on date as a facts plr-123910-15 result of a’s death a’s interest in x passed to trust as a result of the transfer x became a partnership for federal tax purposes and was qualified to make an election under sec_754 for the year of a’s death x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis sec_754 provides that if a partnership files an election in accordance with regulations prescribed by the secretary the basis of partnership property shall be adjusted in the case of 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 and to all transfers of interest in the partnership during the taxable_year with respect to which the election was filed and all subsequent tax 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 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the 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 the grant of relief will not prejudice the interests of the government conclusion plr-123910-15 based solely upon the information 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 following 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 a copy of this letter should be attached to the sec_754 election a copy is enclosed for that purpose except as expressly set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts discussed above under any other provision of the code specifically we express no opinion as to whether or not x is a partnership for federal tax purposes this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs 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 ita b03 plr-106171-11 date date ty ------- ty ------- legend taxpayer ------------------------------------------------ parent -------------------------------------------------------- subsidiary --------------------------------------------------------- fund group -------------------------------- owning funds ---------------------------------------------------------------------------- ---------------------------------------------------- year ------- extended due_date --------------------------- discovery date ------------------------- dear -------------------- this is in response to your letter dated date in your letter you requested an extension of time to file the forms necessary to make a consent_dividend election under sec_565 of the internal_revenue_code for the tax_year ending december year the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations facts taxpayer a corporation is a regulated_investment_company owned by parent subsidiary and the owning funds in parent’s fund group parent administers the various funds in the fund group parent and subsidiary hold shares of each of the funds in the fund group in separate_accounts established for the purpose of funding variable_annuity contracts and variable life_insurance policies investors in parent and subsidiary may select one of the funds in the fund group including taxpayer as an investment option for a variable_annuity contract or life_insurance_policy taxpayer must plr-106171-11 make minimum distributions each tax_year to continue to be subject_to tax as a regulated_investment_company for future tax years parent prepared taxpayer’s form 1120-ric u s income_tax return for regulated_investment_companies for the tax_year ending december year and filed it before the extended due_date before filing taxpayer’s form 1120-ric the board_of directors approved taxpayer’s issuance of consent dividends to parent subsidiary and the owning funds to satisfy the taxpayer’s year distribution_requirements parent’s employees had no prior experience issuing consent dividends after consulting outside accountants and lawyers parent’s employees prepared an internal memorandum outlining the process of how funds in the fund group should issue consent dividends and the tax consequences of issuing them the memorandum stated that parent needed to file a form_973 corporation claim for deduction for consent dividends with each form 1120-ric of each fund in the fund group but the memorandum did not mention the additional regulatory requirement that parent file a form_972 consent of shareholder to include specific amount in gross_income with each fund’s return for each consent_dividend paid to a different shareholder of taxpayer time passed between when parent’s employees prepared the memorandum and when they began preparing the forms 1120-ric for each fund in the fund group when parent prepared form 1120-ric on behalf of taxpayer parent’s employees followed the memorandum’s instructions thus taxpayer’s return included an executed form_973 with the filing but not any executed form sec_972 the form sec_972 were not attached even though parent’s employees possessed two executed originals of form_972 one authorizing the inclusion of consent dividends in parent’s gross_income and the other authorizing the inclusion of consent dividends in subsidiary’s gross_income parent’s employees never obtained executed form sec_972 authorizing the inclusion of consent dividends in the gross_income of the various owning funds because they were inexperienced in issuing consent dividends they believed the law did not require them to obtain form sec_972 for the owning funds because the gross_income would flow through to parent and subsidiary for whom they had obtained executed form sec_972 taxpayer’s shareholders parent subsidiary and the various owning funds each included the appropriate amount of consent_dividend income in their respective gross incomes on parent’s consolidated_income_tax_return for year after the extended due_date but before the discovery date parent’s auditor discovered that no form sec_972 had been attached to taxpayer’s form 1120-ric to taxpayer’s knowledge the irs was not aware of the omission of the form_972 and has not contacted parent about the year consent_dividend election nor has it notified parent that taxpayer’s year form 1120-ric is under examination law and analysis plr-106171-11 sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its investment_company_taxable_income sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its net capital_gains determined with reference to capital_gain dividends only sec_561 provides that the deduction for dividends_paid includes consent dividends for the taxable_year as determined under sec_565 sec_565 of the code provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a consent_dividend for purposes of sec_561 relating to the deduction for dividends_paid consent_stock which is the type of stock with respect to which consent dividends are allowed sec_565 includes what is generally known as common_stock and participating preferred_stock the participation rights of which are unlimited sec_1_565-6 of the income_tax regulations sec_1_565-1 provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 provides that a consent may be filed no later than the due_date of the corporation's income_tax return for the taxable_year for which the dividends_paid deduction is claimed with such return and not later than the due_date the corporation must file form sec_972 for each consenting shareholder and a return on form_973 showing by classes the stock outstanding on the first and last days of the taxable_year the dividend rights of such stock distributions made during the taxable years to shareholders and give all other information required by the form under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1_565-1 includes the extended due_date of a return filed pursuant to an extension of time to file sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides plr-106171-11 extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin 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 internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested plr-106171-11 ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer in this case requested relief before the failure to make the regulatory election was discovered by the service and thus under sec_301_9100-3 the taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer's election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in the regulations under sec_1_565-1 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year plr-106171-11 will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time for making the election to issue consent dividends until days following the date of this ruling the election should be made by filing the forms necessary to make the sec_565 consent_dividend election for year and by including a copy of this ruling with an amended_return for year this ruling is limited to the timeliness of the consent_dividend election taxpayer wishes to make for year this ruling’s application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert casey acting branch chief branch income_tax accounting


department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas tax_exempt_and_government_entities_division number release date date date tax_year ending taxpayer_identification_number person to contact employee identification_number employee telephone number uil certified mail - return receipt dear this is a final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in code sec_501 effective october 20xx your determination_letter dated april 19xx is revoked the revocation of your exempt status was made for the following reason s nonmember income received by you exceeded of your total gross_receipts and non-exempt function income exceeded further you advertise the use of your facilities to the general_public reflecting evidence that that you are engaged in a business and your activities are not substantially_all for pleasure and recreation for your members organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns and pay tax where applicable for further instructions forms and information please visit www irs gov if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you’ve tried but haven’t been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely maria hooke director eo examinations enclosure publication department of the treasury internal_revenue_service tax exempt and government entities exempt_organizations examinations date date taxpayer identification ification number numper form tax_year s ended person to contact 1d number employee id contact numbers telephone fax manager’s name id number employee id manager’s contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren’t an organization described in sec_501 if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also letter rev catalog number 34809f may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication _ please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely maria hooke director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f form a department of the treasury - internal_revenue_service name of taxpayer 20xx explanation of items schedule no or exhibit year period ended issue whether the sec_501 facts will continue to qualify as an exempt social_club under rc the club was granted exemption as a social_club exempt from federal_income_tax under rc sec_501 pursuant to a ruling issued on april 19xx according to the club's articles of organization the club's purpose is exclusively for pleasure recreation and other non-profit purposes within the meaning of rc sec_501 as from time to time amended including the fostering encouraging and engaging in athletic activities the club’s current principal activity is to provide golf facilities and services for the pleasure and recreation of its members their guests and the public the club operates a golf course and a clubhouse that includes a pub and locker facilities with a large parking lot on the grounds the club operates seasonally from the first week in april until mid-november per the club's form_1024 application_for recognition of exemption under a golf carts both pull and mechanized are provided the club also fosters an emphasis on junior golf with several neighboring schools further enhance the social climate of the club an on-site kitchen provides for light snacks and meals for all members etc several social events ie dances held during the year hole semi-private club during the operating the club advertises on its website that it is a season the club is open to the public on weekdays on weekends and holidays non-members must play with a member as their guest the club's signpost located at the main entrance states that the public is welcome to play monday through friday the club's web site advertises that the course is open to the public monday through friday and lists the greens fees for golf and carts tee times are available by calling the pro shop and online booking the web site indicates that gift certificates discount golf cards monthly drawing and other special offers are available by phone or on-line the discount golf cards include five rounds of golf at a savings another option for non-members is a fairway freedom pass available for dollar_figure and used for greens fees for the cardholder and guest the fairway freedom pass application states that purchasers must be non-members for at least one season to be eligible for the pass the club's filing_requirements include form 990-t exempt_organization business income_tax return which is due by the day of the month after the end of its tax_year for tax_year ending 20xx the due_date wa sec_2 xx the club requested an automatic six-month extension of time to file the form 990-t by xx however the club did not file the form 990-t by the extended due_date and did not file it until the examiner requested the delinquent_return which was received on 20xx on form 990-t for its tax_year ending 20xx the club incorrectly reported its entire unrelated_trade_or_business income in part on line rent income including income from the non-member use of the facilities the form 990-t instructions state that a rc sec_501 social_club reports its restaurant and bar receipts from nonmembers on line gross_receipts or sales the 990-t instructions for schedule c rent income state that rc sec_501 and organizations enter gross rents in part i line and applicable form 886-a rev department of the treasury - internal_revenue_service page -1- form 886-a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service 20xx expenses in part il lines through and all rents except those that are exempt_function_income must be included the club's form_990 part viii statement of revenue also included incorrectly its non-member income on line 6a gross rents inspection of the previous and subsequent fiscal_year forms 990-t revealed that the club reported nonmember income incorrectly as rent income on those forms also during the examination it was determined that the club did not comply with the record- keeping requirements of revproc_71_17 1971_1_cb_683 which sets forth guidelines for determining the effect of gross_receipts derived from use of a social club's facilities by the general_public have on the club's exemption under rc sec_501 and recordkeeping requirements in order to determine the income received from outside its membership the examiner requested a breakdown of the 990-t unrelated_business_income exhibit a attached the examiner used the financial system's reports including the profit and loss statements to reconcile forms and 990-t and to determine the income received from outside its membership the examination revealed that the two additional accounts handicap fees - non members and tee signs are non member income and increases the non member gross_receipts by dollar_figure exhibit b attached based on examination of the club’s form_990 returns for the period ending september 20xx and review of their books_and_records the percentage of gross_receipts from nonmember use of facilities exceeded and the percentage of gross_receipts from sources outside its membership including investment_income exceeded of total gross_receipts the following chart illustrates the percentage of gross_receipts from non-member and investment_income u law income income its members from investment year period ended total investment of gross_receipts from nonmember use september 20xx nonmember income of gross_receipts this analysis indicates that the club has been consistently using income from nonmembers to support the activities of sec_501 states that an organization described in subsection c or d shall be exempt from taxation under this subtitle unless such exemption is denied under rc sec_502 concerning feeder organizations or rc sec_503 concerning organization engaged in prohibited_transactions organizations exempt from federal taxes as described in rc sec_501 include clubs organized for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 relating to the requirements of exemption of such clubs under rc sec_501 reads in part as follows department of the treasury - internal_revenue_service page -2- form 886-a rev form 886-a name of taxpayer schedule no or exhibit year period ended department of the treasury - internal_revenue_service explanation of items 20xx a the exemption provided by sec_501 for organizations described in sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs that are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members using club facilities or in connection with club activities b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption prior to its amendment in sec_501 required that social clubs be operated exclusively for pleasure recreation and other non-profitable purposes public law amended the exclusive provision to read substantially in order to allow a sec_501 organization to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status the committee reports for public law further state c receipts if no income is received from non-members’ use of club facilities b thus a social_club may receive investment_income up to the full percent of its gross a within thi sec_35 percent amount not more than percent of the gross_receipts should be in addition the committee reports state that where a club receives unusual amounts of income such as from the sale of its clubhouse or similar facilities that income is not to be included in the percent formula derived from the use of a social club's facilities or services by the public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non-members so long as the latter do not represent more than percent of total receipts these percentages supersede those provided in revrul_71_17 1971_1_cb_683 this standard it does not necessarily establish that there is a nonexempt purpose a conclusion that there is a nonexempt purpose will be based on all the facts and circumstances including but not limited to the gross_receipts factor if a club exceeds the test then it will maintain its exempt status only if it can show through facts and circumstances that substantially_all of its activities are for pleasure recreation and other nonprofitable purposes department of the treasury - internal_revenue_service page -3- d the senate report also indicates that even though gross_receipts from the public exceed form 886-a rev form a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx sec_6001 states every person liable for any_tax imposed by this title or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title revrul_58_589 1958_2_cb_266 sets forth the criteria for exemption under rc sec_501 and provides that a club must have an established membership of individuals personal contacts and fellowship it also provides that while the regulations indicate that a club may lose its exemption if it makes its facilities available to the public this does not mean that any dealings with nonmembers will automatically cause a club to lose its exemption this is particularly true where the receipts from nonmembers are not more than enough to pay their share of the expense where however a club makes its facilities open to the general_public and the purpose is to increase its fund for enlarging its club facilities or for otherwise benefiting its members it evident that it is not operating as an exempt social_club within the meaning of rc sec_501 it is equally clear that the solicitation by advertisements or otherwise of public patronage of its facilities may be adverse to its exempt status revrul_66_149 1966_1_cb_146 provides that a social_club is not exempt from federal_income_tax as an organization described in rc sec_501 if substantial part of its income from non-member sources if the income from non-member sources is not incidental trivial or non-recurrent then the intent is to produce income and is reflective of a purpose inconsistent with exempt under rc sec_501 it regularly derives a it derives income from transactions with other than bona_fide members and their revrul_68_119 1968_1_cb_268 provides that a club will not necessarily lose its exemption if guests or if the general_public on occasion is permitted to participate in its affairs provided such participation is incidental to and in furtherance of its general club purposes and the income therefrom does not inure to members revrul_69_219 1969_1_cb_153 concerns a club organized for social and recreational purposes its principal function is to operate a golf course for its members who pay annual dues however the club regularly holds the golf course open to the public to use upon the payment of an established green fee green fees from the public have constituted a significant portion of the club's total receipts from all sources for each of the past five years the club used the income from this source to help defray the expense of maintaining and improving the golf course based on the facts presented this golf club does not qualify for exemption under sec_501 because it is engaged in business with the general_public by regularly holding its golf course open to the public for use upon payment of established green fees and the income from this source is inuring to the benefit of the members because it is used for maintenance and the improvement of club facilities revproc_71_17 1971_1_cb_683 sets forth guidelines for determining the effect of gross_receipts derived from use of a social club's facilities by the general_public have on the club's exemption under rc sec_501 and recordkeeping requirements the term form 886-a rev department of the treasury - internal_revenue_service page -4- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx general_public as used in this procedure means persons other than members of a club their dependents or guests failure to maintain such records or make them available to the service for examination will preclude use of the minimum gross_receipts standard and audit assumptions set forth in this revenue_procedure when a club makes its facilities available to the public to a substantial degree then the club's activities are not substantially for pleasure recreation and other nonprofitable purposes and operating in this manner jeopardizes the organization's exempt status in 536_f2d_572 3d cir other facts and circumstances noted by the court to consider in addition to the level of nonmember income include the purposes for which the club's facilities were made available to nonmember groups the frequency of use of the club facilities by nonmembers and the amount of net profits derived from the nonmember income taxpayer's position the taxpayer's position is not known at this time government's position sec_501 exempts from taxation clubs organized for pleasure recreation and other nonprofit purposes substantially_all of the activities of which are for such purposes and no part of the net earning of which inures to the benefit of a private shareholder the club allows regular non-member use of their facilities the club uses the income derived from non- members to operate and maintain the facility since the club is not supported solely by the membership dues fees and assessments the non-member income inures to the benefit of the members which is prohibited under rc sec_501 sec_1_501_c_7_-1 states a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofit purposes and is not exempt under rc sec_501 the club regularly allows non-members unrestricted use of the facilities non-members may golf rent carts purchase liquor and or food from the kitchen and adjacent bar and enjoy full use of the club throughout the operating season revrul_58_589 1958_2_cb_266 states that it is equally clear that the solicitation by advertisements or otherwise of public patronage of its facilities may be adverse to a social club's exempt status the club's web site advertises that the course is open to the public monday through friday and lists the greens fees for golf and carts the web site indicates that gift certificates discount golf cards monthly drawing and other special offers are available by phone or on-line which encourages use of the facility by non-members an organization exempt from federal income taxes as described in rc sec_501 must meet the gross_receipts_test in order to maintain its exemption in order to meet the gross_receipts_test an organization can receive up to thirty-five percent of its gross_receipts including investment_income from sources outside its membership without losing its tax-exempt form 886-a rev department of the treasury - internal_revenue_service page -5- form a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx status within thi sec_35 amount the use of a social club’s facilities or services by non-members cannot be more than fifteen percent of the social club's gross_receipts public law and the related senate report no 2d session 1976_2_cb_597 states that the exemption of a social_club exempt under rc sec_501 is jeopardized if they receive over percent of their gross_income from non-member use of facilities or services the club has exceeded the gross_receipts standard for nonmember income nonmembers use the club's facilities throughout its operating season and the club advertises frequently to encourage public use of its facilities the facts of the case show that the club is operating in a manner consistent with a for-profit business in addition the club did not exceed the threshold because of a single or unusual event as noted in 536_f2d_572 3d cir relevant facts and circumstances to consider in determining whether revenues generated from nonmembers are so high as to preclude exemption under sec_501 include the frequency of use of the club facilities by nonmembers and the purposes of such use and the amount and existence of net profits earned from such use for the club the facts and circumstances indicate that nonmembers use the golf course and other facilities on a regular basis with few restrictions and for the same purposes as members the club encourages nonmember use through its advertisements discounts and special pricing inspection of the previous and subsequent fiscal_year forms 990-t revealed that the club's nonmember income has produced consistent profits based on the large percentage of nonmember income as noted in the above table which exceeds the limitation and the large percentage of non-exempt function income as noted in the above table which exceeds the limitation plus the fact that the club's facilities are regularly available to the public it is the government's position that the club is no longer operated exclusively for the pleasure and recreation of its members and is not exempt under rc sec_501 conclusion tax exempt status under rc sec_501 should be revoked because nonmember income received by the club exceeded of the club’s total gross_receipts and non-exempt function income exceeded further the club advertises the use of its facilities to the general_public reflecting evidence that the club is engaged in a business and its activities are not substantially_all for pleasure recreation or social purposes no longer meets the requirements to qualify as exempt from federal_income_tax under rc sec_501 as described in jrc sec_501 therefore its exempt status under rc sec_501 will be revoked effective october 20xx as a taxable entity the club is required to file form_1120 u s_corporation income_tax return for the periods open under statute whether or not it has taxable_income under rc sec_6501 these periods include the years ending september 20xx and subsequent tax years additionally the provisions of sec_277 concerning membership organizations that are not exempt_organizations apply to the club's tax reporting on form_1120 form 886-a rev department of the treasury - internal_revenue_service page -6-