t c memo united_states tax_court philip albert and ana m hendeles petitioners v commissioner of internal revenue respondent docket no filed date philip albert and ana m hendeles pro sese edward lee walter for respondent memorandum opinion chiechi judge this case is before the court on respon- dent’s motion to dismiss for lack of jurisdiction as supple- mented for convenience we shall refer to respondent’s motion to dismiss for lack of jurisdiction as supplemented as respon- dent’s motion we shall grant respondent’s motion background the record establishes and or the parties do not dispute the following petitioners’ address shown in the petition in this case was in lancaster ohio respondent prepared a substitute for return for petitioners’ taxable_year on date respondent issued to petitioners a notice_of_deficiency with respect to their taxable_year on date respondent assessed federal_income_tax tax of dollar_figure additions to tax under sec_6651 and and a of dollar_figure dollar_figure and dollar_figure respectively and interest as provided by law of dollar_figure for petitioners’ taxable_year on date respondent abated the addition_to_tax under sec_6654 that respondent had assessed for that year we shall refer to any unpaid and unabated assessed amounts with respect to petitioners’ taxable_year as well as interest as provided by law accrued after date as petitioners’ unpaid liability on date respondent issued to petitioners a notice of balance due with respect to petitioners’ unpaid liabil- ity 1all section references are to the internal_revenue_code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure on date respondent issued to petitioners a final notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy with respect to petitioners’ unpaid liability on date petitioners submitted to respondent a tax_return return for their taxable_year based upon the information that petitioners reported in that return on date respondent abated the following amounts of tax additions to tax and interest as provided by law that respondent had assessed for petitioners’ taxable_year dollar_figure of tax dollar_figure of the addition_to_tax under sec_6651 dollar_figure of the addition_to_tax under sec_6651 and dollar_figure of interest as provided by law on date petitioners submitted to respondent an amended_return for their taxable_year in which they reported total_tax of zero in response to that amended_return respon- dent sent petitioners a letter dated date respondent’s date letter in that letter respondent indicated that respondent was disallowing petitioners’ claim for credit on date petitioners filed a petition commencing this case in the petition petitioners alleged that the peti- tion was a petition for redetermination of a deficiency petitioners also alleged in the petition that they disagree with the determination contained in the notice issued by the internal_revenue_service for the year s or period s as set forth in such notice dated and petitioners attached to the petition the following two documents pertaining to petitioners’ taxable_year notice cp urgent we intend to levy on certain assets please respond now dated date date notice cp and respondent’s date letter disallowing petitioners’ claim for credit on date respondent filed a motion to dismiss for lack of jurisdiction in that motion respondent asserts that after a diligent search respondent was unsuccessful in retrieving the administrative file for petitioners’ taxable_year respondent however also asserts in respondent’s motion to dismiss for lack of jurisdiction that respondent was able to retrieve form_4340 certificate of assessments payments and other specified matters form for petitioners’ taxable_year that form shows that on date respon- dent issued to petitioners a notice_of_deficiency and there is no record of a petition being filed with the tax_court within the time periods prescribed by law with respect to that notice in respondent’s motion to dismiss for lack of jurisdiction respondent further asserts that form_4340 for petitioners’ taxable_year also shows that on date respon- dent issued to petitioners a notice_of_intent_to_levy and there is no record of a collection_due_process appeal being filed with respondent with respect to that notice on date the court issued an order in which it ordered petitioners to file a response to respondent’s motion to dismiss for lack of jurisdiction petitioners failed to do so on date the court held a hearing on respondent’s motion to dismiss for lack of jurisdiction there was no appear- ance by or on behalf of petitioners counsel for respondent appeared and was heard on april and date respectively respondent filed a supplement to respondent’s motion to dismiss for lack of jurisdiction respondent’s first supplement and a second supple- ment to that motion respondent’s second supplement in each of those supplements respondent asserts that respondent found certain documents pertaining to petitioners’ taxable_year but was unable to find certain other documents pertaining to that year in respondent’s second supplement respondent further asserts that petitioner philip albert hendeles mr hendeles stated to respondent’s counsel that he had preserved copies of all documents related to his case but would not commit to providing copies to respondent respondent attached to respon- dent’s second supplement a letter dated date from mr hendeles to respondent’s counsel that letter stated in perti- nent part i have in my possession documents that will prove my posture and tax case matters i perceive no valid reason why i should assist the internal_revenue_service in any manner whatsoever on date the court issued an order in which it ordered petitioners to file a response to respondent’s motion to dismiss for lack of jurisdiction as supplemented by respon- dent’s first supplement and respondent’s second supplement and to attach to that response all documents in their possession that are relevant to the instant case on date petitioners submitted a document that the court had filed as petitioners’ response to respondent’s motion to dismiss for lack of jurisdiction as supplemented by respon- dent’s first supplement and respondent’s second supplement petitioners’ response petitioners attached to that response a letter dated date respondent’s date letter from respondent to petitioners that letter stated in pertinent part we’ve enclosed the transcript or transcripts that you requested on date petitioners also attached to petitioners’ response the transcript of account for petitioners’ taxable_year transcript of account that respondent had attached to respondent’s date letter petitioners assert in peti- tioners’ response that that transcript constitutes a notice_of_deficiency and that therefore on date petitioners rightfully invoked the jurisdiction of the court on date respondent filed a third supplement to respondent’s motion to dismiss for lack of jurisdiction respon- dent’s third supplement in that supplement respondent asserts that respondent has not received a copy of any notice of defi- ciency or notice_of_determination from the petitioners respon- dent further asserts in respondent’s third supplement that respondent was not successful in retrieving any other docu- mentation pertaining to petitioners’ taxable_year and the appeals_office has no record of a collection_due_process file or the opening of a collection_due_process case for that year discussion petitioners bear the burden of proving that the court has jurisdiction over this case see patz trust v commissioner 69_tc_497 it is petitioners’ position that they timely filed the petition on date in response to a notice_of_deficiency with respect to their taxable_year in the petition petitioners alleged that the petition was a petition for redetermination of a deficiency and that they disagree with the determination contained in the notice issued by the internal_revenue_service for the year s or period s as set forth in such notice dated and petitioners attached to the petition the following two documents pertaining to petitioners’ taxable_year the date notice cp in which respondent informed petitioners that respondent intended to levy on certain of their assets and respondent’s date letter in which respondent informed petitioners that respondent was disallowing their claim for credit in petitioners’ response however petitioners argue that the notice_of_deficiency upon which this case is based is the transcript of account that respondent sent them by letter dated date according to petitioners because that transcript shows that petitioners owe dollar_figure for the tax period ending it constitutes a notice_of_deficiency respondent counters that the court does not have jurisdic- tion over this case according to respondent none of the documents upon which petitioners rely ie the date notice cp respondent’s date letter and the transcript of account that respondent sent petitioners by letter dated date constitutes a notice_of_deficiency respon- dent further points out and petitioners do not dispute that 2petitioners do not argue that they filed the petition commencing the instant case in response to the notice of defi- ciency with respect to their taxable_year that respondent issued to them on date we note that even if petition- ers had filed the petition with respect to that notice the petition would not have been timely filed that is because