vig department of the treasury internal_revenue_service washington d c date may contact person d number telephone number op e eo t employer_identification_number legend a b cc d e f dear sir or madam this is in reply to the letter of date submitted on your behalf regarding the possible tax consequences of a disqualified_person as defined in sec_4946 of the internal_revenue_code exercising an option to purchase property from the estate of a b has been recognized as exempt under sec_501 of the code and is a private_foundation within the meaning of sec_509 a is the founder of b and he is now deceased his will is being probated and b is the sole remaining beneficiary of his estate assets remaining in the estate include an undivided one-half interest in certain timber properties he jointly owned with c as tenants-in-common c was once the wife of a but they divorced many years ago c has the right so long as she lives to either sit on b’s board_of directors or to appoint another to serve in her place daughter is currently appointed by her to sit on b’s board the submitted information states that c is a substantial_contributor to b d her e is a holding_company which conducts its business through a number of wholly-owned it has two classes of authorized stock voting and nonvoting f holds all the shares of subsidiaries the voting common_stock predecessor companies have also been represented as being substantial contributors to b f is the son of a and c and is one of b’s directors e and its re the above mentioned undivided one-half interest in certain timber properties was subject_to a long standing option agreement which is currently held by e as successor to an earlier corporation that was also owned by a purchase the property interest and will pay the sales_price in cash the property is to be sold at fair_market_value as determined by an appraisal done by independent third parties once the appraisal is completed the personal_representatives of a’s estate will seek approval of the sale from the court having jurisdiction over the estate e has notified the estate of a that it wishes to exercise its option to once e has acquired a’s interest in the property it expects to enter into an arrangement with c to exchange pieces of their undivided one-half interests so that each will become the sole owner of an identifiable portion of the acreage thereafter c and e shall use the property as they desire it has been represented that this transaction will satisfy all of the requirements set forth in sec_53 d -l b of the foundation and similar excise_tax regulations - accordingly a ruling has been requested that pursuant to sec_53 d -i b of the regulations the sale by the estate and purchase by e pursuant to the terms and provisions of the option agreement will not be an act of self-dealing under sec_4941 of the code section sol c of the code exempts from federal_income_tax organization organized and operated exclusively for charitable or educational_purposes sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_50l c is a private_foundation and subject_to the excise_taxes of chapter sec_4941 of the code imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code defines self-dealing as including a sale_or_exchange of property or the extension of credit between a foundation and a disqualified_person whether done directly or indirectly sec_53 d -l a of the regulations provides that for the purposes of sec_4941 the term self-dealing means any direct or indirect transaction described in sec_53_4941_d_-2 of the regulations sec_53 d -lb i of the regulations states that indirect self-dealing includes any transaction between a disqualified_person and an organization controlled by a private_foundation sec_53 d -i b of the regulations provides that the term indirect self-dealing shail not include a transaction with respect to a private foundation’s interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if - i the administrator or executor of an estate or trustee of a revocable_trust either - a possess a power of sale with respect to the property fo re b has the power to reallocate the property to another beneficiary or c is required to sell the property under the terms of any option subject_to which - the property was acquired by the estate or revocable_trust ii such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation iii such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of a revocable_trust before it is considered subject_to sec_4947 iv the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation’s interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transaction occurring after date the transaction either - a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying out of its exempt purposes or c is required under the terms of any option which is binding on the estate_or_trust sec_53 d -i b of the regulations example describes a situation where a substantial_contributor to a private_foundation bequeaths one-half of his estate to his spouse and one-half to the private_foundation the estate includes a one-third interest in a partnership the remaining two-thirds of the partnership are owned by a disqualified_person to the private_foundation the one-third interest was subject_to an option agreement when it was acquired by the estate the sale of the one-third interest in the partnership to the disqualified_person did not constitute an act of self-dealing because the transaction satisfied the requirements set forth in sec_53 d -i b sec_53 d -2 of the regulations discusses specific acts of self-dealing sec_53 d -2 a l of the regulations provides that in general the sale_or_exchange of property between a private_foundation and a disqualified_person shall constitute an act of self-dealing sec_4946 defines the term disqualified persons with respect to a private_foundation as including a substantial_contributor to the foundation a foundation_manager and an owner of more than percent of the total combined voting power of a corporation which is a substantial it also includes a member_of_the_family of any individual described contributor to the foundation above percent of the beneficial_interest in addition it includes a_trust or estate in which persons described in above hold more than off re sec_4946 defines the term foundation_manager as including an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation sec_4946 states that the term a member_of_the_family of a disqualified_person includes the spouse children of and grandchildren of a disqualified_person sec_507 d a of the code defines a substantia contributor as any person who contributed or bequeathed an aggregated amount of more than dollar_figure to a private_foundation if such amount is more than percent of the total contributions and bequests received by the foundation before the close of the taxable_year of the foundation in which the contribution or bequest is received by the foundation from such person contributor also means the creator of the trust in the case of a_trust the term substantial sec_4947 of the code provides that certain trusts which are not exempt under sec_50l a of the code are treated as private_foundations and subject_to the excise_taxes imposed by chapter sec_53 4947-i b ii a of the regulations provides that when an estate from which the executor or administrator is required to distribute all of the net assets in trust for charitable beneficiaries or free of trust to such beneficiaries is considered terminated for federal_income_tax purposes under sec_1_641 b -3 a the estate will be treated as a charitable_trust under sec_4947 between the date on which the estate is considered terminated under sec_1_641 b - a and the date final distribution of all of the net assets is made to or for the benefit of the charitable beneficiaries is a private_foundation within the meaning of sec_509 of the code the estate of a is subject_to the provisions of chapter by reason of sec_4947 you have represented that c d e and f are all considered disqualified persons within the meaning of sec_4946 the regulations provide an exception from the self-dealing rules for matters involving the administration of an estate the transfer of the involved property is subject_to an option agreement held by e which has been represented as being legally binding requirements set forth in sec_53 d -i b of the regulations have been or will be satisfied in addition the various accordingly based on the submitted information and representations submitted we have concluded that the sale by the estate and purchase of the interest by e pursuant to the terms and provisions of the option agreement will not be an act of self-dealing under sec_4941 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent in this ruling we have not determined whether the methodology to be used to determine fair_market_value of the assets is proper we merely have accepted the given representation that the appraisal will reflect fair_market_value rr re we are informing the key district_director of this ruling because this letter could help resolve any question about b’s exempt status it should be kept in b’s permanent records if there are any question about this ruling please contact the person whose name and telephone number are shown in the heading of this letter concerning reporting requirements please contact the key district_director for other matters including questions sincerely yours garland a carter chief exempt_organizations technical branch


