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 corp b03 plr-120264-12 date september legend target ------------------------------------------------------------------------------ -------------------------------------------------------------------- ----------------- sub -------------------------------- ---------------------------------------------------------------------------- sub ---------------------------------- ------------------------------------------------------------------------------ bb cc dd ee ff state g ------ --------------- ---- ------ --------------- -------------- potential dispositions ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ----------------------------------------------------------------------- plr-120264-12 dear --------------- this letter responds to your representative’s letter dated date requesting that we supplement a private_letter_ruling dated date plr-149071-11 the original ruling additional information was submitted in letters dated date date date date date date and date collectively with the letter dated date the supplemental submissions the material information submitted for consideration is summarized below capitalized or underlined terms not defined in this letter have the meanings assigned to them in the original ruling the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by penalties of perjury statements executed by appropriate parties this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process supplemental facts step lxxviii of the transactions described in the original ruling states that immediately following distribution the controlled group will acquire all of the issued and outstanding_stock of target the acquisition to effectuate the acquisition the following transactions have been completed or are proposed i ii iii controlled formed sub sub formed sub sub will merge with and into target under state g law with target surviving as a wholly owned subsidiary of sub ie the acquisition in the acquisition target shareholders will receive solely controlled voting_stock equal to approximately aa percent of the sole class of controlled stock outstanding immediately after the acquisition the controlled shareholders as of immediately before the acquisition ie the distributing shareholders who receive controlled shares in distribution will own the remaining approximately bb percent of the controlled stock immediately following the acquisition the exchange ratio in the acquisition under which target shareholders will receive approximately aa percent of the controlled voting_stock will not be adjusted for changes in the economic_performance of controlled and business b and target or the market price of the target common_stock thus although the relative values of controlled and business b and target could fluctuate prior to consummation of the plr-120264-12 acquisition the target shareholders in all cases will receive the same percentage ownership of controlled 11’s voting_stock in the acquisition before the acquisition the controlled group intends to issue debt securities in the amount of approximately dollar_figureff the new securities controlled will issue and controlled will guarantee the new securities the proceeds of which will be held in escrow and would not be released until after the closing of the acquisition controlled will use the proceeds once released from escrow i to repay a portion of the outstanding third-party indebtedness of target ii to repay debt owed to distributing and iii for general corporate purposes distributing has agreed in the event the controlled group is unable to obtain third-party indebtedness in the amount of dollar_figurecc at an interest rate of no higher than dd percent annually to extend a ee-day term_loan to controlled to provide controlled additional time to secure long-term financing following the acquisition it is anticipated that controlled will contribute the stock of sub to controlled controlled will contribute the stock of sub to controlled controlled will contribute the stock of sub to controlled and controlled will contribute the stock of sub to controlled such transfers the subsequent contributions in addition following the acquisition controlled intends to repurchase shares of its stock the share repurchases the share repurchases will be completed through an open market share repurchase program or through an accelerated share repurchase asr program or some combination of both to the extent the share repurchases are completed through an open market share repurchase program all controlled shareholders will be allowed to participate in and benefit from the share repurchases and controlled will be indifferent to which shareholders participate in the share repurchases in addition because such share repurchases will be made on the open market through a broker controlled will not know with certainty the identity of any shareholder from which stock is repurchased under the asr program controlled would purchase a specified number of shares from a third-party investment bank at an agreed per-share price the bank would obtain the shares by borrowing shares eg from customers or mutual funds and would buy shares in the open market over time to return the borrowed shares controlled will be indifferent to which shareholders lend or sell shares to the bank and will not know with certainty the identity of any shareholders from which stock is borrowed or purchased by the bank the share repurchases are not motivated to any extent by a desire to increase or decrease the ownership percentage of any particular shareholder or group of shareholders neither distributing nor target currently has any controlling shareholders within the meaning of sec_1_355-7 of the income_tax regulations and it is anticipated that controlled will not have any controlling shareholders following distribution there have been no discussions regarding the share repurchases with any particular shareholder or group of shareholders plr-120264-12 the share repurchases are intended to be accretive to controlled 11’s future earnings and will be undertaken as part of controlled 11’s capital allocation strategy in which controlled determines the optimal use for cash the share repurchases will be undertaken when consistent with the overall capital allocation strategy controlled has excess available cash and has the opportunity to repurchase shares at an attractive price supplemental representations the following representations have been made with respect to the proposed transactions a b c d e f all of the facts representations and statements contained in the original ruling as modified herein by the supplemental submissions and by plr-137492-12 are hereby affirmed including the representations that distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 of the internal_revenue_code in distributing or any of the controlled corporations including any predecessor or successor of any such corporation the share repurchases will be motivated by a business_purpose the stock to be repurchased in the share repurchases will be widely held the share repurchases will be made in the open market and controlled will have no plan or intention to repurchase directly or through any of its subsidiaries an aggregate amount of its stock that would equal or exceed percent of its outstanding_stock before the fifth anniversary of distribution the fair_market_value of the controlled shares to be received by each target shareholder will be approximately equal to the fair_market_value of the target stock surrendered in the acquisition except for the share repurchases there is no plan or intention by controlled or any person related within the meaning of sec_1_368-1 to controlled to either directly or indirectly acquire any of the controlled shares issued in the acquisition none of controlled sub or any person related within the meaning of sec_1_368-1 to controlled or sub will have acquired any target stock with consideration other than controlled stock target has no plan or intention to issue additional shares of its stock that would result in sub losing control of target within the meaning of sec_368 plr-120264-12 g h i j k l m n sub has no plan or intention to liquidate target to merge target into another corporation to cause target to sell or otherwise dispose_of any of its assets or to sell or otherwise dispose_of any of the target stock acquired in the acquisition except in each case for i the potential dispositions ii dispositions made in the ordinary course of business and iii transfers described in sec_368 or sec_1_368-2 including the subsequent contributions sub will acquire all of the outstanding_stock of target solely in exchange for controlled voting shares for purposes of this representation target stock redeemed for cash or other_property furnished by controlled or sub will be considered as acquired by sub further no liabilities of target or the target shareholders will be assumed within the meaning of sec_357 by sub or controlled nor will any target stock be subject_to any liabilities in connection with the acquisition any outstanding warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in target will be converted into an identical right to acquire controlled voting shares subsequent to the acquisition there will not be outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in target that if exercised or converted would affect sub 19’s acquisition or retention of control of target as defined in sec_368 none of controlled sub or any affiliate of controlled or sub owns directly or indirectly or has owned during the past five years directly or indirectly any stock of target except for expenses that are solely and directly related