internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 2-plr-102960-00 date date legend business a state b state c d e f g r s t v x y holding dear this letter is in reply to a letter dated date and supplemental correspondence regarding certain federal_income_tax consequences of a proposed transaction specifically you request significant subissue rulings in connection with the the information submitted indicates that x is a state b not-for-profit membership taxpayer’s representations that the transaction qualifies under sec_368 and sec_351 of the internal_revenue_code code corporation which carries on business a as a membership_organization x has no authorized capital stock members members may hold one or more memberships x members are entitled to an exclusive right to conduct business on the premises of x and receive special member rates non-equity rights x members may vote on changes to the x by-laws and may vote for and serve on the board_of directors x gives each member one vote regardless of the number of memberships such member holds a member is permitted to lease his right to conduct business on the premises of x to a lessee in conducting business on the premises of x a lessee receives special rates but a lessee’s rates are not the same as the members’ rates subject_to certain limitations x members are entitled to share ratably in the net_proceeds from a complete_liquidation of x lessees do not share in liquidation proceeds since x is a not-for-profit corporation its members do not have any right to dividends x members and lessees may earn continuous service credits in connection with plan v currently x has d memberships outstanding in addition x has g authorized but unissued memberships the d outstanding memberships are not evidenced by certificates x maintains a database register listing all of the x members x is governed by its certificate of incorporation by-laws and rules created by the x board_of directors x members' rights are established and governed by the state b not-for-profit corporation law n-plc x’s by-laws and rules x is also regulated by r r must approve all x by-laws and rules including those which pertain to membership state b law does not allow a not-for-profit corporation to amend its articles of incorporation to convert to a for-profit corporation nor does it allow the merger of a state b not-for-profit corporation into a state b for-profit corporation however state b law does not prevent a state b corporation from merging into a for- profit corporation in another jurisdiction although x is a not-for-profit corporation under state law it has never been recognized as tax-exempt under sec_501 of the code and x pays federal corporate_income_tax on form_1120 as a for-profit corporation x is taxed as a c_corporation x maintains its books_and_records prepares its financial statements and files consolidated federal_income_tax returns based on the accrual_method of accounting and uses a fiscal_year ending december x receives over e percent of its income from fees paid_by members and non-members in association with the t business over f percent of x's income is generated by business s the remainder of x's income is derived from investing in fixed income securities as x is a not-for-profit corporation there is no limit on the amount of money it may accumulate to use for expenses in past years x has been profitable and has earnings_and_profits the plan_of_reorganization for what the taxpayer represents are valid business reasons x will convert from a state b not-for-profit membership corporation to a state c for-profit membership corporation and operate in a holding_company structure accordingly x proposes the following transaction i ii an agent for x will form y a newly formed non-stock corporation organized under state c law to the extent allowed by state c law y will adopt articles of incorporation and bylaws materially identical to those of x x will cancel the g authorized but unissued x memberships without consideration iii x’s board_of directors will authorize the termination of plan v prior to x’s termination the funds in the plan v account will be liquidated as soon thereafter as practicable iv x will merge with and into y under the laws of state b and state c and as a result y will acquire all the property and rights and become responsible for all of the obligations of x y will not conduct business prior to the merger v as a result of the merger each x member will exchange all of the rights associated with his membership in x for a class a and a class b membership in y the class a membership represents non-equity rights in y the class b membership represents the right to vote for y’s board_of directors the right to receive any dividends declared by y and subject_to certain limitations the right to share ratably in the net_proceeds from a complete_liquidation of y collectively the equity rights following the merger the holders of the non-equity rights in x will hold with no material_change the non-equity rights in y and the rules of y will apply to the class a members in the same way that the rules of x applied to the x members for example under the rules of y class a members will maintain their jurisdiction on applications for membership and will advise the board_of directors on changes to the rules governing leasing of t privileges y will not issue class a and b certificates of membership but y will record the ownership of the d class a and b memberships as bookkeeping entries vi holding was formed as a state c stock corporation holding has not yet issued any shares of its capital stock holding is authorized to issue d shares of one class of holding common voting_stock vii holding will form a state c transitory corporation transitory-sub holding will contribute all d shares of its common_stock to transitory-sub in exchange for a single membership in transitory-sub transitory-sub will merge with and into y the holders of class b memberships in y will exchange each class b membership in y for one share of holding common_stock holding will not conduct any business prior to the merger of transitory-sub with and into y a recapitalization of the d shares of holding common_stock issuance of additional holding common_stock or additional classes of holding stock or public offering of holding stock will not soon follow the merger of transitory-sub with and into y the merger of x with and into y you propose that the merger of x with and into y be treated as a reorganization qualifying under sec_368 of the code sec_3 of revproc_2000_3 2000_1_irb_103 provides that the internal_revenue_service will not rule on whether a transaction constitutes a reorganization within the meaning of sec_368 and whether the taxpayer is subject_to the consequences of qualification under that section that are adequately addressed by a statute regulation decision of the supreme court tax_treaty revenue_ruling revenue_procedure notice or other authority published in the internal_revenue_bulletin however the service has the discretion to rule on significant subissues that must be resolved to determine whether a transaction that is in this no-rule area qualifies under sec_368 the following representations are made in connection with the proposed transaction a subject only to the resolution of the issues addressed in rulings - below the conversion of x to y will qualify as a reorganization described in sec_368 of the internal_revenue_code_of_1986 b c the amount of the distribution made in connection with the termination of plan v described above will not exceed percent of the fair_market_value of x immediately before the termination of plan v x y holding and x’s members will pay their own expenses that arise in connection with the transaction described above the merger of transitory-sub with and into y you propose that the merger of transitory-sub with and into y be treated as a constructive exchange of the d class b memberships in y for the d shares of holding common_stock furthermore you propose that the constructive exchange of the d class b memberships for d shares of holding common_stock be treated as the formation of holding under sec_351 of the code sec_3 of revproc_2000_3 2000_1_irb_103 states that the service will not rule on whether sec_351 applies to an exchange of stock for stock in the formation of a holding_company and whether the taxpayer is subject_to the consequences of qualification that are adequately addressed by a statute regulation decision of the supreme court tax_treaty revenue_ruling revenue_procedure notice or other authority published in the internal_revenue_bulletin the following representation is made in connection with the merger of transitory- sub with and into holding a subject only to the resolution of the issue addressed in ruling below the transfer of class b memberships to holding by the holders of the class b memberships in exchange for d shares of common_stock of holding will constitute a transfer described in sec_351 of the code based on the information and representations set forth above we hold as follows no gain_or_loss will be recognized on the exchange of the non-equity rights in x for the non-equity rights that is the class a membership in y the class b membership interests in y will be treated as equity interests the continuity_of_interest requirement of sec_1_368-1 and e of the income_tax regulations is satisfied upon the exchange of the x members’ equity rights in x for class b memberships in y as described above the transaction described in step vii above involving in substance the contribution of all of the class b memberships in y to holding in exchange for all of holding’s common voting_stock will not prevent the merger of x with and into y from qualifying as a reorganization under sec_368 see revrul_96_29 1996_1_cb_50 the merger of transitory-sub with and into y followed by the exchange of the class b memberships for holding common_stock will be characterized as the contribution of all of the class b memberships to holding by the class b members in exchange for the d shares of holding’s common_stock the merger of transitory-sub with and into y will be disregarded a determination as to whether the conversion of x to a state c for-profit membership corporation qualifies as a reorganization under sec_368 and whether the contribution of the class b memberships to holding in exchange for holding common_stock qualifies under sec_351 will be made upon audit of the federal_income_tax returns of x y and holding no opinion is expressed as to the federal tax treatment of the transactions described in i - vii other than those specifically addressed in the above rulings furthermore no opinion is expressed as to the allocation of the basis if any between the class a and class b memberships no opinion is expressed on the federal tax treatment of the liquidation of the plan v account and the distribution of the plan v proceeds this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns to the taxpayers involved for the taxable_year in which the transactions covered by this letter are consummated pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to your representative sincerely yours associate chief_counsel corporate by lewis k brickates assistant to chief branch


