department of the treasury internal_revenue_service release number release date legend org organization name xx date address address org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein dear this is a final adverse determination_letter as to the org’s exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons you have not been operating exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 org also is not a charitable_organization within the meaning of sec_1_501_c_3_-1 you are not an organization which operates exclusively for one or more of the exempt purposes which would qualify it as an exempt_organization you have ceased operations for several years and therefore no longer meet our operational requirements based upon these reasons your sec_501 tax exempt status is revoked effective may 20xx you have signed form_6018 consent to proposed action contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels vels prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours nanetle m downing director eo examinations internal_revenue_service release number release date date date org address certified mail - return receipt requested department of the treasury taxpayer_identification_number form tax_year s ended person to contact id number contact telephone number contact fax number dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code ts necessary if you accept our findings please sign and return the enclosed form_6018 consent to proposed action - sec_7428 if you have already given us a signed form_6018 you need not repeat this process we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within day's from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notily the appropriate stale officials of the revocation in accordance with sec_6104 of the code you 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 in lieu of letter 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 matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely nanette m downing acting director eo examinations enclosures publication publication report of examination in lieu of letter form 886a department of the treasury - internal_revenue_service schedule no or exhibit year period ended explanation of items name of taxpayer org 20xx legend org organization name xx date state state tru tru issue should the tax exempt status of the org be revoked as of may 20xx for failing to file the annual form_990 facts the org was incorporated in the state of state on march 19xx and was granted exemption as an organization described under sec_501 in december 19xx we received information from the social_security administration that your organization paid wages during the tax_year ending december 20xx your organization issued form w-2’s but failed to file a form_941 to report the wages paid federal_income_tax withheld both the employer’s and employee’s share of social_security and medicare taxes in addition it was also noted that the organization had not filed a form_990 since their tax_year ending april 20xx for the tax years ending april 20xx 20xx and 20xx the gross revenue reported by the organization was dollar_figuredollar_figure and dollar_figure respectively we have tried numerous times to contact your organization as indicated in the enclosed attachment all letters sent to the last_known_address of the organization were returned as undeliverable on february 20xx a letter concerning your filing requirement was then mailed to the home address of your trustee tru this letter was signed for on february 20xx to date we have not received a response from the organization law sec_501 of the internal_revenue_code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 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 of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt internal_revenue_code sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specilically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by form or regulations prescribe and keep such records render under oath such statements make form 886-a rev department of the treasury - internal_revenue_service page -1- form 886a a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org 20xx such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6033-1 provides that every organization which has established its right o exemption from tax whether or not it shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 is required to file an annual return of information revrul_59_95 1959_01_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt stalus of an organization previously held exempt on the erounds that the organization has not established that it is observing the conditions required for the continuation of exempt status taxpayer’s position the taxpayer's position is not known is the government’s position that the tax exempt status of the org under sec_501 of governments position it the internal_revenue_code should be revoked for failing to file their annual form_990 when required to do so internal_revenue_code sec_6033 states in part that except as provided in paragraph every organization_exempt_from_taxation under sec_501 shall file an annual return the organization did not meet any of the exceptions stated in sec_6033 of the internal_revenue_code for the tax years ending april 20xx 20xx and 20xx the gross revenue reported by the organization was dollar_figure dollar_figure and dollar_figure respectively based on this information it has been determined that the organization exceeded the dollar_figure0 exclusion for not filing an annual form_990 revrul_59_95 held that failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the internal_revenue_code and the revulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status form 886-a rev service_department of the treasury - internal revenue page -2- form 886a department of the treasury - internal_revenue_service schedule no or name of taxpayer explanation of items exhibit year period ended _ - 20xx __ org using this revenue_ruling as precedent it is the government’s position that the tax exempt status of the org under sec_501 of the internal_revenue_code should be revoked conclusion the tax exempt status of org under sec_501 of the internal_revenue_code should be revoked because the organization has not established that it is observing conditions required for the continuation of exempt status such as filing annual form_990 information returns and failing to provide information that was requested from them by the internal_revenue_service the effective date of revocation is may 20xx the first day of the tax_year under examination a report addressing your employment_tax liability will be issued under separate cover form 886-a rev department of the treasury - internal_revenue_service page -3-


internal_revenue_service number release date index number ------------------------------------------ ---------------------------------------------- -------------------------------------------- ------------------------------------ -------------------------------------- ------------------------------------------ in re ---------------------------------- ------------------------ - department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc ita br05 - plr-143637-03 date date att’n --------------------------- personal representative legend individuals a --------------------------------------------------------------- ---------------------------------------------------- b ------------------------------ ---------------------------------------------------- m n ----------------------------------- ------- o ---------------------------------------------- p -------------------- company c ------------------------------------------------------------ estate of a -------------------------------------- --------------- ------------------------------------------------- state y ------ dates ------------------ ------- ---------------------- ------- -------------------- ------- --------------------------- -------------------- -------------------- ---------------------- ------------------------- --------------------------- law firm -- ------------------------------------------------------- amounts dollar_figuren --------------- dollar_figureo ------------- dollar_figurep ------------------ dollar_figureq --------------- dollar_figurer --------------- dollar_figures ------------- dollar_figuret --------------- dollar_figureu --------------- dollar_figurev ------------- dollar_figurew ------------- dollar_figurex ------------- dollar_figurey --------- dollar_figurez ------------- dear ----------------- this is in response to your authorized representative's letter and submissions of date and other correspondence and submissions in which he requested on your behalf as personal representative of the estate of a rulings regarding the proper federal_income_tax treatment under sec_61 of the internal_revenue_code_of_1986 attendant payment to the estate of a certain judgment for compensatory and related damages as further discussed below we are pleased to address your concerns the information submitted indicates that a died on date b is the surviving_spouse of a and claims an interest in the estate under a’s last will and testament