petitioners did not file the petition until date see sec_6213 the record establishes that on date respondent issued to petitioners a notice_of_deficiency with respect to their taxable_year and that there is no record of a petition being filed with the tax_court within the time periods prescribed by law with respect to that notice we agree with respondent that the court does not have jurisdiction over this case the court’s jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 in determining whether a letter issued by the commissioner of internal revenue commissioner is a notice_of_deficiency the court looks to whether the letter purports to be a notice_of_deficiency and whether the commissioner intended it as such see 84_tc_1308 affd 787_f2d_939 4th cir affd sub nom 787_f2d_1541 11th cir affd sub nom 790_f2d_51 8th cir affd sub nom 791_f2d_383 5th cir affd without published opinion sub nom becker v commissioner 799_f2d_753 7th cir affd sub nom 800_f2d_987 10th cir affd sub nom 800_f2d_633 6th cir affd 814_f2d_1356 9th cir we have reviewed the date notice cp respon- dent’s date letter and the transcript of account that respondent sent to petitioners by letter dated date we conclude that respondent did not intend any of those documents to be a notice_of_deficiency with respect to petitioners’ taxable_year we further conclude that the date notice cp respondent’s date letter and the transcript of account that respondent sent to petitioners by letter dated date are not and do not purport to be notices of deficiency petitioners do not claim that respondent issued to them any other type of determination with respect to their taxable_year that would confer jurisdiction on the court however for the sake of completeness we shall consider whether respondent issued to petitioners any such determination petitioners did not timely file a petition with the court in response to the notice_of_deficiency with respect to their taxable_year that respondent issued to them on date as a result on date respondent assessed a deficiency in and additions to petitioners’ tax as well as interest as provided by law for that year on date respondent issued to petitioners a notice_of_intent_to_levy with respect to their taxable_year petitioners do not claim that they filed a request for a hearing with respondent’s appeals_office with respect to that notice on the record before us we conclude that respondent did not issue to petitioners a determination under sec_6330 with respect to their taxable_year see 116_tc_263 116_tc_255 114_tc_492 on the record before us we further conclude that respondent did not issue to petitioners any other type of determination with respect to their taxable_year that would confer jurisdiction on the court we hold that we do not have jurisdiction over this case we have considered all of the parties’ contentions and arguments that are not discussed herein and we find them to be without merit irrelevant and or moot on the record before us we shall grant respondent’s motion to reflect the foregoing an order granting respondent’s motion as supplemented and dismissing this case for lack of jurisdiction will be entered


t n l s s s i tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c jun uniform issue list se v er rat legend taxpayer a taxpayer b financial_institution c date d date e ira x ira y amount amount amount amount dear this is in response to a letter dated date from your authorized representative in which you request relief under sec_301_9100-3 of the procedure and administration regulations the regulations the following facts and representations support your ruling_request taxpayer a and taxpayer b collectively taxpayers are married taxpayer a maintained a traditional_ira ira x a qualified_individual retirement arrangement established and maintained at financial_institution c under the rules of sec_408 of the internal_revenue_code the code on date d taxpayer a executed a direct conversion request instructing financial_institution c to convert ira x to a roth_ira account ira y pursuant to the conversion request financial_institution c transferred amount from ira x to ira y on date e at the time of the conversion taxpayer a believed she was eligible to make the conversion described above under sec_408a of the code the taxpayers timely filed their calendar_year joint aprilof the taxpayers reported an adjusted_gross_income of amount including federal_income_tax return in amount as the taxable_portion of the ira conversion the modified_adjusted_gross_income agi found at sec_408a of the code for purposes of determining the taxpayers’ eligibility to make a roth conversion for was amount and thus caused taxpayer a to be ineligible to convert ira x into ira y in december of taxpayers engaged a qualified_tax professional to review previously filed returns and financial planning opportunities for the taxpayers it was only then that taxpayers discovered that taxpayer a was ineligible to convert ira x into ira y in apparently the documentation submitted to the income_tax preparer the preparer’ of the taxpayers’ 2g _ return included the form 1099-r issued by financial_institution c but did not include form_5498 reporting amount as a roth conversion an affidavit signed by the preparer was submitted with your request which states that the preparer had no knowledge of the roth conversion and prepared the taxpayers’ _ return based on the form 1099-r she was given showing a distribution of amount from ira x thus the preparer did not inform taxpayer a about the corrective action required or the deadline for recharacterization prior to being contacted by taxpayer a the internal_revenue_service the service had not discovered taxpayer a’s failure to recharacterize as of the date of this ruling_request taxpayer a had not recharacterized her roth_ira ira y to a traditional_ira based on the above you through your authorized representative request the following letter_ruling that pursuant to sec_301_9100-3 of the regulations taxpayer a is granted a period of days from the date of this letter_ruling to recharacterize the failed roth_ira_conversion to a traditional_ira with respect to your request for relief under sec_301_9100-3 of the regulations sec_408a of the code and sec_1_408a-5 of the federal_income_tax regulations the i t regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira ina recharacterization the ira contribution is treated as having been made to the transferee ira and not the transferor ira under sec_408a and sec_1_408a-5 this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax return for the year of contributions sec_1_408a-5 q a-6 of the i t regulations describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer’s intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different from the transferor 24uu555048 trustee with specified information that is sufficient to effect the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with modified_adjusted_gross_income in excess of dollar_figure for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual_retirement_plan other than a roth_ira during that taxable_year sec_1_408a-4 q a-2 of the i t regulations provides in summary that an individual with modified_adjusted_gross_income in excess of dollar_figure for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year sec_1_408a-4 q a-2 further provides in summary that an individual and his spouse must file a joint federal_income_tax return to convert a traditional_ira to a roth_ira and that the modified_adjusted_gross_income subject_to the dollar_figure limit for a taxable_year is the modified_adjusted_gross_income derived from the joint_return using the couple’s combined income sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the procedure and administration regulations in general provide guidance concerning requests for relief submitted to the service on or after date sec_301_9100-1 of the regulations provides that the commissioner of internal revenue in his discretion may grant a reasonable extension of the time fixed by a regulation revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code sec_301_9100-2 lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 sec_301_9100-3 of the regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if the taxpayer's request for sec_301_9100-3 relief is filed before the failure to make a timely election is discovered by the service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer’s control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional 2zvuvul 2d including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election section dollar_figure c ii of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section taxpayers timely filed their federal_income_tax return in this case taxpayer a was ineligible to convert ira x into roth_ira y since her modified_adjusted_gross_income exceeded the dollar_figure limitation in code sec_408a however until she discovered otherwise she believed she was eligible to convert ira x into ira y taxpayer a filed this request for sec_301 relief after discovering that she was ineligible to convert ira x into ira y calendar_year 20__-sis not a closed tax_year with respect to your request for relief we believe that based on the information submitted and the representations contained herein the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been met and you have acted reasonably and in good_faith with respect to making the election to recharacterize your roth_ira as a traditional_ira specifically the service has concluded that you have met the requirements of clause i of sec_301_9100-3 of the regulations therefore you are granted a period of days from the date of the issuance of this letter_ruling to so recharacterize this ruling only applies to amounts converted from traditional_ira x to roth_ira y and not any regular contributions to the roth_ira no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is based on the assumption that ira x and roth_ira y meet the requirements of code sec_408 and sec_408a respectively at all relevant times this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact goverment identification_number _ erer by phone at em _kkkk or by fax at eae eee please address all correspondence to se t ep ra t1 sincerely caklom a watkins carlton a watkins manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose cc