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date conex-103738-16 uil the honorable patty murray united_states senator jackson federal building second avenue seattle wa attention dear senator murray i am responding to your inquiry dated date on behalf of your constituent -- ------------------------------ he wrote that a third-party administrator of his health_flexible_spending_arrangement fsa requested verification of certain medical_expenses for supplements related to a medical_condition he questioned whether irs guidance requires the third-party administrator to request his physician’s signature identification_number and an explanation of how the supplements relate to the medical_condition under a health_fsa an employer may pay or reimburse only those medical_expenses that an employee substantiates see proposed income_tax regulation sec_1 b irs publication health_savings_accounts and other tax-favored health_plans states the general_rule that non-prescription medicines other than insulin are not considered qualified_medical_expenses for fsa purposes it then states that a medicine or drug will be a qualified medical expense for fsa purposes only if the medicine or drug ---------------------- requires a prescription is available without a prescription an over-the-counter medicine or drug and you get a prescription for it or is insulin in addition irs publication medical and dental expenses including the health conex-103738-16 coverage tax_credit states that except for insulin qualified_medical_expenses do not include medical expense amounts paid for a drug that is not prescribed enclosed are both publications and they also are available on www irs gov this irs guidance is not contrary to the request from the third-party administrator for verification of certain medical_expenses for the supplements related to a medical_condition employer reimbursement of non-qualified medical_expenses puts the nontaxable status of the plan at risk based on the information you provided it appears the third-party administrator’s request for documentation is reasonable the third-party administrator can only pay those medical_expenses after it deems them substantiated if a third-party administrator notifies an employee that the documents submitted by a physician’s office are inadequate it is the employee’s responsibility to submit the additional documentation in order to get reimbursement i hope this information is helpful if you need additional information please contact me or sincerely -------------------- of my staff at ---------------- victoria a judson associate chief_counsel tax exempt and government entities enclosure irs publication irs publication


internal_revenue_service number release date index number ----------------------- ----------------------------------------------------- ------------------ ----------------------------- in re -------------------------- ----------------------- legend department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc ita br05 - plr-134165-08 date date company a ------------------------------------------ ----------------------------------------------------- company b ---------------------------- state m ----------- amounts m ----------------- n ------------- dates --------------------------- -------------------------- - --------------------------- -------------------------- --------------------------- ----------------------- month --------------------------- dear --------------- this is in response to your authorized representative’s letter of date and other correspondence and submissions in which he requested on your sometimes herein company a or the taxpayer behalf private letter rulings regarding the proper federal_income_tax treatment of a certain proposed distribution_of_property as more fully discussed below we are pleased to address your concerns facts the information submitted indicates that taxpayer a is a state m corporation and that on date taxpayer elected s_corporation status effective for its taxable_year beginning date and ending date this was the first taxable_year for which the plr-134165-08 taxpayer was an s_corporation pursuant to its most recent election under sec_1362 taxpayer has elected to be on a week taxable_year ending always on the last saturday to occur in -------------- taxpayer’s current taxable_year will end on date taxpayer has owned for some time m shares of the common_stock of company b all of which was held as of the beginning of the first taxable_year in which the taxpayer was an s_corporation date the fair_market_value of the stock exceeded its adjusted_basis at that time the stock is held for investment purposes taxpayer plans to make a distribution of some of these appreciated investment securities to its shareholders the board_of directors of taxpayer has decided to distribute not more than n shares of the stock the stock pro_rata to taxpayer's shareholders taxpayer would like the gain recognized on the distribution not to be taxable to it pursuant to sec_1374 taxpayer also intends to cause the gain on the stock to be recognized in its ------- taxable_year and taxable to its shareholders in their ------- taxable years for reasons discussed below date is the only date in taxpayer’s ------- taxable_year on which the distribution can be made to achieve these intended results this distribution would be accomplished by taxpayer transferring the stock to a newly- formed limited_liability_company the llc of which taxpayer will initially be the sole owner prior to date on date taxpayer will distribute taxpayer’s sole membership interest in llc pro_rata to its shareholders the fair_market_value of the stock held by the llc is expected to exceed its adjusted_basis on date taxpayer requests that the following rulings be issued upon the distribution of the llc pro_rata to the shareholders of taxpayer on date gain on the deemed sale of the stock shall be recognized to taxpayer in its taxable_year ending at that time the gain recognized to taxpayer upon the deemed sale of stock held in the llc on date will not be taxable under sec_1374 of the code because the recognition_period with respect to the stock will end on date ten years after the taxpayer’s election to be taxable as an s_corporation in the case of a shareholder of taxpayer whose taxable_year ends in month eg on date the shareholder’s pro_rata share of the gain recognized to taxpayer upon the deemed sale of the stock on date shall be taken into account in the shareholder’s taxable_year that is deemed to end on date law analysis plr-134165-08 sec_441 of the code provides that taxable_income shall be computed on the basis of the taxpayer’s taxable_year that the term taxable_year means the taxpayer’s annual_accounting_period and that the term annual_accounting_period means the annual period calendar_year or fiscal_year on the basis of which the taxpayer regularly computes its income in keeping its books sec_441 and sec_1_441-1 and sec_1_441-2 of the regulations provide for the election of a week fiscal_year as described therein sec_1_441-2 provides rules for determining certain effective dates in the case of taxpayers employing week taxable years sec_1 e provides special rules for the treatment of the taxable years of a pass-through entity including an s_corporation and the owner of a pass-through entity where one or both employ a week taxable_year ending with reference to the same calendar month sec_1_441-2 provides that if a pass-through entity as defined in sec_1_441-2 or an owner of a pass-through entity as defined in sec_1_441-2 or both use a 52-53-week taxable_year and the taxable_year of the pass-through entity and the owner end with reference to the same calendar month then for purposes of determining the taxable_year in which items of income gain loss deductions or credits from the pass-through entity are taken into account by the owner of the pass-through the owner's taxable_year will be deemed to end on the last day of the pass-through's taxable_year thus if the taxable_year of an s_corporation and a shareholder end with reference to the same calendar month then for purposes of determining the taxable_year in which that shareholder takes into account items described in sec_1366 and items that are deductible by the s_corporation and includible in the income of that shareholder that shareholder's taxable_year will be deemed to end on the last day of the s corporation's taxable_year sec_1371 provides that except as otherwise provided in the code and except to the extent inconsistent with subchapter_s subchapter_c shall apply to an s_corporation and its shareholders sec_311 provides that if a corporation distributes property other than an obligation of such corporation to a shareholder in a distribution to which subpart a of part i of subchapter_c applies and the fair_market_value of such property exceeds its adjusted_basis in the hands of the distributing_corporation then gain shall be recognized to the distributing_corporation as if such property were sold to the distributee at its fair_market_value in the instant case taxpayer acknowledges that the gain on the subject distribution which is viewed as a deemed sale of the stock is taxable to taxpayer under sec_311 sec_1366 provides in part that in determining the tax under chapter of the code of a shareholder for the shareholder's taxable_year in which the taxable_year plr-134165-08 of the s_corporation ends there shall be taken into account the shareholder's pro_rata share of the corporation's items of income sec_1374 provides that if for any taxable_year beginning in the recognition_period an s_corporation has a net_recognized_built-in_gain there is imposed a tax computed under sec_1374 on the income of such corporation for such taxable_year sec_1374 provides that the term net_recognized_built-in_gain means with respect to any taxable_year in the recognition_period the lesser_of i the amount which would be the taxable_income of the s_corporation for such taxable_year if only recognized built-in gains and recognized built-in losses were taken into account or ii such corporation's taxable_income for such taxable_year determined as provided in sec_1375 sec_1374 provides that the term recognized_built-in_gain means any gain recognized during the recognition_period on the disposition of any asset except to the extent that the s_corporation establishes that a such asset was not held by the s_corporation as of the beginning of the 1st taxable_year for which it was an s_corporation or b such gain exceeds the excess if any of i the fair_market_value of such asset as of the beginning of such 1st taxable_year over ii the adjusted_basis of the asset as of such time sec_1_1374-4 of the income_tax regulations provides that sec_1374 applies to any gain_or_loss recognized during the recognition_period in a transaction treated as a sale_or_exchange for federal_income_tax purposes sec_1374 provides that the term recognition_period means the 10-year period beginning with the 1st day of the 1st taxable_year for which the corporation was an s_corporation sec_1374 provides that any reference in sec_1374 to the 1st taxable_year for which the corporation was an s_corporation shall be treated as a reference to the 1st taxable_year for which the corporation was an s_corporation pursuant to its most recent election under sec_1362 sec_1_1374-1 provides that the recognition_period is the 10-year 120-month period beginning on the first day the corporation is an s_corporation and that for example if the first day of the recognition_period is date the last day of the recognition_period is date accordingly in the instant case since the first day of the recognition_period is date ie the first day of the first taxable_year for which taxpayer was an s plr-134165-08 corporation it follows that the last day of the recognition_period will be date the provisions of sec_1 c do not apply in these circumstances thus taxpayer's built-in_gain in the appreciated securities will no longer be taxable under sec_1374 after date however sec_311 still applies which provides that if a corporation distributes appreciated_property to a shareholder the distributing_corporation will recognize gain as if the property were sold to the distributee at its fair_market_value sec_301_7701-2 of the procedure and administration regulations provides that except as otherwise provided in sec_301_7701-2 a business_entity that has a single owner and is not a corporation under sec_301_7701-2 is disregarded as an entity separate from its owner revrul_99_5 1999_1_cb_434 describes the federal_income_tax consequences when a single member limited_liability_company that is disregarded as an entity separate from its owner under sec_301_7701-3 becomes an entity with more than one owner that is classified as a partnership for federal tax purposes where b who is not related to a purchase sec_50 of a's ownership_interest in the llc for dollar_figure a does not contribute any portion of the dollar_figure to the llc and a and b continue to operate the business of the llc as co-owners of the llc the ruling holds that b's purchase of of a's ownership_interest in the llc is treated as the purchase of a interest in each of the llc's assets which are treated as held directly by a for federal tax purposes immediately thereafter a and b are treated as contributing their respective interests in those assets to a partnership in exchange for ownership interests in the partnership conclusions based upon the facts and representations presented and the above analysis of applicable law we conclude as follows upon the distribution of the llc interests pro_rata to the shareholders of taxpayer on date a distribution_of_property to which sec_311 applies gain on the deemed sale of the stock shall be recognized to taxpayer in its taxable_year ending at that time the gain recognized to taxpayer upon the deemed sale of stock held in the llc on date will not be taxable under sec_1374 because the recognition_period with respect to the stock will end on date ten years after the taxpayer’s election to be taxable as an s_corporation in the case of a shareholder of taxpayer whose taxable_year ends in month eg on date the shareholder’s pro_rata share of the gain recognized to taxpayer upon the deemed sale of the stock on date shall be taken into account in plr-134165-08 the shareholder’s taxable_year that is deemed with respect to such distribution to end on date this letter_ruling is based on facts and representations furnished by the taxpayer and its authorized representatives and is limited to the matters specifically addressed except as specifically ruled upon we express or imply no opinion concerning the federal tax consequences of the transactions described in the facts under any other provision of the code specifically we express or imply no opinion regarding whether taxpayer is eligible to be an s_corporation and whether transactions with respect to any assets in the corporation other than the stock result in a recognized_built-in_gain further we express or imply no opinion regarding the treatment of any items of income or deductions that may be realized by the taxpayer during or after the recognition_period pursuant to sec_1374 or any other provision of the code because it could help resolve future federal tax issues a copy of this letter should be maintained with the taxpayer’s permanent records and attached to any federal_income_tax return to which it might be relevant pursuant to a power_of_attorney on file with this office copies of this letter_ruling are being sent to the taxpayer’s authorized representatives this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch


t c memo united_states tax_court harry k amesbury petitioner v commissioner of internal revenue respondent docket no filed date harry k amesbury pro_se stephen r takeuchi for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and additions to tax under sec_6651 and and a respondent has now conceded the addition_to_tax under sec_6651 the main issue for decision is whether petitioner is liable for the 10-percent penalty for early withdrawal from an individual_retirement_account ira 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 findings_of_fact some of the facts have been deemed stipulated under rule f by reason of petitioner’s failure to respond to an order to show cause petitioner resided in florida at the time that he filed his petition during petitioner purchased securities through e-trade securities at some point in the securities were sold to satisfy petitioner’s debt for stocks acquired on margin petitioner did not file a federal_income_tax return for in about he was contacted by the internal_revenue_service irs because the proceeds of the securities sold to pay his debt were reported to the irs the irs assessed a tax_liability for and placed a lien on petitioner’s property during in order to avoid irs collection efforts related to the assessment for petitioner withdrew dollar_figure from his usaa federal savings bank ira petitioner also received dollar_figure in interest during thereafter petitioner was able to show that he did not have a gain on sale of the securities the assessment was abated and the lien was released petitioner did not file a federal_income_tax return for or respondent determined a deficiency for that included income_tax and an additional tax of percent on the early withdrawal from the ira as well as additions to tax for failure_to_file and for failure to pay estimated_taxes opinion sec_72 imposes an additional tax of percent on amounts received from a qualified_retirement_plan absent exceptions set forth in sec_72 petitioner does not dispute his receipt of income or his failure_to_file a return for his entire argument is that the irs was wrong in actions taken starting in to collect taxes erroneously determined for and that the wrongful conduct caused the early withdrawal from his ira although petitioner’s liability for the tax_year is not before us the parties were invited to supplement the record after trial with an explanation of what occurred with respect to petitioner’s liability but petitioner declined the invitation he prefers to assert without factual foundation that he was treated wrongfully by the irs and that therefore he should not be held liable for the amounts determined for even if he were correct that irs actions with respect to were erroneous which we cannot conclude those actions would not affect his liability for he has not shown any error in respondent’s determination and he has not shown any applicable exception to the additional tax imposed under sec_72 because the material facts in this case are deemed stipulated and otherwise are undisputed there is no issue with respect to burden of production or burden_of_proof under sec_7491 petitioner’s argument does not constitute reasonable_cause for his failure_to_file a return for and he is liable for the addition_to_tax under sec_6651 because he failed to file a return for he was required to pay estimated_taxes equal to percent of the tax owed for see sec_6654 he failed to make those payments and no exception to the addition_to_tax under sec_6654 applies see 75_tc_1 to reflect the foregoing including respondent’s concession decision will be entered for respondent except for the sec_6651 addition_to_tax


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 b03 plr-152555-11 date date x a b c d ----------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------------------------------------------- ------------------------ state ---------- date date date ------------------ -------------------------- --------------------- dear ------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to elect to treat a b c and d as qualified subchapter_s subsidiaries qsubs under sec_1361 of the internal_revenue_code code plr-152555-11 facts according to the information submitted x was incorporated under the laws of state and elected to be an s_corporation effective date on date x entered into a purchase agreement to acquire all of the stock of a and b and through those entities their wholly owned subsidiaries c and d effective date x failed to timely file forms qualified_subchapter_s_subsidiary election x represents that all income_tax returns of x and its shareholders have been filed as if the qsub elections were effective as of date law and analysis sec_1361 provides that except as provided in regulations prescribed by the secretary for purposes of title_26 i a corporation which is a qsub shall not be treated as a separate corporation and ii all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines the term qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation as defined in sec_1361 if percent of the stock of the corporation is held by an s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations provides the time and manner of making a qsub election a taxpayer makes a qsub election for a subsidiary by filing form_8869 with the appropriate service_center sec_1_1361-3 provides that a qsub election cannot be effective more than two months and days prior to the date of filing sec_1_1361-3 provides that an extension of time to make a qsub election may be available under sec_301_9100-1 and sec_301_9100-3 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time 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 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-152555-11 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-3 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to elect to treat a b c and d as qsubs effective date the election should be made for each subsidiary by filing form_8869 with the appropriate service_center a copy of this letter should be attached to the elections except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion concerning whether x is a valid s_corporation or whether a b c and d are eligible to be qsubs this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ______ s ______________________ stacy l short senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil dear contact person identification_number contact number employer_identification_number form required to be filed tax years this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 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 federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely kenneth corbin director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil legend b officer c dollar_figuredollar_figure d dollar_figuredollar_figure m address o state p 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 the basis for our conclusion is set forth below do your earnings inure to the benefit of b therefore disqualifying you from exemption under sec_501 of the code yes for the reasons described below letter cg catalog number 47630w facts you were formed as a corporation on date p in the state of o you filed form_1023 requesting recognition of exemption under sec_501 of the code as a church under sec_509 and sec_170 i you indicated that your purpose is to operate a religious congregation you hold daily prayer services weekly worship services and services on holy days your members also study religious law every day using the same space as a study hall you stated you have members you lease a building located at m which is owned by b who is an officer president you intend to use this building as a facility where you will regularly conduct your activities you do not currently have services at m rather your services are held at b’s private residence there is no indication that you considered any buildings other than the building at m to serve as your facility you have been renting the facility located at m for over a year in the amount of dollar_figurec per month the rental amount increased by after the first year the rental amount will continue to increase annually approximately the second year and the third year furthermore the current annual rent is greater than the yearly rent as projected in an appraisal of the facility you submitted that anticipates considerable capital improvements your rental agreement will terminate five years after the lease commenced you state that the reason why the rental amount is increasing annually despite the fact that the building is unusable is because market_value rents generally increase the lease requires you to have a substantial amount of liability insurance you also are required to pay all utilities the facility located at m is a one story brick warehouse it is currently unusable and will require substantial renovations totaling dollar_figured you submitted a contractor's cost estimate for proposed renovations to the approximately of the current square footage of the facility that will be used for your purposes the cost for the improvements is broken down and includes interior framing insulation sheet rock painting flooring windows and doors electric work and fixtures hvac plumbing and fixtures tile roof repair brick pointing cement filing and permits and insurance you are raising funds to make capital improvements to the building you submitted an appraisal of the facility located at m the appraisal states that there is ample deferred maintenance present rendering the building unfit for warehouse use in its current condition there are broken exterior windows several of the garage doors are broken and sections of the concrete slab floor are pitted and gouged the brickwork needs pointing the ceiling is missing in sections and needs to be replaced the structural integrity of the roof is unknown some of the plumbing is inoperative the letter cg catalog number 47630w interior heat is provided by several mounted space heaters but it is unknown if they are operative the property located at m was used as a public garage and later a motor_vehicle repair shop the appraisal assumes that the current lease is for the entire building furthermore it states that the determination of the prospective market rent for the renovated facility assumes that a new lease will be executed to include only the portion of the facility that is being renovated additionally the appraisal states that concessions may be made in the new lease that incorporate some level of rebate on your overall expense in renovating the property however no specific provisions of such a new lease were provided beyond these speculations the financial data you provided indicates that during your first year of operation sec_81 of your revenue was used to pay for occupancy expenses during your second year of operations you anticipate your occupancy expenses will consist of of your total revenue law sec_501 of the internal_revenue_code describes corporations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1 a -1 c defines the words private shareholder or individual’ in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes letter cg catalog number 47630w 477_f2d_340 4th cir cert_denied 413_us_910 found that operating for the benefit of private parties constitutes a substantial nonexempt purpose in 73_tc_196 the tax_court held that although separate requirements the private_inurement test and the operated exclusively for exempt purposes test often overlap substantially - in 74_tc_846 the court found that although the organization did serve religious and charitable purposes it existed to serve the private benefit of its founders and thus failed the operational_test of sec_501 control_over financial affairs by the founder created an opportunity for abuse and thus the need to be open and candid which the applicant failed to do in 70_fedclaims_782 the petitioner brought suit to challenge the denial of its application_for exempt status the court found that the administrative record supported the service's denial on the basis that the organization operated for the private benefit of its founder who had a history of promoting dubious schemes the organization's petition claimed that the founder had resigned and it had changed however there was little evidence of change other than replacement of the founder with an acquaintance who had no apparent qualifications the court resolved these questions against the petitioner who had the burden of establishing it was qualified for exemption if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process it is well-accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant application of law in you are currently leasing an unusable facility from your president a substantial portion of your revenue is used to pay the rent insurance and utilities on this facility addition you intend to make significant capital improvements to this building you did not consider any other alternative locations for your facilities there is no evidence that the facility was selected only after you completed a comparative review of available facilities in the relevant marketplace the terms of your lease were not made at arm’s length such a benefit to a private individual or shareholder is inconsistent with operation exclusively for an exempt_purpose as described in sec_1_501_c_3_-1 of the regulations although the lease agreement states that the current lease amount is reasonable this cannot be substantiated or justified the inherent value of a lease is contingent upon the lessor’s ability to make use of the property they are leasing the facility is not usable therefore you are not realizing any benefit by paying for it because the building would be unrentable were it not for you you are benefiting b by providing a source of revenue that otherwise would not exist b is receiving a catalog number 47630w letter cg substantial benefit by gaining revenue for an unusable building the current amount of rent received by b exceeds the amount projected in the appraisal after completion of the capital improvements in addition b will benefit from the increase in property value resulting from the significant capital improvements made to the facility which b owns the decision in old dominion box co v united_states established that operating for the benefit of private parties constitutes a substantial non-exempt purpose furthermore this substantial benefit demonstrates that you are serving the private interests of b rather than a public interest as required by sec_1_501_c_3_-1 of the regulations you are not operating exclusively for one or more purposes specified in sec_501 of the internal_revenue_code or sec_1_501_c_3_-1 of the regulations as indicated in better business bureau supra the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes your lease and planned improvement of m is a substantial non-exempt purpose which precludes you from qualifying for exemption as in western catholic church v commissioner supra although separate requirements the private_inurement test and the operated exclusively for exempt purposes test often overlap substantially likewise in basic bible church v commissioner it was determined that even if an organization serves exempt purposes it will fail the operational_test if it serves the private benefit of its founders in your case you hold religious services in b’s home however by paying b to lease a facility that is unusable you are serving the private interests of your founder and thus fail the operational_test of sec_501 you were formed for the private benefit of b through your lease and through planned substantial capital improvements to the building owned by b although you may conduct some exempt functions as in the above-cited case of new dynamics foundation v united_states you have not demonstrated that your operations exclusively further exempt purposes applicant’s position you intend to enter into a long term lease for approximately or years you will not enter into such lease until the project is completed you stated by the time you finish your long lease the depreciated value of the improvement would be zero therefore causing no private_inurement service response to applicant’s position although you indicated you might enter into a to year lease you have not yet letter cg catalog number 47630w entered into such lease you do not plan on entering into such lease until the renovations you will pay for are completed you did not provide the terms or rental fees of the planned lease agreement you indicated that the to year lease would depreciate the value of the improvements to zero however because of the current state of the building and the value of the proposed renovations it is impossible to say that the owner will not benefit from the improvements when the proposed lease expires or terminates the terms of your current lease indicate the amount you pay b exceeds the appraised value including reductions for capital improvements because the owner of the property is also your president b the payments constitute inurement to b conclusion based on the above facts and law you do not qualify for exemption under sec_501 of the code your net_earnings inure to the benefit of b causing you to be precluded from exemption under sec_501 of the code you failed to demonstrate that you meet the operational_test as you do not operate exclusively for an exempt_purpose under sec_501 of the code 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 how to appeal an irs decision on tax-exempt status types of information that should be included in your appeal can be found on page of publication under the heading filing a protest’ the statement of facts must be accompanied by the following declaration under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement letter cg catalog number 47630w if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications - mail to if we do not hear from you within days we will issue a final adverse please send your protest statement form_2848 and any supporting documents to the applicable address if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax internal_revenue_service eo determinations quality assurance internal_revenue_service eo determinations quality assurance letter cg catalog number 47630w deliver to if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely kenneth corbin acting director exempt_organizations rulings and agreements enclosure publication letter cg catalog number 47630w


internal_revenue_service number release date index number --------------------------------- --------------------------- ----------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-104475-15 date june legend x ----------------------------------------------------- ---------------------------- a ---------------------- trust ----------------------------------------------------- ------------------------------------------- date date date ----------------------- ------------------------ ------------------------ date ------------------------------------------------ state ------------- dear ------------ this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code the code facts according to the information submitted and representations within x was incorporated on date under the laws of state effective date x elected to be taxed as an s plr-104475-15 corporation a was a shareholder of x on date a died on date a’s shares of x stock were transferred trust pursuant to the terms of a’s will trust qualified under sec_1361 as an eligible shareholder for a two-year period beginning on the day the shares of x were transferred to it a timely election to treat trust as an electing_small_business_trust esbt was not made thus causing x’s s election to terminate on date x represents that trust has at all times met the requirements of an esbt within the meaning of sec_1361 throughout the period that trust has been a shareholder of x it has filed its federal_income_tax returns consistent with being an esbt x represents that x and its shareholders have filed consistently with x being an s_corporation x further represents that its s_corporation_election termination was inadvertent and was not motivated by tax_avoidance or retroactive tax planning further x represents that x and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent_termination_rule as provided under sec_1362 of the code that may be required by the secretary law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that a_trust with respect to stock transferred to it pursuant to the terms of a will but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that for purposes of sec_1362 an electing_small_business_trust esbt may be an s_corporation shareholder sec_1361 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in paragraph or of sec_170 or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust plr-104475-15 sec_1361 provides that the term electing_small_business_trust shall not include i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s election inadvertently terminated within the meaning of sec_1362 on date pursuant to the provisions of sec_1362 x will be treated as an s_corporation from date and thereafter provided x’s s_corporation_election is not otherwise terminated under sec_1362 within days from the date of this letter an election to treat trust as an esbt effective date must be made with the appropriate service_center a copy of this letter should be attached to the esbt election except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the plr-104475-15 code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number release date cc tege eb ec tl-n-709-00 uilc internal_revenue_service national_office service_center advice memorandum for kenneth j rubin assistant district_counsel cc ner pen phi from subject acting assistant chief_counsel cc tege eb whether payments received for jury duty service are earned_income for purposes of the earned_income_credit this responds to your request for service_center advice regarding whether amounts received by a taxpayer for services performed as a juror are considered to be earned_income for purposes of computing the earned_income_credit issue whether amounts received by a taxpayer for services performed as a juror jury fees are earned_income for purposes of the earned_income_credit eic conclusion jury fees are not earned_income for purposes of the eic facts this service_center advice does not address a specific factual scenario rather it addresses the general question of how jury fees are treated for purposes of the eic we note that state statutes differ in how they describe jury fees descriptions include compensation travel allowance and attendance fee the description used by a state is not determinative of the federal tax consequences law and analysis sec_32 of the code allows an eic in the case of an eligible_individual the amount of the eic is based in part on the eligible individual’s earned_income tl-n-709-00 sec_32 defines earned_income as wages salaries tips and other employee compensation plus the amount of the taxpayer’s net_earnings_from_self-employment for the taxable_year within the meaning of sec_1402 but the net_earnings shall be determined with regard to the deduction allowed to the taxpayer by sec_164 under sec_1402 net_earnings from self- employment is the gross_income derived by an individual from any trade_or_business carried on by the individual less deductions attributable to the trade_or_business and certain adjustments specified by law thus in order for jury fees to constitute earned_income for the eic the payments must either be an employee’s wages salaries tips or other compensation or be a self-employed individual’s net_earnings from self- employment whether a worker is an employee depends on whether the entity that retains the worker’s services exercises sufficient control_over the worker so that the worker can be categorized as an employee under the common_law see code sec_3121 sec_31_3121_d_-1 of the employment_tax regulations provides that generally an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished sec_1402 provides that the term trade_or_business for purposes of net_earnings_from_self-employment shall have the same meaning as when used in sec_162 relating to trade_or_business_expenses except that the term shall not include in relevant part the performance of the functions of public_office other than functions performed in a position compensated solely on a fee basis and not subject_to an agreement under sec_218 of the social_security act1 sec_1_1402_c_-2 of the income_tax regulations defines public_office to include any elective or appointive office of the united_states or any possession thereof of the district of columbia of a state or its political subdivisions or of a wholly-owned instrumentality of any one or more of the foregoing while juror is not specifically revrul_74_608 1974_2_cb_275 dealing with the application of self- employment_tax to tax collectors who are paid salaries based on the amount of tax they collect states that only when a public official receives remuneration in the form of fees directly from members of the public with whom he does business does such remuneration constitute fees within the meaning of sec_1402 while compensation to jurors is described in the regulations under sec_3401 as in the nature of fees paid to public officials this does not mean that jurors are fee-based public officials within the meaning of code sec_1402 but only that such compensation is to be treated as fees paid to public officials for withholding purposes tl-n-709-00 mentioned as a public_office the definition is broad enough to include the role of juror as a public_office revrul_61_113 1961_1_cb_400 deals with individuals who serve as members of a hearing board_of an air pollution control district who are appointed by the county board_of supervisors take an oath of office hold public hearings and submit their decisions to the county they are not under the control or direction of the county board_of supervisors or any other body their compensation is based on the number of hearings they attend their services constitute the performance of the functions of a public_office and do not constitute a trade_or_business for purposes of code sec_1402 the performance of services as a juror differs in its very nature from the performance of services as an employee the role of juror has its roots in the common_law as a member of a body of persons chosen according to law and sworn to make determinations of fact in a particular case the role of employee derives from a different common_law relationship that of master and servant service on a jury is often described as a civic duty since jurors are not employees amounts paid to them for services performed as a juror are not wages salaries tips or other employee compensation the amounts paid to jurors are for performance of a civic duty analogous to public_office as described in revrul_61_113 sec_1402 excludes the performance of functions of a public_office from the term trade_or_business for purposes of net_earnings form self-employment therefore amounts paid to jurors for services performed as a juror are not net_earnings_from_self-employment because jury fees are neither wages salaries tips nor other employee compensation nor net_earnings_from_self-employment jury fees are not earned_income for purposes of the eic we note that even though jury fees are not earned_income they are included in the juror’s gross_income under sec_61 of the code and sec_1_61-2 of the income_tax regulations jury fees however are not subject_to income_tax_withholding under sec_31_3401_a_-2 of the employment_tax regulations if you have any further questions please call mary oppenheimer acting assistant chief_counsel by mark schwimmer senior technician reviewer


internal_revenue_service number release date index number ------------------------------------- -------------------------- ---------------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b01 plr-129094-18 date date legend x state date date date ------------------------------------------------------------------------------------------------------------------ ----------- ---------------------- ---------------------- -------------------- agreement ------------------------------------------------------------------------------------------ date --------------------------- amendment ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------- date ---------------------------- dear ---------------- this letter responds to a letter dated date submitted on behalf of x requesting rulings under sec_1362 of the internal_revenue_code plr-129094-18 facts the information submitted states that x is a limited_liability_company organized under the laws of state on date x made elections to be treated as an association_taxable_as_a_corporation and to be an s_corporation effective date on date the original founding members of x entered into agreement agreement provided that all distributions would be made to the members in proportion to their respective membership interests including upon liquidation on date the members adopted amendment which stated that upon liquidation distributions would be paid to members with positive capital accounts in accordance with their respective positive capital_account balances as adjusted pursuant to sec_704 of the code on date amendment was amended to correct the liquidating_distribution language and provide for distributions on a pro_rata basis in accordance with membership ownership percentages x represents that the termination of x’s s_corporation_election was inadvertent and not motivated by tax_avoidance x further represents that since date x and its members have filed all returns consistent with x’s status as an s_corporation x also represents that since date all distributions were made to the members based on their pro_rata shares of ownership of x x and its members have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so plr-129094-18 that the corporation for which the election was made or the termination occurred is a small_business_corporation or b to acquire the shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary sec_1_1361-1 of the income_tax regulations provides that a corporation generally is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election terminated on date due to provisions in amendment however we conclude that such termination was inadvertent within the meaning of sec_1362 therefore pursuant to the provisions of sec_1362 x will be treated as an s_corporation effective date and thereafter provided that x is otherwise eligible to be an s_corporation and provided that the election was not otherwise terminated 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 in particular no opinion is expressed on whether x otherwise qualifies as an s_corporation the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination 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 plr-129094-18 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely joy c spies senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for purposes


t c memo united_states tax_court edward s cullin petitioner v commissioner of internal revenue respondent docket no filed date edward s cullin pro_se lawrence b austin for respondent memorandum findings_of_fact and opinion whalen judge respondent determined deficiencies an addition_to_tax and penalties with respect to petitioner's federal_income_tax as follows year deficiency dollar_figure dollar_figure addition_to_tax sec_6651 penalty sec_6662 -- dollar_figure dollar_figure dollar_figure all section references are to the internal_revenue_code as in effect for the years in issue after concessions the issues remaining for decision are whether petitioner's losses from trading commodity futures are capital or ordinary and whether petitioner is liable for the accuracy-related_penalties prescribed by sec_6662 as determined by respondent for and findings_of_fact the parties have stipulated some of the facts the stipulation of facts filed by the parties and the exhibits attached thereto are incorporated herein by this reference petitioner was a resident of dunwoody georgia at the time he filed his petition in this case during the years through petitioner was self-employed as a freelance writer and publisher prior to the years in issue petitioner researched and wrote a manuscript entitled the wall street newspaper daytrading strategy the manuscript describes a mechanical system for trading commodity futures which focused on the lead story on the commodities page of the wall street journal at the time the manuscript was written there was only one lead story on the commodities page the manuscript instructs a reader in how to execute a day trade with respect to the commodity that is the subject of the lead story it provides mechanical rules for selecting the month and price of the commodity and it describes how to offset the trade at the end of the day the manuscript also sets forth the results of hypothetical day trades using petitioner's system beginning on date and ending on the date the manuscript was mailed to the customer petitioner arranged for the manuscript to be typed printed and bound into book form petitioner wrote and designed all of the advertising and promotional materials used to sell the manuscript he marketed the manuscript using a mail order approach petitioner originally sold the manuscript under the name the wall street journal daytrading strategy however he received a letter dated date from dow jones co inc stating that his use of the names dow jones co the wall street journal wsj and barron's as well as the use of articles from and the logo of the wsj in advertising his manuscript was prohibited under the law after receiving the letter petitioner changed the name of his manuscript to the wall street newspaper daytrading strategy in order to sell his manuscript which rendered advice on commodity futures trading petitioner was required to be registered as a commodity trading adviser cta petitioner applied for and in obtained registration as a cta with the commodity futures trading commission cftc he also applied for and in obtained registration as a cta with the national futures association nfa the nfa is an association responsible for regulating the professional conduct and financial responsibility of cta's and others including futures commissions merchants introducing brokers and commodity pool operators as part of its regulatory activities the nfa conducts periodic audits of its members and monitors their advertising and sales practices petitioner encountered two problems in with respect to his manuscript first on date the wsj changed the format of its commodities page by expanding it to two pages with two lead stories petitioner believed the new format would cause problems for his customers because his manuscript was premised upon evaluating only one lead article per day petitioner believed that readers of the manuscript would become confused as to which if any commodity they should trade on a particular day second on date the nfa began a periodic audit of petitioner and on date it issued an audit report to petitioner the audit report discussed petitioner's advertisements appearing in the atlanta journal and in the date and date editions of future magazine the report also discussed petitioner's tape recorded message to potential customers and his promotional material in general the nfa audit report found alleged violations of cftc regulations and nfa rules many of the deficiencies in petitioner's promotional materials and practices involved alleged violations of nfa rule a rule designed to assure that potential investors in commodity futures receive accurate and verifiable information the nfa had the authority to revoke petitioner's cta license for violation of rule in that event petitioner could not legally continue to sell his manuscript to others the nfa audit report did not require petitioner to trade commodity futures to document claims in his promotional material or to maintain his status as a cta petitioner began trading commodity futures in he traded through seven different accounts during the years in issue the record does not state the number of trades that petitioner made in each year or the specific commodities he traded the record also does not detail the profit or loss history of petitioner's various brokerage accounts petitioner sustained losses of dollar_figure and dollar_figure trading commodity futures in and respectively petitioner received the following gross_receipts from the sale of his manuscript year gross_receipts dollar_figure -- dollar_figure dollar_figure dollar_figure dollar_figure he reported the gross_receipts for federal_income_tax purposes on a schedule c profit or loss from business attached to his return for each of the above years for and petitioner's schedules c report that he received the above gross_receipts from a business by the name of ed cullin commodity trading advisory which was in the business of commodity trading advisor publishing the schedules c for petitioner's publishing business for and also report deductions for research experimentation to improve trading system formula for sale of dollar_figure and dollar_figure respectively these amounts are the losses that petitioner sustained trading commodity futures in the subject notice_of_deficiency respondent disallowed the deduction of petitioner's commodity trading losses for and the notice states as follows it is determined that the amounts of dollar_figure and dollar_figure shown on schedule c of your respective and income_tax returns as research_and_experimentation to improve trading system formula for sale are not allowed because it has not been established that any amount was for an ordinary and necessary business_expense instead the commodities futures transactions constitute capital assets and are includable as capital_gains_and_losses on schedule d accordingly your taxable_income is increased dollar_figure for and dollar_figure for respondent allowed petitioner to treat the losses as short- term capital losses deductible on schedule d capital_gains_and_losses the notice states as follows it is determined that you are entitled to short- term capital losses in the amounts of dollar_figure for and dollar_figure for limited to dollar_figure for each of the years and resulting from commodities futures transactions as a consequence of disallowing the deductions that petitioner claimed for his commodity trading losses respondent also determined that petitioner is liable for additional self-employment taxes in and and respondent allowed petitioner a deduction in the amount of one-half of his self-employment_tax liability in opinion the principal issue in this case is whether petitioner's losses from trading commodity futures are capital or ordinary petitioner realized losses of dollar_figure in and losses of dollar_figure in petitioner treated the losses as ordinary and deducted them on a schedule c profit or loss from business filed with his return for each year each schedule c identifies petitioner's business as commodity trading advisor publishing the gross_receipts reported on each schedule c consist entirely of the receipts from the sale of petitioner's manuscript for his commodity trading system petitioner labeled the deductions as research_and_experimentation to improve trading system formula for sale respondent disallowed the deductions on the ground that petitioner had not established that the amounts were ordinary and necessary business_expenses respondent determined that the commodities futures transactions constitute capital assets and are includible as capital_gains_and_losses on schedule d respondent allowed petitioner to deduct the losses under sec_165 but treated them as losses from sales or exchanges of capital assets which are allowable only to the extent allowed in sec_1211 and sec_1212 accordingly the principal issue for decision in this case is whether the losses realized by petitioner from his trading of commodity futures are losses from sales or exchanges of capital assets in passing we note that petitioner does not claim that the amounts at issue are deductible as ordinary and necessary business_expenses under sec_162 the term capital assets is defined by sec_1221 as follows for purposes of this subtitle the term capital_asset means property held by the taxpayer whether or not connected with his trade_or_business but does not include-- stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable_year or property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business property used in his trade_or_business of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in his trade_or_business a copyright a literary musical or artistic composition a letter or memorandum or similar_property held by-- a a taxpayer whose personal efforts created such property b in the case of a letter memorandum or similar_property a taxpayer for whom such property was prepared or produced or c a taxpayer in whose hands the basis of such property is determined for purposes of determining gain from a sale_or_exchange in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph a or b accounts or notes receivable acquired in the ordinary course of trade_or_business for services rendered or from the sale of property described in paragraph a publication of the united_states government including the congressional record which is received from the united_states government or any agency thereof other than by purchase at the price at which it is offered for sale to the public and which is held by-- a a taxpayer who so received such publication or b a taxpayer in whose hands the basis of such publication is determined for purposes of determining gain from a sale_or_exchange in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph a according to the above definition all property held by a taxpayer whether or not connected with his or her trade_or_business is included in the definition of capital_asset except for the five categories enumerated in sec_1221 see generally 485_us_212 based upon the record of this case we have no basis to conclude that the commodity futures traded by petitioner during the years in issue fall within any of the five categories first petitioner does not claim that the commodity futures were stock_in_trade or inventory of his trade_or_business the category described by sec_1221 in this connection we note that petitioner asserts that he was in the trade_or_business of being self-employed free lance writer self-publisher during the years in issue petitioner does not claim to have been in the business of trading commodity futures during and second commodity futures are not property of a character which is subject_to the allowance for depreciation the category described by sec_1221 third commodity futures are not a copyright a literary musical or artistic composition a letter or memorandum or similar_property the category described by sec_1221 finally petitioner does not contend that the commodity futures are accounts or notes receivable the category described by sec_1221 nor does petitioner contend that they are a publication of the united_states government the category described by sec_1221 notwithstanding the above petitioner contends his losses from trading commodity futures are deductible as ordinary losses petitioner asserts that he opened the commodity futures trading accounts to hedge or solve two problems that affected the manuscript he wrote describing a system for trading commodity futures and thereby to insure and protect the copyright property's value and worth as an income producing property according to petitioner the manuscript is property described by sec_1221 and is not included in the term capital_asset thus according to petitioner the losses he incurred trading commodity futures were incurred to hedge against the decrease in the value of the manuscript and should receive ordinary treatment as well as authority petitioner cites 350_us_46 and fnma v commissioner 100_tc_541 there is no precise or ready definition of the term hedging 34_tc_323 generally it is a label applied to certain futures transactions which on all the facts and circumstances have been found to be a form of price insurance and thus connected so closely with the regular conduct_of_a_trade_or_business as to defy classification as extraneous investments id pincite whether a transaction constitutes a hedge for federal_income_tax purposes is a question of fact fnma v commissioner supra pincite 22_tc_1044 in 38_tc_907 we stated that a hedge is a form of insurance against unfavorable fluc- tuations in the price of a commodity in which a position has already become fixed or as in the case of a producer such as a cotton grower will become fixed in normal course and the sale liquidation or use of the commodity is to occur at some time in the future a bona_fide hedge requires a risk of loss by changes in the price of something to be used or marketed in the taxpayer's business a possibility of shifting the risk to another person through the purchase or sale of futures contracts and an attempt to shift the risk fnma v commissioner supra pincite muldrow v commissioner supra pincite in every hedge there must be a direct relationship between the product that is the basis of the taxpayer's business and the commodity futures in which the taxpayer deals for protection e g 286_f2d_277 6th cir there must also be a close relationship between the price of the product and the price of the commodity_future e g id pincite 72_tc_206 for example in wool distrib corp v commissioner supra pincite we discussed the relationship between the price of the product that is the basis of the taxpayer's business and the price of the commodity_future as follows a dealer with stocks of a particular commodity on hand runs the risk of loss should the market price of the commodity fall to minimize that risk he will customarily enter a futures market and sell the same or a related commodity short in an amount equivalent to the amount in inventory in this way he reaches an even or balanced position between actuals and futures so that any loss resulting from a decline in the market price of the actuals will be offset pro tanto by the gains derived from closing out the futures at a commensurately lower cost g_c_m supra c b however such a balancing of gain and loss will not be possible unless the market prices of the actuals and the futures are so related that they normally rise or fall together if they do not then the futures will increase rather than diminish the overall risk for this reason hedging presupposes an intimate price relationship between the two the actuals and futures need not be in the same commodity so long as their prices move in relation to each other albert 26_tc_958 nor must the futures be in the exact amount of the actuals the latter may be covered entirely or only to the extent protection is desired 9_tc_174 but a larger amount of futures than of actuals or an absence of price relationship between the two will suggest that the futures were acquired as an investment and not as a hedge in this case petitioner claims to have engaged in day trading of commodity futures as a hedge against the loss of value or income from his manuscript describing a system of commodity futures trading both at trial and in his post- trial brief petitioner attempted to establish a relation- ship between his commodity trading and his business of being a free lance writer self-publisher as mentioned above he argues that he was required to trade commodity futures in order to hedge or solve two major copyright problems that happened in the first problem was the fact that the wall street journal changed the format of its commodities page and expanded it to include two lead stories this change threatened to make obsolete petitioner's mechanical system of trading commodity futures based upon one lead story and thereby to make petitioner's manuscript valueless the second problem was the fact that petitioner's promotional literature was audited by the nfa according to petitioner he traded commodity futures to document the accuracy of any statements he made in promotional material for his manuscript it is not necessary for us to address petitioner's argument that there was a direct relationship between his publishing business and the commodity futures that he traded even if we agreed that such a relationship existed we must nevertheless sustain respondent because petitioner has failed to show any relationship between the price or value of his manuscript and the price of the commodity futures that he traded see united_states v rogers supra hoover co v commissioner supra 34_tc_323 indeed petitioner has not even identified the specific commodities that were the subject of his day trades we perceive no necessary relationship between the price of petitioner's manuscript and the price of the commodities that petitioner traded such as to qualify as a hedge thus we reject petitioner's argument that the commodity futures that he traded during the years in issue were hedges against the loss in value of his manuscript accordingly we reject petitioner's argument that his losses from trading commodity futures during and are deductible as ordinary losses before leaving this issue we note that petitioner labeled the deduction of his trading losses in each of the years in issue as research experimentation to improve trading system formula for sale we also note that the petition states that the losses are deductible under sec_1_174-1 income_tax regs as research development expenses however in his post-trial brief petitioner does not claim that the subject losses are deductible as research_and_experimental_expenditures under sec_174 thus petitioner has abandoned this argument 89_tc_46 61_tc_278 n 22_tc_1146 affd 230_f2d_603 2d cir moreover the record of this case suggests that petitioner incurred the subject losses in connection with his manuscript presumably a literary work see quinn v commissioner tcmemo_1974_64 cf crouch v commissioner tcmemo_1990_309 the phrase research or experimental expenditures however does not include expenditures_for research in connection with literary projects sec_1_174-2 income_tax regs the next issue for decision involves respondent's determination that petitioner is liable for the accuracy- related penalty imposed by sec_6662 respondent determined that the entire underpayment for dollar_figure and a portion of the underpayment for dollar_figure is attributable to negligence or disregard of rules or regulations see sec_6662 and b the term negligence includes any failure to make a reasonable attempt to comply with the statute and the term disregard includes any careless reckless or intentional disregard sec_6662 respondent's determinations are presumed correct and petitioner bears the burden of proving that he is not liable for the accuracy-related_penalty rule a all rule references are to the tax_court rules_of_practice and procedure sec_6664 provides that no penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the determination of whether this exception applies is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs an honest misunderstand- ing of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer can support a finding that the taxpayer had reasonable_cause and was in good_faith id generally however the most important factor in determining whether this exception applies is the extent of the taxpayer's efforts to assess the taxpayer's proper tax_liability id petitioner contends that he relied on substantial_authority and provided adequate_disclosure of his deductions within the meaning of the statute and therefore should be absolved from the penalty petitioner also argues that he and respondent merely have an honest difference of opinion with respect to the law and that he should be absolved from the penalty on this basis we construe petitioner's latter argument as invoking sec_6664 the reasonable_cause exception to the accuracy- related penalty based upon the facts and circumstances of this case we find that petitioner has failed to meet his burden of proving that he is not liable for the accuracy-related_penalty on the subject returns petitioner labeled the deduction of his commodity trading losses as research experimentation to improve trading system formula for sale that label suggests that petitioner claimed the amounts as research or experimental expenditures under sec_174 neither of petitioner's returns discloses the fact that the subject amounts are losses from trading commodity futures significantly as mentioned above petitioner did not pursue the claim that the subject amounts are research or experimental expenditures in his post-trial brief moreover we know of no authority permitting losses from the sale_or_exchange of capital assets to be treated as ordinary in these circumstances finally we are not convinced that the underpayment was the result of an honest misunderstanding of fact or law that is reasonable in light of the facts and circumstances of this case accordingly we sustain respondent's determination of the accuracy-related_penalty decision will be entered under rule