t c memo united_states tax_court laura ung petitioner v commissioner of internal revenue respondent docket no filed date r determined a deficiency and a penalty for p’s tax_year the primary issues are whether distributions from each of p’s two qualified_retirement_plans are subject_to the additional tax on early distributions pursuant to sec_72 and whether p is liable for the accuracy-related_penalty under sec_6662 held p does not qualify under any of the exceptions pursuant to sec_72 and is liable for the additional tax for early distributions from the retirement plans for held further p is liable for the accuracy-related_penalty pursuant to sec_6662 for laura ung pro_se carolyn a schenck for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of a deficiency in petitioner’s income_tax for the tax_year after concessions the issues remaining are whether a distribution of dollar_figure from petitioner’s morgan stanley co retirement account qualifies under the first-time home purchase exception pursuant to sec_72 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the taxable_year at issue all rule references are to the tax_court rules_of_practice and procedure petitioner concedes that she had unreported wage income from hardin hyundai of dollar_figure for petitioner concedes that she had unreported interest_income from her citibank account of dollar_figure for petitioner also concedes that she received a taxable_distribution from her fidelity investments retirement account of dollar_figure that was unreported for finally petitioner concedes that she received a dollar_figure taxable_distribution from her morgan stanley retirement account that was originally unreported on her tax_return whether a distribution of dollar_figure from petitioner’s fidelity investments retirement account qualifies under any exception pursuant to sec_72 and whether petitioner is liable for a sec_6662 accuracy-related_penalty of dollar_figure for findings_of_fact the parties’ stipulation of facts with accompanying exhibits and the supplemental stipulation of facts with accompanying exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in california during petitioner held various financial records positions with los angeles california area car dealerships the notice_of_deficiency and petitioner’s petition to this court originally listed her first name as lora however on petitioner’s tax_return her first name is spelled laura during trial petitioner testified that she legally changed her name about four or five years ago from lora to laura petitioner did not contest the different spellings of her first name for purposes of this opinion this court takes notice that although petitioner’s legal name is now laura she also spelled her name as either lora or laora on documentation relating to the tax_year properties associated with petitioner4 a certified grant deed recorded with the los angeles county office of the registrar-recorder county clerk documents the purchase of a residential property pincite ellen drive west covina california ellen drive property on date by petitioner under the name laora ung on date petitioner retitled the property by executing a new grant deed from laora ung to lora d ung a subsequent grant deed from lora d ung to chamnam d ung and lora d ung as joint_tenants transferred ownership of the residential property on date to the two of them chamnam d ung is petitioner’s brother in the ellen drive property was sold by chamnam d ung and lora d ung as joint_tenants between and for purposes of filing her at trial respondent’s witness revenue_officer huerta-harris testified that she ran a property records search for both the ellen drive property and kam court west covina california kam court property on date revenue_officer huerta-harris conducted a search using petitioner’s first and last name it is unclear what name revenue_officer huerta-harris used for the date search on date revenue_officer huerta-harris went back to the county recorder’s office under the instruction to search for property records on variations of petitioner’s name federal_income_tax returns petitioner listed the ellen drive property as her contact and mailing address on date a recorded corporation grant deed conveyed title to the kam court property from homecomings financial llc to chamnam d ung in addition to her brother’s name petitioner’s name appears as lora ung in the when recorded mail to address portion of the deed instructing the registrar-recorder county clerk where to send the deed after it was recorded petitioner’s brother’s name is the only name listed on the deed to the kam court property petitioner’s dollar_figure withdrawal from her fidelity investments retirement account petitioner received a distribution of dollar_figure from her fidelity investments retirement account on date the check issued by fidelity investments to petitioner lists the kam court property as her mailing address petitioner’s dollar_figure withdrawal from her morgan stanley retirement account on date petitioner requested a withdrawal of dollar_figure from her morgan stanley retirement account petitioner listed the kam court property as during the tax_year in addition to the ellen drive address some of petitioner’s employers and banks reported her address a sec_333 east altern street monrovia california there is no evidence in the record that petitioner has ever purchased or owned the property associated with this address the address to which morgan stanley was to mail her distribution check in response to petitioner’s request morgan stanley issued her a check for dollar_figure on date reflecting the kam court property as her mailing address on date respondent sent to petitioner a notice_of_deficiency determining a deficiency of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure according to respondent the additional tax arises on each separate distribution because the dollar_figure morgan stanley and dollar_figure fidelity investments withdrawals do not qualify for any of the exceptions to the additional tax petitioner timely petitioned the court for redetermination of the deficiency on date and later amended her petition on date petitioner claims that her morgan stanley distribution is exempt from the additional tax because she used the proceeds to pay for qualified_acquisition_costs the stipulation of facts states that the notice_of_deficiency was mailed to petitioner on date however the date on the notice_of_deficiency is date we believe the date in the stipulation of facts was a typographical error on respondent’s part and that date is the date that respondent mailed the notice_of_deficiency to petitioner petitioner received the notice_of_deficiency within the applicable three-year period of limitations see sec_6501 the retirement_plan distribution is premature because petitioner had not attained the age of 59½ at the time of the distribution and would need to qualify under an exception in order to avoid the otherwise automatic additional tax see sec_72 and of a first-time home purchase which qualifies as an exception to the sec_72 additional tax pursuant to sec_72 petitioner makes no argument with respect to her fidelity investments distribution i burden_of_proof opinion the commissioner’s determination of a taxpayer’s liability for an income_tax deficiency is generally presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 however pursuant to sec_7491 the burden_of_proof as to a factual issue that affects the taxpayer’s tax_liability may be shifted to the commissioner this occurs where the taxpayer introduces credible_evidence with respect to that factual issue and the taxpayer has inter alia complied with substantiation requirements pursuant to the code maintained all records required under this title and has cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 b petitioner did not contend that the burden should shift and she provided little in the way of records to support her position accordingly the burden_of_proof remains on petitioner ii ten percent additional tax on early distributions from a retirement account a sec_72 to discourage individuals from taking premature distributions from retirement plans congress enacted sec_72 imposing an additional tax of of the portion of such amount which is includible in gross_income sec_72 see also 106_tc_337 s rept no pincite c b supp stating that p remature distributions frustrate the intention of saving for retirement and the committee bill to prevent this from happening imposes a penalty tax of sec_4974 describes the various types of retirement accounts and plans whose distributions are subject_to the additional tax of sec_72 including individual_retirement_accounts iras described in sec_408 petitioner’s morgan stanley and fidelity investments accounts are iras described in sec_408 congress enacted sec_72 to grant relief in certain circumstances from the additional tax examples include premature distributions made as a result of the death of the taxpayer sec_72 because of the taxpayer’s being disabled sec_72 and to pay health insurance premiums for the taxpayer during certain periods of unemployment sec_72 in as part of the taxpayer_relief_act_of_1997 pub_l_no secs and stat pincite congress enacted two more exceptions to the additional tax premature distributions for qualified_education_expenses sec_72 and pertinent to this case premature distributions for first-time homebuyers sec_72 with respect to first-time home purchases congress capped the exemption at a lifetime distribution limit of dollar_figure sec_72 as a result the total potential lifetime tax savings under this provision is dollar_figure of dollar_figure b the first-time home purchase exception a qualified first-time