within the meaning of revrul_73_54 c b to the acquisition controlled sub target and the target shareholders will pay their respective expenses if any incurred in connection with the acquisition following the acquisition target will continue its historic_business or use a significant portion of its historic_business_assets in a business no two parties to the acquisition will be investment companies as defined in sec_368 and iv none of the shareholders of target will have dissenters’ rights with respect to the acquisition and therefore no funds will be supplied directly or indirectly by controlled or sub nor will controlled or sub directly or indirectly reimburse target for any payments to any dissenting shareholders for the value of their stock plr-120264-12 o p q r s t u v at the time of the acquisition the fair_market_value of the assets of target will exceed the sum of its liabilities plus the liabilities if any to which the assets are subject after the acquisition target will satisfy the reporting requirements under sec_1_367_a_-3 target shareholders will receive in the aggregate less than percent of both the total voting power and the total value of the stock of controlled taking into account the attribution_rules of sec_318 as modified by sec_958 in exchange for their target stock in the acquisition u s persons who are officers directors or five-percent target shareholders as defined in sec_1_367_a_-3 of target will own in the aggregate immediately after the acquisition less than percent of each of the total voting power and total value of the stock of controlled taking into account the attribution_rules of sec_318 as modified by sec_958 controlled or a qualified_subsidiary a qualified_subsidiary or a qualified_partnership a qualified_partnership each within the meaning of sec_1 a - c of controlled will have been engaged in an active trade_or_business outside the united_states within the meaning of sec_1_367_a_-2t b and the active business for the entire 36-month period preceding the acquisition at the time of the acquisition neither controlled including any of its qualified subsidiaries or qualified partnerships nor to the knowledge of controlled or target the shareholders of target will have an intention to substantially dispose_of or discontinue the active business the assets of the active business will not have been owned by target or any affiliate of target within the meaning of sec_1504 but excluding the exceptions contained in sec_1504 and substituting percent for percent where it appears therein at any time during the 36-month period ending immediately prior to the acquisition the active business was not acquired for the principal purpose of satisfying the active trade_or_business test contained in sec_1 a - c during the 36-month period ending immediately prior to the acquisition neither controlled nor any of controlled 11’s qualified subsidiaries or qualified partnerships will have acquired i any assets including in particular assets producing or held for the production of passive_income as defined in sec_1297 for any purpose of satisfying the substantiality test of sec_1_367_a_-3 or ii any assets owned by target or any affiliate of target within the meaning of sec_1504 but excluding the exceptions contained in sec_1504 and substituting plr-120264-12 w x y z percent for percent where it appears therein at any time during the month period ending immediately prior to the acquisition the fair_market_value of controlled including the fair_market_value of any qualified_subsidiary or qualified_partnership will include assets producing or held for the production of passive_income as defined in sec_1297 which were acquired outside the ordinary course of business within the 36-month period preceding the acquisition only to the extent the assets were acquired in a transaction which was not undertaken for any purpose of satisfying the substantiality test target has not issued or acquired and will not issue or acquire options or interests similar to options with a principal purpose of avoiding the general_rule of sec_367 the acquisition is not a transaction to which sec_1_367_b_-10 applies the exchange ratio in the acquisition which is the result of arm’s-length bargaining and pursuant to which target shareholders will receive approximately aa percent of the stock of controlled in exchange for their target stock is fixed aa the new securities will constitute debt and not equity for federal_income_tax purposes and will not be convertible into equity supplemental rulings based solely on the information submitted and the representations set forth above we rule as follows the proposed transactions will not adversely affect the original ruling which will remain in full force and effect for purposes of testing the effect of the share repurchases on distribution under sec_355 the share repurchases will be treated as being made from all holders of controlled common_stock on a pro_rata basis the effect of the share repurchases will be taken into account under sec_355 and this ruling only to the extent such share repurchases are otherwise treated for purposes of sec_355 as part of a plan or series of related transactions with distribution for federal_income_tax purposes the formation of sub and its merger with and into target pursuant to the acquisition will be disregarded and the transaction instead will be treated as the acquisition by sub of all of the outstanding_stock of target in exchange solely for shares of controlled voting_stock rev_rul c b plr-120264-12 the acquisition will qualify as a reorganization pursuant to sec_368 controlled sub and target each will be a_party_to_a_reorganization within the meaning of sec_368 except to the extent provided by sec_367 as determined under ruling no gain_or_loss will be recognized by target shareholders on the exchange of their target stock solely for controlled voting common_stock in the acquisition sec_354 and sec_1_367_a_-3 except to the extent provided by sec_367 as determined under ruling no gain_or_loss will be recognized by a holder of target options restricted_stock or other rights to acquire target stock upon the exchange of target options restricted_stock or other rights to acquire target stock for controlled options restricted_stock or other rights to acquire controlled stock respectively with identical terms sec_354 sec_1_354-1 and sec_1_367_a_-3 neither sub nor controlled will recognize any gain_or_loss upon the receipt by sub of target common_stock in exchange solely for controlled voting common_stock in the acquisition sec_1032 and sec_1_1032-2 the basis of the target stock acquired by sub will be determined under sec_362 taking into account the provisions of sec_362 immediately after the acquisition controlled 11’s basis in the stock of sub will be determined under sec_1_358-6 the basis of the controlled voting common_stock received by each target shareholder in the acquisition will be the same as the basis of the target stock surrendered in exchange therefor increased by the gain recognized if any by such shareholder in accordance with ruling sec_358 the holding_period of the controlled voting common_stock received by each target shareholder in the acquisition will include the period during which the target stock surrendered by such shareholder was held provided that the target stock surrendered by such shareholder was held as a capital_asset on the date of the exchange sec_1223 the transfer of target stock by target shareholders pursuant to the acquisition other than by target shareholders who are u s persons and are or will be five- percent transferee shareholders within the meaning of sec_1_367_a_-3 but who do not enter into gain recognition agreements within the meaning of sec_1_367_a_-3 and sec_1_367_a_-8 will qualify for an exception to sec_367 sec_1_367_a_-3 and sec_1_367_a_-3 plr-120264-12 caveats no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding whether any of distribution sec_1 through or any of the transactions described in this letter i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of the earnings_and_profits of any distributing_corporation or controlled_corporation or both see sec_355 and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 further no opinion is expressed as to the reporting requirements of u s persons exchanging target stock under sec_6038b and the regulations thereunder procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ______________________ isaac w zimbalist senior technician reviewer branch office of associate chief_counsel corporate cc


t c memo united_states tax_court brian d ray and betsy ray petitioners v commissioner of internal revenue respondent docket no filed date james c pennington for petitioners sheila r pattison and roberta l shumway for respondent memorandum findings_of_fact and opinion nega judge respondent determined deficiencies in and additions to tax under sec_6651 and accuracy-related_penalties under sec_6662 on petitioners’ federal_income_tax as follows 1unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure addition_to_tax sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure penalty sec_6662 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure year deficiency dollar_figure big_number big_number big_number big_number big_number after concessions the issues remaining for decision for tax years and years at issue are whether the income from checks to petitioners’ children from the national home education research 2as part of his opening statement respondent conceded that the following amounts paid to petitioners’ children were not income to petitioners dollar_figure for tax_year dollar_figure for tax_year dollar_figure for tax_year dollar_figure for tax_year and dollar_figure for tax_year further on the basis of witnesses’ testimony at trial respondent conceded that the dollar_figure check from mr and mrs tindall deposited into petitioners’ visa account at the oregon state university osu credit_union osu visa account was a gift and not taxable_income to petitioners for tax_year the dollar_figure check from eleanor and steven briggs deposited into the osu visa account was a gift and not taxable_income to petitioners for tax_year the dollar_figure check from eleanor and steven briggs deposited into the osu visa account was a gift and not taxable_income to petitioners for tax_year the dollar_figure check from eleanor and steven briggs deposited into the osu visa account was a gift and is not taxable_income to petitioners for tax_year and the dollar_figure check from criminology for dummies deposited into petitioners’ savings account at marion and polk schools maps credit_union maps savings account was a gift and not taxable_income to petitioners for tax_year institute nheri checks should be attributed to petitioners petitioners failed to report certain receipts on schedule c profit or loss from business petitioners are liable for additions to tax under sec_6651 and petitioners are liable for accuracy-related_penalties under sec_6662 findings_of_fact some of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in oregon when the petition was filed i petitioners’ background during the years at issue petitioners brian d ray and betsy ray lived on their six-acre farm in oregon with six of their eight children during those year sec_3during the years at issue the ages of petitioners’ children who resided on the family’s farm were as follows name hanna r daniel r c r e r a r m r year petitioners home schooled their children as part of their home school curriculum petitioners taught their children the importance of working together to take care of the household’s needs including the household’s food shelter and clothing expenses in accordance with that philosophy all members of the family contributed portions of their income to the family’s shared osu visa account ii national home education research institute nheri during the years at issue mr ray worked at nheri nheri is a tax-exempt sec_501 organization cofounded by mr ray to perform analyze and disseminate research on home schooling to the media policymakers and legislators nheri is primarily funded through donations but also generated revenue through book sales and research contracts iii petitioners’ and petitioners’ children’s income-producing activities a mr ray during the years at issue mr ray worked full time as nheri’s sole researcher and served as nheri’s sole financial officer in his role as nheri’ sec_4osu credit_union treated its visa accounts as depository accounts and allowed individual clients or customers to deposit checks or cash directly against an outstanding credit card account balance accordingly we consider petitioners’ osu visa account as a depository_account and treat payments made to that account as deposits in addition to the osu visa account petitioners had exclusive control_over the maps savings account and a savings account at osu credit_union financial officer mr ray had the exclusive authority to determine wages and salaries for all of nheri’s workers including himself during the years at issue however nheri did not pay mr ray for his services citing a lack of funds independent of his work at nheri mr ray earned_income for his family by providing consulting services and giving speeches and expert testimony regarding home education schedule c receipts mr ray deposited some of his schedule c receipts into the osu visa account but typically cashed those he received in check form petitioners reported mr ray’s schedule c receipts as follows gross_receipts total expenses net profit year dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- -0- big_number big_number big_number big_number big_number dollar_figure big_number big_number petitioners did not however report all of mr ray’s schedule c receipts on their schedules c for the years at issue 5nheri did not have written employment contracts with its workers instead mr ray determined each worker’s compensation on the basis of the amount of money that nheri had available at the time it needed to pay its workers b ms ray during the years at issue ms ray generated income by making speeches at various home education retreats and seminars she was paid_by check for some of those speaking engagements and deposited those payments into the osu visa account petitioners did not report any of ms ray’s income for the years at issue c petitioners’ children during the years at issue five of petitioners’ six children hanna r daniel r c r e r and a r purportedly worked at nheri as office assistants their responsibilities ostensibly included answering telephone calls and emails handling the mailing duties and filling orders at no time however did their responsibilities include filling out timesheets or otherwise documenting their hours worked at nheri because nheri did not provide them with nor require them to create timesheets during the years at issue nheri managed to pay petitioners’ children a total of dollar_figure for their work despite nheri’s alleged inability to pay mr ray for his services due to a lack of funds all payments to petitioners’ children were made by check nheri checks mr ray on behalf of nheri signed and authorized those checks typically petitioners’ children would cash the nheri checks at the bank where nheri maintained its bank account the children would then deposit some of that cash into the osu visa account and retain some of it the record does not establish the amounts retained by the children nor the amounts of the nheri checks deposited into the osu visa account iv petitioners’ tax examination returns and notice_of_deficiency a tax examination petitioners did not timely file their form_1040 u s individual_income_tax_return return for any of the years at issue on date internal revenue_agent kimberly clonch ra clonch started her examination concerning 6no forms w-2 wage and tax statement or forms 1099-misc miscellaneous income were ever issued by nheri or mr ray for any of the amounts paid to petitioners’ children or nheri’s other workers petitioners’ children did not report any of the funds they received from nheri on their respective returns 7on occasion petitioners’ children would endorse some of the nheri checks to mr ray who would then deposit the entirety of those checks in the osu visa account in no nheri checks were deposited into the osu visa account in nheri checks totaling dollar_figure were deposited into the osu visa account in nheri checks totaling dollar_figure nheri were deposited in the osu visa account petitioners’ federal_income_tax liability for tax_year on date ra clonch expanded that examination to include petitioners’ federal_income_tax liabilities for the other years at issue at about this time petitioners sought the assistance of their present counsel james c pennington to prepare their returns for the years at issue and later to represent petitioners during their examination with ra clonch before respondent’s office of appeals to assist mr pennington in both his representation of petitioners and preparation of their returns for the years at issue petitioners provided mr pennington the following documents a table which purported to show estimates of mr ray’s schedule c receipts for tax years and a handwritten note that purported to show mr ray’s schedule c receipts for tax_year a handwritten note that purported to show petitioners’ property_tax paid in tax_year a handwritten note that purported to show petitioners’ medical_expenses paid in tax_year and two documents from santiam escrow inc showing that petitioners paid mortgage interest of dollar_figure and dollar_figure for tax_year petitioners did not 8mr pennington who is also a certified_public_accountant did not provide petitioners with any_tax advice before the respective due dates of those returns otherwise provide mr pennington any substantive documentation to aid him in his preparation of their returns for the years at issue b respondent’s reconstruction of petitioners’ income ra clonch issued petitioners information document requests idr for each of the years at issue in response to one of the idrs petitioners provided estimates of household expenses for two of their children petitioners however did not provide all requested documents to ra clonch as a result ra clonch summoned bank records for petitioners’ maps savings account petitioners’ savings account at osu credit_union petitioners’ osu visa account and nheri’s bank account and she analyzed those bank records in order to complete her reconstruction of petitioners’ income bank_deposits analysis ra clonch examined every deposit into each of petitioners’ bank accounts then using information provided by petitioners’ idr responses ra clonch 9the parties refer to this portion of ra clonch’s income reconstruction as her bank_deposits analysis for convenience we will adopt the parties’ use of that term but we recognize that ra clonch’s analysis was not fundamentally a bank_deposits analysis of the type to which that term of art is typically applied to this extent and as discussed further infra we recognize that ra clonch’s methods and analysis in reconstructing petitioners’ income were generally reasonable and permissible see eg brodsky v commissioner tcmemo_2001_240 slip op pincite attempted to ascertain whether any of those deposits were nontaxable or were previously taxed and adjusted her reconstruction of petitioners’ income accordingly in doing so ra clonch observed that many of the deposits into the osu visa account were of cash and were made by petitioners and their childrendollar_figure ra clonch concluded that the following taxable deposits were made in petitioners’ accounts for each of the years at issue 10for purposes of her analysis ra clonch considered petitioners’ paypal account to be a deposit account ra clonch excluded from this portion of her income reconstruction analysis all nheri checks that were deposited into the osu visa account as she had already determined those checks to be income to petitioners elsewhere in her income reconstruction at no time during the course of ra clonch’s examination of their bank accounts did petitioners inform ra clonch that on a number of occasions they had deposited into their bank accounts the proceeds of nheri checks cashed by their children ra clonch testified that had petitioners argued this position she would have asked mr pennington to provide her with contemporaneous_records in support neither petitioners nor their children however kept contemporaneous_records of the movement of cash among members of the household taxable deposit dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure year total nheri checks after completing the bank_deposits analysis ra clonch using standard guidelines and information provided to her by petitioners calculated petitioners’ household expenses for each of the years at issue she then compared that amount to her bank_deposits analysis and determined that very few of the general housing living_expenses were paid out of the osu visa account and the cash from the nheri checks was used in large part to pay petitioners’ household expenses accordingly as part of her reconstruction of petitioners’ income ra clonch also included the nheri checks in petitioners’ taxable_income for each of the years at issue unreported schedule c income after completing the bank_deposits analysis and making her determination with respect to the nheri checks ra clonch analyzed the amounts deposited into petitioners’ accounts and compared those amounts to the amounts on petitioners’ list of schedule c receipts to determine the extent to which those receipts were actually deposited in petitioners’ accounts in doing so ra clonch using information from petitioners’ idr responses determined the following amounts to be the extent to which petitioners deposited their schedule c receipts into their various accounts year total deposited schedule c receipts dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure as a result ra clonch included the following amounts as taxable deposits in her reconstruction of petitioners’ income in addition to those that she found as a result of her bank_deposits analysis of petitioners’ accounts unreported schedule c receipts dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure year total after adding up the taxable deposits nheri checks and missing schedule c receipts ra clonch subtracted the schedule c income otherwise reported in petitioners’ returns c petitioners’ returns on date petitioners filed their return on date they filed their and returns on date they filed their return d notice_of_deficiency on date ra clonch received written supervisory approval to impose an accuracy-related_penalty under sec_6662 for each of the years at issue on date respondent issued petitioners a notice_of_deficiency notice for the years at issue determining a deficiency arising from additional unreported schedule c income for each of the years at issue in doing so respondent relied on ra clonch’s reconstruction of petitioners’ income respondent further determined that for each of the years at issue petitioners are liable for an addition_to_tax under sec_6651 and an accuracy-related_penalty under sec_6662 petitioners timely filed a petition for redetermination i burden_of_proof opinion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper rule a 290_us_111 however if a taxpayer produces credible evidence11 with respect to any factual issue relevant to ascertaining the taxpayer’s liability for any_tax imposed by subtitle a or b of the code and satisfies the requirements of sec_7491 sec_11 credible_evidence is the quality of evidence which after critical analysis the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted without regard to the judicial presumption of irs correctness 116_tc_438 quoting h_r conf rept no pincite 1998_3_cb_747 the burden_of_proof on any such issue shifts to the commissioner sec_7491 sec_7491 requires a taxpayer to demonstrate that he or she complied with the requirements under the code to substantiate any item maintained all records required under the code and cooperated with reasonable requests by the secretary12 for witnesses information documents meetings and interviews see also 116_tc_438 the u s court_of_appeals for the ninth circuit to which an appeal in this case would lie absent a stipulation to the contrary see sec_7482 has held that for the presumption of correctness to attach to the notice_of_deficiency in unreported income cases the commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 or demonstrating that the taxpayer actually received unreported income 680_f2d_1268 9th cir the requisite evidentiary foundation is minimal and need not include direct 12the term secretary means the secretary_of_the_treasury or_his_delegate sec_7701 evidence see banister v commissioner tcmemo_2008_201 aff’d 418_fedappx_637 9th cir if the commissioner introduces some evidence that the taxpayer received unreported income the burden shifts to the taxpayer who must establish by a preponderance_of_the_evidence that the unreported income adjustment was arbitrary or erroneous see 181_f3d_1002 9th cir aff’g tcmemo_1997_97 respondent has established the necessary foundation linking petitioners with income-producing activities and with the bank accounts included in respondent’s bank_deposits analysis therefore the presumption of correctness stands and petitioners bear the burden of proving that respondent’s determinations are incorrect unless petitioners demonstrate that the burden_of_proof should shift to respondent under sec_7491 and petitioners do not contend that they met the requirements and the record confirms that they did not do so accordingly the burden_of_proof remains on petitioners ii respondent’s reconstruction of petitioners’ income as noted above respondent’s reconstruction of petitioners’ income consisted primarily of determining taxable deposits by way of ra clonch’s bank_deposits analysis respondent’s entire reconstruction however also comprised ra clonch’s determination that the nheri checks constituted unreported income of petitioners petitioners contend that respondent’s reconstruction of their income is inaccurate because respondent improperly assigned the nheri checks to petitioners as unreported income ie assignment_of_income and improperly determined that certain bank_deposits made by petitioners their children and third parties constituted unreported gross_income of petitioners ie the bank_deposits analysis a assignment_of_income nheri checks sec_61 defines gross_income as all income from whatever source derived a fundamental principle of income_taxation is that income is taxable to the person who earns it 281_us_111 the ‘true earner’ of income is the person or entity who controlled the earning of such income rather than the person or entity who received the income barmes v commissioner tcmemo_2001_155 slip op pincite aff’d a f t r 2d ria 7th cir the crucial question is whether the assignor retains sufficient power and control_over the assigned_property or over the receipt of the income to make it reasonable to treat him as the recipient of the income for tax purposes id quoting 333_us_591 petitioners contend that respondent erred in including the nheri checks in petitioners’ income in his reconstruction for the years at issue because with respect to petitioners’ adult children there is clear evidence that the children had dominion and control_over the amounts paid to them by nheri and minor children sec_73 requires that the amounts paid to them by nheri must not be included in petitioners’ gross_income petitioners further contend that if this court finds that respondent did not err in assigning the nheri checks as income to petitioners in his reconstruction of petitioners’ income for the tax years at issue then petitioners are nonetheless entitled to a deduction for the amounts their children received respondent however contends that he did not err in including the nheri checks as income to petitioners in his reconstruction of petitioners’ income for the tax years at issue because by purporting to pay five of his six children instead of himself mr ray attempted to disguise petitioners’ receipt of over dollar_figure during the years at issue petitioners exercised complete dominion and control_over the bank accounts including the osu visa account into which petitioners and their children deposited cash from the nheri checks and petitioners’ children would regularly endorse nheri checks to mr ray who then either deposited the checks into petitioners’ bank account or cashed them and used that cash to pay petitioners’ household expenses we agree with respondent first during the years at issue mr ray worked full time at nheri as its sole researcher and financial officer as nheri’s financial officer mr ray had the exclusive authority to determine wages and salaries for all of nheri’s workers including himself yet during those years nheri citing a lack of funds did not pay mr ray for his services in those aforementioned roles but did manage to pay petitioners’ children dollar_figure