the primary asset of the estate is the decedent’s interest in an action against company c c now pending against c in the state y supreme court that case arose out of c’s bad-faith defense of an earlier lawsuit the personal injury action brought against a by p and m n the personal injury action was filed following an automobile accident on date in state y in which p was disabled and o m n’s son was killed at the trial of the personal injury action in date a was found at fault and judgments against him were entered in the amount of dollar_figureo c refused to pay the judgments on his behalf which left his personal assets exposed to execution by p and m n c had rejected offers to settle the case before trial for policy limits of dollar_figure in consequence of c’s bad-faith handling of the defense parties a p and m n executed an agreement on date the date agreement wherein a agreed to pursue a bad-faith action against c on behalf of himself p and m n in exchange p and m n agreed to forego execution on their judgments against a the date agreement provided that a would be represented by law firm also p and m n’s attorneys that p and m n would have the right to participate in all major decisions respecting the litigation and that any recovery would be allocable to and divided among the participating partie sec_45 to p to m n and to a a and b commenced litigation against c on date alleging among other things fraud and intentional infliction of emotional distress the state y trial_court granted summary_judgment to c on the grounds that there was no bad-faith as a matter of law a b appealed and the state y court_of_appeals reversed and remanded permitting a b to pursue a claim for bad faith in c’s previous dealings following remand a bifurcated trial was conducted in date sec_5 before trial the parties renegotiated some of the terms of the date agreement because b was not a party to the earlier agreement failure of the earlier agreement to address her claim was proving an impediment to negotiating an overall settlement of the dispute and because in the intervening period c had paid certain amounts to p and m n under the revised agreement the date agreement the parties agreed that the balance of any recovery from c in the action would after payment of the costs and expenses of litigation including attorney’s fees be disbursed to a b to m n and to p on date terms of the earlier agreements were memorialized into a single document for clarity of reference on date following trial judgment was entered against c for general compensatory_damages in the amount of dollar_figureq which the trial_court later remitted to dollar_figurer for a and for b and special compensatory_damages of dollar_figurey in a subsequent judgment entered on date the trial_court also awarded attorneys fees and expenses costs to the plaintiffs a b totaling dollar_figures the total compensatory award of dollar_figuret thereafter accrued interest until paid the jury also awarded punitive_damages against c in the amount of dollar_figurep however that action has been remanded for further re- determination and is still pending issues respecting the tax treatment of punitive_damages if any are not a part of this ruling_request the compensatory_damages award became final and payable and was paid_by c to the clerk of the state y supreme court on date shortly thereafter date that amount plus certain additional_amounts the proceeds was paid to law firm and placed in interest bearing trust accounts no amounts have yet been distributed to the concerned parties pending a determination of the estate’s potential federal_income_tax liabilities in connection with such proceeds you as personal representative of the estate of a believe that no portion of the amounts that m n and p are entitled to receive under the date agreement is required to be included in the estate’s gross_income for federal_income_tax purposes and that only a portion a’s portion of the total_amounts that a b have been awarded in the subject personal injury litigation is properly includible in the estate’s gross_income for such purposes you have requested a ruling confirming the correctness of this position since the date agreement does not address how amounts received for attorney fees costs and expenses of litigation are to be allocated as between a and b you have requested additional guidance on this matter as well we are pleased to assist you in addressing the federal_income_tax obligations of the estate in this matter sec_61 of the internal_revenue_code provides that except as otherwise provided in subtitle a relating to income taxes gross_income means all income from whatever source derived in general under the anticipatory_assignment_of_income doctrine a taxpayer who earns or otherwise creates a right to receive income will be taxed on any gain realized from it if the taxpayer has the right to receive the income or if based on the realities and substance of the events the receipt of the income is practically certain to occur ie whether the right basically had become a fixed_right even if the taxpayer transfers the right before receiving the income 174_f3d_997 9th cir 531_f2d_1343 6th cir kinsey v commissioner 447_f2d_1058 2d cir 471_f2d_275 8th cir est of applestein v commissioner t c big_number lucas v earl u s big_number in contrast a mere anticipation or expectation of the receipt of income is insufficient to conclude that a fixed_right to income exists johnson son inc v commissioner t c big_number with respect to the assignment of claims in litigation a review of the case law shows that anticipatory_assignment_of_income principles require the transferee to include the proceeds of the claim in gross_income where recovery on the transferred claim is certain at the time of transfer but not where recovery on such claim is doubtful or contingent at the time of transfer in 147_f2d_769 4th cir a taxpayer assigned percent of a claim that he owned to his wife and children after the court of claims denied application_for a new trial and the supreme court of the united_states denied taxpayer's petition for a writ of certiorari the government argued that after the denial of certiorari and before the transfer to the wife and children the gain that the taxpayer expected to receive was practically assured and thus its transfer resulted in an anticipatory_assignment_of_income doyle f 2d pincite the court agreeing with the government's argument held that the taxpayer was in receipt of the profits on his purchase of the interest in the lawsuit because at the time he made the gifts of his interest in the lawsuit such profits had already been rendered certain by the judgment of the court of claims and denial of certiorari by the supreme court doyle f 2d pincite emphasis added like doyle 247_f2d_864 6th cir revg t c follows the view that a taxpayer's right to income on a judgment is not earned or does not ripen until all appeals with respect to the judgment have been exhausted cold metal demonstrates the doubtful and contingent nature of a lower court judgment during the time an opposing party is prosecuting appeals citing to harrison v schaffner u s the court stated that the rule applicable to an assignment_of_income applies when the assignor is entitled at the time of the assignment to receive the income at a future date and is vested with such a right cold metal f 2d pincite in cold metal the court held that notwithstanding a district court's opinion for the taxpayer in a cancellation suit as of the end of that year it had only a continent right to income payable if at all at some indefinite time in the future in an indeterminate amount with respect to which the assignor had no voice or control whatsoever cold metal f 2d pincite thus cold metal's assignment did not result in an assignment_of_income similarly in wellhouse v tomlinson f_supp s d fla the court found that a transferor was not taxable on the interest portion of a note because there were doubts as to whether there ever would be payment by the debtor and because the creditor divested himself of all rights to the note in a year prior to the year of payment likewise see 306_f2d_292 5th cir and schulze v commissioner t c memo in jones an insolvent taxpayer-subcontractor made a claim in through the general contractor against the united_states for additional compensation_for work done in date the taxpayer assigned the claim to a related corporation for dollar_figure and the corporation's agreement to pay the taxpayer's tax deficiencies thereafter the corporation assumed the costs of the action in date the court of claims decided the claim favorably to jones which decision became final in date in date the taxpayer received an award of dollar_figure net of attorneys' fees of dollar_figure which he endorsed over to the corporation pursuant to the assignment the court concluded that the taxpayer was not taxable on the award in so holding the court noted that the claim was contingent and doubtful when it was assigned no gift was involved the assignment was made prior to the year the income was received and the assignment arose out of the exercise of a legitimate business_purpose in schulze v commissioner t c memo a taxpayer sued his former law partnership for damages subsequently taxpayer and his wife divorced and agreed to divide their assets equally including taxpayer's claim against the partnership the value of the claim was indeterminate at the time of the property division subsequently taxpayer recovered on his claim as a result of an arbitrator's decision and paid a portion to his former spouse following jones supra the tax_court held that taxpayer was not required to include in his gross_income the portion of the award paid to his former spouse because at the time of the assignment recovery on the claim was uncertain the recovery did not occur for more than a year after the assignment of the claim the assignment did not involve a gift or gratuity and the assignment was made for a legitimate non-tax purpose the court noted also that the outcome of a lawsuit is rarely if ever certain or free of doubt since the assignment was made before the arbitrator's decision and the arbitrator's decision appears to have been final this opinion is not inconsistent with the principle that income arising from a judgment is contingent until the final_decision in a suit is rendered the above-cited line of cases support the proposition that in general a transferor who makes an effective transfer of a claim in litigation to a third person prior to the time of the expiration of appeals in the case is not required to include the proceeds of the judgment in income under the assignment_of_income_doctrine because such claims are contingent and doubtful in nature in the instant circumstances the date sec_3 and agreements gave each of the relevant parties at issue herein an irrevocable interest in a claim in litigation or chose- in-action even before the beginning of the trial in the action that generated the subject recovery at a time when no recovery was certain or even foreseeable for purposes of this letter_ruling it is assumed that the transfers or assignments of the interests in the bad-faith action against company c at issue herein are valid effective and binding under the laws of state y the initial summary_judgment action granting c dismissal of a b’s claim and the lapse of over years between the initial date transfers and the date that the award of the compensatory_damages at issue herein became final and payable tend to further confirm the uncertainty of any recovery at the time of the conveyances further a b’s assignments appear to have been motivated by genuine business purposes ie the forbearance of judicial remedies including immediate execution of judgments against their personal assets and m n and p provided valuable consideration for the rights and interests assigned to them by agreeing to forego execution of their judgments against a b thus we conclude that the assignment_of_income_doctrine is not applicable in the subject circumstances and that those portions of the dollar_figureu judgment proceeds received by law firm that are payable to m n and p under the date sec_3 and transfer agreements relevant herein are not properly includible in the estate of a’s gross_income for federal_income_tax purposes the date sec_3 and agreements are silent as to how the general compensatory award to a b and other_amounts received for attorney fees costs and expenses of litigation are to be allocated as between a and b and you have requested guidance as to the sums properly includible in the estate of a’s gross_income we believe that the amounts of general compensatory_damages properly allocable to a and to b must follow the apportionment as determined in the state y litigation judgments of dates and ie of dollar_figurer or dollar_figurev being allocable to a and of dollar_figurer or dollar_figurew allocable to b the amount of dollar_figurex received for attorneys fees being determined by and based upon the general damages award may properly be apportioned in the same ratio ie to a and to b the jointly awarded amounts of dollar_figurey and dollar_figurez for special damages and general costs of litigation may properly be allocated equally between a and b final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by adoption of final regulations to the extent the regulations are inconsistent with any conclusions in this ruling see section dollar_figure of revproc_2004_1 2004_1_irb_1 however when the criteria in section dollar_figure of revproc_2004_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this letter_ruling is based on facts and representations provided by the taxpayer and its authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with the estate of a’s permanent records pursuant to a power_of_attorney on file with this office copies of this letter_ruling are being sent to the estate of a’s authorized representatives this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------- --------------------------------------- ------------------------------------ in re ---------------------------------------- ---------------------------- --------------------------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc corp b05 plr-104478-04 date date distributing controlled shareholder a shareholder b individual a individual b state x state y year business x business y -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ------------------------ -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- --------------------------- -------------------------- -------------------------- -------------------------- ------------- ------ ------- -------------------------------- ----------------------------- this is in response to a letter dated date submitted on behalf of plr-104478-04 dear --------------------- distributing requesting rulings under sec_355 of the internal_revenue_code the code with respect to a proposed transaction additional information was received in letters dated date date and date the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party 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 moreover no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 and 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_355-7t business x it is the common parent of an affiliated_group that files its income_tax return on a consolidated basis using a tax_year ending december distributing has one class of common_stock outstanding percent of which is owned by shareholder a a grantor_trust that is jointly owned by individual a and individual b who are husband and wife shareholder a owns either stock or membership interests in several other entities engaged in business y distributing provides business x services to all of these entities controlled an accrual_method taxpayer is a state y corporation engaged in business y controlled joins in the consolidated federal_income_tax return filed by distributing controlled has one class of stock outstanding percent of which is owned by distributing and percent of which is owned by shareholder b the general manager of controlled distributing and controlled have supplied information indicating distributing’s business x and controlled’s business y each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years distributing elected to be taxed as an s_corporation effective january distributing an accrual_method taxpayer is a state x corporation engaged in plr-104478-04 year and controlled will elect to be taxed as s_corporation on the first available date after the proposed transaction described below liabilities posed by distributing’s conduct of business x therefore distributing has proposed separating distributing and controlled by effecting a spin-off of controlled to shareholder a accordingly for what is represented to be a valid business_purpose the following transaction is proposed distributing represents that it wants to protect controlled from the risks and distributing will distribute to shareholder a all of its controlled stock the distribution or transaction distributing will not retain any stock_or_securities of controlled distributing has made the following representations with respect to the proposed transaction a b c d e f no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of distributing is representative of distributing’s present operation and with regard to distributing there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of controlled is representative of controlled’s present operation and with regard to controlled there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing and controlled will each continue the active_conduct of its business independently and with its separate employees the distribution of the stock of controlled is carried out for the following corporate business_purpose risk reduction the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any plr-104478-04 of their stock in or securities of either distributing or controlled after the transaction g h i j k there is no plan or intention to liquidate either distributing or controlled or to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business there is no acquisition of stock of distributing or controlled including any predecessor or successor of any such corporation that is part of a plan or series of related transactions within the meaning of sec_1_355-7t that includes the distribution of the controlled stock controlled is not assuming any liabilities of distributing or receiving any assets subject_to liabilities from distributing there will be no surrender of distributing stock or controlled stock distributing neither accumulated its receivables nor made any extraordinary payment of its payables nor will it accumulate receivables or make any extraordinary payment of payables in anticipation of the proposed transaction l no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the controlled stock m payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length n o p immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations further distributing’s excess_loss_account if any with respect to controlled stock will be included in income immediately before the distribution the transaction is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to plr-104478-04 q revoke or otherwise terminate the s_corporation_election of either distributing or controlled proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 of the treasury regulations above we have concluded that based solely on the information submitted and the representations set forth no gain_or_loss will be recognized by distributing upon the distribution of its controlled stock to its shareholder sec_355 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the distributing shareholder on its receipt of controlled stock in the distribution sec_355 the aggregate basis of the distributing stock and of the controlled stock in the hands of the distributing shareholder after the distribution will equal the aggregate basis of the distributing stock held by the distributing shareholder immediately before the distribution allocated between the distributing stock and controlled stock in proportion to the fair_market_value of each corporation’s stock in accordance with sec_1_358-2 sec_358 b and c the holding_period of the controlled stock received by the distributing shareholder will include the holding_period of the distributing stock held by such shareholder provided that such shareholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 no opinion is expressed about the tax treatment of the proposed transaction 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 transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the transaction is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 plr-104478-04 iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv whether distributing’s s election is valid or whether controlled’s election to be an s_corporation will be valid under sec_1362 v whether salaries and bonuses paid to individual a by distributing are excessive_compensation within the meaning of sec_162 and the regulations thereunder and vi whether the amounts paid to distributing by controlled for business x services are excessive_compensation within the meaning of sec_162 and the regulations thereunder in accordance with the power_of_attorney on file with this office a copy of this 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 letter is being sent to distributing a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated cc __alison g burns_______ alison g burns senior counsel branch office of associate chief_counsel corporate sincerely yours


department of the treasury internal_revenue_service washington d c date number release date cc el gl br1 gl-808185-99 uilc memorandum for southern california district_counsel from subject alan c levine chief branch general litigation notice_of_intent_to_levy cdp_notice issued during automatic_stay taxpayer this memorandum responds to your memorandum regarding the above subject this document is not to be cited as precedent legend taxpayer x date a date b date c amount a amount b amount c date d date e date f date g issue s whether a notice_of_intent_to_levy and notice of your right to a hearing pursuant to sec_6330 issued after commencement of the bankruptcy violates the automatic_stay in bankruptcy provided in u s c sec_362 gl-808185-99 -2- whether the taxpayer had a right to dispute the underlying liability pursuant to sec_6330 because he did not receive a statutory_notice_of_deficiency pursuant to sec_6213 conclusion a notice_of_intent_to_levy and notice of your right to a hearing violates the automatic_stay because it is an act to collect a claim that arose before the commencement of the bankruptcy case in violation of u s c sec_362 the taxpayer is entitled pursuant to sec_6330 to dispute the underlying tax_liability because the tax_liability in dispute arose from filed income_tax returns for and date b for which no statutory notice was issued facts on date c the taxpayer filed a federal_income_tax return for showing a refund of dollar_figureamount a he then filed an amended_return that showed a tax_liability of dollar_figureamount b the taxpayer filed a timely federal_income_tax return for date b showing a tax_liability of dollar_figureamount c the internal_revenue_service service properly assessed the tax_liabilities and sent the taxpayer proper notice_and_demand under sec_6303 the taxpayer entered into an installment_agreement with regard to the date a and date b tax_liabilities but made no payments on the installment_agreement the service sent the taxpayer a notice_of_intent_to_levy pursuant to sec_6331 in date d informing the taxpayer that he had defaulted on his installment_agreement and that the service intended to levy it does not appear that the service took any_action prior to date as a result of that notice the taxpayer filed a chapter petition in bankruptcy on date e sec_6330 became effective on date pursuant to sec_6330 the service sent the taxpayer a notice_of_intent_to_levy and notice of your right to a hearing known as a collection_due_process_notice or cdp_notice form on the taxpayer timely sent a request for a cdp hearing form which was timely received by the service the appeals officer contacted the taxpayer by mail to schedule a cdp hearing in that letter the appeals officer set forth sec_6330 as his legal basis for informing the taxpayer that by law he could not raise the underlying liability prior to january the effective date of sec_6330 enacted by the internal_revenue_service restructuring and reform act of taxpayers did not have a right to a collection_due_process_hearing prior to levy gl-808185-99 -3- because he had received notices the appeals officer did not specify to which notices he was referring but it appears that he was referring to the statutory_notice_of_deficiency mentioned in sec_6330 the taxpayer met with the appeals officer on date g and set forth his reasons for challenging the underlying liability the appeals officer has requested assistance from your office with respect to the wording of a proposed notice_of_determination law and analysis cdp_notice as violation of automatic_stay in our view the issuance of a sec_6330 cdp_notice by the service is a violation of the automatic_stay in bankruptcy in violation of u s c sec_362 in the present case both date a and date b are prepetition years hence any attempt to collect from the taxpayer-debtor would violate the automatic_stay a debtor is protected from any act to collect assess or recover a claim against the debtor that arose before the commencement of the case u s c sec_362 the service will generally issue a cdp_notice pursuant to sec_6330 only when it has identified a levy source and levy is the next planned action sec_6330 directs that the cdp_notice inform the taxpayer of the service’s proposed action ie the proposed levy we conclude that issuance of a cdp_notice during bankruptcy is in violation of the automatic_stay therefore the cdp_notice is void in re 954_f2d_569 9th cir violations of the automatic_stay are void taxpayers have the right to request a cdp hearing under sec_6330 only if they do so within thirty days of the date on the cdp_notice if the cdp_notice is void the taxpayer does not have a right to a cdp hearing and the service may not issue a notice_of_determination on the basis of a hearing held pursuant to a void cdp_notice in addition we believe there has been no statutory suspension of the limitations_period on collection in this case pursuant to sec_6330 because no valid cdp_notice was sent and the taxpayer therefore does not have the right to request a cdp hearing which would cause the service to suspend the statute once the taxpayer is no longer in bankruptcy the service may send a valid cdp_notice to avoid any confusion we recommend delivering a new valid cdp_notice to the taxpayer in person and explaining to the taxpayer that his prior cdp hearing was held in violation of the automatic_stay of u s c sec_362 he should therefore sign a new request for a cdp hearing form and appeals will grant him a new cdp hearing we do not agree with your suggestion that actions taken by the appeals officer that are analogous to settlement discussions or compromise agreements might be permissible during the pendency of a bankruptcy this approach fails to recognize gl-808185-99 -4- that the very issuance of a cdp_notice pursuant to sec_6330 was a step by a revenue_officer to collect or recover a liability owed to the government as such it is a violation of the automatic_stay and is void if the service intends to enter into settlement discussions or a compromise_agreement while a taxpayer is in bankruptcy there are alternative courses of action that do not include sending a cdp_notice right to dispute the underlying liability when the taxpayer in this case receives a valid cdp_notice he has a right to dispute the underlying tax_liability sec_6330 permits a taxpayer to raise the underlying liability at a cdp hearing if he did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have any opportunity to dispute such tax_liability emphasis added the tax_liability in this case arose from filed tax returns the service did not issue a statutory_notice_of_deficiency with regard to these tax_liabilities for and date b rather they were self- assessed it appears from the facts presented that the taxpayer has never had an opportunity to meet with the service to discuss the merits of his tax_liabilities the service could issue a new cdp_notice to the taxpayer since we understand that the applicable statute_of_limitations on assessment is still open we agree with your proposed recommendation that the appeals officer turn the case over to the examination_division for resolution case development hazards and other considerations we can identify no other litigating hazards that would change or qualify the conclusions reached in this memorandum please modify your advice to reflect the conclusions reached in this memorandum if you have any further questions please call branch cc assistant regional_counsel gl western region


number release date internal_revenue_service 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-100886-06 date date ------------- ----------------------- ----------------------- ----------------------------------- ------------------------ legend legend x state d1 d2 trust a dear --------------------- requesting relied under sec_1362 of the internal_revenue_code facts -------------------------------------------------------------- ------------------------ -------- this responds to a letter dated date submitted on behalf of x according to the information submitted x was formed under the laws of state on d1 x elected to be treated as an s_corporation for federal tax purposes effective d1 on d2 a shares of x stock were transferred to trust trust intended to meet the requirements of a qualified_subchapter_s_trust qsst however a timely qsst election was not filed on behalf of trust upon a review of trust’s documents trustee’s plr-100886-06 tax advisor discovered that trust was an ineligible shareholder accordingly trust was amended on d3 x represents that trust meets the requirements of a qsst x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 -- a such trust shall be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small plr-100886-06 business corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 in relevant part provides that if an election under ' a by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or b was terminated under ' d the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the representations made and the information submitted we conclude that x's s_corporation_election terminated on d2 under sec_1362 further we conclude that this termination of x's s_corporation_election was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided that the required qsst election with an effective date of d2 is filed with the appropriate service_center within days from the date of this letter trust otherwise qualifies as a qsst and x's s_corporation_election was valid and was not otherwise terminated under sec_1362 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely plr-100886-06 enclosures copy of this letter copy for sec_6110 purposes david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs special industries


number release date id office uilc cca_2012100210291537 ---------- from ------------------- sent tuesday october am to ------------------- cc ----------- subject re t r a -2 an indirect_partner can be designated as tmp by the service under the flush language after sec_6231 and sec_6231 ----------------------------------------------------------------------------------------------------------


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-148021-01 date november legend taxpayer authority project state place county d j dear this letter responds to a letter dated date submitted on behalf of taxpayer requesting a private_letter_ruling regarding the application of sec_42 of the internal_revenue_code to a proposed transfer of bare_legal_title to certain real_property owned by taxpayer to authority taxpayer represents the following facts taxpayer is a state limited_partnership the general_partner of taxpayer is authority a public body corporate and politic of state taxpayer was formed to develop own rehabilitate and operate a multifamily rental housing development to be known as the project consisting of j residential rental housing units located in place under applicable state law the project is subject_to real_estate_taxes levied by county under state law if authority were to own the project the project would not be subject_to real_estate_taxes in county taxpayer has received a written ruling from plr-148021-01 state’s department of revenue dor that property owned by authority but leased to taxpayer in which authority is the sole general_partner should not be subject_to property_tax therefore taxpayer intends to transfer record title in the project to authority through a quitclaim_deed and lease the project back from authority the parties do not intend to transfer any of the benefits or burdens of ownership of the project which will remain with taxpayer taxpayer acquired the land underlying the project on d rehabilitated the project and has been paying real_estate_taxes to county taking into account the rental income restrictions under sec_42 the payment of real_estate_taxes to county economically impacts the project taxpayer has been advised by dor that the project currently does not qualify for real_estate tax exemption under state law but that it would qualify if it were owned by authority and leased back to taxpayer taxpayer has informed dor of the intended sale-leaseback transaction subject_to review of the transaction documentation dor has agreed that the project would be exempt from real_estate_taxes after the sale-leaseback taxpayer intends to transfer to authority record title to the real_estate and improvements with respect to the project subject_to existing easements and encumbrances pursuant to a statutory form quitclaim_deed immediately after this transaction taxpayer would lease the property back pursuant to a lease agreement taxpayer represents that taxpayer would retain all of the benefits_and_burdens_of_ownership therefore there will be no sale_or_exchange of the project for federal or state_income_tax purposes based on the foregoing which assumes that under these facts the transfer of bare_legal_title to the project from taxpayer to authority is not a sale_or_exchange for federal and state_income_tax purposes and does not result in a shift in the benefits_and_burdens_of_ownership for federal and state_income_tax purposes taxpayer requests a ruling that the sec_42 recapture provisions do not apply to the proposed transfer of bare_legal_title to the project by taxpayer to authority sec_42 provides a tax_credit for investment in low-income_housing buildings placed_in_service after date for any taxable_year in a 10-year credit_period the amount of credit is equal to the applicable_percentage of the qualified_basis of each qualified_low-income_building in the case of any qualified_low-income_building placed_in_service by the taxpayer after sec_42 provides in part that the term applicable_percentage means the appropriate percentage prescribed by the secretary for the month applicable under sec_42 or ii sec_42 provides that the percentages prescribed by the secretary for any month shall be percentages that will yield over a year period amounts of credit that have a present_value equal to i percent of the plr-148021-01 qualified_basis of new buildings that are not federally_subsidized for the taxable_year 70-percent present_value credit and ii percent of the qualified_basis of existing buildings and of new buildings that are federally_subsidized for the taxable_year percent present_value credit sec_42 provides that the qualified_basis of any qualified_low-income_building for any taxable_year is an amount equal to the applicable_fraction defined in sec_42 of the eligible_basis of such building in general under sec_42 the eligible_basis of a new_building is its adjusted_basis as of the close of the first taxable_year of the credit_period sec_42 provides rules concerning the recapture of low-income_housing tax_credits sec_42 provides that if as of the close of any taxable_year in the compliance_period the qualified_basis of any building with respect to the taxpayer is less than the amount of qualified_basis as of the close of the preceding_taxable_year then the taxpayer’s tax for the taxable_year shall be increased by the credit recapture_amount the credit recapture_amount for a recapture_event occurring during any year in the credit_period as defined in sec_42 is one-third of all credits claimed assuming no prior recapture plus interest at the overpayment rate under sec_6621 beginning with the date the recaptured amount was claimed the legislative_history to sec_42 provides generally that any change in ownership during the compliance_period is a recapture_event and that all dispositions of ownership interests in buildings are treated as transfers for purposes of recapture see h_r conf_rep no 99th cong 2d sess ii-96 and ii-102 vol c b however under sec_42 in the case of a disposition of a low-income building or an interest therein a taxpayer can avoid recapture liability for the disposition if the taxpayer posts a satisfactory bond using form_8693 low-income_housing_credit disposition bond and it is reasonably expected that the building will continue to be operated as a qualified_low-income_building for the remaining compliance_period of the building taxpayer represents in the above facts that the transfer of bare_legal_title from taxpayer to authority is not a sale_or_exchange for federal and state_income_tax purposes and will not result in a shift of the benefits_and_burdens_of_ownership for federal and state_income_tax purposes from taxpayer to authority this representation is a material fact in this case therefore the issue being considered in this case is not whether a sale_or_exchange or a transfer of the burdens and benefits of ownership is for federal_income_tax purposes a recapture_event under sec_42 but whether the transfer of bare_legal_title under the above facts is a disposition or change in ownership contemplated by the sec_42 legislative_history that results in a recapture_event the transfer of bare_legal_title under the above circumstances would not be made for the evasion or avoidance of federal_income_tax further the federal tax plr-148021-01 treatment of the proposed transaction has been disclosed to dor taxpayer represents that all indicia of ownership of the project other than bare_legal_title would remain unchanged consequently the transfer of bare_legal_title in this case is not a disposition or change in ownership contemplated by the sec_42 legislative_history to result in a recapture_event accordingly based solely on the representations and the relevant law set forth above we rule as follows the transfer of bare_legal_title to the project by taxpayer to authority will not under these facts result in recapture under sec_42 no opinion is expressed or implied regarding the application of any other provisions of the code or income_tax regulations specifically no opinion is expressed or implied regarding whether the transfer of bare_legal_title to the project from taxpayer to authority is a sale_or_exchange for federal or state_income_tax purposes or causes a shift in the benefits_and_burdens_of_ownership for federal or state_income_tax purposes nor is any opinion expressed or implied regarding whether the project otherwise qualifies for the low-income_housing_credit under sec_42 according to the power_of_attorney on file with the ruling_request a copy of this letter was sent to taxpayer this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours harold e burghart assistant to the chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------ -------------------------------- ---------------------------------- in re -------------------------------- -------------------- --------------------------- 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 b07 plr-126304-04 date date -------------------------------- ----------------------- -------------------------- -------------------------- legend corporation x y dear ---- this letter responds to your letter dated date requesting permission for corporation to revoke its election under ' c of the internal_revenue_code the represented facts are as follows corporation is a calendar_year accrual_method taxpayer for the taxable_year ending on x corporation elected on behalf of itself and the members of its sec_41 controlled_group to utilize the alternative_incremental_research_credit rules under ' c to calculate its research_credit corporation has continued to use the alternative_incremental_research_credit all the members of corporation’s sec_41 controlled_group are included on corporation’s consolidated tax_return before the due_date for its return including extensions for the taxable_year ending on y corporation submitted a request to revoke its election to determine its research_credit under the alternative_incremental_research_credit rules of ' c for qualified_research_expenses paid_or_incurred on or after the taxable_year ending on y and all subsequent years for taxable years beginning after date taxpayers may elect to determine their research_credit under the alternative_incremental_research_credit rules of ' c sec_41 provides that any election under ' c a shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary based solely on the facts submitted and representations made we grant permission for corporation to revoke its election to determine its credit for increasing research plr-126304-04 activities under the alternative_incremental_research_credit rules of ' c for itself and on behalf of its controlled_group for qualified_research_expenses paid_or_incurred during the taxable_year ending on y corporation should compute the research_credit for the taxable_year ending on y and all succeeding years using the general_rule of ' a provided that corporation does not make a new election to determine its credit_for_increasing_research_activities under the alternative_incremental_research_credit rules of ' c in a later year except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation treated as qualified_research_expenses this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to corporation a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s brenda m stewart senior counsel branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-154777-01 date date legend x d1 d2 state this responds to your letter dated date in which you requested relief under sec_301_9100-1 of the procedure and administration regulations for x to file an election under sec_301_7701-3 to be treated as a c_corporation for federal tax purposes facts according to the information submitted x an eligible_entity with more than one member was organized during d1 under the laws of state x intended at all times to be treated as a c_corporation for federal tax purposes effective d2 inadvertently x did not file an election to be treated as a corporation law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 an eligible_entity with at least two members can elect either to be classified as an association and thus a corporation under sec_301 b or as a partnership sec_301_7701-3 provides that unless a domestic eligible_entity elects otherwise the entity is a partnership if it has two or more members to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 an election will be effective on the date specified cc psi b1-plr-154777-01 on the form_8832 or on the date filed if no such date is specified the effective date specified on form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 sec_301_9100-1 allows the commissioner to grant a reasonable extension of time for making a regulatory election under the rules set forth in sec_301_9100-2 and sec_301_9100-3 sec_301_9100-1 defines a regulatory election as an election having a due_date prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions for time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish 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 conclusion based solely on the facts submitted and the representations made the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as a corporation effective as of d2 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly set forth above no opinion is expressed or implied concerning the tax consequences of the transactions described above under any other provision of the internal_revenue_code specifically no opinion is expressed concerning whether x is an eligible_entity this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer paul f kugler sincerely associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110


internal_revenue_service number release date index number ------------------------------- ---------------------------- ----------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b01 plr-100932-16 date date ----------------------------------------------------------------------------------------------------- ------------------------- ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ------------------------------------------------ ----------------------------------------------------------------------------------------------------- ------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ------------------------------------------------ --------- -------------------------- ------------------ ---------------------- ------------------- x y a b c state date date date date dear --------------- plr-100932-16 this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated under the laws of state on date and elected to be treated as an s_corporation effective date on date x converted from a state corporation to a state limited_partnership and x filed a new election to be treated as an s_corporation y was formed as a state limited_liability_company to act as the general_partner in the limited_partnership and was wholly owned by individuals a and b y became a shareholder of x on date however y was an ineligible s_corporation shareholder and therefore x’s s election terminated on date effective date c an eligible shareholder of x acquired y’s shares of x stock the conversion on date may have created a second class of stock in violation of the one class of stock requirement under sec_1361 thereby possibly creating a second basis for x’s s election to terminate therefore x converted from a state limited_partnership to a state limited_liability_company on date x represents that the termination of its s_corporation_election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning additionally x represents that x and its shareholders have filed their federal_income_tax returns consistent with having a valid s_corporation_election in effect for x x and its shareholders have agreed to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that does not have more than one class of stock sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business plr-100932-16 corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and the representations made we conclude that x’s s_corporation_election terminated on date when shares of x were transferred to y an ineligible shareholder we further conclude that the termination was inadvertent within the meaning of sec_1362 moreover we conclude that if x’s conversion from a state corporation to a state limited_partnership did create a second class of stock the consequent termination of x’s s_corporation_election was inadvertent within the meaning of f accordingly under sec_1362 x will be treated as an s_corporation from date and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 this ruling is conditioned upon x filing a form_8832 within days from the date of this letter with the appropriate service_center with a copy of this letter attached a copy is enclosed for that purpose except for the specific ruling above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x was otherwise eligible to be treated as an s_corporation this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-100932-16 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court dartmouth clubs inc petitioner v commissioner of internal revenue respondent docket no filed date william f patten for petitioner ronald f hood and david n brodsky for respondent memorandum opinion parr judge this case is before the court on petitioner's motion for reasonable litigation and administrative costs pursuant to sec_7430 and rules through filed ‘references to sec_7430 in this opinion are to that section of the internal_revenue_code as amended by the taxpayer bill of right sec_2 tbor publaw_104_168 secs stat which is effective with respect to continued date the issues for decision are whether petitioner is the prevailing_party in the underlying tax case within the meaning of sec_7430 we hold it is not whether the litigation and administrative costs claimed by petitioner are reasonable within the meaning of sec_7430 and because of our holding that petitioner is not the prevailing_party we need not consider whether the costs claimed by petitioner are reasonable neither party has requested an evidentiary hearing on petitioner's motion and the court concludes that such a hearing is not necessary for the proper disposition of petitioner's motion see rule a accordingly we decide petitioner's motion for an award of administrative and litigation costs on the record of the case including respondent's objection petitioner's response to respondent's objection and the parties' ‘ continued proceedings commenced after date see tbor secs 7o01 d b b and b stat sec_7430 as amended by tbor requires the united_states to establish that the position_of_the_united_states was substantially justified see sec_7430 b a judicial proceeding is commenced in this court with the filing of a petition see rule a maqgie management co v commissioner 108_tc_430 petitioner filed its petition on date thus sec_7430 as amended by tbor is applicable other section references are to the internal_revenue_code in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated affidavits and exhibits which are incorporated herein by this reference petitioner is an exotic dance club whose address was westport massachusetts at the time the petition in this case was filed background petitioner filed its federal_income_tax returns using a fiscal_year ending on march in date respondent began an examination of petitioner's and corporate tax returns the examining revenue_agent found that during these years petitioner had deducted cash payments made to many individuals including henry lauzon jr lauzon jr petitioner's president and sole shareholder for which no forms w-2 wage and tax statement or forms 1099-misc miscellaneous income had been issued these cash payments totaled dollar_figure in and dollar_figure in on date date date and date the revenue_agent sent petitioner information document requests for documents that would substantiate that the cash payments were corporate expenses during the course of the examination the revenue_agent and petitioner had several meetings regarding the requested documentation eventually the revenue_agent wrote a report on the disputed items and proposed adjustments in date petitioner q4e- protested the proposed adjustments at an administrative review in the internal_revenue_service office of appeals appeals appeals returned the case to the revenue_agent with instructions to consider whether additional evidence that petitioner had presented at the administrative review provided the required substantiation the parties were not able to reach an agreement on the disputed items and petitioner refused to agree to a statutory extension of the time to assess tax accordingly on date respondent mailed a notice_of_deficiency to petitioner in the notice respondent determined deficiencies of dollar_figure and dollar_figure and accuracy-related_penalties of dollar_figure and dollar_figure for petitioner's fiscal years and respectively the deficiencies were based on the disallowance of deductions that petitioner claimed for casual labor security expenses talent scouting expenses music expenses and management consulting fees the notice_of_deficiency stated that the deductions for the casual labor security expenses music expenses and management consulting fees were disallowed because petitioner did not provide substantiation including invoices matching canceled checks and forms to support its claimed deductions respondent disallowed the deduction for the talent scouting expenses because he determined that dollar_figure of the amount - - claimed in each of the years at issue for this expense was a dividend paid to lauzon jr on date petitioner filed a petition with this court on date respondent's answer was filed on date respondent sent the case to appeals for consideration on date an appeals officer contacted petitioner's attorney william f patten mr patten and the parties scheduled a conference for july the appeals officer requested that mr patten bring copies of any forms that petitioner had issued a worksheet reconciling the forms to the corporate records anda list of all persons that received less than dollar_figure from petitioner mr patten brought the forms to the conference and he stated that the worksheet and other information would be provided on july preparation of the worksheets took longer than expected and petitioner was not able to provide them by the promised date on date the appeals officer received the worksheet and other requested information for both years in issue except for any information about the dollar_figure payments to lauzon jr after reviewing the worksheets and other information the appeals officer concluded that all the claimed deductions were allowable as ordinary and necessary business_expenses except for the dollar_figure payments to lauzon jr petitioner claimed and respondent allowed deductions of - - dollar_figure and dollar_figure in and respectively for management consulting fees paid to lauzon jr the dollar_figure payments were also recorded on petitioners books as management consultant fees paid to lauzon jr however petitioner later reclassified these payments as expenses_incurred in scouting new talent considering the amount of the management consultant fees paid to lauzon jr the appeals officer believed that the dollar_figure payments may have been excessive_compensation accordingly on date the appeals officer initiated a discussion with petitioner's accountant to resolve this last item on september the appeals officer and petitioner agreed to split the dollar_figure--one-half of the amount claimed was allowed as a deduction in each year and one-half was disallowed on date the appeals officer received the audit department's computation and prepared the stipulated decision document the decision document showed income_tax deficiencies of dollar_figure and dollar_figure for and respectively on date mr patten signed the stipulated decision document and respondent signed it two days later the court entered the stipulated decision on date petitioner thereafter filed a motion to vacate the decision and a motion for administrative and litigation costs petitioner claims that it incurred dollar_figure in administrative and litigation - costs from date to date the court issued an order granting petitioner's motion to vacate the decision and we now consider petitioner's motion for administrative and litigation costs discussion sec_7430 provides that the prevailing_party may be awarded reasonable_administrative_costs incurred in connection with an administrative_proceeding within the internal_revenue_service and reasonable_litigation_costs incurred in connection with a court_proceeding for this court to award reasonable administrative and litigation costs under sec_7430 several conjunctive requirements must be met the record must show that the moving party exhausted any administrative remedies available to him or her within the internal_revenue_service see sec_7430 respondent concedes that petitioner has met this requirement the moving party did not unreasonably protract the administrative_proceeding or the proceeding in this court see sec_7430 respondent concedes that petitioner has met this requirement the moving party is the prevailing_party see sec_7430 as discussed below we find that petitioner is not the prevailing_party to be a prevailing_party a taxpayer must establish that the taxpayer substantially prevailed with respect to the amount - - in controversy or with respect to the most significant issue or set of issues presented sec_7430 a and that the taxpayer is either an individual whose net_worth does not exceed dollar_figure million or an owner of any unincorporated business or any partnership corporation etc the net_worth of which does not exceed dollar_figure million at the time the petition is filed see sec_7430 a u s c sec d b respondent concedes that petitioner substantially prevailed with respect to either the amount in controversy or the most significant issues and that petitioner meets the net_worth requirements a party however will not be treated as the prevailing_party if the united_states establishes that the position_of_the_united_states in the proceeding was substantially justified see sec_7430 b respondent contends that petitioner is not the prevailing_party because the position that respondent took regarding the disallowed expense deductions was substantially justified we agree with respondent the united states' position is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis in both law and fact 487_us_552 interpreting similar language in the equal_access_to_justice_act u s c sec see also maggie management co v commissioner t c --- - a position has a reasonable basis in fact if there is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion see pierce v underwood supra pincite the reasonableness of respondent's position and conduct necessarily requires considering what respondent knew at the time cf 88_tc_1329 85_tc_927 thus in determining whether respondent acted reasonably this court must consider the basis for respondent's legal position and the manner in which the position was maintained 86_tc_962 the fact that the commissioner eventually loses or concedes the case is not determinative as to whether the taxpayer is entitled to an award of administrative or litigation costs see 92_tc_760 wasie v commissioner supra pincite it remains however a relevant factor to consider in determining the degree of the commissioner's justification see hstate of perry v commissioner 931_f2d_1044 5th cir 100_tc_457 affd in part and revd in part 43_f3d_172 5th cir in some cases courts have adopted an issue-by-issue approach to sec_7430 apportioning the requested awards between those issues for which the respondent was and those issues for which - respondent was not substantially justified see 51_f3d_34 5th cir 106_tc_76 in the instant case both parties make their respective arguments for all the adjustments in the notice_of_deficiency collectively thus we do not determine whether to apportion the awards if any between those adjustments for which respondent was or was not substantially justified in deciding this issue we must identify the point in time at which the united_states is first considered to have taken its position and then decide whether the position from that point forward was substantially justified the substantially justified standard is applied as of the separate dates that respondent took a position in the administrative proceedings as distinguished from the proceedings in this court see sec_7430 a and b the administrative position of respondent means the position taken in the administrative proceedings as of the earlier of the date of receipt of the appeals decision by the taxpayer or the date of the notice_of_deficiency see sec_7430 b in this case respondent took a position in the administrative_proceeding as of date the date the notice_of_deficiency was issued see sec_7430 b the position taken by the united_states for purposes of litigation costs refers to the position_of_the_united_states in a judicial proceeding see sec_7430 a respondent's position in the proceeding before this court was established on date the date respondent filed his answer see huffman v commissioner 978_f2d_1139 9th cir affg in part and revg in part tcmemo_1991_144 although ordinarily the reasonableness of each of those positions is considered separately to allow respondent to change his position huffman v commissioner supra pincite7 it appears in this case that respondent took the same position in both the notice_of_deficiency and the answer more specifically respondent's position was that petitioner failed to substantiate the deductions for cash payments that it claimed on its returns petitioner contends that it provided the required substantiation at the administrative review in date that the case should have concluded at that point and that the notice_of_deficiency constituted nothing but harassment the record does not support petitioner's contention at respondent's request in date petitioner promised to provide worksheets reconciling the forms to the corporate records however petitioner required months to prepare the worksheets therefore it is apparent that the worksheets did not exist at the time of the date conference and that petitioner did not provide respondent information sufficient to substantiate its claimed deductions before date on this record we conclude that respondent's position was substantially justified in the notice_of_deficiency respondent premised the adjustments primarily on petitioner's failure to substantiate items on its returns taxpayers do not have an inherent right to take tax deductions deductions are a matter of legislative grace and a taxpayer bears the burden of proving entitlement to any deduction claimed see 308_us_488 292_us_435 this includes the burden of substantiating the amount and purpose of the item claimed see sec_6001 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_1_6001-1 income_tax regs we find that it was reasonable for respondent not to concede the adjustments until he had received and verified adequate substantiation for the items in question simpson fin servs inc v commissioner tcmemo_1996_317 citing 854_f2d_263 7th cir affg tcmemo_1987_52 sokol v commissioner supra pincite petitioner argues that the commissioner mishandled this case and that if it had been administered properly petitioner would have incurred much less expense petitioner states that the appeals officer raised issues that were not in the revenue agent's examination_report and that it was denied the opportunity to respond to these issues before respondent issued the notice_of_deficiency petitioner also stated that when it was informed by respondent that a notice_of_deficiency would be issued if petitioner did not agree to an extension of the statutory period for assessment that it welcomed the notice as an opportunity to resolve the issues this statement is contrary to petitioner's statement that the notice_of_deficiency was issued to harass petitioner we are not persuaded by petitioner's arguments we find nothing in our review of the record to support petitioner's claims of overreaching or abusive tactics by respondent's agents rather we find that respondent promptly conceded that petitioner's deductions were allowable once petitioner provided the information necessary to substantiate the disputed items although petitioner attempts in its motion to articulate the overreaching of respondent's agents such statements are not proof see rule b see also 99_tc_202 n 90_tc_1248 we hold that respondent's positions had a reasonable basis in law and fact accordingly petitioner is not entitled to administrative and litigation costs under sec_7430 to reflect the foregoing an appropriate order will be issued denying petitioner's motion for an award of administrative and litigation costs and a decision will be entered