home purchase distribution is a distribution from an ira in an amount not to exceed dollar_figure that is used within days of its receipt to pay qualified_acquisition_costs with respect to a principal_residence of a first-time_homebuyer sec_72 a and b a first-time_homebuyer is an individual who has not had a present ownership_interest in a principal_residence as defined in sec_121 during the two-year period ending on the date_of_acquisition of another principal_residence sec_72 and ii the date_of_acquisition is the date on which a binding contract to acquire the principal residence is entered into or when construction or reconstruction is commenced sec_72 qualified_acquisition_costs are the costs of acquiring constructing or reconstructing a residence and include any usual or reasonable settlement financing or other closing costs sec_72 c the dollar_figure distribution from morgan stanley petitioner contends that her withdrawal of dollar_figure from her morgan stanley ira qualifies for the first-time home purchase exception because she used the money towards the downpayment for the purchase of the kam court property respondent makes three arguments with respect to petitioner’s claim first petitioner does not own the kam court property because her name is not on the deed second even if petitioner’s name was on the kam court property deed she is not a first-time_homebuyer because she had prior ownership within two years of the ellen drive property third again assuming arguendo that petitioner owned the kam court property she did not use the dollar_figure distribution for qualified_acquisition_costs incurred in the year this property was purchased which was only dollar_figure from the actual distribution would be exempt see sec_72 petitioner stated that she owned the kam court property because she made the offer to purchase it and withdrew the dollar_figure from her morgan stanley retirement account to apply towards the downpayment title to real_estate is governed by the laws of the place where it is situated see 99_us_482 under california law a deed is a written instrument conveying or transferring the title to real_property it is an executed conveyance and operates as a present transfer of the real_property estate of stephens v williams p 3d cal i t is clear that if there is only one owner of record of a legal estate or title he is the sole owner thereof even if the ownership is only of the naked legal estate or title i t is plain that under the statute cal civ code sec_683 the legal_title owner may convey the legal_title to himself and another as he is the sole owner of what he conveys ie the legal_title lowenthal v kuntz p 2d cal app 2d petitioner is not the legal_title owner and has failed to prove that she is an equitable_title owner the kam court property deed lists only petitioner’s brother as the owner petitioner submitted an incomplete copy of the residential purchase agreement for the kam court property that does not provide a sufficient basis upon which this court may determine the purchaser of the property an addendum to the residential purchase agreement however lists the buyer of the kam court property as chamnam ung and not petitioner petitioner’s brother also secured the loan in order to purchase the kam court property petitioner did not execute any agreements with her brother with respect to the kam court property at trial petitioner submitted home warranty fee bills for plumbing repairs invoices from home depot and receipts for payments to a contractor to prove that she paid these expenses since she was the kam court homeowner absent legal documentation that confers title on petitioner payments for home repairs are not acquiring constructing or reconstructing costs within the meaning of sec_72 and do not without substantially more constitute or establish either legal or equitable homeownership cal civ code sec_1091 west an estate in real_property can be transferred only by operation of law or by an instrument in writing on the basis of the record we find that petitioner did not hold an ownership_interest in the kam court property because we find that petitioner had no ownership_interest in the kam court property we need not address whether the morgan stanley distribution qualifies under the first-time home purchase exception or whether the dollar_figure distribution was used for qualified_acquisition_costs d the dollar_figure distribution from fidelity investments at trial petitioner produced no evidence that she qualified for any exception from the early withdrawal penalty in fact petitioner stated that she did not object to the imposition of the additional tax with respect to her fidelity investments withdrawal upon the record before us and absent evidence to the contrary we conclude that the dollar_figure distribution petitioner received from fidelity investments is subject_to the additional tax iii sec_6662 accuracy-related_penalty sec_6662 and b imposes a penalty of on the portion of an underpayment_of_tax attributable to among other things a substantial_understatement_of_income_tax an understatement of income_tax is substantial within the meaning of sec_6662 if in the case of individuals as relevant here the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax even if we did find that she held an ownership_interest in the kam court property petitioner’s prior ownership in the ellen drive property within two years of the kam court purchase disqualifies her as a first-time_homebuyer pursuant to sec_72 regs respondent bears the burden of production with respect to the imposition of the penalty see sec_7491 and that has been satisfied because the understatement of income_tax exceeds both of the tax required to be shown on the tax_return and dollar_figure see sec_6211 sec_6662 sec_6664 it is petitioner’s burden to establish that the imposition of the penalty is not appropriate because inter alia of a defense such as reasonable_cause under sec_6664 see 116_tc_438 sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioner worked in several different financial records positions petitioner had her tax_return prepared by pedro aguilar of p a mortgage inc using records and information given to him petitioner testified that she did not provide mr aguilar with the forms 1099-misc miscellaneous income issued by morgan stanley and fidelity investments to avoid liability for a sec_6662 penalty on the grounds of reliance on a tax professional a taxpayer must meet the following three requirements the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir petitioner did not review her tax_return before it was filed with respondent and testified that she should have reviewed her tax_return before she signed anything petitioner candidly testified that it was irresponsible of her to not provide mr aguilar with all of the forms and documents including all forms w-2 wage and tax statement and forms 1099-misc that related to the tax_year petitioner failed to satisfy the requirements of neonatology assocs to establish reasonable_cause or that she acted in good_faith with respect to any portion of the underpayment_of_tax or that any portion of the underpayment is due to reasonable_cause petitioner is liable for the sec_6662 accuracy-related_penalty for the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered for respondent


internal_revenue_service number info release date cc psi 1-cor-137286-01 date uilc we are responding to correspondence submitted on your behalf by requesting relief in order to establish date as the effective date for your s_corporation_election because the internal_revenue_service notified you about the form_2553 election deficiency within six months after receiving your form_1120s tax_return the corporation is ineligible for automatic relief under revproc_97_48 although we are unable to respond to to your request as submitted this letter provides useful information relating to your request based on the instructions to form_2553 taxpayers are generally notified of acceptance or nonacceptance of their election within three months of date of filing_date mailed if the irs questions whether the election was filed acceptable proof of filing is a certified or registered mail receipt b form_2553 with an accepted stamp c form_2553 with stamped irs received date or e an irs letter stating the election has been accepted your submission failed to include proof of mailing a timely form_2553 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_2001_1 copy enclosed in addition revproc_2001_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 to use the reduced fee provision you must include the statement described in b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room by way of introduction the irs has a new small_business website which provides specific information and various links to useful non-irs sites visit this new site at www irs gov smallbiz additionally you can order a single free copy of the small_business resource guide cd-rom by calling the cd-rom provides critical tax information including forms instructions and publications as well as valuable business information from a variety of government agencies non-profit organizations and educational institutions 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_2001_1 copy of submission


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 b02 plr-137857-04 date date ----------------- ------------------ ------------------ ------------------ legend x ------------------------------------------- a -------------------------------------------- b -------------------------------------------- c -------------------------------------------- d1 dear -------------- submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 a b and c the shareholders of x on d1 intended for x to be an s_corporation effective for the taxable_year beginning d1 however a form_2553 election by a small_business_corporation was not timely filed for x’s taxable_year beginning d1 accordingly x requests a ruling that it will be treated as an s_corporation effective d1 this responds to a letter dated date and subsequent correspondence ----------------- plr-137857-04 sec_1362 provides that if -- a an election under sec_1362 is made for based solely on the facts and the representations submitted we conclude that x any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 provides that it may not be used or cited as precedent being forwarded to x‘s authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer who requested it sec_6110 except as specifically set forth above no opinion is expressed concerning the sincerely beverly katz senior technician reviewer branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


tax_exempt_and_government_entities_division number release date department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx taxpayer_identification_number person to contact identification_number telephone number certified mail - return receipt requested uil dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code our favorable determination_letter to you dated - october 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective august 20xx the revocation of your exempt status was made for the following reasons you are not operating exclusively for any charitable purpose educational_purposes or any other exempt_purpose our examination reveals that you are not engaged primarily in activities which accomplish charitable educational or other exempt_purpose as required by sec_1_501_c_3_-1 your activities including your financial transactions more than insubstantially furthered non-exempt purposes moreover you failed to establish that you were not operated for the benefit of private interest of your members president and recognition of exemption pursuant to sec_1_501_c_3_-1 your income inured to the benefit of private shareholders and individuals as required for continued you failed to keep adequate books_and_records and failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by sec_6001 and sec_6033 sec_1_6033-2 and revrul_59_95 1959_1_cb_627 contributions to your organization are no longer deductible under sec_170 after august 20xx you are required to file form_1120 u s_corporation income_tax return these returns should be filed with the appropriate service_center for tax years ended july 20xx july 20xx july 20xx july 20xx and july 20xx and for all years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code 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 before the 91st day after the date this determination was mailed to you if you wish to seek review of our determination please contact the clerk of the respective court for rules and the appropriate forms regarding 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 nw washington dc united_states court of federal claims madison place nw washington dc united_states district_court for the district of columbia constitution ave n w washington dc the taxpayer_advocate_service tas is an independent organization within the irs that can help protect you 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 taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours maria d hooke director eo examinations enclosure publication department of the treasury internal_revenue_service irs tax_exempt_and_government_entities_division date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers phone number fax number manager's name id number manager's contact number phone 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 after we issue the final revocation letter we’ll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code 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 may file a protest with the letter rev catalog number 34809f 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 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 margaret von lienen 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 -0002 name of taxpayer explanation of items schedule no ot exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 issue whether the exempt status of under internal_revenue_code irc section sec c should be revoked on the grounds that it served the private benefit of its members and disqualified persons including its president and facts organization was incorporated in the state of in april 19xx on december 20xx the internal_revenue_service service issued a favorable determination_letter to organization recognizing it as tax-exempt under sec_501 the service determined that organization was not a private_foundation because it was classified as a publicly_supported_organization as described in sec_170 for the years under examination organization reported it was not a private_foundation because it was an organization described in sec_170 the organization’s articles of incorporation provide its purpose is similarly organization summarizes its mission on its forms stating its purpose is organization was founded by who served as organization’s first president during her tenure as president was a co-owner of which is a for-profit entity that form 886-a rev department of the treasury - internal_revenue_service page -1- form a name of ‘taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 operates gymnastics and cheerleading facilities in and organization’s inception her business partner since who was also one of the organization’s directors and worked closely with organization trained amateur athletes from ages x through xx in gymnastics and placed them on teams according to age ability et cetera organization then helped the athletes trained by to raise funds to pay the expenses related to sanctioned amateur gymnastics competitions organization also assisted participants in cheerleading competitions to raise funds however organization never disclosed to the service that it intended to support cheerleading activities around 20xx left her position as president of organization and sold her to left interest in when asked explained that with gymnastics after her position and sold her share in however this requirement was waived for replaced this individual and became the served until approximately 20xx in 20xx left organization selected its second president who because she was no longer interested in being involved organization’s third president to hold a position as an officer of the board_of directors organization mandated that an individual be a parent guardian of an athlete training within and signing checks making book entries making day-to-day decisions for the organization and quickbooks records depositing funds reconciling accounts approving expenditures writing has been responsible for recording receipts in organization’s since becoming organization’s department of the treasury - internal_revenue_service form 886-a rev president page -2- form a name of ‘taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 making decisions for the organization’s long-term direction is currently organization’s president and owns with her husband the organization was asked to provide extensive records for all tax years under examination multiple times initially the examination was focused on the year ending july 20xx primary year thus records obtained were for the primary year however after expanding the examination to prior and subsequent tax years the service made repeated requests for records and provided organization several extensions for additional information for the primary as well as new information for all other years throughout the request and extensions the organization provided minimal and incomplete responses according to the records provided organization generated its income from membership fees fundraisers and sponsorships organization’s policy identified in exhibit a item number stated that members were required to pay directly and or to participate in fundraisers in addition to organization’s annual membership fee members were required to pay a team assessment assessment which consisted of each member’s share of cumulative estimated expenses for the year including training coaching fees athletic membership fee meets banners equipment competitive gear and other competition related expenses according to organization’s competitive budget for 20xx-20xx exhibit b the assessment ranged from dollar_figurexxx xx to dollar_figurex xxx xx depending on the athlete’s level and whether travel was involved organization tracked each member’s assessment balance separately to verify that each member met his or her share of the expenses organization communicated about member’s account balance when inquired by that individual members form 886-a rev department of the treasury - internal_revenue_service page -3- fom 886-a department of the ‘treasury - internal_revenue_service -0002 name of taxpayer explanation of items schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 were required to sign a commitment form that acknowledged their commitment to and acknowledged that members would be removed from the team should their attendance fall below xx exhibit c on the commitment form members also signed to acknowledge that they understood that the money provided to the organization would under no circumstances be refunded transferred or directed members who were not current with their assessment were not allowed to participate in organization’s activities as an alternative to paying the assessment organization offered members the option to reduce their assessment obligation by participating in a number of fundraisers organization’s fundraisers included scrip gift wrapping and other fundraisers scrip as used by organization involved interested merchants offering support by allowing the purchase of gift card order fundraiser would travel to the full face value members purchased scrip using a program offered by for exempt_organizations only members participating in this merchant the value of the scrip was also attributed to the members who purchased the gift cards which was also identified on the order form organization’s fundraiser was a discounted gift certificates gift cards members would buy gift cards from organization at form order form organization generated a scrip profit equal to the discount offered by the organization statements showing the members who participated in the gift wrapping program and the total amount generated by each individual member organization would then use records to determine the amount to credit each individual member towards their gifts each gift wrapped earned dollar_figure xx for the organization department of the treasury - internal_revenue_service facility located in the would then provide area to wrap form 886-a rev page -4- form a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 assessment according to members could also raise funds by volunteering to work for when asked explained that she would pay minimum wage to members who volunteered to work for then explained that instead of paying the wages directly members would earn their wages in the form of a donation which was paid to the organization under the individual member’s name and applied to their assessment during the interview explained that organization’s members have consistently carried out organization’s fundraisers in the same manner during organization’s existence the limited historical records provided by organization have shown the same although organization failed to provide extensive records relating to its fundraising activities for the other years under examination explanation indicates that the policies and examination confirmed that while members it had for each year however when asked examination was equal on average to the numbers shown on the 20xx phone list membership may have increased around 20xx organization’s membership for all years under organization’s phone list identified that organization had approximately xx members procedures for organization’s fundraising activities were consistent during all tax years under - during 20xx organization failed to provide more extensive records concerning the number of fundraisers based on these records about xx of members were identified as having elected to satisfy at least part of their assessment through fundraising the records identifying members records such as handwritten notes typed notes order forms scrip deposits and identified a number of members who participated in organization’s department of the treasury - internal_revenue_service statements from form 886-a rev page -5- form a department of the treasury - internal_revenue_service -0002 name of taxpayer explanation of items schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 who participated in organization’s fundraisers also showed a portion of the amounts attributed to each individual member members who participated in fundraising earned the value of the fundraising profits which was then applied to their assessment overall a member’s participation in a fundraiser whether scrip or any other program reduced their assessment based on the amount of funds raised members who did not participate in a fundraiser did not receive a reduction of their assessment the organization’s sponsorship income was primarily generated from businesses advertising in organization’s yearbook organization’s yearbook also contained a significant amount of content related to content within yearbook included e animage of facility on the cover e e e logo identifying background asthe owner of __ and discussing including the history of which included a narrative the entire third page was dedicated to organization but instead were employees of on page one the top right corner contained a three by two inch image of inthe coaches section approximately x of x coaches were not coaches of the content was included in yearbook because organization and organization did not receive any payments from as a sponsor or advertiser according to related content in organization’s yearbook despite the substantial amount of department of the treasury - internal_revenue_service form 886-a rev page -6- had a the form a name of taxpayer explanation of items department of the treasury - internal_revenue_service and 20xx07 schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 very close relationship in explaining the close relationship stated the following concerning both entities e all athletes of the organization were referred to as members of which was title for its athletes e the organization’s policies required all members of the organization to also be members of and receive training from e all of organization’s trainers were also employees of - therefore organization depended on for training in addition to using trainers organization paid for each trainer’s certifications no records were presented showing that reimbursed organization for these expenses e e by received promotion and to generate business income validation for its training programs members of organization attended competitions which were created and hosted whenever organization’s athletes won competitions the expenses_incurred by the organization throughout the years under examination among other things included coaching fees gymnastics and cheerleading entry fees gymnastics and cheerleading uniforms and travel although organization provided limited to no training organization purchased uniforms for coaches and athletes which were used organization also purchased uniforms for athletes which specifically included during training sessions performed by department of the treasury - internal_revenue_service company logo form 886-a rev page -7- form a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 law sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office treasury regulations treas reg sec_1 c -1 c operational test- primary activities -an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose distribution of earnings --an organization is not operated exclusively for one or more exempt purposes of its net_earnings inure in whole or in part to the benefit of private shareholders or individuals for the definition of the words private_shareholder_or_individual see paragraph c of sec_1_501_a_-1 tax_court case- form 886-a rev department of the treasury - internal_revenue_service page -8- form a department of the treasury - internal_revenue_service -0002 name of taxpayer explanation of items schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 capital gymnastics booster club inc v commissioner tcmemo_2013_193 government’s position the organization’s exempt status under sec_501 should be revoked on the grounds that it served the private benefit of its members and disqualified persons including its president and members organization’s assessment policy assessment policy provided during the field_examination showed that organization mandated funds be paid_by the members through direct payment and or through fundraising activities sponsored by the booster club refer to exhibit a item number for additional information organization’s assessment policy shares similarities with the policies at issue in capital gymnastics booster club inc v commissioner as with the organization in capital gymnastics booster club organization gave its members the option to pay their assessment in cash or members could raise funds to offset their assessment according to handwritten and typed notes and other records showing a reduction in only certain member’s accounts the members who did not participate in fundraising did not receive any benefit from the fundraising activities of the other members instead those members paid for their full assessment amounts moreover there was no evidence among the records provided that showed funds raised through scrip or other fundraising activities were used to form 886-a rev department of the treasury - internal_revenue_service page -9- form a department of the treasury - internal_revenue_service -0002 name of taxpayer explanation of items schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 support scholarships for other members or to defray the expenses of participation of members who may have been unable to afford the costs rather than operating exclusively for the public organization served the private interest of its members by allowing members to raise funds for their own accounts thus organization failed to meet requirements under sec_501 no part of the net_earnings of the organization may inure to the benefit of any private_shareholder_or_individual as a result organization should be revoked of its exempt status president and given relationship with organization ownership of and her position as organization’s president both and are disqualified persons with respect to organization the policies that required organization’s members to also be members of clearly provided financial benefits to and for the years under examination whether identified as organization’s president or owner and also clearly benefitted from the following e e e the use of the organization’s members to work as volunteers for donations advertising on organization’s publications without compensating organization advertising on uniforms and other items paid for by organization use of training uniforms and other related items for both gymnastics and cheerleading which were purchased by organization form 886-a rev department of the treasury - internal_revenue_service page -10- form a department of the treasury - internal_revenue_service -0002 name of taxpayer explanation of items schedule no or exhibit year period ended 20xx07 20xx07 20xx07 20xx07 and 20xx07 e use of trainers and training curriculum which increased organization’s dependency on operating organization for the benefit of and served the private interest of and as a result organization failed to meet requirements under sec_501 that no part of the net_earnings of the organization may inure to the benefit of any private_shareholder_or_individual consequently organization’s exempt status should be revoked at this time taxpayer’s position the service is awaiting organization’s response conclusion organization’s net_earnings in a substantial part have inured to the benefit of its members its president and this violates both sec_501 and sec_1_501_c_3_-1 and warrants revocation of organization’ sec_501 status effective august 20xx the service has requested completed forms for the years ending july 20xx through july 20xx organization is required to file form_1120 u s_corporation income_tax return for the year ending july 20xx any_tax year thereafter form 886-a rev department of the treasury - internal_revenue_service page -11-