for their purported work as office assistants during that same perioddollar_figure we also note that at no time were any of those payments reported to the internal_revenue_service on forms w-2 or any other return nor did mr ray inform his children that they might be required to file returns for the years at issue moreover petitioners’ children would then cash those nheri checks at the bank where nheri maintained its bank account the children would deposit some of that cash into the osu visa account and retain some of itdollar_figure the record does not establish what petitioners’ children did with the cash they retained nor 13the record does not establish how many hours petitioners’ children ostensibly worked because nheri did not provide them with nor require them to create timesheets 14see supra note does the record establish the extent to which petitioners’ children actually deposited the cash proceeds from the nheri checks into the osu visa account because neither petitioners nor their children maintained a contemporaneous ledger or other account book that might establish the source or ownership of the cash deposited into the family osu visa account nevertheless the record does establish that the cash from the nheri checks was used to pay petitioners’ household expenses finally since we have found that respondent did not err in assigning the nheri checks as income to petitioners we must address petitioners’ contention with respect to sec_73 we find petitioners’ contention to be without merit this is because while sec_73 requires inclusion of a mounts received in respect of the services of a child in the child’s own gross_income rather than that of the parents it applies only to income the child is deemed to have earned 79_tc_152 dollar_figure to determine the true_earner we looked to who had the ultimate direction and control_over the earning 15before the enactment of the predecessor of sec_73 income received in respect of the services of a child was reported by parents who held rights to such services under local law h_r rept no pincite c b however states had varying laws and exceptions concerning parental entitlement to the services of a child id congress sought to create uniformity by requiring inclusion of amounts received for a child’s services in the child’s own gross_income id of the income 73_tc_1246 quoting nesenberg v commissioner 69_tc_1005 see fritschle v commissioner t c pincite as we noted above we determined the true_earner of the income to be petitioners not their children therefore sec_73 is inapplicable and does not operate to include any portion of those amounts in the gross incomes of petitioners’ childrendollar_figure accordingly on the record before us we find that respondent properly included the nheri checks in petitioners’ income in his reconstruction for the tax years at issue b bank_deposits analysis as stated above gross_income includes all income from whatever source derived including income derived from business sec_61 a taxpayer 16on brief petitioners claim that if this court finds that respondent properly included the nheri checks in their income for the tax years at issue then they would be entitled to any ordinary and necessary business_expenses related to such self-employment_income with respect to cash retained by their children from the nheri checks petitioners fail to cite any statutory authority or caselaw but assert that given such a finding they would then be in the position of being taxed on certain amounts now as independent contractors of nheri to the extent we understand petitioners’ contention we find it to be without merit to the extent petitioners’ children may have retained any money from the nheri checks the record lacks any evidence to establish that these amounts were deductible business_expenses of petitioners rather than nondeductible personal parenting expenses see 25_tc_859 must maintain books_and_records establishing the amount of his or her gross_income see sec_6001 92_tc_661 sec_1_446-1 income_tax regs when a taxpayer fails to keep adequate books_and_records the commissioner is authorized to determine the existence and amount of the taxpayer’s income by any method that clearly reflects income sec_446 petzoldt v commissioner t c pincite the commissioner may use indirect methods and he has latitude in determining which method of reconstruction to apply when a taxpayer fails to maintain adequate books_and_records petzoldt v commissioner t c pincite the commissioner’s reconstruction of a taxpayer’s income need only be reasonable in the light of all surrounding facts and circumstances 40_tc_30 see also 54_tc_1530 the method of reconstruction that the commissioner uses is not invalidated solely because the commissioner’s income determination may not be completely correct 175_f2d_500 2d cir aff’g 7_tc_245 96_tc_858 aff’d 959_f2d_16 2d cir respondent used the bank_deposits method because petitioners failed to maintain or produce for examination adequate books_and_records for the tax years at issue a bank deposit is prima facie evidence of income dileo v commissioner t c pincite 87_tc_74 the bank_deposits method of reconstruction assumes that all of the money deposited into a taxpayer’s account is taxable_income unless the taxpayer can show that the deposits are nontaxable see dileo v commissioner t c pincite see also 335_f2d_671 5th cir the commissioner need not show a likely source of the income when using the bank_deposits method but the commissioner must take into account any nontaxable items or deductible expenses of which the commissioner has knowledge see price f 2d pincite tokarski v commissioner t c pincite to this extent however the commissioner is not obligated to follow any leads that suggest a taxpayer has deductible expenses dileo v commissioner t c pincite when the commissioner reconstructs a taxpayer’s income using the bank_deposits method and determines a deficiency the taxpayer bears the burden of proving the commissioner’s analysis and determinations are erroneous see 102_tc_632 dileo v commissioner t c pincite the taxpayer may prove that the commissioner’s reconstruction_of_income is in error in whole or in part by proving that a deposit is nontaxable see clayton v commissioner t c pincite petitioners did not produce all books_and_records requested during audit ra clonch subsequently needed to summon bank records directly from petitioners’ maps savings account a savings account at osu credit_union the osu visa account and nheri’s bank account in order to accurately determine petitioners’ income for the years at issue from these records ra clonch prepared the bank_deposits analysis upon which respondent’s determinations of income_tax deficiencies are partly based petitioners contend that ra clonch’s bank_deposits analysis is inaccurate because ra clonch erred in determining that certain reimbursements transfers between accounts and gifts were taxable deposits and that certain cash deposits were double counted because petitioners bear the burden of proving that respondent’s bank_deposits analysis is erroneous they must prove that respondent erred in preparing it see sec_446 petzoldt v commissioner t c pincite sec_1_446-1 income_tax regs we address each of petitioners’ contentions in turn as discussed below we generally find that ra clonch’s methodology for determining petitioners’ taxable_income and the resulting income_tax deficiencies was reasonable reimbursements transfers between accounts and gifts petitioners contend that the bank_deposits analysis is inaccurate because ra clonch erred in determining that certain reimbursements transfers between accounts and gifts were taxable deposits respondent contends that petitioners failed to identify any nontaxable deposits during the examination and that respondent eliminated nontaxable sources of income and transfers between accounts based on available information at trial mr ray conceded that petitioners failed to report all of their schedule c income in their untimely filed returnsdollar_figure further at trial mr ray testified without providing any corroborating evidence that many of the disputed items were in fact reimbursements gifts income of another or transfers between accounts we find mr ray lacked credibility and decline to rely on his uncorroborated and self-serving testimony to establish that the disputed items 17to the extent any of petitioners’ arguments can be construed to contend that respondent erred in including petitioners’ missing schedule c income in his reconstruction of petitioners’ income we find such a contention to be without merit in calculating petitioners’ missing schedule c income ra clonch calculated the difference between the amounts that petitioners reported on their respective schedules c for the years at issue and the deposits she could identify as being schedule c income on the basis of documents petitioners provided to her during the examination petitioners have failed to provide any evidentiary support to establish that ra clonch erred in preparing this portion of the bank_deposits analysis were reimbursements gifts income of another or transfers between accounts see tokarski v commissioner t c pincite on the record before us we find that petitioners failed to introduce credible_evidence that the aforementioned deposits are not taxable_income and to that extent we find that no adjustment to respondent’s bank_deposits analysis is required cash deposits petitioners also contend that respondent’s bank_deposits analysis is inaccurate because it fails to properly account for certain cash deposits specifically petitioners contend that in the light of our holding above that the nheri checks constitute income to petitioners for the years at issue inclusion of those cash deposits resulted in the double counting because petitioners allege that the cash deposits into the osu visa account came from cashed nheri checks although mr ray did not support his testimony with evidence of any worth and did not even make the argument about double counting until after the audit in which petitioners were not particularly cooperative it is logical that some of the checks made out to the children from nheri were deposited into the osu visa account to that extent we find that respondent’s bank_deposits analysis would have double counted at least some portion of petitioners’ taxable_income for each of the years at issue the conundrum is how to determine what portions of the nheri checks were actually deposited into the osu visa account given the shortcomings of the evidence at trialdollar_figure because we believe that petitioners engaged in a pattern of behavior to replace what ordinarily would be taxable salary payments to mr ray with what petitioners argue are nontaxable payments to their children the court believes that the deposits into the osu visa account most likely to be the subject of this sleight of hand were those deposits which were evenly divisible by and not otherwise the subject of a stipulation by one or both partiesdollar_figure we make a further refinement to this calculation for tax_year 18the record does not establish what petitioners’ children did with the cash they retained nor does it establish the extent to which petitioners or their children actually deposited the cash proceeds from the nheri checks into the osu visa account as neither petitioners nor their children maintained a contemporaneous ledger or other account book that established the source or ownership of such cash 19using our best judgment we conclude that some of the cash deposits were in fact cash from the nheri checks that has already been counted against petitioners as income for the years at issue see 39_f2d_540 2d cir buske v commissioner tcmemo_1998_29 applying cohan to determine the amount of unreported income kale v commissioner tcmemo_1996_197 same alanis v commissioner tcmemo_1995_263 holding that in cases of unreported income it may be appropriate for the court to make estimates of the amount of income that the taxpayer has failed to report applying the cohan principle smith v commissioner tcmemo_1993_548 applying cohan to adjust both bank_deposits and nontaxable items in reconstructing income the appendix infra pp details which deposits were continued when we employ the lesser_of the sum of such deposits and the total amount of checks made out that year from nheri to petitioners’ children accordingly on the record before us we find that dollar_figure for dollar_figure for dollar_figure for dollar_figure for dollar_figure for and dollar_figure for must be excluded in calculating petitioners’ alleged unreported schedule c income iii penalties and additions to tax a general the commissioner bears the burden of production with respect to the taxpayers’ liability for penalties and additions to tax and must produce sufficient evidence indicating that it is appropriate to impose them see sec_7491 higbee v commissioner t c pincite as part of that burden with respect to certain penalties the commissioner must also show that he complied with the written approval requirement of sec_6751 see graev v commissioner 149_tc_23 supplementing and overruling in part 147_tc_460 dollar_figure continued actually cash from the nheri checks sec_6751 provides that n o penalty under this title shall be assessed unless the initial determination of such assessment receives supervisory approval this provision does not apply to any addition_to_tax under section continued once the burden of production is met the taxpayers must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayers had reasonable_cause or substantial_authority for their position see higbee v commissioner t c pincite b sec_6651 addition_to_tax for failure_to_file timely sec_6651 imposes upon taxpayers an addition_to_tax for failure_to_file a timely return the addition_to_tax will not apply if the taxpayers show their failure was due to reasonable_cause not willful neglect id taxpayers demonstrate reasonable_cause when they show that despite exercising ordinary business care and prudence they were unable to file the return on time sec_301_6651-1 proced admin regs the obligation to file timely is the taxpayers’ unambiguous and nondelegable and reliance on an agent generally will not amount to reasonable_cause for untimely filing 469_us_241 taxpayers bear a heavy burden when attempting to prove reasonable_cause for failure_to_file timely id pincite see 77_f3d_236 8th cir continued or sec_6751 accordingly respondent was not required to verify that the additions to tax determined against petitioners for the years at issue under sec_6651 had been approved by a supervisor petitioners failed to file timely returns for the years at issue petitioners argue however that they had reasonable_cause because they were unaware of their filing requirement for the years at issue and therefore their failure to timely file was neither conscious nor intentional petitioners’ mistake as to or ignorance of the law does not amount to reasonable_cause and thus will not relieve them from the imposition of the addition_to_tax pursuant to sec_6651 rayhill v commissioner tcmemo_2013_181 citing 25_tc_13 and west v commissioner t c memo on the record before us we find that petitioners have failed to carry their burden of establishing that their failure to timely file returns for the years at issue was due to reasonable_cause and not due to willful neglect on that record we sustain respondent’s imposition of the addition_to_tax under sec_6651 c sec_6662 accuracy-related_penalty sec_6662 and b and imposes an accuracy-related_penalty on any portion of an underpayment_of_tax that is attributable to the taxpayers’ n egligence or disregard of rules or regulations or substantial_understatement_of_income_tax negligence includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs an understatement of income_tax is substantial if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 on the record before us we find that if the rule_155_computations confirm substantial understatements of income_tax for the years at issue then respondent has met his burden of productiondollar_figure further we find that petitioners were required but failed to maintain adequate_records to substantiate their deductions sec_1_6662-3 income_tax regs on that record we find that respondent has also met his burden of production with respect to the accuracy-related_penalties under sec_6662 attributable to petitioners’ negligence the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to that portion sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on all the pertinent facts and circumstances including the taxpayer’s efforts to assess the taxpayer’s proper tax_liability the knowledge and 21we note that the record contains evidence in the form of a civil penalty approval form that respondent complied with the requirements of sec_6751 see graev v commissioner t c __ __ slip op pincite date supplementing and overruling in part 147_tc_460 experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs on the record before us we find that petitioners have failed to carry their burden of establishing that there was reasonable_cause for and that they acted in good_faith with respect to the underpayments for the years at issue on that record we find that petitioners have failed to carry their burden of establishing that they are not liable for the years at issue for the accuracy-related_penalties because of underpayments attributable to negligence or alternatively substantial understatements of income_tax under sec_6662 and b and we have considered all the other arguments of the parties and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered under rule date appendix date amt dollar_figure big_number big_number amt dollar_figure big_number big_number date amt dollar_figure big_number big_number date amt dollar_figure big_number big_number big_number big_number big_number big_number big_number date amt dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number date amt dollar_figure big_number big_number big_number big_number big_number big_number big_number date amt date amt date amt big_number big_number big_number big_number big_number date amt big_number big_number big_number big_number big_number big_number big_number date amt big_number big_number big_number big_number big_number big_number big_number big_number date amt big_number big_number big_number big_number big_number big_number big_number date amt date amt date amt date amt date amt big_number big_number big_number date amt big_number big_number big_number big_number big_number total big_number total big_number total big_number total big_number total big_number total big_number


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 plr-109414-17 date date -------------------------- -------------------------------------- ------------------------- ------------------------- ---------------------------------- ------------------------------------------------------------------------ re -------------------------- legend donor child accountant attorney trust ----------------------- ----------------------- date year ------- ------- year ------- year ------- year year sec_2 through -------------------------- -------------------------- years through ------- year ------- year x ---------- ---------------------------------- company ---------- a b ---------- ---------- c d ---------- plr-109414-17 dear -------------------- this letter responds to a letter from your authorized representative dated date requesting an extension of time pursuant to sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations the facts and representations submitted are summarized as follows on date donor’s spouse established trust an irrevocable_trust for the primary benefit of child although trust has generation-skipping_transfer gst potential a portion of trust has the potential to be included in the gross_estate of a non-skip_person other than the transferor if such person died immediately_after_the_transfer in year donor transferred x shares of company stock to trust in each of year sec_2 through donor transferred dollar_figurea in cash to trust in each of years through donor transferred dollar_figureb in cash to trust in year donor transferred dollar_figurec in cash to trust and transferred dollar_figured in cash to trust in year year sec_1 through are prior to and year sec_4 through are after donor retained accountant and attorney for advice on reporting the transfers and preparing any necessary form sec_709 united_states gift and generation-skipping_transfer_tax return at all times donor indicated her intention that trust be exempt from gst tax accountant prepared a year form_709 on which donor reported her year transfer to trust however in preparing this form accountant failed to allocate donor’s available gst_exemption to the transfer to trust no form sec_709 were prepared or filed for year sec_2 through based on accountant’s and attorney’s advice that filing form sec_709 was not necessary it is represented that donor has sufficient gst_exemption to allocate to the transfers donor requests an extension of time under sec_2642 and sec_301_9100-3 to i allocate gst_exemption to her transfers to trust in year sec_1 through and ii elect under sec_2632 to treat trust as a gst_trust with respect to all transfers made by donor to trust law and analysis sec_2601 imposes a tax on every gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip plr-109414-17 sec_2602 provides that the amount of the gst tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that for purposes of chapter the inclusion_ratio with respect to any property transferred in a gst is generally defined as the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of certain taxes and charitable deductions under sec_2631 individuals are allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor for purposes of determining the inclusion_ratio sec_2631 provides that once an allocation of gst_exemption is made it is irrevocable sec_2632 is effective for transfers subject_to chapter or made after date and to estate_tax inclusion periods etips ending after date see pub_l_no sec_561 sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter made to a gst_trust sec_2632 provides that the term gst_trust means a_trust that could have a gst with respect to the transferor unless the trust is described in sec_2632 through vi sec_2632 provides that an individual may elect to treat any trust as a gst_trust for purposes of sec_2632 with respect to any or all transfers made by such individual to such trust sec_2632 provides in part that an election under sec_2632 may be made on a timely filed gift_tax_return for the calendar_year for which the election is to become effective sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that a transferor may elect to treat any trust as a gst_trust gst_trust election without regard to whether the trust is subject_to sec_2642 with respect to a any current-year transfer or any or all current-year transfers by the electing transferor to the trust b any selected future transfers c all future transfers by the plr-109414-17 electing transferor to the trust or d any combination of these sec_26_2632-1 provides that to make a gst_trust election the transferor must attach a statement gst_trust election statement to a form_709 filed on or before the due_date for timely filing the form_709 for the calendar_year in which the first transfer to be covered by the gst_trust election is made whether or not any transfer was made in the calendar_year for which the form_709 was filed and whether or not a form_709 otherwise would be required to be filed for that year the gst_trust election statement must identify the trust specifically describe or otherwise clearly identify the transfers to be covered by the election and specifically provide that the transferor is electing to have the trust treated as a gst_trust with respect to the covered transfers sec_26_2632-1 provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a plr-109414-17 reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied donor is granted an extension of time of days from the date of this letter to allocate gst_exemption to his gifts made in year year and year the allocations will be effective as of the date of the transfers and the value of the transfers as determined for federal gift_tax purposes will be used in determining the amount of donor’s gst_exemption to be allocated the allocation of gst_exemption for year should be made on a supplemental form_709 for that year the allocations for year and year should be made on form sec_709 for those years likewise donor is granted an extension of time days from the date of this letter to elect to treat trust as a gst_trust for purposes of sec_2632 with respect to the year transfer and all subsequent transfers by donor to trust the automatic allocation rules of sec_2632 will automatically allocate donor’s unused gst_exemption to trust the value of the transfers to trust as determined for federal gift_tax purposes will be used in determining the amount of donor’s unused gst_exemption to be allocated to trust the election to treat trust as a gst_trust should be made by filing a form_709 for year that includes the fair_market_value of the property transferred to trust in year and on which donor makes the election to treat trust as a gst_trust for purposes of sec_2632 with respect to the current_year and all subsequent transfers made by donor to trust plr-109414-17 donor’s supplemental form_709 for year and form sec_709 for year year and year should be filed with the internal_revenue_service cincinnati service_center cincinnati ohio a copy of this letter should be attached to the supplemental form_709 a copy is enclosed for this purpose except as expressly provided herein we express no opinion on the federal tax consequences of the transactions under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs and special industries karlene lesho karlene lesho senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes cc


department of the treasury taxpayer_identification_number person to contact tax peried s snded - vil internal_revenue_service appeals_office san jose appeals ms-7100 s market st ste san jose ca release number release date date date certified mail dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code itis determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective our adverse determination was made for the following reason s organizations described in sec_501 and exempt under sec_501 a must be organized and operated exclusively for an exempt_purpose you have not established that you benefited a charitable_class or that its non-exempt activities were insubstantial you have failed to establish that you meet the requirements of sec_501 and sec_1_501_c_3_-1 in that you do not limit the recreational card game activities to only low income people with addictions contributions to you are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov if you were a private_foundation as of the effective date of the adverse determination you are considered to be taxable private_foundation until you terminate your private_foundation_status under sec_507 of the code in addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period 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 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 within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager enclosure publication department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number uil tax_exempt_and_government_entities_division date jn - legend b state c date d city dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do you qualify for exemption under section sonex of the code no for the reasons outlined below facts you were formed as a nonprofit corporation in the state of b on c your stated purposes in your articles of incorporation are said corporation is organized exclusively for charitable educational and or scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organizations under c of the internal_revenue_code or the corresponding section of any future tax code the specific purpose of the corporation is to provide for the benefit and civil welfare of the community and region in which the corporation exists with specific interest in promotion of adult sobriety and the general welfare of citizens of the state of e you are conducting recreation entertainment programs open to the general_public for those over the age of in the city of d where there are few alternatives to bars and casinos you currently meet on monday and thursdays at a local venue you do not require absolute abstinence for participation you do promote community-minded sobriety during otherwise prolific times of alcoho and drug use particularly during evening hours your only programs consist of providing free and low cost tabletop gaming activities in a supervised non-alcoholic sober environment along with access to gaming accessories that are provided without cost to participants you are promoting tabletop customizable games such as card and miniature games ccgs and cmgs there is also a strong interest in promoting role-playing games rpgs beginner players can learn and obtain free gaming materials solely for playing moreover you have a redemption system-players get free decks and can learn additional games you operate two separate programs for game playing these are tutorials and organized play your website indicates the tutorials are an open opportunity for anyone meeting the program's criteria at least years of age and a commitment towards sobriety during game play individuals may learn any of the games the program is presently promoting and receive a free deck of playing cards or materials as available for the experience tutorials are available at organized play events though can be also arranged by appointment organized play involves structured gaming events on evenings as an alternative to patronizing bars and casinos your programs are dedicated to promoting socialization among adults suffering addictions in their lives you indicated individuals might relapse due to boredom and isolation moreover you want to help those from falling into lifestyles that lead to such problems you stated that those with addiction histories are a distressed class and your recreational programs target lower income people because those with means generally have the resources available to address sobriety issues in addition you do not publically bill yourself as a treatment program and do not offer counseling or therapeutic type services you also are not affiliated with any formal support groups future activities involve developing an online interactive price and reference guide for games an online trading community guide an online sellers market and a classic bulletin board system you have a five person board which you plan to compensate in the future furthermore your founder president has over years experience in collectible and gaming genre activities your projected revenues are from gifts grants contributions and the solicitation of unused gaming materials from the gaming industry vendors collectors retailers and other players gamers moreover the for-profit gaming industry has provided you surplus bulk gaming materials for your recreational programs your projected expenses are salaries facility occupancy expenses and other related expenses to a social recreational meeting place to host games law sec_501 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 to foster national or international amateur sports competition but only if no - part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals séction c -1 a of the income_tax regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -1 c of the regulations provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 c of the code an organization must not engage in substantial activities that fail to further an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the lessening of the burdens of government revrul_77_366 1977_2_cb_192 provides that a nonprofit organization that arranges and conducts winter-time ocean cruises during which activities further religious and educational_purposes are provided in addition to extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify for exemption under sec_501 the organization accomplished both charitable and non-charitable purposes through its cruises 326_us_279 66_sct_112 90_led_67 c b the court held that if an organization is not operated exclusively for charitable purposes it will not qualify for exemption under sec_501 if it has a single non-charitable purpose that is substantial in nature this is true regardless of the number or importance of the organization's charitable purposes in 505_f2d_1068 the court held that an organization it satisfies the seeking a ruling as to recognition of its exempt status has the burden of proving that requirements of the particular exemption statute whether an organization has satisfied the operational_test is a question of fact 74_tc_396 the court stated that the church failed to show that it successfully segregated the clearly social and political aspects of its supper club meetings and its publication from its purpose to further the doctrine_of ethical egoism as the church operated for social and political purposes to more than an insubstantial degree it fails to qualify for exemption under sec_501 of the code the court stated that an organization will-not qualify for exemption if a non-exempt activity is more than an insubstantial part of its overall activities or if an activity has more than an insubstantial non-exempt purpose the court explained clearly the regulations and cases contemplate that a single activity may be carried on for more than one purpose if a substantial secondary purpose is not an exempt one qualification under sec_501 will be denied application of law you are not described in sec_501 of the code because you are not organized and operated exclusively for charitable or educational_purposes you do not meet the provisions of sec_1_501_c_3_-1 of the regulations because your stated purpose in your articles of incorporation is to provide for the benefit and civil welfare of the community and region in which the corporation exists with specific interest in promotion of adult sobriety and the general welfare of citizens of the state of e this purpose is not limited to one or more of the purposes specified in the code and regulations you-are not operating in accordance with sec_1_501_c_3_-1 of the regulations you have a substantial non exempt_purpose of providing regular social and recreational activities to the for example your organized game playing meets general_public to promote adult sobriety regularly and is composed of both tutorials and organized game play you do not meet the provisions of sec_1_501_c_3_-1 of the regulations although some of your participants may be members of a charitable_class you are not conducting services exclusively to a charitable_class activities you provide to the community exclusively further a charitable purpose in compliance with the requirements of sec_501 of the code furthermore you have not explained how your game play you are similar to the organization described in revrul_77_366 you also have extensive social and recreational activities that are not consistent with the purposes described under sec_501 of the code for example your only activity is providing organized game play including tutorials to the community to promote adult sobriety you are devoting all your time energy and other resources to conducting the game play therefore you are operating substantially for noncharitable purposes you are similar to better business bureau v united_states although some of your activities may benefit a charitable_class a substantial portion of your activities is providing social and recreational activities open to the public this precludes you from exemption under sec_501 you are similar to the organization in revenue as you too predominately provide extensive social and recreational activities therefore you are not operated exclusively for exempt purposes described under sec_501 c first libertarian church v commissioner of internal applicant's position you wrote you are neafly identical to a 501_c_3_organization that fosters a supportive physically active community for individuals who are recovering from alcohol and substance abuse and those furthermore you host events strictly and exclusively to provide a who choose to live a sober life safe sober environment for individuals who seek to avoid frequenting bars and casinos you are not just a group of random people getting together to play games yours is a program dedicated to promoting socialization amongst individuals suffering addictions in their lives or as a resource to avoid falling into lifestyles that lead to such problems your recreational program focuses upon providing alternative activities during otherwise prolific periods of substance use and the program addresses the primary cause of recidivism in addicts boredom you provide recreational activities during periods that might otherwise be used for addictive behaviors influenced by boredom these activities are therapeutic and rehabilitative you therefore qualify under sec_501 cx3 service response to applicant’s position you failed to provide any additional information from which it can be concluded that your activities exclusively further or advance a purpose described in sec_501 although you provided the description of a similar organization exempt under sec_501 whose operations you believe are like yours similar to the organization in 505_f2d_1068 you have the burden of proving that you satisfy the requirements for tax exemption you have failed to provide enough information to prove to us that you are operating exclusively for purposes described in sec_501 conclusion based on the above we find that you are not organized and operated for exempt purposes within the meaning of sec_501 of the code specifically you do not meet the organizational_test for exemption because the purpose in your organizing document is not limited to one or more of the purposes specified in the code and regulations you do not meet the operational_test for exemption because you are operating for a substantial non - exempt_purpose you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal accompanied by the following declaration the statement of facts item must be under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during ‘ the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance internal_revenue_service eo determinations quality assurance you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations enclosure publication