internal_revenue_service appeals_office elm street suite cincinnati oh release number release date date a b cc dear department of the treasury taxpayer_identification_number e person to contact tel fax tax period ended uil this is our final adversé determination regarding your request for recognition of exempt status under sec_501 of the internal_revenue_code the code it is determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective date the date of your incorporation in the d our adverse determination was made for the following reason your proposed activities involve substantial commercial-type pharmaceutical sales we have determined that the sales activity is your primary activity therefore we have determined that you are not an organization operating for exempt social welfare purposes described in sec_501 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the retum for further instructions forms and information please visit www irs gov please show your employer_identification_number on all returns you file and in all correspondence with internal_revenue_service you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date may contact person identification_number contact number fax number employer_identification_number uil number legend m state n city state x date dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 this letter supersedes our proposed adverse letter dated date and incorporates your protest and our response to your protest the basis for our conclusion is set forth below issues do you qualify for exemption under sec_501 c no for the reasons described below are you excluded from qualifying from exemption because you are operated in a commercial manner yes for the reasons described below facts you were incorporated on date x pursuant to the nonprofit corporation statutes of the state of m your articles indicate that you were formed to operate a pharmacy on a non-profit basis to serve the economically disadvantaged and their families to purchase medicine directly from manufacturers and sell at slightly above cost to those individuals who are needy and cannot afford to pay market costs of medications and are unqualified to obtain either private or governmental insurance for drugs to solicit donations for the purpose of dispensing medications at no cost to the uninsured recipient individual who cannot afford to pay for such medications your articles also say that the lawful public or quasi-public objective which the above business_purpose will achieve is to provide medication to low income individuals their families and other people who otherwise may not be able to afford necessary medication your articles go on to state that notwithstanding any other provision of this document you will not carry on other activities not permitted to be carried on by an organization exemption from federal_income_tax under sec_501 of the internal_revenue_code or by an organization contributions to which are deductible under sec_170 of the internal_revenue_code you previously applied for exemption under sec_501 of the internal_revenue_code but you withdrew your application because you determined that you would not be qualified you are the successor to a for-profit pharmacy with a similar name the for-profit pharmacy is not dissolved you said it operates at the same location as you but has had minimal to no activity over the last three years you did not explain why you changed from a for-profit to a non-profit or why you did not dissolve the for-profit entity you stated you are currently a retail pharmacy selling only fertility drugs your hours are monday through friday from 12pm - 4pm you advertise through media published by non-profit organizations engaged in infertility counseling you are not located at street level you are operated out of a floor office you employ four individuals including a licensed pharmacist you indicated that in communities in which large families predominate such as the orthodox jewish community infertility carries both a physical and emotional stigma to alleviate these conditions and help those afflicted you were formed to aid all infertility patients to be able to procure the drugs they need you also are in close contact with medical personnel and other organizations so you know the patient's needs of your sales each year all charges for the fertility medications were waived you said for for uninsured customers you sell the drugs at cost for insured customers you sell the drugs at the amount the applicable insurer will reimburse and you waive the copayment for the customer you verify through third parties such as clergy medical practitioners and other charitable organizations that the customer is very needy in those cases with needy clients you waive all charges for fertility drugs you do not collect actual financial information from individuals to verify their financial situation nor did you define poor you submitted copies of the forms you have filed the form 990s show your only source_of_income is from the sale of fertility drugs between of your total expenditures each year are used for advertising your excess revenue as relative to your total revenue for your first year of operations was the forms also include substantial excess revenues over expenses each year as well as abouta of charity listed as program service expenses year si cost on ee rtisin es total expenses excess revenue - dollar_figure dollar_figure_ dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figurei dollar_figure dollar_figure dollar_figure program service expenses dollar_figure dollar_figure dollar_figure law sec_501 of the code provides for the exemption from federal income_taxation of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_6110 of the code states that a written_determination may not be used or cited as precedent sec_1_501_c_4_-1 states a civic_league_or_organization may be exempt as an organization described in sec_501 if - i it is not organized or operated for profit and ii it is operated exclusively for the promotion of social welfare promotion of social welfare i in general an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements ii nor is an organization operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations which are operated for profit in revrul_65_299 1965_2_cb_165 a nonprofit organization formed to advise counsel and assist individuals in solving their financial difficulties by budgeting their income and expenses and effecting an orderly program for the payment of their obligations is entitled to exemption from federal_income_tax as a social_welfare_organization described in sec_501 c of the internal_revenue_code of revrul_69_545 1969_2_cb_117 states that the promotion of health like the relief of poverty and the advancement of education and religion is one of the purposes in the general law of charity that is deemed beneficial to the community as a whole even though the class of beneficiaries eligible to receive a direct benefit from its activities does not include all members of the community such as indigent members of the community provided that the class is not so small that its relief is not of benefit to the community the fact that a hospital operates at an annual surplus of receipts over disbursements does not preclude its exemption by using its surplus funds to improve the quality of patient care expand its facilities and advance its medical training education and research programs the hospital is operating in furtherance of its exempt purposes revrul_70_535 1970_2_cb_117 describes an organization formed to provide management development and consulting services for low and moderate income housing projects for a fee the revenue_ruling held that the organization did not qualify under sec_501 c of the code the revenue_ruling stated since the organization's primary activity is carrying on a business by managing low and moderate income housing projects in a manner similar to organizations operated for profit the organization is not operated primarily for the promotion of social welfare the fact that these services are being performed for tax exempt corporations does not change the business nature of the activity revrul_72_369 1972_2_cb_245 described an organization formed to provide management and consulting services at cost to unrelated exempt_organizations the organization applied for exemption under sec_501 of the code this ruling stated an organization is not exempt merely because its operations are not conducted for the purposes of producing a profit p roviding managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit in revrul_73_349 1973_2_cb_179 an organization was formed to purchase groceries for its membership at the lowest possible prices it received orders from its members consolidated them and purchased the food in quantity each member paid for the cost of his food and each member was assessed an equal monthly service charge for the monthly operating costs membership was open to all individuals in a particular community this revenue_ruling stated that the organization was a private cooperative enterprise for the economic benefit or convenience of its members citing commissioner v lake forest inc infra this ruling stated that the organization operated primarily for the private benefit of members any benefits to the community were not sufficient to meet the requirement of the regulations that the organization operate primarily for the common good and general welfare of the people of the community accordingly it did not qualify for exemption under sec_501 of the code revrul_79_316 1979_2_cb_228 found that a nonprofit organization whose purpose is to prevent liquid spills primarily oil spills within a city port area and to develop a program for the containment and cleanup of liquid spills that do occur is entitled to exemption as a social_welfare_organization under sec_501 of the code provided that its services are equally available to members and nonmembers and both members and nonmembers are charged on the same basis for the cleanup services rendered there are no commercial cleanup companies operating in the entire geographical region where the port is located although there are a few commercial organizations providing similar services in other geographical areas previous studies show that operation of a commercial cleanup organization is not economically feasible in the port area served by the organization by preventing and cleaning up liquid spills that endanger marine life and foul recreational beaches and shorefront property in the port area the organization is primarily engaged in activities designed to benefit all inhabitants of the community served by it in 125_f2d_611 cir an organization requesting exemption under sec_811 of the social_security act of relating to the exemption of charitable organizations from fica_taxes instituted a nonprofit_hospital service plan to provide health care to its subscribers at a set fee any surplus proceeds were used to reduce future subscription rates or increase services and the corporate officers performed their duties without compensation but the corporation solicited no charitable_contributions and its subscribers were required to pay the fee charged in order to receive its benefits the court held that such an arrangement was commercial in nature and although the rates were as low as possible the corporation was not organized and operated exclusively for a charitable purpose 305_f2d_814 cir stated that while a social_welfare_organization necessarily benefits private individuals in the process of benefiting the community as a whole even when the benefits are confined to a particular group of individuals the organization may be exempt if the general community derives a substantial benefit conversely an organization that benefits a large number of people will not necessarily be organized for social welfare purposes within the meaning of sec_501 because numbers are not necessarily determinative of social welfare objectives social welfare is the well being of persons as a community and classification depends upon the character as public or private -- of the benefits bestowed of the beneficiary and of the benefactor the court also concluded that lake forest did not meet the dictionary definition of social or welfare stating it does not propose to offer a service or program for the direct betterment or improvement of the community as a whole it is not a charitable corporation in law or equity for its contribution is neither to the public at large nor of a public character lake forest does of course furnish housing to a certain group of citizens but it does not do so on a community basis it is a public-spirited but privately-devoted endeavor its work in part incidentally redounds to society but this is not the social welfare of the tax statute in 39_tc_756 the petitioner corporation operated the largest and one of the most modem vacation resorts in the commonwealth of pennsylvania it charged its guests substantial rates for the accommodations and activities there provided its total revenues for the taxable_year derived principally from the operation of the resort were more than dollar_figure same was used for the promotion of social welfare it had net assets represented principally by accumulated earnings_of more than dollar_figure million held that the operation of said resort did not constitute the ‘promotion of social welfare’ within the meaning of sec_501 c of the code that said operation was petitioner's primary activity and that for the taxable_year petitioner was not exempt from income_tax under said statute as an organization ‘operated exclusively for the promotion of social welfare ’ _and only a relatively small portion of the in 46_tc_519 petitioner corporation was organized by two doctors to own and operate a 42-bed hospital previously owned and operated by them petitioner applied for exemption under sec_501 of the code they had no defined plan for dispensing charity provided only a minimal amount of charitable care and allowed the founding doctors to share in the substantial fees from the privately operated laboratory and x-ray departments within the hospital for which they performed no services of any consequence held under the facts involved herein petitioner was operated to a considerable extent for the benefit of the two founding doctors and was not operated exclusively as a charitable_organization the court found that certainly failure or unwillingness to provide free or below cost service indicates a nonexempt commercial purpose in 70_tc_352 the court stated that free or below cost service is only one of several factors to consider in making a determination others include the particular manner in which the organization's activities are conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits all of these must be considered for no single factor alone is determinative the court concluded that the petitioner is not an organization described in sec_501 because its primary purpose is neither educational scientific nor charitable but rather commercial in 71_tc_158 acq 1981_2_cb_2 the organization had a primary but not sole purpose to provide a wide range of health care services to its members the association's goal was to provide comprehensive health care services to all members and the community respondent ruled that petitioner was qualified as an organization described in sec_501 but denied petitioner's application to be granted c status on the grounds that it served a private interest its members rather than the required public interest and that it provided a form of insurance held in an action brought under sec_7428 for a declaratory_judgment on petitioner's qualifications under sec_501 and sec_501 it is found that petitioner does serve a public interest and is not engaged in providing a form of insurance and is therefore organized and operated exclusively for charitable purposes consequently petitioner qualifies as an organization described in sec_501 in 72_tc_687 affd 625_f2d_804 cir the tax_court stated that the sale of prescription drugs to senior citizens and handicapped persons is a trade_or_business normally carried on for-profit the court ruled that sales of prescription drugs to the elderly and the handicapped even at a discount is not without more in furtherance of a charitable purpose the court said it is clear that petitioner's exclusive purpose for being is to sell drugs an activity that is normally carried on by commercial profit making enterprises the tax_court said that they failed to see how the fact that it happened to deal in drugs could convert it to a sec_501 c organization if it could be so converted then so could a store selling orthopedic shoes crutches health foods or any other product beneficial to health virtually everything we buy has an effect directly or indirectly on our health they concluded that they did not believe that the law requires that any organization whose purpose is to benefit health however remotely is automatically entitled without more to the desired exemption application of law you previously operated your pharmacy as a for-profit organization for several years you then modified your name and applied for exemption as a 501_c_3_organization when you realized you would not qualify for exemption under sec_501 you withdrew your application_for exemption you then requested exemption as an organization described in sec_501 of the code there is considerable overlap between sec_501 and sec_501 c of the code many organizations could qualify for exempt status under either code section unlike sec_501 c of the code which includes both an organizational_test and operational_test sec_501 c has only an operational_test thus establishing whether an organization qualifies for exemption requires analysis of the organization's actual operations based on an examination of all of the relevant facts and circumstances sec_1 c -1 a of the regulations states that an organization may be exempt as an organization described in sec_501 if it is not organized or operated for profit and is operated exclusively for the promotion of social welfare the promotion of social welfare includes being primarily engaged in promoting in some way the common good and general welfare of the people of the community it further states that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations which are operated for profit your primary activity is the provision of fertility medication in a commercial manner this type of pharmaceutical business activity is commonly conducted to produce a profit accordingly you do not meet the definition of a social_welfare_organization as described in the regulations the tax_court in commissioner v lake forest inc concluded the organization did not qualify for exemption because they did not propose to offer a service or program for the direct betterment or improvement of the community as a whole you too are not promoting social welfare because you are not offering a service or program for the betterment of the community as a whole instead you operate very much in a commercial manner selling medications at or above cost social welfare organizations are not precluded from engaging in business activities as a means of financing their social welfare programs however the regulations provide that an organization is not operated exclusively for the promotion of social welfare if its primary activity is carrying on a business with the general_public in revrul_70_535 an organization that provided various services for low and moderate income housing projects for a fee was not exempt under sec_501 c of the code because its primary activity was carrying on a business in a manner similar to organizations operated for profit in the same manner your primary activity is carrying on a pharmaceutical business and not promoting social welfare you operate a pharmacy that sells fertility medication at cost to the uninsured and for insured customers you sell the drugs at the amount the applicable insurer will reimburse you waive the copayment for the customer in b s w group inc the organization's purpose was to furnish consulting services to exempt and other not-for-profit_organizations and they sought to be classified as a 501_c_3_organization as in hassett v associated hospital service corp of mass and sonora community hospital while giving some consideration to the client's ability to pay the organizations planned to charge a sufficient fee which would enable it to recover their costs plus a small profit the tax_court pointed out that the corporations were engaged ina business normally pursued by commercial enterprises and appeared to be in competition with them which is strong evidence of the predominance of nonexempt commercial purposes your forms you submitted demonstrate that each year since your inception you have had substantial surplus of revenues over expenses other than giving away medication you do not sell the medication below cost although you waive the co pay you charge the individual's insurance the amount they are willing to pay for the fertility medication which is above cost that any commercial pharmacy would it is clear therefore you do not promote health except to the same extent ' of your much like the organization described in people's educational camp soc you charge your clients substantial rates for your services provided your total revenues are derived principaily from the operation of the pharmacy and only a relatively small portion of the revenues were used for the promotion of social welfare you are similar to the organization described in revrul_72_369 you too are providing services on a regular basis for a fee which is a trade_or_business ordinarily carried on for profit specifically you provide fertility drugs in the same manner as a for-profit pharmacy the fact that you waive co pays and give ' of your medicine away does not cause your activities to further a social welfare purpose medications covered by the insurance payments you receive further the commercial nature of your operations is demonstrated through your revenues and expenditures you receive all of rou still incur substantial profits on the sales of the your revenue from sales of medication and between years of operation are attributable to advertising ‘ of your expenses for your first you are similar to revrul_73_349 because the benefits you provide to the community are also not sufficient to meet the requirement of the regulations that the organization operates primarily for the common good and general welfare of the people of the community in the same manner the provision of fertility medicine similarly to a for-profit is not promoting the common good and general welfare of the community perhaps most applicable is the organization described in the case of federation pharmacy services inc the tax_court stated that virtually everything we buy has an effect directly or indirectly on our health the court further stated that they do not believe that the law requires any organization whose purpose is to benefit health however remotely is automatically entitled without more to the desired exemption the tax_court also said the sale of prescription drugs to senior citizens and handicapped persons is a trade_or_business normally carried on for profit sales of prescription drugs to the elderly and the handicapped even at a discount is not without more in furtherance of a charitable purpose n the same manner the provision of fertility medication is a commercial business although it is beneficial to some individuals and often at a discount it is not an exempt_function you have provided no information showing that you conduct your activity differently from a commercial entity your sole source_of_income is the sale of medicine although you provide some of your medicine free of charge and waive the co-pay this is not enough to make your activity exempt see revrul_70_535 the form 990s show three years of excess receipts over expenditures the distribution of free drugs to a few customers was financed by selling drugs to other customers at above your cost applicant's position you state you provide for the alleviation of the medical and psychological stigmas and other problems resulting from infertility the resultant community growth from births and the creation and enhancement of the family unit which are advanced by your free and discounted pharmacy programs and promote the common good and general welfare of the community as a whole you say that like the organization in revrul_65_229 sic which was an organization formed to advise counsel and assist individuals in solving their financial difficulties by budgeting income and expenses you are also promoting social welfare you further state that just because your activity is normally undertaken by a commercial for- profit entity does not necessarily preclude exemption particularly if the entity offers its services for free or below cost as in sound health association you said you are distinguished from federation pharmacy services inc because you extend free and discounted benefits to individuals financially unable to make the required_payment thus benefitting the community as a whole furthermore you said the standards for qualification should not be more stringent than the service's evaluation of hospitals under sec_501 the service requires that a hospital provide a minimal level of charity care you cited revrul_69_545 and said the service announced it will utilize the community benefits standard looking at the overall facts and circumstances in which the hospital's operations confer a community benefit you later elaborated on your position to say that infertility causes serious family marital physical physiological and psychological programs affecting the community as a whole you submitted a number of internet hyperlinks to articles written by professionals on the topic of infertility you said you believe that the treatment of infertility falls within the ambit of social welfare under sec_501 of the code you said c encompasses social welfare organizations such as yourself you said the regulations under sec_501 c state that an organization qualifies as eligible if it is primarily engaged in promoting in some way the common good and general welfare of the community an organization that promotes social welfare directs it sic efforts towards providing benefits to the community see commissioner v lake forest inc in determining whether an organization is promoting the public welfare the activities of the organization must be examined to see who derives a benefit form them and the degree of benefit conferred in people's educational camp soc inc the court characterized the promotion of social welfare as involving the serving of a purpose beneficial to the community as a whole or the promotion of the welfare of mankind in the manner generally similar to the charitable educational and religious_organization exempted by like provision of the code revrul_79_316 you also referenced technical_advice_memorandum tam per sec_6110 k of the code a tam cannot be cited as legal precedent you said the alleviation of the medical psychological family marital and other problems resulting from infertility the resultant community growth from births and the creation and enhancement of the family unit which are advanced by the free and discounted pharmacy programs promote the common good general welfare and ‘purposes beneficial to the community as a whole people's educational camp soc inc you said in one year you waived copayments totaling dollar_figure _ clients in excess of dollar_figure- reemphasized in part for treatment of certain needy individuals as you previously stated and ‘by providing medications at cost and paid physicians in excess of additionally you saved in order to be eligible to receive discounted drugs a patient either will not have any insurance coverage or the medical insurance will not cover infertility treatment clients that receive free services are generally initiated by referral from clergyman or other not- for-profit organization specializing in assisting infertile couples to receive the necessary treatments you said your professional staff also provides free counseling to any person regardless of need on the causes of infertility medical and other treatment options possible drug regimes and coping with the debilitating effects of infertility adverted to above you go on to state that the fact an activity is normally undertaken by commercial for profit entities does not necessarily preclude tax exemption particularly if the entity offers its services free or below cost per sound health association you said the court noted in this case that the promotion of health may be deemed beneficial to the community if the class of beneficiaries is sufficiently large to benefit the community as a whole you say your services are available to the entire community and a sufficiently large class of beneficiaries you say the applicable standard of review should not be more stringent than the service's evaluation of hospitals under sec_501 in people's educational camp soc inc the service requires a hospital to provide a minimal level of charity care in revrul_69_545 the service announced that it will utilize community benefits standard looking at the overall facts and circumstances in which the hospital’s operations confer a community benefit you say that it should be noted that federation pharmacy services inc and revrul_69_545 were issued in the context of c service’s response to applicant's position you cited several precedents none of which granted exemption under sec_501 of the code to a pharmacy although you stated you are distinguished from federation pharmacy services inc because you extend free and discounted benefits to individuals financially unable’ to make the required_payment you charge the insurance_companies above-cost prices for the medication you provide you only give away cost prices insured individuals are not charged a copayment for their fertility medication but their insurance is billed at normal commercial rates pharmacy services inc the court concluded that the sale of prescription drugs to senior citizens and handicapped persons is a trade_or_business normally carried on for profit sales of prescription drugs to the elderly and the handicapped even at a discount is not without more in furtherance of a charitable purpose in the same manner the sale of fertility medication even at a discount is not furthering an exempt_purpose of your medication and charge the insured at- in fact in the case of federation you cited the tax_court case sound health association this case refers to a c applicant as opposed to a c applicant in 985_f2d_1210 cir the third circuit_court of appeals stated first the sound health court ventured too far when it reasoned that the presence of a subsidized dues program meant that the hmo in question served a large enough class that benefited the community the court ruled that because there was no economic barrier to subscribership ‘the class of persons potentially benefitted sic by the association is not so small that its relief is of no benefit to the community ’ citations omitted in doing so the court misconstrued the relevant inquiry by focusing on whether the hmo benefited the community at all rather than whether it primarily benefited the community as an entity must in order to qualify for tax-exempt status second the sound health court need not have gone as far as it did the presence of a subsidized dues program was not the only factor it considered when deciding that the hmo in question qualified for tax-exempt status for example the hmo in sound health ‘in effect ran a substantial outpatient clinic as an important ingredient if its medical_care services citation omitted it also provided free care even to persons who did not subscribe and offered educational programs to the public finally even considering the subsidized dues program the amount of benefit ghp intends to confer on people other than paying subscribers is minuscule ghp anticipates subsidizing approximately people we cannot say that ghp operates primarily to benefit the community at large rather than its subscribers by -_ people who would not otherwise belong as arranging for health care for only paying subscribers ghp argues that the hmo in compared to more than in subsidies when it was granted tax- sound health had provided only dollar_figure exempt status this is true but as previously noted the hmo in that case also benefited the community in other ways most notably by providing free or reduced- cost care to people who were not subscribers an hmo must primarily benefit the community not its subscribers plus a few people in order to qualify for tax-exempt status under sec_501 cx3 in sum ghp does not qualify for tax-exempt status under sec_501 since it does no more than arrange for its subscribers many of whom are medically underserved to receive health care services from health care providers arranging for the provision of medical services only to those who ‘belong’ is not necessarily charitable particularly where as here the hmo has arranged to subsidized only a small number of persons ghp standing alone is not entitled to tax-exempt status under sec_501 cx3 you have no other activity other than operating a pharmacy this activity is limited to the n area and is further limited to large orthodox jewish families and then only to those persons who a review of your forms have fertility problems thus negating any sort of community benefit showing only gross_sales and no contributions indicate you are similar to a for-profit pharmacy per sec_1 c4 -1 a ii an organization is not operated primarily for the promotion of social welfare if its primary activity is the carrying on a business in a manner similar to organizations which are operated for profit in lake forest the court held that an organization operating low-income_housing units was neither civic nor promoting social welfare but was a private cooperative organization the respondent lake forest was a membership_organization that was formed to operate a low-cost housing cooperative for its members it did not offer any program or service to benefit the community you are similar to lake forest in that your sales of pharmaceuticals at or above cost does not provide any benefit to the community at large you cite people’s educational camp society stating that you alleviate medical psychological family marital and other problems resulting from fertility the court said w e are satisfied that petitioner's activities in maintaining and operating the large resort at tamiment were not directed to and did not result in providing benefits either for the public at large or for any community as a whole rather the facilities and activities at said resort were devoted principally and primarily to providing living accommodations meals and a variety of recreational and cultural programs for the personal benefit of paying guests who were attracted to the resort because it was an enjoyable and luxurious place for summer vacations and who were willing and able to pay the substantial daily or weekly overall rates which petitioner charged you are similar to the organization in people’s educational camp society in that your operation of a pharmacy and your selling of pharmaceuticals at or above cost only to individuals with fertility problems does not benefit the community as a whole in tam the organization’s primary activity was the ensuring of public safety the organization provided technical assistance oversight audit review and onsite visits to verify compliance with a uniform safety code the service held that in performing such activities the organization benefits the community as a whole even though it benefitted manufacturers inspectors and repairers they are incidental to the organization’s primary activity of ensuring the public safety the service ruled that the organization did not qualify for exemption as a business league under sec_501 c of the code but did qualify as promoting social welfare under sec_501 of the code in contrast your organization does not ensure public safety rather you compete with for-profit pharmacies in the delivery of certain pharmaceuticals to a small portion of the community although you cited revrul_65_229 it appears that you intended to cite revrul_65_299 as revrul_65_229 does not refer to subchapter_f of the code ie exempt_organizations regarding revrul_65_299 you are dissimilar to the organization in this case as you are not operating exclusively for the benefit for the promotion of social welfare you are operating in a manner similar to that of a commercial pharmacy you do not provide counseling or other activities to individuals unlike the hospitals described in revrul_69_545 you are not providing a benefit to the community that promotes the general health and welfare of the public although exempt hospitals are only required to provide a minimal amount of charity care they also promote community health your only activity is and continues to be the operation of a commercial pharmacy not a hospital since the organization's primary activity is carrying on a business by operating a pharmacy in a manner similar to organizations operated for profit the organization is not operated primarily for the promotion of social welfare the fact that these services are being performed for free for activity of your customers does not change the business nature of the you cited revrul_79_316 as a rationale for the basis for your exemption this ruling describes an organization that was found to be exempt under sec_501 c of the code this ruling describes an organization that is very dissimilar to you the organization desci yed in this ruling tried to prevent liquid spills primarily of oil and to contain and clean up spills wi_ area it provided services to members and nonmembers for the same fees inz organization trained members of the city fire department and personnel of its mei organizations in their effective use of equipment it had acquired to clean up the spu in the event of a spill the u s coast guard called the organization to the scene while the fire department contained the spill it was determined that since charges for the organization's services were sufficient only to cover the cost of labor equipment and supplies used the organization was not carrying on business with the general_public in a manner similar to organizations operated for profit unlike your organization this organization was not carrying on a business with the general_public similarly to those operated for profit you are operating a in a city port ition the ‘er pharmacy much like those that are operated for profit a for-profit enterprise for several years and filed forms as such in fact you operated your pharmacy as applicant’s protest you stated the service's denial is incorrect for legal and factual reasons you asserted you are primarily engaged in promoting in some way the common good and general welfare of the community specifically you stated the following the fact that you are a successor to a for-profit pharmacy of similar name is of no import while the for-profit pharmacy which was an interim step has not been dissolved it has had no operations for the last years you said you will consent to the dissolution of the for-profit corporation as a condition to securing the sec_501 exemption in response to the analysis of your excess revenue relative to your total revenue in the proposed adverse letter you stated that this focuses only on the first year of operation furthermore the excess revenue from each year is a utilized reserve for future operations you said you were not aware of any requirement under the code or in the state of m’s not-for-profit corporation law that a not-for-profit corporation have no excess revenue to be utilized as a reserve for future operations in response to our citation of federation pharmacy services you stated the decision in that case was limited to the fact that the sole service of the pharmacy was the sale of drugs at a discount you state that you on the other hand provide other services including counseling similarly you state the service's reliance on revrul_72_369 is inapposite in that you do not operate in the same manner as the for-profit pharmacy especially given your extensive counseling services and its payment of treatment costs for needy individuals you stated you are not aware of any for-profit pharmacy that voluntarily makes payments to medical providers for needy individuals you stated the materials you previously provided demonstrate that advertising was not general commercial advertising but was limited to community publications published for and circulated primarily to infertile couples you said this distinguishes you from a for- profit pharmacy in fact you say the advertising expense includes a generous contribution to a major organization which assists infertile couples you said you will if we so require as a condition of granting exemption amend your business operations to sell all drugs at manufacturer's cost plus reasonable overhead however you believe this would be counter-intuitive to the charitable and community services you provide which includes providing drugs at no or low cost for the truly needy such as those without necessary insurance coverage if you were to implement its understanding of the service's intent the cost of the drugs to the truly needy would increase you said you do not believe this is the service’s intent you said the service’s reliance on the circuit’s holding which distinguished geisinger’s from the tax_court decision in sound health decisions is misplaced you say as the service noted sound health was a c applicant the language in sec_501 for the promotion of social welfare is not as restrictive as the requirements of sec_501 furthermore unlike geisinger's which provided benefits only to people in a group of big_number paying subscribers you provide benefits to a majority of your clients as the geisinger court stated the hmo in sound health benefited the community in other ways most notably by providing free or reduced cost care to people who are not subscribers you said you are similar to sound health because there is no requirement that one be a member or otherwise belong to the applicant to receive benefits d you said the service is in error in noting that the activities were limited only to the city in fact you are well known outside of the city of of n and to orthodox jewish families for n and physicians specializing in fertility through the country refer patients to you last year you provided the following numbers city n state m outside of state m clients referring physician sec_41 service’s response to protest although you asserted you are primarily engaged in promoting in some way the common good and general welfare of the community you are still operating for a substantial non-exempt commercial purpose specifically your assertions are addressed point-by-point below although you stated being a successor to a for-profit pharmacy of similar name is of no import it establishes the basis of your formation - to operate a commercial pharmacy not only is the for-profit pharmacy which you stated was an interim step not yet dissolved you said you will only consent to the dissolution of the for-profit corporation as a condition to securing the sec_501 exemption realistically the dissolution of the for-profit corporation has no direct impact on your exemption as you are operating in a commercial manner we agree there is not a requirement under the code for a not-for-profit corporation to have no excess revenue to be utilized as a reserve for future operations however you continue to charge above-cost to the majority of your clients and to their insurance_companies as stated in b s w group one of the factors in determining whether an organization is operated for a non-exempt purpose is the existence and amount of annual or accumulated_profits you continually operate with excess revenues over expenses which is typical of a commercial business you now say you offer counseling unlike federation pharmacy services however this does not eliminate the commercial manner in which you conduct your sales of fertility medicine your primary activity you state that unlike the organization described in revrul_72_369 you do not operate in the same manner as the for-profit pharmacy especially given your extensive counseling services and its payment of treatment costs for needy individuals however based on your revenues and expenses you are operated primarily for the purpose of purchasing fertility medications and distributing them in a manner similar to a for-profit pharmacy as mentioned previously even for- profit pharmacies provide some charitable distributions of medication one element of charity does not negate the overall significance of your commercial operations although you stated your advertising was not general commercial advertising and was limited to community publications for infertile couples this does not distinguish you from a for-profit pharmacy the manner in which you advertise does not eliminate the although you provide discounted medication fact that you sell medication above cost to needy individuals and give away about of your medicine it does not cause you to be operating exclusively for social welfare purposes you said if we so require as a condition of granting exemption you will amend your business operations to sell all drugs at manufacturer's cost plus reasonable overhead this statement illustrates and emphasizes our position that you are operating a business not a social_welfare_organization per revrul_72_369 an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption you noted the language in sec_501 c for the promotion of social welfare is not as restrictive as the requirements of sec_501 while this is true in order to qualify for exemption you must still be operated primarily for an exempt_purpose you are operating for the substantially non-exempt purpose of operating a pharmacy you also said you are similar to sound health because there is no requirement that one be a member or otherwise belong to the applicant to receive benefits however even a commercial pharmacy does not require one to be a member to receive benefits again under sec_501 c an organization is not operated for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations which are operated for profit you stated your activities are not limited only to the city of n and to orthodox jewish families and you are well known outside of the city of n you said physicians specializing in fertility throughout the country refer patients to you the physical location of your clients does not negate the commercial hue of your operations conclusion based on the above facts and law we conclude that you do not qualify for exemption under sec_501 c of the irc as outlined below the facts clearly show you are not primarily engaged in promoting the common good and general welfare of the community because you are primarily engaged in a commercial operation therefore we conclude you do not qualify under sec_501 of the code you were formed to provide fertility medication to individuals you charge at or above cost of your customers your activity of providing fertility drugs does not differ from to all but’ that of a commercial pharmacy therefore you are excluded from qualifying from exemption because you are operated in commercial manner you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication cc


t c summary opinion united_states tax_court joseph larry becker petitioner v commissioner of internal revenue respondent docket no 29066-13s filed date joseph larry becker pro_se hans famularo sandy hwang and sheri wight student for respondent summary opinion cohen judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax for and a dollar_figure penalty under sec_6662 after respondent’s concession the issues for decision are whether petitioner is entitled to an alimony paid deduction greater than dollar_figure and whether he is liable for the penalty background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in california at the time his petition was filed on date petitioner and his wife jennifer rose becker becker separated in prior to their anticipated divorce petitioner made payments to becker for spousal and child_support petitioner and becker’s divorce was finalized on date pursuant to the judgment of dissolution of the superior court of california county of orange petitioner was ordered to provide payments of temporary child_support of dollar_figure per month and temporary alimony of dollar_figure per month for the past period of date to date petitioner was further ordered starting as of date to provide alimony of dollar_figure per month and child_support of dollar_figure per month along with additional child_support in the manner of paying for his children’s health insurance in accordance with the judgment petitioner owed for dollar_figure for alimony and dollar_figure for child_support in petitioner made payments to becker for alimony and child_support totaling dollar_figure petitioner filed hi sec_2011 form_1040 u s individual_income_tax_return the return was prepared by a certified_public_accountant c p a on the return petitioner claimed an alimony paid deduction of dollar_figure the internal_revenue_service subsequently disallowed the entire alimony expense deduction discussion amounts received as alimony are includible in the gross_income of the recipient sec_71 see also sec_61 correspondingly a taxpayer who made alimony payments during a tax_year is entitled to deduct them if they meet the requirements of sec_71 sec_215 this court focuses on the divorce instrument in determining whether payments meet the criteria of alimony as defined by sec_71 see rosenthal v commissioner tcmemo_1995_603 70_tcm_1614 sec_71 provides sec_71 payments to support children -- in general --subsection a shall not apply to that part of any payment which the terms of the divorce_or_separation_instrument fix in terms of an amount of money or a part of the payment as a sum which is payable for the support of children of the payor spouse special rule where payment is less than amount specified in instrument --for purposes of this subsection if any payment is less than the amount specified in the instrument then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support petitioner argues that he allocated payments between child_support and spousal support in in accordance with instructions from his family law attorney to deduct child-related expenses that he paid directly rather than to his wife petitioner believes that he is allowed under the instrument to reduce the child_support for those direct payments but not the spousal support the parties do not dispute that any spousal support received by becker would be considered alimony under sec_71 the issue arises over how much of petitioner’s payments should be allocated towards alimony as opposed to child_support petitioner admits that the amount he claimed on hi sec_2011 tax_return as an alimony paid deduction also included child_support payments and so the amount would need to be adjusted accordingly by his calculation he paid dollar_figure in spousal support and should be entitled to that amount as a deduction petitioner does not take into account sec_71 which provides that where the payments actually made are less than the amounts specified in the divorce instrument for alimony and child_support then those payments are considered to have been made towards the child_support portion first and will only be allocated towards the alimony portion once child_support has been fully paid see 129_tc_92 21_tc_275 sec_1_71-1 income_tax regs provides the following example i f the husband is by terms of the decree instrument or agreement required to pay dollar_figure a month to his divorced wife dollar_figure of which is designated by the decree instrument or agreement to be for the support of their minor children and the husband pays only dollar_figure to his wife dollar_figure is nevertheless considered to be a payment by the husband for the support of his children here the divorce instrument specifically designated amounts for alimony and for child_support that for would total dollar_figure and dollar_figure respectively petitioner only made payments that totaled dollar_figure pursuant to sec_71 and the regulations thereunder dollar_figure of the dollar_figure of payments is allocated to child_support leaving the dollar_figure remainder as alimony respondent concedes the dollar_figure alimony paid deduction and we conclude that petitioner is not entitled to any deduction greater than this amount sec_6662 accuracy-related_penalty respondent determined a sec_6662 penalty for petitioner’ sec_2011 tax_year sec_6662 and b and imposes a accuracy-related_penalty on any underpayment of federal_income_tax attributable to among other things a taxpayer’s negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties 116_tc_438 respondent represents that the burden of production has been satisfied as there is a substantial_understatement ie greater than dollar_figure for petitioner’ sec_2011 tax_year even after the rule recomputation once the commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the penalty is inappropriate--for example by showing that he or she acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner t c pincite petitioner’s return was prepared by a c p a and his calculations of reduced child_support were made on the advice of his lawyer nevertheless the record reflects that petitioner claimed a deduction of dollar_figure but paid only dollar_figure of total alimony and child_support this disparity is unexplained on balance we cannot find that he acted with reasonable_cause accordingly he is liable for the sec_6662 penalty for we have considered the other arguments of the parties and they are not material to our conclusions to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court nicholas mack petitioner v commissioner of internal revenue respondent nicolas mack petitioner v commissioner of internal revenue respondent docket nos filed date nicholas mack pro_se mark j miller for respondent memorandum opinion gerber judge by order dated date these deficiency cases were scheduled for trial on date at milwaukee wisconsin in each case respondent moved at trial for a dismissal for failure to properly prosecute and for the imposition of penalties under sec_6673 we must decide whether the cases should be dismissed for lack of prosecution and whether penalties should be imposed background docket no respondent determined a dollar_figure income_tax deficiency for petitioner’s tax_year solely attributable to the 10-percent additional tax under sec_72 on early distributions from qualified_retirement_plans the petition was filed on date and respondent’s answer was filed on date after filing his petition petitioner immediately began requesting documents from respondent and on date respondent moved for a protective_order which the court granted date approximately year later respondent moved to have this case calendared petitioner objected and the court calendared this case for trial along with docket no on the court’s date milwaukee wisconsin session on date petitioner moved for summary_judgment on the basis that respondent’s counsel and certain unnamed clerks of the tax_court have engaged in serious misconduct and the presiding judge has failed and failed again to show any semblance of impartiality petitioner did not seek summary_judgment with all section references are to the internal_revenue_code as amended and in effect for the periods under consideration rule references are to the tax_court rules_of_practice and procedure respect to the underlying merits of respondent’s determination in effect petitioner was seeking a dismissal of this case as a sanction against respondent after considering the parties’ written positions the court denied petitioner’s motion for summary_judgment by a date order petitioner also served respondent with a request for admissions and respondent responded at about the same time respondent’s motion to show cause why proposed facts in evidence should not be accepted as established under rule f was filed on date and on date the court issued an order to show cause why said facts should not be deemed stipulated under rule f petitioner failed to respond and the order to show cause was made absolute by order dated date the facts deemed stipulated support respondent’s position that his determination is not in error respondent’s attorney and appeals officer made numerous attempts to contact petitioner for purposes of normal pretrial preparation and or settlement of the case petitioner was recalcitrant and refused to speak with respondent’s employees petitioner sent respondent a final offer to resolve the case and thereafter on date the court received and filed petitioner’s notice of refusal to accept service of court’s documents attached to petitioner’s notice was a letter to the clerk of the tax_court dated date returning unopened and unread certified mail the court had sent to petitioner petitioner’s letter also stated that his settlement offer was his final involvement with the court docket no respondent determined that petitioner was liable for a deficiency in self-employment_tax for his tax_year petitioner reported gross_receipts of dollar_figure from general rentals and an dollar_figure net profit from his general rentals quality homes business on schedule c profit or loss from business attached to his return on the basis of petitioner’s reported items respondent determined that petitioner was liable for a deficiency of dollar_figure in self- employment_tax for his tax_year petitioner had received a form 1099-misc miscellaneous income for dollar_figure from ssi independent living center inc ssi and petitioner contends he included this amount in the gross_receipts he reported on his schedule c petitioner contends that ssi is a nonprofit corporation of which petitioner’s father is a director and an officer respondent reports that according to ssi’s web site petitioner is permanently paralyzed and during under a contract with ssi was paid dollar_figure to provide himself with a home and with transportation the petition in docket no was filed date and respondent’s answer was filed date initially petitioner had designated milwaukee wisconsin as the place of trial but in march he sought to strike milwaukee as the place of trial because he considered respondent’s determination to be fraudulent and he believed the case would never properly proceed to trial around the same time petitioner moved to have the case dismissed with prejudice on the ground that respondent’s determination was frivolous and without merit petitioner’s motions were denied and over the next few months petitioner sought reconsideration of the denial of his motions subsequently petitioner served requests for admission which respondent answered petitioner filed a motion for summary_judgment that was denied petitioner also sent a final offer to resolve docket no and subsequently filed a notice of refusal to accept service of court’s documents as he had in docket no other than an ultimatum of settlement on his terms petitioner has not provided respondent with any reason or argument that would show that respondent’s determinations for and were in error instead petitioner has attempted to collaterally attack respondent’s determinations by means of broadly stated assertions that respondent’s determinations are fraudulent or frivolous and that respondent’s employees are involved in some type of conspiracy with court employees petitioner has not shown or specifically identified any particular act that would be considered fraudulent discussion our consideration of respondent’s motions to dismiss for lack of prosecution is a relatively simple matter petitioner filed petitions in these cases generally alleging error in respondent’s determinations for his and tax years no penalties or matters upon which respondent would bear a burden_of_proof or production were determined against or identified by petitioner there was some pretrial activity including petitioner’s failed motion for summary_judgment petitioner then made ultimatums of settlement on his terms followed by his refusal to further discuss these cases with respondent or to receive any correspondence from the court he failed to appear for trial or respond to respondent’s motions or court orders and it is clear that his cases should be dismissed for his failure to prosecute petitioner delayed these cases his conduct has been contumacious and he was given ample opportunity to pursue the merits of his tax dispute but failed to do so accordingly we will grant respondent’s motions to dismiss for failure to properly prosecute respondent’s motions to impose sanctions under sec_6673 are also presented for our consideration in support of his motions respondent contends that initial attempts to communicate with petitioner were met with abject hostility including accusations of fraud and misconduct respondent also points out that petitioner refused to meet with respondent’s employees or to discuss his cases by telephone in addition petitioner’s correspondence to respondent and the court contained insulting and false accusations of ‘unethical misconduct’ and ‘bad faith’ respondent contends that petitioner filed numerous frivolous motions or documents such as petitioner’s motion to strike designation of place of trial petitioner’s motion to dismiss and for costs petitioner’s motion for reconsideration petitioner’s request for admissions petitioner’s motion for summary_judgment petitioner’s request for stipulations petitioner’s notice of refusal to accept service of court’s documents petitioner’s motions were denied and did not address the underlying merits of respondent’s determinations in most instances they were collateral attacks on respondent’s or the court’s employees respondent contends that petitioner has filed in another court a false and frivolous law suit against respondent’s counsel and judges of this court respondent contends that petitioner is using that law suit as a basis for this court to ‘stay’ this proceeding it is for those reasons that respondent moves the court to impose a penalty upon petitioner under sec_6673 sec_6673 provides that whenever it appears to the tax_court that-- a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer's position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure respondent argues that penalties should be imposed because petitioner instituted and or is maintaining these proceedings primarily for delay and because petitioner’s positions in these proceedings are frivolous in particular respondent contends that petitioner did not advance meaningful positions regarding his or tax years and that the documents he filed were frivolous and contained insulting and false accusations against respondent’s employees court employees and judges of the court the court_of_appeals for the third circuit has observed that the legislative_history of sec_6673 supports the view that it is a penalty statute designed to deter taxpayers from bringing frivolous or dilatory suits and not a damage provision enacted to compensate the irs 771_f2d_64 3d cir affg tcmemo_1984_367 see also 791_f2d_68 7th cir the court_of_appeals for the fifth circuit has recently approved and imposed a sanction where a taxpayer insulted the court_of_appeals the tax_court and the opposing party 436_f3d_533 5th cir affg tcmemo_2005_39 in approving the imposition of penalties against the taxpayer the court_of_appeals observed that it is difficult to imagine a lesser sanction that would vindicate the integrity of the court proceedings and deter taxpayers from similar misconduct wasteful and dilatory appeals unjustifiably consume the limited resources of the judicial system while judges staff and support personnel have expended energy to dispose_of this meritless appeal justice has been delayed for truly deserving litigants 918_f2d_534 5th cir id fn ref omitted in deciding whether to sanction petitioner’s conduct by imposing penalties under sec_6673 we note that we will dismiss petitioner’s cases with prejudice for failure to prosecute because there was a record of delay and contumacious conduct and petitioner had been given ample opportunity to pursue the merits of his tax dispute a lesser sanction than dismissal would under the circumstances be futile see 410_f3d_743 5th cir understanding that a dismissal with prejudice in itself is a form of sanction we consider whether the same actions should also be sanctioned by means of a penalty imposed under sec_6673 initially we note that petitioner’s conduct meets the letter and intent of sec_6673 in that his personal attacks on respondent’s and the court’s employees are frivolous petitioner has not advanced any particular reasons for his broad-based claims of fraud and misconduct in addition he has failed to present any meaningful basis to support his generalized claim that respondent’s determinations are in error finally after instituting these proceedings petitioner has sought to engineer a delay of them he has made unreasonable ultimatums refused to cooperate or follow the court’s rules and most significantly intentionally refused to accept read or follow the court’s correspondence some of which contains court orders requiring a specific action petitioner’s income_tax deficiencies are modest dollar_figure for and dollar_figure for but his belligerence and actions require that in addition to the dismissal of his cases he be sanctioned by the imposition of penalties under sec_6673 of dollar_figure for and dollar_figure for petitioner’s attempts to delay and his belligerence must be sanctioned to vindicate the integrity of this court’s proceedings and to deter petitioner from similar misconduct in the future accordingly we will grant respondent’s motions to impose sanctions under sec_6673 to reflect the foregoing orders of dismissal and decision will be entered for respondent


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 b04 plr-128637-16 date date legend decedent spouse date date dear ------ ----------- -------------------------------------------------- ------------------------- ------------------- --------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code a portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are summarized as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 to provide for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-128637-16 spouse served as executor of decedent’s estate spouse represents that the value of decedent’s gross_estate including taxable_gifts made during his lifetime is less than the basic exclusion amount in the year of decedent’s death as executor spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-128637-16 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is 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_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 plr-128637-16 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as executor spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return plr-128637-16 pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries by lorraine e gardner lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


t c summary opinion united_states tax_court david paul morgan petitioner v commissioner of internal revenue respondent docket no 24533-08s filed date david paul morgan pro_se michael t shelton for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure for respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issue for decision is whether petitioner failed to report nonemployee compensation_for background some of the facts have been stipulated1 and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when petitioner filed his petition he resided in illinois petitioner is a subcontractor for market plan consultants inc mpc mpc is run by petitioner’s long-time friend and colleague mpc paid petitioner for work he performed for mpc’s clients mpc issued multiple checks to compensate petitioner for his work in amounting to dollar_figure mpc reported this amount to the internal_revenue_service irs on a form 1099-misc miscellaneous income petitioner reported only dollar_figure as nonemployee compensation on his return on date respondent issued a notice_of_deficiency to petitioner determining a deficiency of dollar_figure for the year this deficiency is based on dollar_figure of unreported interest and 1petitioner stipulated that he failed to report dollar_figure in interest_income for dollar_figure of unreported nonemployee compensation on the basis of this larger taxable_income of dollar_figure respondent increased petitioner’s self-employment_tax deduction reduced the medical_expense_deduction and reduced his earned_income_credit eic to zero petitioner does not dispute the total amount of the compensation but he does dispute that the final payment of dollar_figure was received in petitioner concedes that the check bore a date date but contends that he did not and agreed not to cash the check immediately discussion i burden_of_proof generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in certain circumstances however sec_7491 places the burden_of_proof on the commissioner petitioner has not alleged that sec_7491 is applicable nor has he established compliance with the requirements of sec_7491 therefore the burden_of_proof does not shift to respondent under sec_6201 the burden of production may shift to 2petitioner testified that he also did not include the dollar_figure as income on his income_tax return the commissioner where an information_return such as a form_1099 serves as the basis for a deficiency determination if a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on a third-party information_return and he has fully cooperated with the commissioner the commissioner will have the burden of producing reasonable and probative information concerning the item_of_income in addition to the information_return id petitioner has not disputed the amount of the check has not provided any evidence that he did not receive the check in has not sought correction of the form 1099-misc and concedes that the check bore a date date we find therefore that there is no reasonable dispute which would shift the burden to respondent ii unreported income taxpayers are required under sec_61 to include in gross_income all income from whatever source derived unless any income has been specifically excepted from inclusion see 348_us_426 congress’ intent was to tax income unless specifically excluded exclusions from gross_income must be narrowly construed 515_us_323 citing 504_us_229 for many years this court has favored and followed the cash-equivalent-upon-receipt rule enunciated in 18_tc_31 holding that a cash_basis taxpayer realized income in from a check dated and received on date but not cashed until date in that and similar situations the date of payment has been related back to the date of receipt see 926_f2d_383 5th cir 349_f2d_953 3d cir affg tcmemo_1963_344 rosser v commissioner tcmemo_2010_6 stephens v commissioner tcmemo_1956_284 see also sec_1_451-2 income_tax regs in 14_tc_792 we held that a check delivered to the taxpayer on date which was not deposited until was not income in but in since the check was subject_to a substantial restriction at the time of delivery of the check there was an oral agreement between the drawer and the taxpayer that the latter would hold the check for a few days before cashing it since the drawer was short of money in the bank such a situation is distinguishable from that in the instant case petitioner provided no evidence beyond his own testimony of the purported agreement with mpc not to cash the check he did not call his long-time friend and colleague or any other person as a witness to corroborate his testimony about the purported agreement petitioner agreed that there was no reason to believe the check would not be honored petitioner stated that if mpc’s client had failed to pay mpc he would not have cashed the check at all and instead would have claimed a business loss in order to preserve his relationship with his friend the owner of mpc considering that petitioner failed to report the disputed income even in the subsequent year the court does not accept his uncorroborated self-serving explanation see 294_f2d_328 4th cir the court may reject a taxpayer’s uncorroborated testimony affg 34_tc_845 87_tc_74 in conclusion the court finds that petitioner has not shown that there was an agreement not to cash the check in even though the check was received in accordingly petitioner received dollar_figure in unreported nonemployee compensation in and respondent’s determinations are sustained other arguments made by the parties and not discussed herein were considered and rejected as irrelevant without merit and or moot to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number 7702b ------------------ ---------------------------------------------------- ---------------------------------------------- -------------------------------- ---------------------------- 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 fip b04 plr-135747-10 date november legend legend taxpayer rider dear ---------- ------------------------------------------------------------------------ ------------------------------------------ this is in response to your request for rulings concerning a rider to be offered in connection with certain qualified long-term care insurance contracts under sec_7702b of the internal_revenue_code taxpayer represents as follows facts taxpayer is a stock_life_insurance_company taxable under sec_801 and is the issuer of certain qualified long-term care contracts contracts that comply with the requirements of sec_7702b taxpayer proposes to issue rider by either including it on contracts to be issued or adding it to certain in-force contracts in its base form there are two attributes to the rider first through the rider taxpayer will provide the policyholder1 with access to information pertaining to health wellness and long-term care that promotes and encourages a healthy lifestyle this information will be disseminated through written or media-based educational materials telephonic or internet-based access to a registered nurse or other professional to the policyholder is generally the person insured under a contract hence the term policyholder will be used herein plr-135747-10 answer questions on general wellness long-term care and other health-related topics will also be available additionally information about long-term care and other health care services that the policyholder may separately purchase from third-party sources will be provided the purpose of providing such information is to either facilitate the provision of long-term care services or reduce the incidence or severity of any future need for long-term care this information will be provided regardless of the policyholder’s health ie no insurable event need have occurred second the rider sets forth a voluntary incentive program for policyholders to maintain wellness if the policyholder participates in certain periodic health assessments to be offered by a third-party and satisfies certain medical criteria eg a prescribed body mass index score that evidences healthy living the policyholder will be entitled to any incentive benefit taxpayer may declare such as a premium discount or increase in benefits as part of the assessment information customized to the policyholder’s particular circumstance may be provided the extent and scope including termination of this program is at taxpayer’s discretion in some instances the rider will be offered in an alternative form without the voluntary incentive program there will be no additional_charge for the rider requested rulings taxpayer requests rulings that the inclusion of a rider in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified_long-term_care_services within the meaning of sec_7702b and all premiums_paid for a contract that includes a rider are premiums for a qualified_long-term_care_insurance_contract requested ruling law and analysis under sec_7702b a qualified_long-term_care_insurance_contract is an insurance_contract under which the only insurance protection provided is coverage of qualified_long-term_care_services there is no stated charge for the rider nor is it taken into account in pricing the contract except as part of taxpayer’s overall administrative expenses plr-135747-10 neither the code nor the regulations define the terms insurance or insurance_contract the supreme court of the united_states has explained that in order for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk transferred must be risk of economic loss 572_f2d_1190 7th cir the risk must contemplate the fortuitous occurrence of a stated contingency 183_f2d_288 2d cir and must not be merely an investment or business risk le gierse u s pincite revrul_2007_47 2007_2_cb_127 in addition the arrangement must constitute insurance in the commonly accepted sense see eg 988_f2d_1135 fed cir 979_f2d_162 9th cir aff’g 96_tc_18 it is common for insurance contracts to be priced with reference to the risk profile of the insured life_insurance contracts are implemented and priced differently depending on underwriting risk factors some life_insurance contracts provide wellness incentives in determining the current mortality charge sec_7702b was enacted to provide an incentive for individuals to take financial responsibility for their long-term care needs sec_7702b therefore generally provides favorable tax treatment with respect to long-term care insurance contracts and services meeting sec_7702b’s requirements h_rep_no pincite the rider will not provide any diagnostic except as is implied from the periodic health assessments or therapeutic treatment in essence the rider allows the contract to be implemented based on the risk profile of the policyholder it would be inconsistent with the stated goal of sec_7702b to deny qualification to a long-term care insurance_contract because it provided ancillary mechanisms aimed at minimizing long-term care needs accordingly the inclusion of a rider in either form in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified long- term care services within the meaning of sec_7702b requested ruling under sec_7702b the general_rule is that amounts paid for a qualified long- term care insurance_contract providing the benefits described in sec_7702b shall be treated as payments made for insurance for purposes of sec_213 sec_7702b provides that per_diem payments without regard to the expenses_incurred will not disqualify a contract under sec_7702b or b under see eg society of actuaries product tax seminar session life_insurance product tax update and 7702a www soa org files pdf 2010-washington-prod-tax-se sec_1 pdf pincite plr-135747-10 sec_7702b a qualified_long-term_care_insurance_contract provides only coverage of qualified_long-term_care_services qualified_long-term_care_services are defined by sec_7702b as being those required by a chronically_ill_individual pursuant to a plan of care prescribed by a licensed_health_care_practitioner the information and incentives provided by the rider are not insurance benefits but are a loss prevention program consistent with the purpose of sec_7702b as explain in connection with requested ruling the amount of consideration paid for the contract that could be allocated to this program should not be recharacterized as something other than an amount_paid for a long-term care insurance_contract based on the foregoing ruling sec_1 the inclusion of a rider in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified_long-term_care_services within the meaning of sec_7702b and all premiums_paid for a contract that includes a rider are premiums for a qualified_long-term_care_insurance_contract caveats 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 no ruling has been requested and no opinion is expressed concerning whether the contract constitutes a qualified_long-term_care_insurance_contract or the treatment of any incentive declared by taxpayer this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-135747-10 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 sheryl b flum chief branch office of associate chief_counsel financial institutions products