t c memo united_states tax_court philip d long a k a phil long petitioner v commissioner of internal revenue respondent docket no filed date philip d long pro_se kimberly a daigle for respondent memorandum findings_of_fact and opinion morrison judge the respondent issued a notice_of_deficiency determining a dollar_figure deficiency in the petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 for the tax_year unless otherwise indicated all section references are to the internal_revenue_code as in effect for the tax_year and all rule references are to the tax_court rules_of_practice and procedure the respondent is referred to as the irs the petitioner is referred to as long the only issues remaining to be resolved are is long entitled to a deduction for dollar_figure in legal fees in addition to the dollar_figure in legal fees determined to be deductible in the notice_of_deficiency at trial long waived the issue of the deductibility of the dollar_figure in legal fees he is therefore not entitled to that deduction of the dollar_figure million that long received from louis p ferris jr is dollar_figure excludable from long’s income on the theory that this amount was the share of earnings attributable to long’s alleged joint_venture partner steelervest inc we find there was no joint_venture long must therefore include the dollar_figure in his income is the character of the dollar_figure million received by long capital or ordinary we hold that the income is ordinary is long entitled to cost_of_goods_sold of dollar_figure as claimed on his return or dollar_figure as determined in the notice_of_deficiency we hold that the allowable_amount is dollar_figure is long liable for the accuracy-related_penalty pursuant to sec_6662 we hold that he is liable findings_of_fact the parties stipulated some facts those facts are so found long resided in fort lauderdale florida at the time the petition was filed long was married to susan long until their divorce in date long was involved in various entities that conducted real_estate development projects in florida the development projects often spanned several years long owned and operated las olas tower co inc hereinafter lot lot was incorporated in as a delaware corporation long never filed any corporate_income_tax returns for lot and treated the entity as a sole_proprietorship reporting its income and deductions on his schedule c profit or loss from business long created lot to design and build a luxury high-rise condominium building called the las olas tower the las olas tower was to be built on land to be purchased from las olas riverside hotel hereinafter lor neither long nor the irs urges that lot be treated as other than a sole_proprietorship for federal_income_tax purposes the land was on las olas boulevard in fort lauderdale florida in lot began negotiations to purchase the land from lor in lot borrowed dollar_figure from steelervest inc a corporation owned by henry j langsenkamp iii hereinafter langsenkamp in addition to agreeing to repay the principal on the loan lot granted steelervest an option to acquire of an entity to which lot promised to transfer ownership of the building to be constructed on las olas boulevard the loan agreement provided that if the option was exercised by steelervest any distributions steelervest received from the entity would reduce the loan principal lot owed steelervest never exercised the option at some point steelervest made other loans to lot beyond the initial dollar_figure by the balances of all of steelervest’s loans to long amounted to dollar_figure from through long owned alhambra partners inc hereinafter alhambra alhambra was formed to construct a luxury condominium building on birch road in fort lauderdale florida to facilitate the project alhambra entered into a joint_venture called alhambra joint_venture with steelervest the parties stipulated the existence of the alhambra joint_venture the second issue for decision relates to long’s assertion that there was a different joint_venture with respect to the las olas tower which would allow him to exclude part of the dollar_figure million received from ferris alhambra joint_venture was responsible for constructing the birch road condominium building and selling the condominium units to customers from to alhambra joint_venture suffered significant losses steelervest lent dollar_figure to alhambra joint_venture the loan was guaranteed by long and susan long in steelervest entered into an agreement that restructured its legal and financial arrangements with the longs and their related entities ie lot alhambra and alhambra joint_venture the agreement had four components steelervest forgave the dollar_figure in loans it had made to lot steelervest released the longs from their personal guaranties of the dollar_figure loan steelervest made to alhambra joint_venture alhambra which was owned entirely by long transferred its interest in alhambra joint_venture to steelervest thus leaving steelervest as the sole owner of alhambra joint_venture long agreed to pay steelervest either a dollar_figure in the event he sold his interest in lot or b of lot’s net profits from the it is unclear from the record whether the agreement terminated steelervest’s option under the agreement to acquire of the entity to be formed by lot development of the property on las olas boulevard if he did not sell his interest by the end of the units in the condominium building alhambra joint_venture developed on birch road were sold on date lot and lor signed a contract known as the riverside agreement obligating lor to sell the property on las olas boulevard to lot for dollar_figure the closing date of the contract was date the contract required lot to use the property for no other purpose than as a multiunit residential building with at least big_number square feet of residential units and a height of at least feet when the contract was executed long intended that lot would construct a condominium building and sell the condominium units even before the date closing date of the riverside agreement the condominium building to be constructed on las olas boulevard became long’s full-time project long hired architects to prepare the plans for the building he sought to obtain a zoning permit from the city he printed lot had the option of accelerating the closing date to a date not earlier than date provided it gave lor nine months’ written notice of the new closing date promotional materials about the building operating out of his business office long negotiated contracts with purchasers of condominium units he obtained deposits for of the units in the building before the closing date of the riverside agreement the president of lor died his heirs did not wish to go through with the riverside agreement they terminated it in date in date lot sued lor in the 17th judicial circuit_court for broward county florida to enforce its rights under the riverside agreement the suit against lor included claims for specific performance of the riverside agreement damages incident to a decree of specific performance declaratory relief and tortious interference with contract by the time of the lawsuit long had decided that instead of constructing the condominium building lot would sell the land ready for construction to a purchaser langsenkamp filed a motion to intervene in the suit in order to be kept apprised of its status on date the 17th judicial circuit_court for broward county florida found in favor of lot on all claims except tortious interference the state court ordered specific performance and required lor to close the contract within days in addition it ordered lor to pay monetary damages to lot the amount of which was to be determined later the order explained that the purpose of the monetary damages was to compensate lot for the delay between the original closing date date and the earliest date that lor would be compelled to fulfill its obligations under the riverside agreement days from date lor dissatisfied with the outcome of the suit appealed the decision during the appeal louis p ferris jr hereinafter ferris offered to purchase lot’s position in the lawsuit against lor meanwhile in date long and steelervest renegotiated the fourth component of their agreement long agreed that lot would pay steelervest of the proceeds of the first dollar_figure million up to a maximum of dollar_figure of any moneys received by lot as a result of lot’s lawsuit against lor or the development of the condominium building on las olas boulevard in a separate agreement steelervest lent susan long dollar_figure the loan was secured_by a mortgage on real_property owned by long and susan long the dollar_figure loan agreement is not in the record from the testimony it appears to us that steelervest and long agreed that long’s repayment of the dollar_figure loan would reduce the amount long owed under the date agreement thus if long were to repay the dollar_figure loan the maximum amount he would owe under the date agreement would be dollar_figure not dollar_figure on date lot assigned its position in its lawsuit against lor and all rights arising under the riverside agreement to ferris for a purchase_price of dollar_figure million in this agreement hereinafter the ferris-lot assignment agreement ferris and lot acknowledge that dollar_figure of the purchase_price ie dollar_figure of the dollar_figure million is allocated towards reimbursement of attorneys’ fees incurred by seller ie by lot earlier the same day the longs who were then in divorce proceedings entered into an agreement to resolve their respective claims to each other’s assets this agreement hereinafter the marital settlement agreement was contingent on the execution of the ferris-lot assignment agreement pursuant to the marital settlement agreement susan long released any interest in lot that she had acquired because of her marriage to long in exchange long agreed to pay susan long dollar_figure million from the dollar_figure million payment from ferris long also agreed to make an additional dollar_figure in payments to various third parties including dollar_figure to steelervest the parties to the ferris-lot assignment agreement were lot and ferris although long signed in both his individual capacity and as president of lot long agreed to pay certain creditors and have them release susan long from any claims at the time that lot sold its lawsuit to ferris long was the sole owner of lot after the sale ferris dropped the appeal and the 17th judicial circuit_court of broward county florida entered an order vacating its earlier judgment and dismissing the lawsuit with prejudice as agreed in the ferris-lot assignment agreement ferris paid long dollar_figure million for lot’s position in the lawsuit and its rights in the riverside contract as required by the marital settlement agreement long paid susan long dollar_figure million and various third parties dollar_figure these payments included an dollar_figure payment to steelervest in consideration of the dollar_figure payment steelervest executed an agreement releasing the longs and lot from any claims including any claims based on the date agreement and the dollar_figure loan long filed a form_1040 u s individual_income_tax_return for he attached a schedule c to report the income and expenses of lot the schedule c stated that long’s trade_or_business was real_estate developer on the schedule c long reported dollar_figure of the dollar_figure million payment as ordinary_income he did not report the remaining dollar_figure on the schedule c long reported cost_of_goods_sold of dollar_figure he did not claim a deduction for legal-and-professional-services expenses on his return he reported that his tax liability for the year was zero long discussed the ordinary character of the dollar_figure million payment with his accountant but no other aspects of the return the irs timely issued a notice_of_deficiency on date determining a deficiency in tax for of dollar_figure the notice made the following noncomputational adjustments to the amount long reported as income on his return item schedule c gross_receipts schedule c cost_of_goods_sold schedule c legal-and- professional- services deduction amount reported by long on his return amount of adjustment in notice_of_deficiency adjusted amount in notice_of_deficiency dollar_figure dollar_figure dollar_figure big_number -big_number big_number big_number big_number in his petition long made a blanket statement disputing the deficiency and penalty determined in the notice_of_deficiency in addition the petition contained the following specific allegations the dollar_figure million payment from ferris is excludable from long’s income to the extent of dollar_figure he paid to steelervest the irs erred in adjusting the cost_of_goods_sold to dollar_figure long is entitled to deduct dollar_figure in legal fees in addition to the dollar_figure determined to be allowable as a deduction in the notice_of_deficiency at trial long asserted that the character of any income from the dollar_figure million payment was capital not ordinary at trial long waived his claim that he is entitled to deduction of dollar_figure for legal fees opinion the taxpayer generally bears the burden of proving that the determinations in the notice_of_deficiency are erroneous rule a 290_us_111 pursuant to sec_7491 the burden_of_proof may be shifted to the irs however long has not established that he has met the long paid steelervest a total of dollar_figure which included the dollar_figure mortgage loan repayment for susan long long asserted that only dollar_figure of his payment to steelervest should be excluded from income at the end of trial the irs moved to amend its answer to assert that long earned dollar_figure in cancellation-of-indebtedness income we denied this motion in a separate order conditions for such a shift see sec_7491 and 135_tc_471 aff’d 668_f3d_888 7th cir consequently he still bears the burden_of_proof deductions for legal fees in his petition long sought a deduction for dollar_figure in legal fees in addition to the dollar_figure in legal fees determined to be allowable as a deduction in the notice_of_deficiency at trial long conceded the issue of the deductibility of the dollar_figure in legal fees by stating i’ve agreed to give up on the additional legal fees on brief long attempted to revive his claim that he was entitled to the dollar_figure deduction a concession made on the record by a taxpayer during trial is the equivalent of a stipulation 83_tc_381 a concession in open court is the equivalent of a stipulation aff’d 823_f2d_1310 9th cir a taxpayer is bound by his or her stipulations 108_tc_320 aff’d without published opinion 208_f3d_205 3d cir thus long’s concession is binding even if long had not conceded the issue his claim for a deduction for dollar_figure in legal fees would have failed for lack of proof taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the irs to determine the correct_tax liability sec_6001 112_tc_183 it is a general_rule established in 39_f2d_540 2d cir that if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to fully substantiate the precise amount of the deduction the court may estimate the amount of the deductible expense and allow a deduction to that extent in making such estimates the court may bear heavily against the taxpayer who caused the inexactitude id pincite for the court to estimate the amount of an expense there must be some basis on which an estimate may be made 245_f2d_559 5th cir 85_tc_731 because the irs has already determined that long is entitled to a deduction for dollar_figure in legal fees long’s assertion that he is entitled to an additional dollar_figure in legal fees is tantamount to a claim that he is entitled to a deduction of legal fees of dollar_figure the sum of dollar_figure and dollar_figure there is some evidence in the record that dollar_figure in legal expenses was incurred in relation to lot’s lawsuit against lor long also moved the admission of a letter from his law firm referring to dollar_figure in fees however the letter was not a business record and was excluded from evidence long testified about the dollar_figure but the testimony was too vague and inconsistent to establish a basis for estimating what he spent on legal fees see williams f 2d pincite vanicek v commissioner t c pincite we hold that no deduction for legal expenses is available to long beyond the dollar_figure determined in the notice_of_deficiency the excludability from income of dollar_figure of the dollar_figure million long received from steelervest in long agreed that lot would pay steelervest of the proceeds of the first dollar_figure million up to a maximum of dollar_figure of any moneys lot received as a result of lot’s lawsuit against lor or the development of the condominium building on las olas boulevard later in long received dollar_figure million from ferris and paid steelervest dollar_figure of the proceeds the dollar_figure loan to susan long was also repaid to steelervest long now claims that his date agreement with steelervest created a joint_venture and that the dollar_figure portion of the dollar_figure million was steelervest’s taxable share of the income of the joint_venture the irs contends that there was no joint_venture implicitly long argued that the dollar_figure million payment was income of the joint_venture and that dollar_figure million of the joint venture’s income was his taxable share his express contention was that dollar_figure of the dollar_figure million payment is steelervest’s income not his between long and steelervest in its view the entire dollar_figure million is the income of long a joint_venture has been defined as a ‘special combination of two or more persons where in some specific venture a profit is jointly sought without any actual partnership or corporate designation ’ and also as ‘an association of persons to carry out a single business_enterprise for profit ’ 27_tc_840 citing c j s joint adventures sec_1 and 14_tc_1406 and 22_bta_935 the existence of a joint_venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership for tax purposes 42_tc_1067 the required inquiry for determining the existence of a partnership for federal_income_tax purposes is whether the parties really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both 327_us_280 the parties’ intentions are a matter of fact to be determined from testimony disclosed by their ‘agreement considered as a whole and by their conduct in execution of its provisions ’ id quoting 113_us_51 the court in luna v commissioner t c pincite8 distilling the principles established in tower and 337_us_733 held that the following factors are relevant in evaluating whether parties intend to create a partnership for federal_income_tax purposes the agreement of the parties and their conduct in executing its terms the contributions if any which each party has made to the venture the parties’ control_over income and capital and the right of each to make withdrawals whether each party was a principal and coproprietor sharing a mutual proprietary interest in the net profits and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of a percentage of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns or otherwise represented to respondent ie the irs or to persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise no single factor is conclusive of the existence of a partnership 352_f2d_995 2d cir aff’g 43_tc_252 62_tc_720 examining each luna factor we determine that long and steelervest did not engage in a joint_venture regarding lot the date agreement provided only that steelervest would receive a share of long’s profits from lot neither this agreement nor any prior agreements purported to create a joint_venture steelervest did contribute money besides its profit share steelervest had no right to control lot’s assets or to receive money from lot steelervest’s interest in lot’s profits was capped at dollar_figure and it had no liability for lot’s losses neither long’s ownership of lot nor lot’s operations were conducted in steelervest’s name long and steelervest did not file partnership returns or otherwise represent to the irs or others that there was a joint_venture no evidence shows that separate books of account of any joint_venture were maintained long possessed all control_over his ownership_interest in lot and over lot’s operations there was no control by steelervest on the basis of these factors we find that steelervest was not in a joint_venture with long regarding long’s investment in lot or in lot’s operations thus long must include the entire dollar_figure million payment in his income see sec_61 capital-versus-ordinary character of the dollar_figure million payment pursuant to the ferris-lot assignment agreement lot sold its position in its lawsuit against lor and all rights arising under the riverside agreement to ferris in exchange it received dollar_figure million from ferris in its suit lot requested specific performance of a sales contract for the property on las olas boulevard the florida court awarded specific performance ordering lor to sell the property to lot in exchange for this right of specific performance lot received dollar_figure million therefore the character of the dollar_figure million in income depends upon whether long intended to acquire the las olas boulevard property for investment the irs contends that long intended to have lot construct a condominium building on the land and sell condominium units the irs asserts that the condominium units are not capital assets under sec_1221 which provides that property held by the taxpayer primarily_for_sale_to_customers in the ordinary course of the taxpayer’s trade_or_business is not a capital_asset long argues that he intended to sell the land to a developer which seems to mean he expected