t c memo united_states tax_court newhouse broadcasting corporation and subsidiaries et al petitioners v commissioner of internal revenue respondent docket nos filed date p and r have both moved for partial summary_judgment on the issue of whether royalties payable by an accrual basis publisher to authors based upon book sales less actual returns are fully deductible in the ' cases of the following petitioners have been consolidated herewith advance publications inc and subsidiaries docket no cox enterprises inc and subsidiaries docket no and chronicle publishing co richard t thieriot tax_matters_person docket no such consolidation was made because of a common issue of eligibility for transition investment_tax_credit under cable television franchise agreements that issue was addressed on motions for partial summary_judgment in docket no petitioner in this case is petitioner in docket no and the issue involved is unique to that petitioner - - year of the sales or whether the deduction must be reduced to the extent that payment of the royalties is withheld as a reasonable reserve for returns held the royalties are fully deductible in the year_of_sale bernard j long david e mills and james r saxenian for petitioner gary d kallevang and william j gregg for respondent memorandum opinion halpern judge both petitioner advance publications inc petitioner and respondent have moved for partial summary_judgment each party objects to the other’s motion the issue common to those motions petitioner’s motion respondent’s motion or together the motions is whether petitioner’s deduction for royalties owed to book authors under agreements between its publisher subsidiaries and the authors was properly computed for petitioner’s and taxable calendar years the audit years by not taking into account a reduction in the royalty payments to authors for a reasonable reserve for returns unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure i background for purposes of the motions the parties have stipulated certain facts we accept the stipulated facts as being true for purposes of deciding the motions the stipulation of facts with attached documents is incorporated herein by this reference the parties have also filed various memoranda of law some with attached affidavits and other documents the following recitation of facts is drawn primarily from the stipulation of facts certain other facts which facts we deem noncontroversial are included in that recitation petitioner is a new york corporation with its principal office in staten island new york petitioner an accrual basis taxpayer engaged in the book publishing business during the audit years through its then wholly owned subsidiary random house inc random house and random house’s subsidiaries ’ during the audit years random house through its divisions and subsidiaries published books under several trade names known as imprints in the publishing business random house’s major imprints included random house random house adult trade imprint alfred a knopf and ballantine books which accounted for more than percent of its book sales revenue during the random house was sold to an unrelated third party on date q4e- audit years approximately additional imprints accounted for the remainder of its book sales during the audit years random house’s publishing business consisted of the following primary activities acquisition of rights to manuscripts editing manuscripts contracting for the manufacture of books and marketing and selling books random house primarily sold books to individual bookstores book wholesalers book retail chains mass marketers and book clubs customers random house customers sold books purchased from random house and other publishers to the general_public consumers under the terms of its sales agreements with customers the customers had the right under certain circumstances to return books for full credit random house and its subsidiaries entered into written contracts with each random house author or licensor author contracts the principal terms covered by an author contract included delivery timetables for the manuscripts royalty rates and payment terms the random house adult trade and alfred a knopf knopf imprints used one standard form of author contract and the ballantine books division ballantine used another over percent of all executed author contracts utilized such standard contracts under the terms of all author contracts authors generally earned royalties as a percentage of the publisher’s invoice price on copies of books sold by the publisher the - - invoice price was defined in each author contract as the price shown on the publisher’s invoices to its wholesaler and retailer customers from which the publisher’s wholesaler and retailer discounts are calculated the ballantine standard author contract provides that t he publisher agrees to pay the author a royalty on the retail price or for any hardcover copies on the invoice price of each copy of the work sold by publisher less returns a separate paragraph of the contract requires publisher to render semi-annual accountings on or before february lst for the six-month accounting_period ending in the preceding september and on or before august lst for the six-month accounting_period ending the preceding march this paragraph further provides that e lach statement rendered will be accompanied by payment of the amount shown to be due thereon after allowance of a reasonable reserve for returns and after recoupment of advances both the random house and knopf standard author contracts provide that t he publisher shall pay to the author a royalty on the invoice price of every copy sold by the publisher less actual returns and a reasonable reserve for returns the random house and knopf standard author contracts like the ballantine form of a few contracts in effect during the audit years ina format different from the contracts discussed above provided for the withholding of a royalty reserve against future returns only during the first years following publication -- - contract also require semiannual accountings and royalty payments and the procedures followed with respect to royalties payable under all three forms of author contract are identical thus along with the royalty check for the 6-month royalty period random house typically issued a royalty statement to the author covering such period each statement contains a column entitled earnings and a subsequent column entitled charges the former shows cumulative earnings to date based upon total books sold less total books actually returned through the beginning of the statement period where the prior withholding based upon the reasonable reserve for returns was in excess of the amount justified by the actual returns for the prior period the earnings column also includes an amount for refund of reserves refund of reserves thus for each 6-month royalty period the prior estimated reserve is adjusted to reflect actual experience the charges column includes an amount representing actual returns for the period and an amount for the current reserve for returns these charges are an offset to any royalty based on sales that might otherwise be due for the period random house was contractually required to and did pay royalties with respect to books that were sold and not returned even though random house never received payment for the books and wrote off the debt as uncollectible eg because of the customer’s bankruptcy the royalty payable upon the sale of a - book was reversible only in the event of a subsequent return of the book by the customer in computing random house’s income each year for financial statement purposes petitioner took into account the revenue attributable to books sold to customers during the year less the revenue attributable to books actually returned by customers during such year this amount was adjusted by the difference between the reserve for returns reserve for returns at the beginning and at the end of the year i e an increase in the reserve for returns would be subtracted from sales the reserve for returns adjustment represented the revenues attributable to books sold during a particular year that random house estimated would be returned during the subsequent year these factors resulted in the figure net sales appearing on the financial statements the financial statements also took into account as an expense each year royalties payable on book sales less books actually returned by customers during such year this amount was adjusted by the difference between the royalty reserve royalty reserve at the beginning and at the end of the year i1 e an increase in the royalty reserve would be subtracted from the amount of the royalty expense the royalty reserve adjustment represented the royalties attributable to the books sold during a particular year that random house estimated would be returned --- - during the subseguent year therefore for financial statement purposes each year’s royalty expense reflected a reduction for royalties attributable to the estimated subsequent year’s returns according to random house’s books the beginning and end of year balances of the reserve for returns for the audit years were as follows balance in reserve for returns dollar_figure dollar_figure beginning of year balance in reserve for returns big_number big_number end of year net increase to reserve big_number big_number for returns according to random house’s books the beginning and end of year balances of the royalty reserve for the audit years were as follows balance in royalty reserve dollar_figure dollar_figure beginning of year balance in royalty reserve big_number big_number end of year net increase to royalty reserve big_number big_number for tax purposes random house reversed those financial statement reserve adjustments accordingly to arrive at net sales for income_tax purposes random house increased financial statement net sales by dollar_figure for and dollar_figure for --- - and to arrive at royalty expense for income_tax purposes random house increased financial statement royalty expense by dollar_figure for and dollar_figure for respondent disputes only the latter adjustment to random house’s financial statement income the parties disagree on whether the annual adjustments to the royalty reserve for financial statement purposes were the same as the annual amounts withheld from the royalties paid to authors as a reasonable reserve for returns reasonable reserve for returns petitioner alleges that the financial statement reserve for returns and royalty reserve were determined on a completely different basis than the reasonable reserve for returns withheld from the royalty payments to authors the former were generally_accepted_accounting_principles gaap reserves whereas the latter was determined on an author-by-author basis as a cash management device and was intended to protect random house against the possibility of a payment of royalties to an author in one accounting_period and the company’s subsequent inability to recover royalties from that author based upon returns ina later accounting_period according to petitioner the amount of royalties actually withheld from authors is not known in determining taxable_income and deductible royalty expense attributable to the sale of soft cover books random house did take into account subsequent year returns to the extent permitted by sec_458 -- - individually or in the aggregate because petitioner saw no need to keep a record of such amounts in petitioner’s view they were irrelevant for both financial and tax reporting purposes petitioner therefore concludes that respondent’s proposed reversal of petitioner’s royalty expense deductions by focusing on the financial statement royalty reserve necessarily focuses on an incorrect amount respondent responds that the alleged difference between the financial statement royalty reserve and the amounts actually withheld from authors cannot be readily corroborated one way or the other and that petitioner has not adduced any specifics to establish the extent to which the two amounts may have differed respondent also argues that u jnless petitioner wishes to admit that its financial statements are grossly unreliable petitioner’s adjustments to the royalty reserves should be considered reasonably accurate as to the overall expense deduction at issue it is apparently on that basis and on the basis that respondent views any difference between the two amounts as irrelevant to the resolution of the legal issue that respondent justifies his proposed increase in petitioner’s income for the audit years by the amount of the petitioner’s position is based upon affidavits filed by the former general counsel and the former chief financial officer of random house increase in the financial statement royalty reserve for such years il summary_judgment a summary_judgment is appropriate if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b a partial summary adjudication may be made which does not dispose_of all the issues in the case id summary_judgment is a device used to expedite litigation and is intended to avoid unnecessary and expensive trials of phantom factual questions see eg 78_tc_412 it is not however a substitute for a trial in that disputes over factual issues are not to be resolved in such proceedings see id the party moving for summary_judgment has the burden of showing the absence of a genuine issue as to any material fact see id iii discussion a arguments of the parties respondent argues that because the author contracts provide that random house is liable to pay a royalty amount that subtracts a reasonable reserve for returns random house does not owe its authors the amount of the reasonable reserve for returns because petitioner does not owe this amount and because it does not anticipate that a royalty will be paid for such amount petitioner fails to satisfy the sec_461 all_events_test with respect to the reserve amount as of the end of the taxable_year therefore its annual tax accrual for royalty expense must be reduced by such amount respondent agrees that a book reserve based upon gaap principles is not normally taken into account for tax purposes but where as in this case the contracts establishing the taxpayer’s liability specifically reduce that liability by the amount of the reserve it is the contract terms and not gaap principles that require the same reduction in liability for tax purposes respondent summarizes his position as follows quite simply an accrual taxpayer cannot accrue as an expense what it does not legally owe and petitioner does not owe payment for the reasonable reserve for returns that is to be subtracted from the royalty payment when payment is made petitioner counters that the logical and plain reading of those portions of the author contracts that pertain to author royalties is that random house and its subsidiaries owe royalties for all books sold and not actually returned by the end of each 6-month royalty accounting_period but that the obligation to pay a portion of these royalties is deferred to a later period as security against the possibility of future returns petitioner argues that respondent erroneously treats that reduction in the amount of royalties payable to authors as a reduction in the amount of royalties owed to the authors as of the end of the taxable_year petitioner further argues that withholding payment of a liability accrued in one taxable_year pending the outcome or occurrence of an event in a subsequent taxable_year does not reduce the accrual by the amount of the withheld payment petitioner concludes that because a delay in the payment of an accrued liability does not delay its deductibility by an accrual basis taxpayer petitioner’s deduction for royalties owed to its authors may not be reduced by the amounts withheld as a reasonable reserve for returns petitioner additionally argues that because respondent’s determination of deficiency is based upon the yearend financial statement royalty reserve rather than upon the royalties that were actually withheld from authors it is arbitrary and erroneous and cannot be sustained b analysi sec_1 proper royalty accrual in general a liability may be taken into account for federal_income_tax purposes by an accrual_method taxpayer in the taxable_year in which all the events have occurred that establish the fact a finding that a determination of deficiency is arbitrary and without foundation would not in and of itself require that we grant petitioner’s motion for summary_judgment rather we would be constrained to deny respondent’s motion for summary_judgment and reguire respondent to sustain what then would be respondent’s burden of going forward with evidence to show the correctness of the deficiency determination see 293_us_507 85_tc_1 franklin v commissioner tcmemo_1993_184 -- of the liability the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability see sec_1_461-1 income_tax regs the first two requirements comprise the all_events_test for accrual of a liability see sec_461 the parties are in agreement that the amount of petitioner’s liability for royalty expense can be determined with reasonable accuracy respondent also acknowledges that economic_performance has occurred see sec_461 h a sec_1_461-4 ii and qd example income_tax regs which provide in effect that economic_performance with respect to a royalty based upon sales during the taxable_year arising from the use of property occurs as the sales occur during such taxable_year we are therefore left to decide whether all of the events had occurred as of the end of each of the audit years that established petitioner’s liability for royalties attributable to book sales for those years including amounts representing royalties that had been withheld from the authors as a reasonable reserve for returns a the author contracts the three forms of author contract the contracts are ambiguous with respect to the royalties due the author at yearend because the contracts discuss authors’ royalties solely in terms of the amount payable at the royalty payment dates rather than in terms of the amount owed thus under the contracts the -- - publisher either random house knopf or ballantine hereafter generally referred to as random house agrees to pay the author a royalty based upon sales less actual returns and less a reasonable reserve for future returns the contracts require semiannual royalty payments and accompanying statements of account or accountings an examination of the manner in which the semiannual royalty payments were determined pursuant to the contemporaneous statements of account reveals however that the royalties owed by random house to its authors at any given point in time were as urged by petitioner based upon book sales less actual returns as noted above the royalty statements of account furnished by random house itemize the royalties due the author on the basis of total books sold less total books actually returned through the beginning of the statement period in addition an adjustment is made for the excess if any of the prior period withholding of royalties based upon the reasonable reserve for returns over the royalty reduction justified by actual returns during the statement period ie the statement reflects an additional_amount for refund of reserves and such amount is included in the royalty payment for the statement period the balance of the payment for the statement period is based upon sales of books less actual returns for such period and less the current reasonable reserve for returns -- - generally speaking the practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great if not controlling influence 230_us_100 that principle has been applied in tax controversies involving one of the parties to the contract see 491_f2d_1226 5th cir revg 59_tc_272 we look to that most reliable indicator of what the contracting parties meant what they did see also 1_tc_139 affd 142_f2d_449 6th cir and connally v commissioner tcmemo_1961_312 both of which cite with approval the admonition of the supreme court in 95_us_269 there is no surer way to find out what the parties meant than to see what they have done 7’ we note that the reversals of this court in 491_f2d_1226 6th cir revg 59_tc_272 and in two cases cited infra 131_f2d_682 6th cir revg a memorandum opinion of this court and 198_f2d_214 2d cir affg in part and revg in part 16_tc_882 were not based upon any disagreement by this court with the legal principles for which those cases are cited herein rather the reversals were based upon the appellate courts’ rejection of our factual finding in each case that the employees had not earned and the taxpayer did not owe any sales commissions until a year subsequent to the year_of_sale ie there was disagreement whether the payment contingency was a condition_precedent or a condition_subsequent to a fixed commission obligation see the discussion of this distinction infra ultimately the authors were entitled to be paid and in fact were paid royalties on all books that were sold and not actually returned including unreturned books for which payment was never received by random house therefore based upon the parties’ conduct under the contracts we find that the withholding of royalties representing a reasonable reserve for returns constituted a delay in the payment of royalties otherwise due the authors for each statement period in anticipation of actual returns during the subsequent statement period b discussion of authorities we agree with petitioner that this case is governed by the rule_of law which states that the deduction of a liability that otherwise satisfies the all_events_test is not negated by the taxpayer’s right to defer payment of the liability pending the occurrence or nonoccurrence of some event after the close of the taxable_year see 508_f2d_1 5th cir w s badcock corp v commissioner supra 131_f2d_682 6th cir revg a memorandum opinion of this court 198_f2d_214 2d cir affg in part and revg in part 16_tc_882 46_bta_897 affd 135_f2d_679 rehearing denied 136_f2d_685 5th cir as stated by the court_of_appeals for the fifth circuit in lawyers’ title guar -- - fund v united_states supra pincite ‘the all events test’ is recognized but regarded as not failed merely because a ‘condition subsequent’ may interfere with actual payment see also central cuba sugar co v commissioner supra in the cases cited the taxpayer was obligated to pay a fixed commission based upon sales that had occurred by the end of the taxable_year although actual payment of the commission was predicated upon events transpiring after the close of the taxable_year for example in ohmer register co v commissioner supra pincite as in this case where the royalties to authors were reduced to take account of returns a commission credited to a sales agent on the original sale would be reversed should the company be required to take back the product sold ie should the product be returned in ohmer register co as in the other cited cases the taxpayer was allowed to deduct commissions due with respect to sales in the year of the sales rather than in the subsequent year when the obligation to actually pay the commissions was discharged the court noted that t he fact that the agent might not in the end receive his full commission is no more material than that the petitioner might not receive full payment of the purchase_price of the article sold id pincite in 77_f2d_324 2d cir affirming a memorandum opinion of this court the court_of_appeals for the second circuit stated the applicable - - rule as follows that the liability may not subsequently be discharged by payment does not necessarily prevent its consideration as a liability for the years accrued the existence of an absolute liability is necessary absolute certainty that it will be discharged by payment is not see also 476_us_593 the cases upon which respondent places principal reliance 481_us_239 56_tc_1083 affd 482_f2d_150 3d cir 348_f2d_485 are inapposite in each of these cases the court found that the taxpayer’s liability for the payments in question in general dynamics corp claims for medical benefits in abkco indus royalties and in field enters inc guality bonuses was contingent upon the prior occurrence of a particular event a condition_precedent in this case all of the events that fixed the author’s right to royalties had occurred by the end of the taxable_year ie the completed sales of books that a portion of these royalties was withheld and might never be paid because of returns in a subsequent taxable_year does not negate petitioner’s right to accrue the royalty expense in the year_of_sale - - the parties also dispute whether respondent’s position gives rise to an improper mismatching of income and expense this dispute is largely beside the point in light of our conclusion that random house’s obligation to pay royalties to its authors in the year_of_sale undiminished by the amounts withheld as a reasonable reserve for returns constituted a proper accrual under the all_events_test where as here both the income and expense items relating to the same transaction meet the tax requirements for accrual matching is appropriate and desirable see 46_bta_897 affd 135_f2d_679 rehearing denied 136_f2d_685 5th cir an exception to the deduction of an expense that otherwise satisfies the all_events_test has been made under circumstances in which payment of the expense would have been delayed for such a substantial period that there was a violation of the clear_reflection_of_income standard see 420_f2d_400 5th cir and 102_tc_87 affd 71_f3d_209 6th cir see also 114_tc_293 date also exceptions to the principle that related_income and expense items should be accrued in the same taxable_year have been made where the tax law specifically requires or permits the acceleration or deferral of one but not both of these items see eg 89_tc_181 where we allowed a current deduction for certain preparation and installation costs under circumstances in which the related fees for these services were considered part of the payments for merchandise the reporting of which was deferred under the statutorily permitted installment_method no such exception to the normal rules of expense accrual or to the matching principle pertains to this case --- - we hold that for the audit years petitioner was entitled to a deduction for royalties due with respect to books sold during the year less returns without reduction for royalty payments withheld from the authors during the year as a reasonable reserve for returns whether the determination of deficiency was arbitrary because of our holding that any reduction in petitioner’s accrual deduction for royaltie sec_1s improper it is unnecessary to address petitioner’s argument that the amount of respondent’s proposed deficiency is arbitrary and erroneous and cannot be sustained c conclusion petitioner’s motion for partial summary_judgment shall be granted and respondent’s motion for partial summary_judgment shall be denied an appropriate order will be issued


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 ita plr-141194-07 date date re request for extension of time to make the election to use the alternative re request for extension of time to make the election to use the alternative_depreciation_system p sec_1 sec_2 date1 lmsb official ---------------------- dear ------------ ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------- ------------------- this letter responds to a letter dated date submitted by p on behalf of itself and sec_1 and sec_2 hereinafter p sec_1 and sec_2 will be collectively referred to as taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election to use the alternative_depreciation_system ads under sec_168 of the internal_revenue_code for 5-year_property placed_in_service in the taxable_year ended date1 facts taxpayer represents that the facts are as follows taxpayer is an affiliated_group_of_corporations that is headed by p and that files consolidated federal_income_tax returns taxpayer is primarily engaged in the business of providing air medical emergency transport services and systems throughout the united_states taxpayer reported a consolidated net_loss on its timely filed consolidated federal_income_tax return for the taxable_year ended date1 for this taxable_year taxpayer had a net_operating_loss_carryover that was expiring also on this return taxpayer determined its depreciation_deductions by using the general depreciation system of sec_168 instead of the ads plr-141194-07 taxpayer does not have an internal tax department as a result taxpayer relied on a qualified_tax professional to prepare its consolidated federal_income_tax return for the taxable_year ended date1 taxpayer was not told nor did taxpayer know independently that taxpayer could elect to use the ads to determine depreciation for certain or all classes of property placed_in_service during the taxable_year ended date1 if the officers of p had been aware of this election p would have made the election to use the ads for certain classes of property placed_in_service during the taxable_year ended date1 ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election to use the ads under sec_168 for 5-year_property placed_in_service by taxpayer in the taxable_year ended date1 law and analysis sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in the taxpayer’s trade_or_business the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 sec_168 prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the ads in sec_168 in the case of any property to which an election under sec_168 applies sec_168 provides that the depreciation deduction provided by sec_167 is determined under the ads pursuant to sec_168 the ads is depreciation determined by using the straight_line method without regard to salvage_value the applicable convention determined under sec_168 and a recovery_period determined under the table prescribed in sec_168 for most personal_property the recovery_period is the property’s class_life sec_168 provides special rules for determining class_life sec_168 permits a taxpayer to elect for any class of property for any taxable_year to use the ads for determining depreciation for all property in that class placed_in_service during that taxable_year however in the case of nonresidential_real_property the election is made separately with respect to each property once made an election to use ads is irrevocable sec_301_9100-7t provides that the election under sec_168 must be made for the taxable_year in which the property is placed_in_service sec_301 plr-141194-07 7t a i further provides that this election must be made by the due_date including extensions of the tax_return for the taxable_year for which the election is to be effective sec_301_9100-7t provides that the election under sec_168 is made by attaching a statement to the tax_return for the taxable_year for which the election is to be effective under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' sec_301_9100-3 provides that requests for relief under ' will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of and have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election to use the ads under sec_168 for determining depreciation for 5-year_property placed_in_service by taxpayer in the taxable_year ended date1 this election must be made by p filing an amended consolidated federal tax_return for the taxable_year ended date1 with a statement indicating that taxpayer is electing to use the ads under sec_168 for determining depreciation for 5-year_property placed_in_service during that taxable_year except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on whether taxpayer’s classification of each item of depreciable_property placed_in_service by taxpayer during the taxable_year ended date1 is proper under sec_168 or whether taxpayer’s determination of the recovery_period for each item of 5-year_property placed_in_service by taxpayer during the taxable_year ended date1 is proper under sec_168 and for purposes of determining depreciation under the ads plr-141194-07 in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate lmsb official this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely enclosures kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax and accounting copy of this letter copy for sec_6110 purposes


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-127238-18 date date legend x --------------------------------------------------- ------------------------------- y ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------- ----------------------------------------------------------------------------------------- affidavit affidavit affidavit ------------------------------------------------------ ------------------------------------------------------------- --------------------------------------------------------------- agreement ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- date date date ----------------- ------------------------ -------------------------- partnership -------------------------------------------------------------- project state --------------------------------------------------------------------- ------------ plr-127238-18 tax_year ------ dear ---------------------- this letter is in response to a request for a private_letter_ruling dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_168 of the internal_revenue_code code to not be treated as a tax-exempt_controlled_entity beginning date and for a ruling granting an extension of time for x to make an election under sec_301_7701-3 of the regulations to be treated as an association_taxable_as_a_corporation for federal tax purposes beginning date facts the information submitted states that x was formed as a limited_liability_company under the laws of state on or about date x uses the cash_method as its overall_method_of_accounting and has the calendar_year as its taxable_year x has been wholly owned by y a tax-exempt_entity described in sec_501 since its date of formation x was formed to serve as the general_partner of partnership a limited_partnership formed on date pursuant to agreement x intended to be a tax-exempt_controlled_entity under sec_168 partnership was formed to provide affordable housing and in furtherance of such purpose to acquire rehabilitate own lease and manage project project is a qualified low_income_housing_project pursuant to sec_42 of the code project was placed_in_service on date under sec_5 ll and mm of the agreement x as the general_partner of partnership is required to make the election under sec_168 of the code to not be treated as a tax-exempt_controlled_entity for purposes of the tax-exempt_use_property rules sec_168 election in order to make the foregoing election x was required to make an entity classification election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes entity classification election x represents that at all times after the formation of partnership it intended to make an election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date and that it intended to make a sec_168 election effective for date however x inadvertently failed to timely file a form_8832 entity classification election and the sec_168 election given that sec_5 ii and mm of agreement required the timely filing of the entity classification election and the plr-127238-18 sec_168 election there is no evidence that x is using hindsight in requesting relief x has submitted affidavit affidavit and affidavit to support its position x represents that x has requested relief before the failure to make the sec_168 election and the entity classification election was discovered by the service x further represents that during the pendency of the review of x’s request neither x nor y’s returns for the taxable years --------------------------have been or are being examined by a district_director or have been or are being considered by an appeals_office or a federal court x represents that it will not have a lower tax_liability for all tax years affected by the sec_168 election and the entity classification election than it would have had if both elections had been timely made and the taxable_year in which the two elections should have been made is not closed under sec_6501 x and y represent that they will file all required returns and or amended returns as necessitated by the grant of the requested extension of time to make regulatory elections and will recognize any formerly unreported income as applicable law sec_167 provides generally for a depreciation deduction for property used in a trade_or_business under sec_168 the alternative_depreciation_system must be used for any tax-exempt_use_property as defined in sec_168 sec_168 provides that for purposes of sec_168 if any property which but for this subparagraph is not tax-exempt_use_property is owned by a partnership having a tax-exempt_entity and a non-exempt entity as partners and any allocation to the tax-exempt_entity is not a qualified_allocation then an amount equal to the tax-exempt entity’s proportionate share of such property is treated as tax-exempt_use_property sec_168 provides generally that any tax-exempt_controlled_entity is treated as a tax-exempt_entity for purposes of sec_168 under sec_168 a tax-exempt_controlled_entity means any corporation without regard to that subparagraph and sec_168 if percent or more in value of the corporation’s stock is held by one or more tax-exempt entities other than a foreign_person_or_entity under sec_168 a tax-exempt_controlled_entity can elect not to be treated as a tax-exempt_entity for purposes of sec_168 and such an election is irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt_controlled_entity plr-127238-18 under sec_301_9100-7t the sec_168 election must be made by the due_date of the tax_return for the first taxable_year for which the election is to be effective sec_301_9100-7t provides the manner in which the sec_168 election is made sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association_taxable_as_a_corporation or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as including any election the due_date for which is prescribed by a regulation because the due_date of sec_168 election is prescribed in sec_301_9100-7t that election is a regulatory election in addition because the due_date of the entity classification election is prescribed in sec_301_7701-3 that election is a regulatory election sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer i ii iii iv v i ii iii plr-127238-18 acted reasonably and in good_faith and the grant of the relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer- requests relief before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional and the professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer is considered to have not acted reasonably and in good_faith if the taxpayer- seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested was fully informed of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to the taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the service will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of the relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made under sec_301 c ii the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable_year affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section analysis the information and representations submitted indicate that x at all times intended from the outset to make the sec_168 election and the entity classification election and that x’s failure to make the sec_168 election and the plr-127238-18 entity classification election was inadvertent x represents that x has requested relief before the failure to make both elections was discovered by the service there is no evidence that x is using hindsight in requesting relief further based on the facts presented and the representations made x will not have a lower tax_liability for all tax years affected by the sec_168 election and the entity classification election than x would have had if both elections had been timely made and the taxable_year in which the sec_168 election and the entity classification election should have been made is not closed under sec_6501 we conclude that x has acted reasonably and in good_faith further the interests of the government will not be prejudiced by the granting of relief x requests an extension of time under sec_301_9100-1 and sec_301_9100-3 to file the sec_168 election and the entity classification election to be treated as an association_taxable_as_a_corporation for federal tax purposes under sec_301_7701-3 based solely on the above facts and representations we conclude that x has met the requirements of sec_301_9100-1 and sec_301_9100-3 with respect to obtaining an extension of time to file both the sec_168 election and the entity classification election conclusion based solely on the facts as represented and the applicable law we conclude that the requirements of sec_301_9100-3 have been met accordingly x is granted an extension of time of days from the date of this letter to file an original or amended_return for tax_year x must attach the aforementioned sec_168 election and the information set forth in sec_301_9100-7t to the original or amended_return x also must attach a copy of this letter to the original or amended_return pursuant to sec_301_9100-7t a copy of this letter and the sec_163 election statement must also be attached to the federal_income_tax returns of each of the tax-exempt members or beneficiaries of x in addition based on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 with respect to the entity classification election accordingly x is granted an extension of time of days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election 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 further we express no opinion concerning the assessment of any interest additions to tax additional_amounts or penalties for failure_to_file timely income_tax return with respect to any taxable_year plr-127238-18 the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to powers of attorney on file with this office we are sending copies of this letter to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by ______________________________ caroline e hay assistant to the branch chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


significant index number government entities division department of the treasury internal_revenue_service washington d c mar tep ral ad re plan no ein plan taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning this extension applies to the eligible amortization charge bases as identified in your application submission established as of the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided in granting this ruling it is expected that the plan's assumptions and methods will be reviewed and updated as appropriate so that each prescribed assumption was applied in accordance with applicable law and regulations and each other assumption is reasonable taking into account the experience of the plan and reasonable expectations and such other assumptions in combination offer the best estimate of anticipated experience under the plan in addition we are not expressing any opinion as to the accuracy of any material submitted with your request we have sent a copy of this letter to the manager ep classification in ' to the manager ep compliance unit in and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact id at sincerely yours cc david m ziegler manager ep actuarial group


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx uil last date for filing a petition with the tax_court tax exempt and government entities ‘ division release number release date org dear sir a final adverse determination_letter as this is to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 c of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons org is not operated for an exclusive exempt_purpose as is required by sec_501 and sec_1 c -1 d a substantial part of the activities of org furthers private interests rather than public interests which is prohibited by sec_1 c -1 d i the net_earnings of org inures to the benefit of private shareholders and individuals which is prohibited by sec_501 c contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter commerce street dallas tx letter do processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district coutt of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations enclosures 886-a - explanation of items commerce street dallas tx letter d0o form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein num schedule no or exhibit year period ended dec 20xx dec 20yy dec 20zz legend org name of organization num ein issue whether the sec_501 exempt status of org a private non-operating foundation be revoked effective january 20xx facts a private non-operating foundation exempt under irc org organization was recognized as sec_501 on february 20xx and effective for the year ending december 20ww per their form_1023 application_for recognition of exemption which was filed in august of 20ww the organization activities would exclusively consist of making grants to other c organizations classified as public_charities for religious charitable educational scientific and literary purposes the organization’s form_1023 also states that the organization would develop operating procedures to ensure that it adheres to the rules of sec_4941 sec_4942 sec_4943 sec_4944 and sec_4945 as applicable to private non-operating foundations the form_1023 also states that the foundation will be funded primarily from donations by its founders the organization’s forms 990-pf for years ending december 20xx december 20yy and december 20zz were selected for examination based on information obtained from a promoter in regards to abusive trusts funding analysis analysis of the organization’s books_and_records determined that a majority of the organization’s funding took place in with an original contribution of dollar_figure received from its founders during 20xx the foundation received one additional_contribution of an automobile from its founders with a fair_market_value of dollar_figure no additional contributions were received during years ending 20yy and 20zz in addition to the 20xx contribution the organization also generated a small percentage of total revenue from investment_income during years ending 20xx and 20yy the figures are as follows trustee contributions investment_income total 20xx dollar_figure dollar_figure dollar_figure 20yy 20zz dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure expenditure analysis the following figures represent the organization’s expenditure activity for years ending december 20xx and 20yy the organization did not have any disbursement activities during year ending december 20zz form acrev department of the treasury - internal_revenue_service page -1- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein num schedule no or exhibit year period ended dec 20kx dec 20yy dec 20zz disbursements 20xx 20yy e e e grants organizations grants individuals legal fees professional fees travel e e total dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure q dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number during the course of the examination it was concluded that a substantial percentage of the organization’s total expenditures were of a personal nature and conducted for the personal benefit of its trustees and individuals the expenditures in question included the grant made to an individual in 20xx and the travel_expenses paid during 20yy during 20xx the organization donated the automobile received as a contribution from its founders to an individual however the organization did not seek prior grant making authority from the internal_revenue_service nor does it have any established procedures for selecting grantees or expenditure_responsibility the travel_expenses paid_by the foundation were also determined to be for the personal benefit of trustees these expenses primarily consisted of the costs for airfare lodging meals and a car rental for day trip to orlando florida for both of the trustees and their children according to one of the trustees this trip was under taken for the specific purpose of touring two hospitals located in the orlando area for which the foundation was considering making grants to however through further discussions with the trustee it was learned that the two hospital tours were conducted over a two day period with each being roughly hours in duration and no contributions were made to either of these hospitals the organization was also unable or unwilling to provide substantiation for these expenses asset analysis the organization assets consist exclusively of cash and investments which is held in an interest- bearing investment account based on the year-ending statement for 20yy it was concluded that these assets were not properly reflected on the organization’s form_990 and by year ending 20yy the assets held in this account had been depleted and reflected a negative balance per return beginning ending 20k 20yy 20zz dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure form 886-a crev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein num schedule no or exhibit year period ended dec 20xx dec 20yy dec 20zz per exam beginning ending dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure in addition to paying for personal travel_expenses it was also concluded that the trustees withdrew the remainder of the funds from the foundation’s corpus during 20xx and 20yy and utilized these funds for their own personal benefit rather than for conducting the exempt purposes of the foundation the organization was unable or unwilling to provide any documentation to substantiate for_the_use_of these funds see attachment law and analysis sec_501 provides tax exemption for corporations and foundations that are operated exclusively for religious charitable scientific testing for public safety literary or educational_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 states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -1 states 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 or private shareholders or individuals sec_1_501_c_3_-1 states that an organization is not organized or operated exclusively for one or more of the purposes specified in sec_501 unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of ptivate interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_162-2 states in part that traveling expenses include travel fares meals_and_lodging and expenses incident to travel such as expenses for sample rooms telephone and telegraph public stenographers etc only such traveling expenses as are reasonable and form 886-acrev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended dec 20xx org ein num dec 20yy dec 20zz necessary in the conduct of the taxpayer's business and directly attributable to it may be deducted if the trip is undertaken for other than business purposes the travel fares and expenses incident to travel are personal expenses and the meals_and_lodging are living_expenses is or trip trade_or_business primarily personal in nature depends on is related primarily to the sec_1_162-2 states that whether a taxpayer's facts and circumstances in each case the amount of time during the period of the trip which is spent on personal activity compared to the amount of time spent on activities directly relating to the taxpayer's trade_or_business is an important factor in determining whether the trip is primarily personal if for example a taxpayer spends one week while at a destination on activities which are directly related to his trade_or_business and subsequently spends an additional five weeks for vacation or other personal activities the trip will be considered primarily personal in nature in the absence of a clear showing to the contrary the taxpayers position the organization failed to submit an official protest or respond in any manner to the service’s proposed revocation of its exempt status within the required day timeframe government’s position the organization has failed to meet the operational_test described in sec_1 c -1 c above a substantial percentage of the organization’s total disbursements from 20xx through 20yy were clearly personal in nature and resulted in the total depletion of the foundation’s corpus by 20zz these personal disbursements included payment of expenses and cash disbursements for the benefit of the trustees as well as a grants being provided to individuals for personal reasons as stated in sec_1_501_c_3_-1 an organization will be regarded as opetated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 since the majority of the organization’s disbursements were for personal purposes the organization is clearly not engaging primarily in activities that accomplish exempt purposes under sec_501 further as indicated in sec_1_501_c_3_-1 the organization is not operated exclusively for exempt purposes because a substantial amount of its net_earnings are inuring to trustees of the foundation the organization is also being operated for private rather than public interests since the majority of its total expenditures were personal in nature as stated in sec_1 c - form 886-arev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ein num schedule no or exhibit year period ended dec 20xx dec 20yy dec 20zz d i an organization is not operated for exempt purposes it interests is being operated for private based on the above precedent it sec_501 c should be revoked is our position that the organization’s exemption under irc n ion the organization did not meet the operational_test under sec_501 during the three years under review therefore it was concluded that this foundation was not organized or ever intended to be operated exclusively for exempt purposes described in sec_501 as a result we are proposing that its tax exemption be revoked retroactive to the date of january 20xx form 886-acrev department of the treasury - internal_revenue_service page -5- tax_exempt_and_government_entities_division org department of the treasury internal_revenue_service commerce street dallas tx date taxpayer_identification_number form_990-pf tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding uniess the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service taxpayer_advocate sincerely thank you for your cooperation if you write please provide a telephone number and if you have any questions please cail the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you enclosures publication publication report of examination marsha a ramirez director eo examinations letter catalog number 34809f


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-129048-01 date date legend x a b c d e f g h i j k d1 year dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the represented facts are as follows x was incorporated on d1 a b c d e plr-129048-01 f g h i j and k the shareholders of x on d1 intended x to be an s_corporation effective for the year taxable_year but form_2553 election by a small_business_corporation was not filed timely i chairman of the board_of x states in an affidavit that he intended that x be an s_corporation effective d1 accordingly x requests a ruling that it will be treated as an s_corporation effective d1 sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes