department of the treasury internal_revenue_service washington d c date number release date cc intl br1 wta-n-114343-99 uilc internal_revenue_service national_office field_service_advice memorandum for senior technical reviewer cc intl br1 w edward williams subject from this field_service_advice responds to a request made by your office on date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend corp a corp b corp c corp d corp e year year year group wta-n-114343-99 date a date b treaty treaty article a article b article c article d article e issues whether the royalties received by corp a from corp c are exempt from withholding under sec_881 and sec_1442 of the code pursuant to article a of treaty whether the royalties received by corp b from corp a are subject_to_withholding under sec_881 and sec_1442 of the internal_revenue_code pursuant to article a of treaty whether the royalties received by corp b from corp d are exempt from withholding under sec_881 and sec_1442 of the code pursuant to article a of treaty conclusions wta-n-114343-99 if corp a qualifies for benefits under treaty the royalties paid to it by corp c attributable to the use of or right to use an intangible in the united_states are exempt from u s taxation if corp a is not entitled to treaty benefits such royalties would be subject_to u s income_tax only if corp c is a conduit or the principles of revrul_80_362 apply royalties paid to corp b by corp a attributable to use of or right to use an intangible in the united_states are subject_to u s income_tax only if one of the circumstances in article a of treaty applies royalties paid to corp b by corp d attributable to use of or right to use an intangible in the united_states are subject_to u s income_tax unless corp b is entitled to the benefits of article a of treaty facts pursuant to an agreement dated date a between corp a a country corporation and corp b also a country corporation corp b granted to corp a the exclusive rights to exploit throughout the world during a term that included the years year through year certain master recordings embodying the recorded performances of group corp a sublicensed to certain of its affiliates the right to distribute the group recordings in various territories throughout the world including the united_states pursuant to licensing agreements between corp a and corp c a country corporation and between corp c and corp e a u s_corporation royalties were paid_by corp e to corp c the royalties were then paid_by corp c to corp a which in turn paid the royalties to corp b in addition pursuant to a licensing agreement between corp b and corp d a u s_corporation granting corp d certain worldwide rights corp b received royalties for_the_use_of group 1-related intangibles in the united_states 1the existence of these licensing agreements has not been established further it is not clear that your office is treating the group of which corps a c and e are members as separate from the group of which corp b is a member or alternatively both groups as one taxpayer 2in a statement dated date b corp a denies under penalties of perjury ever receiving or having the right to receive any royalties with respect to the exploitation of the recordings in the united_states in a letter dated date b the taxpayer’s representative states that corp b received no royalties from corp a during the years year through year attributable to exploitation of the recordings in the united_states 3we note that corp b denies that any of the royalties received from corp d were attributable to use of the intangibles in the united_states wta-n-114343-99 law and analysis whether corp a qualifies for treaty benefits in general sec_861 and sec_862 treat royalties as having a source in the place of use of the property for which the royalties are paid pursuant to this place-of-use test sec_861 provides that royalties from property located in the united_states or from any interest in such property will be treated as income_from_sources_within_the_united_states specifically sec_861 treats as gross_income from sources within the united_states royalties from property located in the united_states or from any interest in such property including royalties for_the_use_of or for the privilege of using in the united_states patents copyrights secret processes and formulas goodwill trade-marks trade brands franchises and other like property u s source royalties paid to a foreign_corporation not connected with a u s business are subject_to a percent tax see sec_881 and sec_1442 the percent rate_of_tax may be lowered or eliminated pursuant to the terms of an income_tax treaty article a of treaty provides that royalties arising in one of the states and beneficially owned by a resident of the other states shall be taxable only in that other state however article b of treaty limits indirect use of treaty by persons who are not entitled to its benefits by reason of residence in the united_states country or in some cases countries other than the united_states and country if corp a qualifies for treaty benefits the royalties paid to it by corp c are exempt from u s taxation article b sets forth various requirements for entitlement to benefits under treaty set forth below is a discussion of the requirements corp a must satisfy in order to qualify for treaty benefits as the discussion indicates determining whether corp a qualifies for treaty benefits would require substantial additional factual development article b of treaty provides that a resident of country is entitled to the benefits of treaty if it is engaged in the active_conduct_of_a_trade_or_business in 4there is no indication that any of the foreign_corporations involved in this case are engaged in a u s trade_or_business therefore the issue of whether any of the u s source royalties are effectively connected with a u s trade_or_business and therefore not subject_to_withholding does not arise 5assuming that the royalties derived from corp e are beneficially owned by corp c they would be exempt from u s taxation pursuant to article e of treaty wta-n-114343-99 its country of residence and either the income from the other country is derived in connection with that trade_or_business and is substantial in relation to the activity producing the income or the income is incidental to that trade_or_business the term active trade_or_business is not specifically defined in article b however treasury’s technical explanation of treaty provides that the regulations issued under code sec_367 will be used to define the term sec_367 in general terms provides that transfers of assets to foreign_corporations will be taxable an exception exists for transfers of assets that constitute an active trade_or_business in the context of royalties the sec_367 regulations provide that the principles under sec_1_954-2 without regard to whether the rents or royalties are received from an unrelated_person will apply sec_1 a - 2t b sec_1 d provides that royalties will be considered to be derived from the active_conduct_of_a_trade_or_business in two circumstances in the first the property must be property that the licensor has developed created or produced or has acquired and added substantial value to this applies only if the licensor is regularly engaged in the development creation production of or in the acquisition of and addition of substantial value to intangible_property sec_1_954-2 the performance of marketing functions will not be considered to add substantial value to property sec_1_954-2 in the second set of circumstances in which royalties will be considered to be derived from the active_conduct_of_a_trade_or_business the property being licensed must be property that is licensed as a result of the performance of marketing functions by the licensor sec_1_954-2 the licensor active through its own staff of employees located in a foreign_country must maintain and operate an organization in that country that is regularly engaged in the business of marketing and servicing the licensed property the organization must be substantial in relation to the amount or royalties derived from the licensing of such property whether an organization in a foreign_country is substantial in relation to the amount of royalties it receives is determined based on all of the facts and circumstances sec_1_954-2 however an organization will be considered substantial in relation to the amount of royalties if active licensing expenses equal or exceed percent of the adjusted licensing profit adjusted licensing profit means the gross_income of the licensor from royalties reduced by the amounts set forth in sec_1_954-2 the term active licensing expenses means the deduction incurred by an organization of the licensor in a foreign_country that are properly allocable to royalty income and that would be allowable under sec_162 to the licensor if it were a domestic_corporation sec_1_954-2 certain deductions are not allowed wta-n-114343-99 as previously noted even if corp a is engaged in an active trade_or_business in country the royalties received by it must be either derived in connection with that trade_or_business and substantial in relation to the activity producing the royalties or the royalties must be incidental to that trade_or_business article b a of treaty the royalties received by corp a are derived in connection with a trade_or_business if the income-producing activity in the united_states is a line_of_business which forms a part of or is complementary to the trade_or_business of corp a in country article b b of treaty the technical explanation to treaty provides that royalties generally will be considered to be derived in connection with the trade_or_business to which the underlying intangible_property is attributable article b c of treaty provides that whether the trade_or_business of corp a is substantial will generally be determined by reference to its proportionate share of the trade_or_business in the united_states the nature of the activities performed and the relative contributions made to the conduct of the trade_or_business in both the united_states and country the trade_or_business of corp a will be deemed to be substantial if for the preceding_taxable_year year the average of the ratios for the following three factors exceeds percent and each of the ratios exceeds percent provided that for any separate factor that does not meet the percent test in the first preceding_taxable_year the average of the ratios for that factor in the three preceding_taxable_years may be substituted i ii iii the ratios of the value of assets used or held for use in the active_conduct of the trade_or_business by the income recipient in country to all or as the case may be the proportionate share of the value of such assets so used or held for use by the trade_or_business producing the income in the united_states the ratio of gross_income derived from the active_conduct of the trade_or_business by the income recipient in country to all or as the case may be the proportionate share of the gross_income so derived by the trade_or_business producing the income in the united_states and the ratio of the payroll expense of the trade_or_business for services performed within country to all or as the case may be the proportionate share of the payroll expense of the trade_or_business for services performed in the united_states the royalties derived from the united_states are incidental to the trade_or_business of corp a if the income is not derived in connection with a trade_or_business of either company and the production of the income facilitates the conduct of the trade_or_business of the companies in country for example the investment of the working_capital of such trade_or_business article b d of treaty wta-n-114343-99 in addition corp a may not be eligible for the benefits of treaty if it is a conduit company as defined in article b article b c iii c of treaty provides that in the case of a company that is a resident of country treaty benefits shall apply only if the company is not a conduit company as defined in subparagraph m subparagraph m provides that the term conduit company means a company that makes payments of interest royalties and any other_payments included in the definition of deductible payments as defined in subparagraph c in an amount equal to or greater than percent of its aggregate receipts of such items during the same taxable_year subparagraph c provides that the term deductible payments includes payments for interest or royalties as previously noted substantial factual development would be required to determine whether corp a satisfies the above described requirements and therefore is entitled to the benefits of article a of treaty if corp a does not qualify for treaty benefits if corp a does not qualify for benefits under treaty then the royalties paid to it by corp c are subject_to u s taxation under either of two arguments first the service may rely on the anti-conduit_regulations set forth in sec_1_881-3 conduit financing arrangements of the income_tax regulations for any u s source royalties received by corp a from corp c after date the effective date of the regulations in general sec_1_881-3 provides the service with the authority to disregard the participation of one or more intermediate entities when these entities are acting as conduit entities in a financing_arrangement a financing_arrangement is a series of two or more financing transactions including a license7 involving a financing_entity the licensor here corp a and a financed entity the licensee here corp e when the arrangement is effected through one or more intermediate entities corp c sec_1_881-3 when the intermediate_entity and either the financing_entity or the financed entity are related the service may determine that the intermediate_entity is a conduit_entity and disregard the entity accordingly if the service can establish either that corp c and corp e are related or that corp c and corp a are related then corp c may be disregarded and the royalties received by corp a would be treated as having been received directly from corp e thereby subjecting them to u s taxation sec_1_881-3 alternatively the service may rely on revrul_80_362 1980_2_cb_208 in revrul_80_362 the commissioner dealt with cascading royalties 6for taxable years prior to the effective date of the regulations the service may rely on prior case law involving conduit situations sec_1_881-3 8the term related is defined in sec_1_881-3 wta-n-114343-99 for_the_use_of intangible_property in the united_states in the revenue_ruling a nonresident_alien_individual residing in a foreign_country with which the united_states had no income_tax treaty licensed u s rights on a patent to an unrelated dutch corporation the dutch corporation relicensed the patent to a u s_corporation royalties paid to the dutch corporation by the u s_corporation were exempt under the prior country treaty however revrul_80_362 holds that the royalties paid_by the dutch corporation to the alien individual in the non-treaty country are subject_to the percent u s tax imposed by sec_871 which the dutch corporation was required to withhold revrul_80_362 embodies the place-of-use test of sec_861 and sec_862 ie since the royalties paid_by the dutch company to the taxpayer were for the privilege of using a patent in the united_states the royalties were u s source income under sec_861 and as such subject_to_withholding assuming that the relevant facts can be established revrul_80_362 applies to the instant case and supports imposition of the tax provided for in sec_881 on the royalties paid_by corp c to corp a we note that the right to tax a cascading royalty was successfully challenged by a netherlands corporation in 107_tc_161 wherein the tax_court refused to apply revrul_80_362 therefore the commissioner would face litigation hazards in the tax_court should an income_tax deficiency be determined on the basis of revrul_80_362 taxation of royalties paid to corp b by corp a we note that even if corp a qualifies for benefits under treaty article a provides for u s taxation of royalties paid_by a resident of country to another person under certain specified circumstancesdollar_figure article a provides for u s taxation of royalties paid_by a resident of country in the following circumstances a b c the royalties are paid to a resident_of_the_united_states the royalties are attributable to a permanent_establishment or a fixed_base situated in the united_states the contract under which the royalties are paid was concluded in connection with a permanent_establishment or a fixed_base which country payer has in the united_states and the royalties are 9no action on decision has been issued with respect to the case 10it should be noted that article a supports the place-of-use test embodied in sec_861 article a limits those instances where u s tax may be imposed on royalties paid_by a netherlands resident wta-n-114343-99 borne by such permanent_establishment or fixed_base and are not paid to a country resident or d the royalties are paid in respect of intangible_property used in the united_states and not paid to a resident of country but only where the payer has also received a royalty paid_by a resident_of_the_united_states or borne by a permanent_establishment or fixed_base situated in the united_states in respect of the use of the property in the united_states and provided that the use of the intangible_property in question is not a component part of nor directly related to the active_conduct_of_a_trade_or_business in which the payer is engaged within the meaning of paragraph of article b the taxpayer asserts none of the exceptions set forth above apply to the payment of royalties to corp b by corp a as follows since corp b is not a u s resident exception a does not apply since corp b did not have a permanent_establishment or fixed_base in the u s to which the amounts in question were attributable exception b does not apply since the payee corp b is a country resident neither exception c nor exception d appliesdollar_figure regarding exception a there presently is no information indicating that corp b is a resident of the united statesdollar_figure regarding exceptions b c and d there presently is no information indicating that either corp a or corp b had a permanent_establishment or fixed_base in the united states13 or that corp b is not a resident of country for purposes of treaty dollar_figure accordingly assuming that the taxpayer’s factual assertions are correct u s income_tax may not be imposed on the royalties paid to corp b by corp a pursuant to article a of the treaty royalties received by corp b from corp d as previously noted corp b received royalties from corp d pursuant to a licensing agreement granting corp d certain worldwide rights to group 1-related intangibles the taxpayer has denied that any of the royalties received pursuant to 11see page of letter from taxpayer’s representative dated date b 12in general article c of treaty provides with respect to corporations that the term resident of one of the contracting states means any person who under the laws of that state is liable to tax therein by reason of his place of management and who otherwise qualifies for treaty benefits under article b of treaty 13whether corp a has a permanent_establishment or fixed_base in the united_states would be determined under article d of treaty 14we note in this regard that corp b must be a resident entitled to all of the benefits of treaty and therefore must qualify under article b of treaty wta-n-114343-99 the agreement were for_the_use_of the intangibles in the united_states emphasizing that the agreement granted certain worldwide rights to corp d for_the_use_of intangibles in the united statesdollar_figure as explained above sec_861 treats as u s source income any royalties received for use of an intangible in the united_states as well as any royalties for the privilege of using intangibles in the united_states if you have any further questions please call w edward williams senior technical reviewer cc intl br1 15see page of letter from taxpayer’s representative dated date b 16we note that country 1’s competent_authority certified that corp b was qualified to receive benefits under treaty however country 1’s determination is not binding on the united_states see notice_94_85 c b accordingly the discussion of whether corp a is entitled to benefits under treaty is relevant for determining whether corp b is entitled to benefits under treaty


internal_revenue_service number release date index number ---------------------- --------------------------------------------------- --------------------------------------- ---------------------------- in re ------------------------------ - - department of the treasury washington dc person to contact ---------------- id telephone number --------------------- refer reply to cc corp - plr-145847-03 date december legend ------------------------------ parent ------------------------------------------------------------- --------------------------------------------------- subsidiary -------------------------------------------------------- --------------------------------------------------- date a ------------------------------- ---------------------- dear ------------- parent is a holding_company that wholly owns subsidiary parent and subsidiary this letter is in reply to your letter dated date requesting rulings on behalf of parent regarding the proper treatment under sec_1374 of the internal_revenue_code of the grant or transfer of certain franchise rights to franchisees are subchapter_c corporations that use the accrual_method of accounting with franchisees agreements for a specified period of years pursuant to these agreements subsidiary grants franchisees use of a license to establish and operate a franchise along with the right to use certain trademarks and the operational system for running the franchise franchisees pay subsidiary a license fee upon grant of the license and monthly royalty fees which are composed of a fixed fee portion and a variable fee portion except for the limited use allowed by the agreements subsidiary retains a subsidiary is engaged in a franchise business subsidiary enters into agreements plr-145847-03 based solely on the information submitted we rule as follows parent proposes to elect under sec_1362 to be treated as an s_corporation the income of parent with respect to the receipt of the license fees and royalty fees from franchisees after the conversion date will not be treated as recognized_built-in_gain within the meaning of sec_1374 significant_power_right_or_continuing_interest in the franchise and terminates any agreement in violation of the terms and conditions of the license grant the grant or transfer of franchise rights pursuant to an agreement does not constitute a sale_or_exchange of a capital_asset under sec_1253 within the meaning of sec_1361 effective for the tax_year beginning on date a the conversion date parent also proposes to elect to treat subsidiary as a qualified_subchapter_s_subsidiary under b b effective for the tax_year beginning on the conversion date we express no opinion about the tax treatment of the license fees or royalty fees under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or the effects resulting from the license fees and royalty fees that are not specifically covered by the above ruling we also express no opinion about the tax treatment under of any income or gain that may be realized by parent during the recognition_period except as specifically provided above provides that it may not be used or cited as precedent a copy of this letter must be attached to parent’s federal_income_tax returns for parent’s final year as a c_corporation and for each recognition_period year in which the parent receives license fees or royalty fees pursuant to an agreement is being sent to the taxpayer in accordance with the power_of_attorney on file with this office a copy of this letter this ruling letter is directed only to the taxpayer requesting it sec_6110 sincerely michael j wilder michael j wilder senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ----------------------------- ---------------------------------------- ----------------------------------------- ---------------------------------- ---------------------------- department of the treasury washington dc third party communication private firm date of communication date person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp br2 plr-135027-11 date date legend parent buyer seller seller seller sub ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- plr-135027-11 sub sub fsub fsub ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------ ------------------------- ---------------------------------------------- fsub --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------- -------------------------- fsub dre dre dre dre dre ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- plr-135027-11 dre dre partnership buyer affiliate buyer affiliate buyer affiliate merger sub agreement agreement ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------- 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------------------------------------------------------------------------------- ---------------------------------------------------- a businesses ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- -------------------------------------------------- plr-135027-11 b business state x state y state z country a country b country c date date a b c d e f g h i j k l m ------------------------------------------------------------------------------- ------------------------------------------ ------------- -------------------- ---------- ------ ---------- --------------------- ------------------ -------------------------- ------ ------ ---------------- ---- -- -------------- -------------- ----------------- -------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------------------------------------------------- -------------- ----------------- -------------- plr-135027-11 n dear -------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------ this letter responds to your date request for rulings on certain federal_income_tax consequences of the proposed transaction defined below the information provided in that request and in later correspondence is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties 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 summary of facts parent a privately held state x corporation is the common parent of an affiliated_group whose includible corporations join in the filing of a consolidated u s federal_income_tax return the parent group parent owns all of the outstanding common_stock of sub sub also has outstanding non-voting preferred_stock described in sec_1504 that is wholly owned by the shareholders of parent sub owns all of the outstanding_stock of sub which wholly owns dre dre owns all of the outstanding_stock of seller which wholly owns dre dre owns all of the outstanding_stock of seller which is engaged in the a businesses and b business both directly and indirectly through its subsidiaries among other interests seller owns all of the stock in each of sub a state y corporation and seller each of sub sub seller seller and seller is a state x corporation each of dre and dre is a state x limited_liability_company llc that is disregarded under sec_301_7701-3 as an entity separate from its owner for u s federal_income_tax purposes a disregarded_entity sub functions solely as a holding_company for a portion of the parent group’s investment in fsub a country a entity fsub is owned approximately a percent by dre b percent by sub and c percent by seller seller also owns d percent of fsub and d percent of fsub with seller owning the remaining e percent of each company both country b entities in addition seller wholly owns fsub a country c entity buyer affiliate a privately held state x corporation is the common parent of an affiliated_group whose includible corporations join in the filing of a consolidated u s federal_income_tax return the buyer affiliate group buyer affiliate owns all of the outstanding_stock of buyer affiliate which owns all of the outstanding_stock of buyer affiliate buyer affiliate is a state x corporation and buyer affiliate is a state z plr-135027-11 corporation buyer affiliate also has existing debt to third party lenders in the amount of dollar_figuref parent and its shareholders desired to sell the stock of seller whereas the shareholders of buyer and buyer affiliate desired to purchase the assets of seller the transactions described below are being undertaken in part as a sale of assets and in part as a sale of stock reflecting a compromise between the parties’ conflicting preferences proposed transaction to accomplish the foregoing business objectives the parties proposed the following series of transactions some of which have been completed the proposed transaction i ii iii iv v vi vii on date certain shareholders of buyer affiliate the buyer investors formed partnership a state x llc that is classified as a partnership for u s federal_income_tax purposes on date the buyer investors and partnership formed buyer a state x limited_partnership that is classified as a partnership for u s federal_income_tax purposes on date buyer formed dre a state x llc and together buyer and dre formed dre a state x limited_partnership dre and dre are each classified as a disregarded_entity on date dre and dre formed dre a state x limited_partnership that is classified as a disregarded_entity on date dre and dre formed dre a state x limited_partnership that is classified as a disregarded_entity dre also formed merger sub a state x corporation on date dre formed dre a country c entity that is classified as a disregarded_entity buyer affiliate will become a wholly owned subsidiary of dre which will occur either pursuant to an exchange transaction or a merger in the equity exchange or merger the buyer investors and other stockholders of buyer affiliate will receive limited_partnership interests in buyer in exchange for their stock in buyer affiliate and buyer affiliate stock_options will become buyer options plr-135027-11 viii the buyer investors will contribute approximately dollar_figureg to buyer in exchange for limited_partnership interests of buyer ix x xi buyer will contribute approximately dollar_figureg that was received in step viii to dre dre will contribute approximately dollar_figureg that was received in step ix to dre dre will a borrow from third party lenders the senior secured lenders approximately dollar_figureh of senior secured term loans the senior secured loans b issue to third parties up to dollar_figurei in aggregate principal_amount of senior unsecured notes the notes and c if and to the extent less than approximately dollar_figurei in aggregate principal_amount of notes are issued borrow senior unsecured increasing rate loans the bridge loan from third party lenders dre will guarantee the senior secured loans and will pledge its interest in dre buyer affiliate and its subsidiaries will guarantee the senior secured loans and pledge their assets including their equity interests in their subsidiaries as security for the senior secured loans buyer affiliate and its subsidiaries will guarantee the notes and the bridge loan if any xii dre will transfer approximately dollar_figurej and dollar_figuren to dre in exchange for limited_partnership interests and a dollar_figurek note xiii dre will transfer approximately dollar_figurel to merger sub in exchange for common_stock and a dollar_figurem note xiv dre will transfer approximately dollar_figuren to dre in exchange for common equity and a note xv dre will transfer dollar_figuref to buyer affiliate in exchange for a dollar_figuref note xvi buyer affiliate will repay its existing debt of dollar_figuref owed to third party lenders xvii prior to step xviii seller and sub will undertake a series of transactions involving a transfer of their interests in fsub1 to dre2 after which seller will no longer own any interest in either sub or fsub xviii dre will acquire all of the assets of fsub relating to the a businesses as well as all of the foreign assets of seller relating to the a businesses for an estimated amount of approximately dollar_figuren of cash and the assumption of certain liabilities xix dre will acquire a assets of seller relating to the a businesses excluding any assets related to the b business and seller 3’s interests in fsub and fsub and b all of the remaining assets of the a businesses excluding those sold plr-135027-11 to dre in step xviii from seller respectively for an estimated aggregate amount of dollar_figurej of cash and assumption of certain liabilities together with step xviii the asset sale pursuant to agreement dre will pledge its assets to dre 5’s senior secured lenders xx fsub4 will distribute to seller the amount of cash equal to the sales proceeds net of expenses if any received for the a businesses assets of fsub4 from dre in step xviii the fsub cash distribution xxi seller will distribute to seller the amount of cash equal to the sales proceeds net of expenses if any received for the a businesses assets of seller from dre in step xix a the seller cash distribution xxii seller will further distribute to dre the amount of cash equal to the sales proceeds net of expenses if any received in the asset sale from dre and dre in step xviii and step xix respectively plus the cash received from fsub and seller in the fsub cash distribution and the seller cash distribution respectively the cash distribution xxiii dre will further distribute the proceeds of the cash distribution to seller seller expects to use the cash distribution to repay outstanding indebtedness of seller or its subsidiaries owed to third party lenders and pay certain expenses including state taxes related to the transactions seller will pay on behalf of parent the u s federal_income_tax liability related to the asset sale and the fsub4 cash distribution or it will distribute an amount through the ownership structure to parent and parent will pay such liability xxiv on the business_day immediately following the asset sale the fsub4 cash distribution the seller cash distribution and the cash distribution merger sub will merge with and into seller the merger pursuant to agreement seller will receive approximately dollar_figurel of cash consideration following the merger seller and its domestic subsidiaries will provide guarantees of the senior secured loans the notes and the bridge loans and pledge certain of their assets to the senior secured lenders xxv dre is expected to thereafter contribute all of the shares of buyer affiliate to seller representations buyer makes the following representations regarding the proposed transaction plr-135027-11 a b c the a businesses will be operated by buyer as distinct businesses separate from the remaining business of seller buyer has no plan or intention to combine the a businesses with seller dre dre and dre are classified as disregarded entities for u s federal_income_tax purposes and are ultimately owned by buyer and dre which are classified as a partnership and a disregarded_entity owned by a partnership respectively for u s federal_income_tax purposes none of dre dre dre buyer dre partnership or dre will make an election to be classified as a corporation for u s federal_income_tax purposes buyer’s ownership of the stock of seller will not be attributed to any corporation under sec_318 and b resulting in such corporation together with its affiliates being treated as owning an aggregate of at least percent of the stock of seller owned by buyer rulings based solely on the information submitted and the representations made herein we rule as follows each of seller and seller will recognize gain on the asset sale to dre which gain will be included in the consolidated_taxable_income of the parent group for purposes of calculating seller 1’s gain_or_loss recognized in respect of its shares of seller common_stock sold in the merger seller 1’s basis in the stock of seller will be immediately prior to the merger a b c increased to reflect the gain recognized by seller and seller on the asset sale to dre and dre and the portion of the fsub cash distribution treated as taxable_income or gain to seller sec_1_1502-32 reduced to reflect the amount of the distribution by seller of the cash distribution representing the cash proceeds net of expenses if any from the asset sale and the fsub cash distribution sec_1 b ii and iv reduced to reflect the u s federal_income_tax expense recognized by seller and seller on the asset sale and as a result of the fsub cash distribution as a noncapital nondeductible expense sec_1_1502-32 d reduced to reflect the state and local_tax expense recognized by seller plr-135027-11 and seller on the asset sale and as a result of the fsub cash distribution sec_1_1502-32 and e increased by the amount of the u s federal_income_tax expense and state and local_tax expense of seller and seller to reflect a deemed contribution_to_capital of seller for the taxes to be paid_by parent or seller on behalf of parent sec_1_1502-32 and iv d sec_1_1552-1 344_us_6 the proposed transaction by itself will not be treated as a qualified_stock_purchase within the meaning of sec_338 therefore the proposed transaction by itself will not result in an application of the consistency rules of sec_338 and sec_1_338-8 to cause buyer to take a carryover_basis in the assets of the a businesses 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 specifically aside from ruling no rulings have been requested and no opinion is expressed or implied concerning the u s federal tax consequences of certain aspects of the proposed transaction involving the sale of foreign assets and distributions from foreign entities including steps xviii and xx transactions entered into subsequent to the proposed transaction may affect whether the proposed transaction in combination with subsequent transactions is treated as a qualified_stock_purchase within the meaning of sec_338 and may also affect whether the proposed transaction in combination with subsequent transactions will result in an application of the consistency rules of sec_338 and sec_1_338-8 therefore no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item that arises subsequent to the proposed transaction procedural matters this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-135027-11 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely douglas c bates reviewing attorney branch corporate cc


internal_revenue_service number release date index number --------------------------------- ---------------------------------------- ------------------------------------ - department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eb qp2 - plr-145557-03 date december legend league --------------------------------- ----------------------- plan ----------------------------------------------------------------------- country x ----------- dear ------------------ ------------------ exempt from tax under sec_501 of the internal_revenue_code code concerning whether plan would continue to meet the requirements of sec_457 of the code and continue to be excepted from sec_457 of the code following the proposed amendment to the plan as described below the plan was established as of date to provide certain benefits to general managers of the league’s member teams participants the plan is a nonelective nonqualified_deferred_compensation_plan that provides compensation to participants the plan provides for the payment of benefits in the amounts and at the times determined under the plan all plan benefits are paid as annuities except that benefits worth less than minimum amounts specified in the plan are paid as lump sums none of the participants are employees of the league and there are no individual variations or options under the plan participants in the plan include citizens of the united_states as well as citizens of country x this is in reply to a request for a ruling on behalf of the ---------- ----------------------- the league has been advised that under the tax laws of country x general by a ruling letter plr dated date the service ruled in part plr-145557-03 that sec_457 would not apply to compensation deferred under the plan because the plan met the requirements of sec_457 of the code managers of the clubs whose home facilities for playing league games are located in country x may now be subject_to the federal_income_tax of country x on their vested benefits in the plan as those benefits accrue rather than when the benefits are actually paid or made available to the general managers accordingly the league proposes to amend the plan to exclude all of the general managers whose home facilities for playing league games are located in country x amendment specifically the league proposes to amend the plan to apply only to general managers whose home facilities for playing league games are located in the united_states under the amendment general managers whose clubs are located in country x will no longer be eligible to participate in the plan but will be entitled to the benefits they have accrued under the plan as of the date of the amendment unless all of the current and former general managers of clubs located in county x with accrued_benefits under the plan consent in writing to give up those benefits sec_457 of the code contains rules for the taxation of deferred_compensation plans of state and local governments and tax-exempt organizations if a plan complies with sec_457 compensation deferred under the plan will not be included in income until the year is paid or otherwise made available sec_457 of the code exempts a plan from sec_457 if it provides nonelective deferred_compensation for services not performed as an employee the compensation shall be treated as nonelective only if all individuals with the same relationship to the payor other than those who have not satisfied any applicable initial service requirements are covered under the same plan with no individual variations or options under the plan does not include and sec_457 and sec_1_457-2 through of the regulations do not apply to any nonelective deferred_compensation under which all individuals other than those who have not satisfied any applicable initial service requirement with the same relationship with the eligible_employer are covered under the same plan with no individual variations or options under the plan as described in sec_457 but only to the extent the compensation is attributable to services performed as an independent_contractor clubs have home facilities for playing league games that are located in the united sec_1_457-2 of the income_tax regulations provide that the term plan under the proposed amendment the plan will apply to all participants whose this ruling concerns only the effect of the amendment no opinion is expressed plr-145557-03 states thus all individuals with the same relationship to the eligible_employer will be covered under the same plan with no individual variations or options under the plan accordingly the proposed amendment to exclude general managers of clubs located in country x who are subject_to the federal_income_tax of country x will not violate the requirements of sec_457 and sec_457 will continue to be inapplicable to the deferred_compensation under the plan with respect to the general managers of clubs located in the united_states with regard to the timing of inclusion in income of amounts deferred under the plan this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that this ruling may not be used or cited as precedent except as specifically stated above no opinion is expressed on the federal tax consequences of the transaction described above under any other provision of the code moreover if the plan or trust agreement is significantly amended this ruling may no longer apply concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter letter is being sent to your authorized representative representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and sincerely robert d patchell chief branch office of office of the associate chief_counsel employee_benefits and exempt_organizations


tcmemo_2012_280 united_states tax_court humberto s diaz and clara d diaz petitioners v commissioner of internal revenue respondent docket no filed date held ps who concede deficiencies in tax attributable to their failure to pay self-employment_tax on p-h's compensation from the world bank do not qualify for the sec_6664 reasonable_cause exception to sec_6662 accuracy-related_penalties for failure to show the resulting underpayments in tax were due to reasonable_cause and that they acted in good_faith in relying on incorrect advice from an aarp tax-aide volunteer p-h did not provide the volunteer with necessary and accurate information and did not rely in good_faith on the volunteer's advice the second and third prongs of the test in 115_tc_43 aff'd 299_f3d_221 3d cir are not satisfied bryon a christensen roxanne grossman john p marston brendan t o'dell and cary douglas pugh for petitioners jeffrey e gold stephen c huggs and lindsey d stellwagen for respondent memorandum findings_of_fact and opinion halpern judge respondent determined deficiencies in and accuracy- related penalties with respect to petitioners' federal_income_tax as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure petitioners do not contest the deficiencies in tax they contest only the penalties they do so on the grounds that there was reasonable_cause for and they acted in good_faith with respect to the underpayments in tax resulting from their omitting from their and returns petitioner husband's mr diaz's self- employment_tax 1unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue we round all dollar amounts to the nearest dollar findings_of_fact introduction some facts are stipulated and are so found at the time they filed the petition petitioners resided in virginia they are calendar_year taxpayers background in mr diaz originally a chilean national retired from a career working for the chilean air force his last assignment was in washington d c in he went to work in the united_states for the international bank for reconstruction and development world bank in he became a u s citizen and because of that change in status he became subject_to federal taxation as a citizen because he was a u s citizen the world bank switched from paying him on a net_basis no additional compensation to cover estimated u s tax obligations to paying him on a gross basis compensation includes additional_amounts to cover estimated u s tax obligations 2international organizations such as the world bank are exempted from social_security and medicare payments and withholding and therefore do not withhold from employees nor pay the employer's share of those taxes see sec_3121 moreover those employers withhold no employee federal_income_tax see sec_3401 sec_31_3401_a_5_-1 employment_tax regs thus u s citizen employees of international organizations are required to report income from employment by the organization as self-employment_income and they are liable for self-employment_tax in addition to regular income_tax with respect to that continued the world bank's efforts to educate their employees the world bank has taken several steps to ensure that its u s citizen employees understand their unusual tax responsibilities including operating a tax services desk on its premises the world bank also advises employees of their tax_liabilities through employment agreements and supplementary certifications several times during the years in issue mr diaz signed new employment agreements each of which stated on its first page the fee compensation is based on the understanding that you will assume any_tax obligation which may be imposed on your the sic world bank income united_states citizens working in the united_states with international organizations are covered for social_security under the u s social_security act and are liable for social_security at the self-employed rate mr diaz read those agreements and concluded that he had an obligation to pay self- employment_tax on his world bank compensation_generally when mr diaz signed a new employment agreement he also signed a world bank certification stating the following i certify that if i am a united_states citizen i have so advised the world bank group for income_tax reporting purposes even if i am also a citizen of another country if my continued income sec_1402 unlike their u s citizen counterparts non-u s citizen employees of international organizations are exempt from u s taxation sec_893 sec_1402 remuneration is designated gross i certify that i am subject_to tax thereon and will assume the tax obligation that will be imposed in date mr diaz received from the world bank a form bank form containing images of his form_w-2 wage and tax statement for tax_year form_w-2 the form_w-2 identified his employer as the world bank and it identified him as the employee box labeled wages tips other compensation showed dollar_figure boxe sec_2 through labeled respectively federal_income_tax withheld social_security wages social_security_tax withheld medicare wages and tips and medicare_tax withheld were blank the bank form in space outside the images of the form_w-2 contained the following instruction schedule se self-employment_tax must be attached to your form_1040 u s staff must pay social_security and medicare_tax at the self- employment rate on wages for services performed inside the u s please refer to instructions for schedule se u s citizens employed by foreign governments or international organizations at www irs gov on date approximately world bank employees attended a two- hour presentation by the internal_revenue_service irs concerning world bank employee tax obligations the presentation took place in the world bank's auditorium and handouts were provided to attendees the presentation was simulcast to world bank employees' individual desktop computers at that meeting the irs explained that all world bank employees who are u s citizens are required to prepare and submit with their federal tax returns a schedule se self- employment_tax and pay self-employment_tax because the world bank does not withhold the employee's share and does not pay the employer's share of social_security and medicare taxes preparation of mr diaz's joint federal_income_tax return mr diaz did not prepare petitioners' federal_income_tax return he visited an aarp foundation tax assistance site and was assisted by a volunteer participating in the aarp tax-aide program the aarp tax-aide program helps low-to-moderate-income taxpayers particularly those or older aarp tax- aide volunteers are trained and irs certified to understand individual federal tax issues mr diaz believed that he owed self-employment_tax on his world bank wages and checked a box on the aarp tax-aide intake and interview form that he filled out indicating that he had self-employment_income for he told the volunteer who assisted him that he was a u s citizen and provided him with the copies of his form_w-2 to accompany his federal and state returns he had 3see about aarp foundation tax-aide http www aarp org money taxes info-2004 about_aarp_taxaide html last visited date cut those copies from the bank form therefore he did not provide the aide with the portion of the bank form advising him of his liability as a u s citizen for social_security at the 'self-employed' rate he told the volunteer that he worked for the world bank and paid self-employment_tax the volunteer asked why he paid self-employment_tax adding that normally world bank employees do not pay taxes he responded that for and after he had become a u s citizen he paid self-employment_tax the volunteer left his interview with mr diaz and discussed with another volunteer whether individuals who work at the world bank do or do not pay self-employment_tax the two individuals disagreed one saying that mr diaz did have to pay self-employment_tax and the other saying that he did not the two individuals called over a third individual who appeared to mr diaz to be a supervisor they all looked in a book which apparently did not resolve the issue the supervisor then asked what did the w-2 form say what do you see there you have to follow the instructions and if there's nothing here you put nothing there this is the w-2 form in the world bank the volunteer returned to mr diaz and said okay you're not going to pay the self-employment_tax the aarp tax-aide prepared petitioners' joint form_1040 u s individual_income_tax_return and petitioners signed and filed the return the return is dated date the return did not include a schedule se and showed no liability for self-employment_tax and petitioners paid no self-employment_tax while mr diaz harbored doubts about the position petitioners were taking on their return with respect to self-employment_tax he took no action to further investigate his self-employment_tax obligation because he did not believe that he had the time to do so he testified that had he had more time he would have investigated further petitioners do not know the name of the volunteer or of anyone else at aarp tax-aide from whom mr diaz requested assistance in preparing their form_1040 preparation of petitioners' joint federal_income_tax return after receiving from the world bank a form_w-2 for tax_year form_w-2 mr diaz prepared petitioners' joint tax_return like the form_w-2 the form_w-2 had an entry in box but no entries in boxe sec_2 through relying on aarp tax-aide's preparation of the joint tax_return petitioners did not attach to the joint form_1040 a schedule se showed no liability for self-employment_tax and paid no self-employment_tax for deficiencies respondent determined deficiencies in tax for and on the basis of petitioners' failure to pay self-employment_tax respondent also determined an accuracy-related_penalty under sec_6662 for each of those years opinion i imposition of the accuracy-related_penalty a introduction sec_6662 and b and imposes an accuracy-related_penalty equal to of the portion of an underpayment_of_tax attributable to among other things negligence or disregard of rules or regulations without distinction negligence or any substantial_understatement_of_income_tax the commissioner bears the burden of production see sec_7491 to meet his burden he must produce evidence regarding the appropriateness of imposing the penalty 116_tc_438 the taxpayer's concessions may be taken into account in determining whether the commissioner has met that burden oria v commissioner tcmemo_2007_226 once the commissioner carries his burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause see higbee v commissioner t c pincite respondent determined the accuracy-related_penalty for each year in issue alternatively on the grounds of negligence or substantial_understatement_of_income_tax only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is subject_to the penalty on more than one of the grounds set forth in sec_6662 sec_1_6662-2 income_tax regs b substantial_understatement_of_income_tax sec_6662 defines substantial_understatement_of_income_tax as an amount exceeding the greater of of the tax required to be shown on the return or dollar_figure petitioners concede that there is a substantial_understatement_of_income_tax for and respondent concedes that there is no substantial_understatement_of_income_tax for we accept the parties' concessions and find that barring reasonable_cause and good_faith petitioners are liable for the accuracy-related_penalty for substantial_understatement_of_income_tax for c negligence_penalty we need address petitioners' liability for the sec_6662 penalty on the ground of negligence only for sec_6662 imposes a penalty for negligence or disregard of rules or regulations negligence is defined as a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances viralam v commissioner 136_tc_151 negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true' under the circumstances sec_1_6662-3 income_tax regs mr diaz admits that he believed he had a duty to report and pay self- employment_tax for each year in issue despite that belief petitioners did not attach a schedule se to either their or joint_return nor did they pay the self- employment_tax due petitioners concede that they improperly failed to report and pay self-employment_tax for both and their concession is sufficient for us to conclude that respondent has carried his burden of production accordingly we find that barring a showing of reasonable_cause and good_faith petitioners are liable for the accuracy-related_penalty for negligence for d reasonable_cause and good_faith defense introduction with exceptions not here relevant a taxpayer may avoid the sec_6662 penalty by showing that he acted with reasonable_cause and in good_faith sec_6664 reasonable_cause requires that the taxpayer exercise ordinary business care and prudence as to the disputed item 469_us_241 the term good_faith has no precise definition but means among other things an honest belief and the intent to perform all lawful obligations e g 964_f2d_318 4th cir those determinations are made on a case-by-case basis taking into account all pertinent facts and circumstances including the taxpayer's knowledge and experience racine v commissioner tcmemo_2006_162 aff'd 493_f3d_777 7th cir sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs the most important factor is the taxpayer's efforts to assess the proper liability id a taxpayer may demonstrate reasonable_cause through good_faith reliance on the advice of an independent professional such as a tax adviser a lawyer or an accountant as to the item's tax treatment boyle u s pincite 135_tc_199 to prevail the taxpayer must show that he selected a competent adviser with sufficient expertise to justify reliance supplied the adviser with necessary and accurate information and actually relied in good_faith on the adviser's judgment 115_tc_43 aff'd 299_f3d_221 3d cir petitioners' argument petitioners assert that they are not liable for the sec_6662 penalty for either year in issue because they reasonably relied on the advice of an aarp tax- aide volunteer in preparing their and joint tax returns specifically petitioners contend that they relied on the volunteer's advice that mr diaz was not liable for self-employment_tax for and that he provided to the volunteer all necessary information including his status as a u s citizen his employment at the world bank and his form_w-2 for the tax_year respondent's argument respondent argues that petitioners have not shown reasonable reliance on the volunteer because they have not identified the volunteer nor shown that he rendered a judgment concerning the tax treatment of the item at issue and did not provide the volunteer with all necessary and accurate information as to his second argument respondent contends that mr diaz failed to provide the volunteer with all necessary information because he provided the form_w-2 without the special instructions on the bank form regarding self-employment_tax obligations of world bank employees finally respondent argues that the volunteer was not a professional and was not a competent adviser with sufficient expertise to justify petitioners' reliance he contends that the volunteer would not have been familiar with returns involving international organizations such as the world bank that are exempted from federal income and fica tax withholding for their u s citizen employees yet still provide to those employees a form_w-2 with instructions to pay self-employment_tax analysis a supplying adviser with necessary information we first address whether petitioners failed to satisfy the second prong of the neonatology assocs test viz that mr diaz supplied the aarp tax-aide volunteer with necessary and accurate information the parties have stipulated the only information necessary to make a proper determination as to whether petitioners were liable for self-employment_tax on mr diaz's world bank income for is a copy of mr diaz's complete form_w-2 and knowledge of the fact that mr diaz was a u s citizen the parties disagree as to the meaning of the adjective complete giving each word in the sentence proper weight we find that the adjective complete suggests more than just the images of the form_w-2 that petitioner cut from the bank form and furnished to the aarp volunteers we find that in context the complete form_w-2 could only mean the bank form in its entirety which in addition to the images of the form_w-2 contained specific instructions regarding the obligation of a u s citizen employee of the world bank to file a schedule se since mr diaz did not supply the aarp volunteers with the complete form_w-2 petitioners cannot rely on the stated stipulation to show that they supplied the aarp volunteers with the necessary information to determine whether mr diaz was liable for self-employment_tax putting the stipulation aside petitioners argue that the aarp volunteer's knowledge that mr diaz was a u s citizen who worked at the world bank is sufficient as a matter of law for him to have properly determined that petitioner owed self-employment_tax on his world bank income petitioners cite no authority for that claim nor do we interpret the necessary-and-accurate-information criterion of neonatology assocs as requiring such a minimalist approach to the meaning of the term necessary and accurate indeed the failure to provide the aarp volunteer with the caveat with respect to self-employment_tax embodied in the bank form would seem to defy the warning in sec_1_6664-4 income_tax regs that the requirement to disclose all pertinent facts and circumstances as the basis for advice includes facts that the taxpayer knows or reasonably should know to be relevant to the tax treatment of an item had mr diaz provided the aarp volunteers with the complete form_w-2 they would have been alerted to the possible distinction between u s citizen and non-u s citizen world bank employees and very likely they would have correctly advised him of the need to file a schedule se and pay self-employment_tax on his world bank income and therefore would have included a schedule se in preparing his return petitioners have failed to show that mr diaz supplied the aarp tax-aide volunteers with necessary and accurate information and for that reason they fail to show that they satisfy the second prong of the neonatology assocs test b good_faith reliance on advice the third prong of the neonatology assocs test is that the taxpayer actually relied in good_faith on the adviser's judgment the parties have stipulated and we have found that aarp tax-aide volunteers are trained and irs certified to understand individual federal tax issues that does not mean of course that the volunteers are in every instance qualified to assist an individual taxpayer with return preparation principally the aarp tax-aide assistance program is intended to help elderly low-to-moderate-income taxpayers there are undoubtedly many individuals who are not typical of that clientele petitioners presented an atypical issue and because of his training the unidentified volunteer who assisted mr diaz undoubtedly recognized it as such he had in front of him petitioners' form_w-2 which showed that mr diaz had earned substantial income from employment but that his employer had withheld neither income social_security nor medicare taxes he doubtless understood that individuals receiving forms w-2 generally have at least potential income_tax and social_security_tax obligations but he told mr diaz that normally individuals employed by the world bank do not pay taxes perhaps drawing upon his familiarity with the u s tax treatment of non-u s citizen world bank employees when mr diaz told him that since he had become a u s citizen he paid self-employment_tax the volunteer went off to discuss mr diaz's situation with another volunteer mr diaz overheard the disagreement between the volunteer assisting him and the other volunteer as to whether he was required to pay self-employment_tax an individual that mr diaz assumed to be a supervisor was called over and all three looked in a book but apparently found no satisfactory answer the supervisor then told the volunteer assisting mr diaz to follow the instructions for the form_w-2 the volunteer returned to mr diaz and told him that he did not have to pay self-employment_tax that advice was contrary to what mr diaz understood from the employment agreements with the world bank that he had read and signed it was contrary to the bank form which contained his form_w-2 and instructed that he as a u s citizen must pay social_security and medicare_tax at the self-employment rate on wages for services performed inside the united_states it was also contrary to the widely distributed date irs presentation at the world bank in which the irs explained that all world bank employees who were u s citizens were required to prepare and submit a schedule se with their federal tax returns and pay self-employment_tax because the world bank did not withhold the employee's share and pay the employer's share of social_security and medicare taxes indeed mr diaz testified that following his visit to aarp tax-aide he had his doubts whether the volunteer who assisted him was right or whether the world bank was right indeed mr diaz testified that he would have further investigated his self- employment_tax obligation if he had thought he had more time in fact petitioners could have obtained more time to file their return by requesting the automatic six-month extension of time to file their return that was available to all individual taxpayers see form_4868 application_for automatic_extension of time to file u s individual_income_tax_return whether mr diaz was aware that he could have requested an extension of time to file is beside the point he had good reason to understand that the volunteer who assisted him was not certain how to deal with his situation and that the volunteer's advice was contrary to the positions of both his employer the world bank and the irs despite his admitted uncertainty he did not further investigate because he erroneously thought that he had not left himself adequate time to do so thus he did not rely on the volunteer's advice solely upon the basis of a good_faith belief that it was correct he relied upon it at least in part because he did not believe that he had time to question it moreover mr diaz went to some trouble to separate copies of his form_w-2 from the portion of the bank form including the instructions advising that u s citizen employees are required to file a schedule se while we are cognizant of his testimony that he told the volunteer that he worked for the world 4petitioners' form_1040 is dated date which as pertinent to petitioners is the last day on which they could have requested an automatic_extension of time to file bank and paid self-employment_tax we do not dismiss the possibility that he intentionally withheld those instructions from the volunteer therefore we find that petitioners filed a income_tax return that mr diaz at best doubted was accurately prepared and at worst knew or strongly suspected was incorrect petitioners have failed to convince us that in relying on the aarp tax-aide volunteer and in failing to file schedule se and to pay self- employment_tax on mr diaz's compensation from the world bank they acted in good_faith for we reach the same result for substantially the same reasons but with somewhat more force since for that year's return petitioners have no excuse that they lacked time to question the volunteer's advice that mr diaz need not pay self- employment_tax conclusion petitioners have failed to demonstrate that they acted with reasonable_cause and in good_faith in failing to satisfy their and self-employment_tax obligations with respect to mr diaz's world bank wages for those years 5that among other facts distinguishes the facts of this case from those in chien v commissioner tcmemo_2012_277 taxpayer an employee of the international monetary fund had reasonable_cause for and acted in good_faith with respect to underpayment in self-employment_tax ii conclusion we sustain the deficiencies in tax and sec_6662 accuracy-related_penalties respondent determined decision will be entered for respondent