the purchaser to construct the building a threshold question regarding the application of sec_1221 is whether the property long intended to sell is the land the land plus the building or the individual condominium units as discussed the irs contends that long intended to sell the condominium units long contends that he intended to sell the land ready for construction while we agree with long that he intended to sell the land ready for construction we hold that the character of the income is ordinary recall that in lot began negotiations to buy the land from lor in date lor agreed to sell the land to lot with a closing date of date in date lor terminated the riverside agreement lot sued lor for specific performance of the riverside agreement as of date long’s intention was that lot would construct the building and sell the units however by the time lot filed suit against lor long had changed his mind and decided to have lot sell the property before completion of the building it was long’s intent at this time that informs our view of the nature of the claims asserted in the lawsuit see rice v commissioner tcmemo_2009_142 looking to the taxpayer’s intent at the time property was disposed of raymond v commissioner tcmemo_2001_96 at the time he sold his rights under the riverside agreement and to the lawsuit to ferris long intended to sell the land to another developer therefore the applicability of sec_1221 depends on whether long intended to sell the land to customers in the ordinary course of his business income from the sale of a capital_asset is capital in character see sec_1221 sec_1_1221-1 and b income_tax regs under sec_1221 property is not a capital_asset if it is stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business the supreme court has defined primarily in this context to mean principally or of first importance 383_us_569 see also 526_f2d_409 5th cir the question of whether property is held primarily_for_sale_to_customers in the ordinary course of a taxpayer’s business requires a factual analysis 63_tc_149 typically the factors in making this determination include the taxpayer’s purpose in acquiring the property the purpose for which the property was subsequently held the taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income the frequency continuity and substantiality of sales of property the extent of developing and improving the property to increase the sales revenue the extent to which the taxpayer used advertising promotion or other activities to increase sales the use of a business office for sale of property the character and degree of supervision or control the taxpayer exercised over any representative selling the property and the time and effort the taxpayer habitually devoted to sales of property biedenharn realty co f 2d pincite 417_f2d_905 5th cir the frequency and substantiality of sales is especially probative 615_f2d_171 5th cir the purpose of the sec_1221 exclusion is to differentiate between gain derived from the everyday operations of a business and gain derived from assets that have appreciated in value over a substantial period of time 65_tc_197 citing malat u s pincite aff’d 583_f2d_443 9th cir we first examine long’s purpose for attempting to acquire the property on las olas boulevard at the time of the lawsuit long intended that lot would acquire the las olas boulevard property develop a condominium building ie design the building and navigate the zoning-approval process and then sell the land to a purchaser this intention is consistent with the proposition that the las olas boulevard property like the units in the condominium building on birch road which long had bought and sold would be held by long primarily for sale to his customers see 57_tc_618 nor does the fact that nearly half of petitioner’s sales in and were made to one customer preclude his being engaged in a business see also 48_tc_906 finding a limited customer base such as two customers meets the requirements under sec_1221 aff’d 419_f2d_213 9th cir we also consider the taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income long’s full-time activity was developing the land for the condominium building on las olas boulevard although this activity was interrupted by the termination of the riverside agreement which required long to divert his energies to supervising lot’s lawsuit against lor long presumably would have soon gone back to developing the condominium building had he not struck a deal with ferris we also consider the frequency continuity and substantiality of long’s sales we believe that long initially intended to sell all the units in the yet-to-be- constructed condominium building he received deposits for of the units although long changed his plans and decided to sell the land ready for construction of a building--and not the building units--this does not alter our view that long held the land primarily_for_sale_to_customers in the ordinary course of business the sale of a parcel of land ready for construction would result in a large profit from a single-sale transaction the profit would have been from long’s efforts to develop the land not from the mere passage of time we consider the extent to which the taxpayer developed and improved the property long used substantial efforts to develop the property he hired architects he obtained a zoning permit he printed promotional materials he negotiated contracts with residential customers and he obtained deposits we consider the extent to which the taxpayer used advertising promotion or other activities to increase sales through his sales efforts long received deposits on of the units had long sold the land to a single buyer we believe he would have overseen the sale we consider whether a business office was used long used a business office to sell the condominium units however he may not have used a business office to effect a sale of the land we consider the character and degree of supervision or control long exercised over any representative selling the property long would have been primarily responsible for selling the land if he had not sold the rights under the riverside agreement and the lawsuit we also consider the time and effort the taxpayer habitually devoted to sales of property long was a professional in the real-estate industry his full-time business was developing and selling condominium properties on the basis of our consideration of these factors we find that the preponderance of evidence demonstrates that long intended that the land subject_to the riverside agreement would have been property held by long primarily for sale to his customers in the course of his business thus if long had not sold lot’s rights under the riverside agreement and lawsuit against lor he would have earned ordinary_income through lot after the state court had ordered specific performance of the riverside agreement accordingly we hold that the dollar_figure million payment is correctly treated as giving rise to ordinary_income cost_of_goods_sold the notice_of_deficiency determined that cost_of_goods_sold should be dollar_figure rather than the dollar_figure amount reported on long’s return long’s petition challenged this dollar_figure reduction but at trial he provided no evidence to support the disputed cost-of-goods-sold amount consequently we hold that cost_of_goods_sold is dollar_figure accuracy-related_penalty pursuant to sec_6662 sec_6662 and b imposes an accuracy-related_penalty of of the portion of the underpayment_of_tax attributable to any substantial_understatement_of_income_tax by definition an understatement of income_tax for an individual is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 under sec_7491 the irs bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in this case see 116_tc_438 once the irs meets this burden the taxpayer must come forward with persuasive evidence that the irs’s determination is incorrect see rule a higbee v commissioner t c pincite a taxpayer who is otherwise liable for the accuracy-related_penalty may avoid the liability with respect to a portion of an underpayment if the taxpayer can show under sec_6664 that the taxpayer had reasonable_cause for that portion and that the taxpayer acted in good_faith with respect to that portion sec_1 b income_tax regs provides the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer an isolated computational or transcriptional error generally is not inconsistent with reasonable_cause and good_faith reliance on professional advice constitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith whether the taxpayer acted with reasonable_cause and in good_faith thus depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess the proper tax_liability the taxpayer’s knowledge and experience and the extent to which the taxpayer relied on the advice of a tax professional there are other defenses to the penalty sec_6662 provides that an understatement is reduced first where there is substantial_authority for the taxpayer’s treatment of any item giving rise to the understatement or second where the relevant facts affecting the treatment of any item giving rise to the understatement are adequately disclosed in the return and the taxpayer had a reasonable basis for the treatment of that item long understated his income_tax_liability by dollar_figure an amount which is greater than of the amount required to be shown on his return dollar_figure which is greater than dollar_figure therefore the irs has met its burden of producing evidence that imposing the penalty is appropriate the evidence does not provide grounds for the reasonable-cause substantial-authority or reasonable-basis defenses long consulted with his tax_return_preparer about the character of the income ie ordinary versus capital from the dollar_figure million payment the two decided to report the income as ordinary but that is not the aspect of the return that the irs challenged with respect to the challenged portions of his return the portions that we hold result in the underpayment the evidence does not show that he provided enough information to his return preparer or that he relied on his return preparer’s judgment see 115_tc_43 aff’d 299_f3d_221 3d cir accordingly we hold that long is liable for the sec_6662 penalty for because he substantially understated his income_tax we have considered all other arguments made by the parties and to the extent that we have not discussed them we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent