department of the treasury int ernal revenue service washington d c date of f i c e of c h i e f c ou n s e l number release date cc ita b01 tl-n-4653-00 uilc 263a internal_revenue_service national_office field_service_advice memorandum for large and mid-size business_associate area_counsel -- denver cc lm nr den from subject associate chief_counsel income_tax and accounting cc ita application of sec_263a to benefit costs paid on behalf of former employees this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend corporation tl-n-4653-00 issue whether certain employee_benefits paid_by corporation for production employees who performed services in a previous year are subject_to capitalization as an indirect_production_cost conclusion amounts paid_by corporation for certain employee_benefits for production employees who performed services in a previous year are subject_to capitalization as an indirect_production_cost facts corporation in the utility industry is a member of a consolidated_group for the tax years under examination during the years under examination corporation incurred significant annual construction expenditures accordingly corporation was a significant producer of property and was subject_to the uniform_capitalization_rules the years under examination are prior to the final uniform_capitalization_rules which were final for years beginning after date during the years under examination corporation among its many costs incurred costs associated with the services of former employees corporation provided health care and life_insurance benefits to its retired employees these costs for past service are costs incurred in the current_year in the form of employee_benefits relating to employees who performed services in a previous year corporation incurred certain employee_benefits costs for both current and past employees corporation also incurred other employee benefit costs for current employees corporation did not capitalize the past_service_costs for the retired employees as an indirect_cost of production activities under sec_263a law and analysis sec_263a provides uniform rules for capitalization or inclusion in inventory of certain expenses sec_263a provides in part that sec_263a applies to real or tangible_personal_property produced_by_the_taxpayer sec_263a provides that the term produce includes construct build install manufacture develop or improve 1the issue only involves retired employees who were former production employees tl-n-4653-00 where sec_263a applies a taxpayer must include in inventory costs or capitalize the direct costs and the proper share of those indirect_costs including taxes part or all of which are allocable to such property subject_to sec_263a temp sec_1_263a-1t b ii provides that a taxpayer must capitalize all indirect_costs properly allocable to property produced indirect_costs are properly allocable to property produced when the costs directly benefit or are incurred by reason of the performance of production activities temp sec_1_263a-1t b iii p provides that among the indirect_costs required to be capitalized are contributions paid to or under a stock bonus pension profit-sharing or annuity plan or other plan deferring the receipt of compensation whether or not the plan qualifies under sec_401 except for amounts described in paragraph b v h of this section and other employee benefit expenses paid_or_accrued on behalf of labor to the extent such contributions or expenses are otherwise allowable as deductions under chapter of the code other employee benefit expenses include but are not limited to payments pursuant to a wage contribution plan under sec_105 as it existed prior to its repeal in and premiums on life and health insurance patterned after the long-term_contract rules for pensions in sec_1 temp sec_1_263a-1t b v h provides that among the indirect_costs not required to be capitalized are contributions paid to or under a pension or annuity plan allowable as a deduction under sec_404 and sec_404a if applicable to the extent such contributions represent past_service_costs as determined under the particular funding method established for the plan for the period in question under the provisions of sec_412 in the preamble to the temporary regulations under the heading pension costs-past service_costs the treasury explained the initial provision regarding past_service_costs for pensions in this way under the temporary regulations contributions paid to or under a pension or annuity plan which are allowable under sec_404 and sec_404a if applicable are not subject_to the capitalization requirements of sec_263a to the extent that such contributions represent past_service_costs until otherwise provided to the contrary past_service_costs shall be determined for purposes of sec_263a with reference to the allocation between normal costs and past_service_costs under the funding standards of sec_412 with respect to an actuarial method which does not distinguish between normal costs and tl-n-4653-00 past_service_costs none of the amount allowable as a deduction under sec_404 shall be treated as past_service_costs t d preamble printed in 1987_1_cb_98 the joint_committee on taxation in its explanation of the pension costs and past_service_costs blue_book stated pension costs under the uniform_capitalization_rules contributions to a pension profit- sharing or stock_bonus_plan and other employee benefit expenses are considered indirect_costs that must be capitalized to the same extent as other indirect_costs unless such contributions relate to past-service costs it was intended that in the case of a contribution to a qualified_plan the determination of whether the contribution relates to past or current services will be made independently of any allocation between normal_cost and past-service cost required under the minimum_funding standards sec_412 or under the plan's benefit formula the congress anticipated that the treasury_department will publish guidelines for making this determination and that such determination may be based in whole or in part on any actuarial funding methods that may be utilized by qualified defined benefit plans joint_committee on taxation staff general explanation of the tax_reform_act_of_1986 100th cong 1st sess pincite past_service_costs refers to those costs for retirement benefits that are based upon the employee’s years_of_service with the employer prior to the inception of a defined_benefit_plan see generally sec_412 section of the omnibus budget reconciliation act of p l no date act overruled the exception which permitted the deduction for past_service_costs for contributions to certain pension or annuity_plans omnibus budget reconciliation act of p l no date reprinted in 1987_3_cb_114 section a of the act provided that for purposes of sec_263a the allocable_costs with respect to any property shall include contributions paid to or under a pension or annuity plan whether or not such contributions represent past_service_costs the change in law was effective for years beginning after date the legislative_history to section of the act is found under the heading treatment of past service pension costs under uniform_capitalization_rules tl-n-4653-00 house bill no provision senate amendment under the senate amendment past_service_costs are subject_to the uniform_capitalization_rules thus an allocable portion of all otherwise allowable pension costs whether relating to current or past services must be included in the basis of the property produced_by_the_taxpayer or held for resale by the taxpayer conference agreement the conference agreement generally follows the senate amendment with respect to the costs allocable to property produced_by_the_taxpayer or held for resale by the taxpayer h_r conf_rep no 100th cong 1st sess 1987_3_cb_204 under the final regulations congress’ mandate for the change in law regarding the past_service_costs for pension plans is incorporated for pension and other related costs contributions to employee_plans representing past services must be capitalized in the same manner as amounts contributed for current service sec_1 263a- e ii c other employee benefit expenses including premiums on life and health insurance and wage_continuation_plan payments under former sec_105 must also be capitalized sec_1_263a-1 the costs under consideration here involve certain employee benefit costs for production employees who performed service in a previous year these costs do not involve pension or annuity costs rather the costs involve life_insurance and health care premiums ie they are other benefit costs the issue is whether the past_service_costs language associated with the pension costs in the temporary regulations has any impact on payments for benefits for prior service involving other types of benefit costs the original temporary and proposed_regulations indicated in the preamble that past_service_costs for pensions were not subject_to capitalization congress in specifically changed the service’s position on past_service_costs for pensions mandating that such past_service_costs must be capitalized taxpayer argues that all past_service_costs are deductible under the temporary regulations with the pension costs specifically singled out this would apply whether it is a past_service_costs for a current employee or a cost incurred for a retired employee tl-n-4653-00 for prior service congress remedied the treatment of pension costs by the law change in but did not address other past_service_costs taxpayer points to the silence of the regulations regarding these costs and also the blue book’s interpretation of past_service_costs our view is that the original temporary regulations required all past_service_costs for employee_benefits to be capitalized except pension costs the exclusion for pension costs followed from the long-term_contract regulations upon which the uniform_capitalization_rules were modeled when the past service pension costs exception was specifically overruled by congress in then all past_service_costs were treated alike all were capitalizable retiree benefits are incurred by reason of the performance of production activities and are thus an indirect_cost to be capitalized under temp sec_1 263a- 1t b ii temp sec_1_263a-1t b ii provides that producers must capitalize direct and indirect_costs properly allocable to property produced under sec_263a without regard to whether those costs are incurred before during or after the production_period even prior to sec_263a there was a requirement to capitalize all costs incurred in the construction of capital assets see sec_1_263_a_-2 418_us_1 requiring depreciation used in the construction of a capital_asset to be capitalized to the capital_asset 60_tc_368 aff’d sub nom 519_f2d_1280 10th cir cert_denied 423_us_1087 requiring capitalization of certain construction department overhead costs as well as other construction-related costs and 66_tc_962 aff’d in part rev’d in part 641_f2d_435 6th cir requiring capitalization of health and welfare benefits applicable to direct and indirect labor involved in construction activity sec_263a similarly requires capitalization of all costs incurred in the construction of capital assets additionally capitalization of recurring costs subject_to the economic_performance rules of sec_461 is best accomplished by capitalization of past_service_costs to current production this is the best alternative since costs cannot be capitalized any earlier than when incurred under sec_1_446-1 and tracing is administratively impractical accordingly capitalizing some retiree benefit costs each year clearly reflects income and is an administratively feasible methodology that ensures general matching and treatment consistent with that of salaries and other_benefits our view that when the past service pension costs exception was specifically overruled by congress in then all the past_service_costs were treated alike -- all were tl-n-4653-00 capitalizable - is buttressed by legislative_history the legislative_history to section of the act under senate amendment states that past_service_costs are subject_to the uniform_capitalization_rules h_r conf_rep no 100th cong 1st sess 1987_3_cb_204 emphasis added the conference agreement followed the senate amendment the change under section of the act to require capitalization of past service pension costs arguably reflects congressional intent that the law requires capitalization of all past service pension and employee_benefits costs hence the language used in the legislative_history past_service_costs are subject_to the uniform_capitalization_rules that is now that past_service_costs for pensions were to be capitalized all past_service_costs are treated alike -- all are subject_to the uniform_capitalization_rules furthermore we note that the temporary and final regulations involving indirect production_costs in the definition of other employee benefit expenses both include a specific situation where there was a requirement to capitalize a cost in the current_year for a former worker temp sec_1_263a-1t b iii p and sec_1_263a-1 provide that among the indirect_costs required to be capitalized are payments pursuant to a wage_continuation_plan under sec_105 as it existed prior to its repeal in sec_105 wage continuation plans involve payments to former employees who retired on total or permanent disability thus like the employee_benefits provided to the production employees who performed services in a previous year that are the subject of this advice wage_continuation_plan payments involve current_year costs for former workers accordingly within the definition of other employee benefit expenses found in the temporary and final_regulation there is an analogous situation involving costs incurred in the current_year for services in a previous year we interpret the regulation as requiring capitalization of these costs case development hazards and other considerations this issue is not free from doubt past_service_costs do not benefit and are not incurred by reason of current production activity furthermore there is no specific requirement in the temporary regulations or the final regulations relating to employee benefit expenses for capitalization of past_service_costs no cases have been found that specifically address past_service_costs finally one can argue that since the taxpayer is not obligated to provide benefits to retirees retiree benefits should be treated as a current period cost the conference_report is legislative_history as opposed to the blue_book written by the joint_committee on taxation the blue_book is not part of the legislative_history although it is entitled to respect 106_tc_31 citations omitted tl-n-4653-00 on the other hand we do not believe that the lack of a specific reference to capitalizing past service employee benefit costs in temp sec_1_263a-1t b iii p is determinative congress intended to include all types of direct and indirect_costs as subject_to capitalization and past_service_costs are indirect_costs of production while it is a cost paid in the current_year for people who no longer work the cost is paid to those who were production employees accordingly this year’s production_costs include benefits paid on behalf of both current and former production employees and since costs cannot be capitalized any earlier than when incurred under sec_1_446-1 it makes the most administrative sense to require capitalization of past_service_costs in the current_year finally it is reasonable to apply consistent treatment to all past service employee benefit costs such as pensions other employee_benefits vacation pay wage continuation plans etc please call if you have any further questions by heather c maloy clifford m harbourt senior technician reviewer branch income_tax and accounting


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-114406-99 date date number release date legend company state shareholder a b this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since b after the end of its taxable_year beginning on b however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on b sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-114406-99 sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on b however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of b with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court john y ding and linda h zhang petitioners v commissioner of internal revenue respondent docket no 18253-07s filed date john y ding and linda h zhang pro sese paul v colleran for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure petitioners are husband and wife the sole issue for decision is whether petitioners are entitled to deduct dollar_figure in expenses that john y ding petitioner claimed on schedule c profit or loss from business for background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in massachusetts when they filed their petition petitioners earned combined compensation of dollar_figure from their employers in ms zhang earned dollar_figure from blackrock inc a large global investment management firm with offices in the united_states europe and asia petitioner earned dollar_figure in from leggett platt inc leggett platt headquartered in missouri leggett platt manufactures a variety of engineered products including metal products for use in furniture such as inner springs for mattresses and recliner mechanisms for recliner chairs petitioner has a ph d in economics and at some time before he was a college professor and a consultant for local businesses one of which was acquired by leggett platt in leggett platt hired petitioner full time to establish and manage the corporation’s asian operations as a result petitioner now oversees the day-to-day operating decisions and technical customer service issues for leggett platt’s factories in asia he is also responsible for the corporation’s asian planning and budgeting work a separate sales team is responsible for bringing in new customers and servicing existing accounts petitioner’s duties necessitate travel to leggett platt’s manufacturing facilities in asia and during he traveled to asia or times for factory visits petitioner also traveled to the head office in missouri six or seven times during leggett platt reimbursed petitioner for all of his international and domestic traveling expenses however because leggett platt did not provide an office from to petitioner used a small room on the second floor of his two-story big_number square-foot house as his principal_place_of_business leggett platt did not reimburse petitioner for expenses related to his home_office the room was adjacent to some of the bedrooms because of the time zone differences when calling or receiving calls from asia petitioner would frequently receive and make telephone calls in the evenings and late at night disturbing his family to eliminate the disruption petitioner remodeled his basement which was previously bare and unfinished he started remodeling in and completed the project in petitioner installed carpeting furniture partitioning lighting heating and wiring in the basement creating about big_number square feet of usable space with a reception area at the bottom of the staircase he divided about one-half of the space into an open conference area which he used exclusively for occasional meetings with prospects for his consulting activities as described further below the other half of the basement he made into a self-enclosed main office where he kept and used his telephone computer printer and fax machine and where he maintained records for the administrative and management duties leggett platt required petitioner used the office exclusively for his work with leggett platt and for his consulting activities petitioner prepared the couple’s joint federal_income_tax returns for and separate from his employment with leggett platt petitioner reported schedule c losses of dollar_figure for and dollar_figure for in connection with his attempts beginning in to start a consulting business petitioner’s goal was to try to match american businesses interested in exporting to asia with asian businesses interested in investing in american businesses petitioner had hoped to earn income through commissions and finder’s fees petitioner thought he could develop business leads and contacts through the business associations to which he already belonged including the asian business chamber of massachusetts the greater china business council of new england and the american chamber of commerce in china the meetings were social as well as networking opportunities petitioner never generated any income from his efforts to launch a consulting business and he abandoned the efforts at the end of the details of petitioner’s schedule c for are as follows gross_receipts or sales expenses car and truck expenses office expense repairs and maintenance supplies travel away from home meals ent ½ of total utilities other expenses computer printer fax telephone furniture total other expenses total expenses net_loss for the year dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number 1for petitioner reported his home_office expenses on form_8829 expenses for business use of your home which flowed into schedule c as a separate line item in contrast for petitioner reported his home_office expenditures as part of repairs and maintenance utilities telephone and furniture expenses respondent issued a notice_of_deficiency dated date stating that the schedule c expenses should have been reported on schedule a line as unreimbursed employee business_expenses subject_to a reduction of percent of adjusted_gross_income as required by sec_67 the notice_of_deficiency however did not reclassify the expenses to schedule a itemized_deductions instead the notice outright disallowed all of petitioner’s schedule c business_expenses the disallowance in turn caused a series of computational adjustments to self- employment income itemized_deduction limitations and alternative_minimum_tax resulting in a federal_income_tax deficiency for of dollar_figure respondent issued a letter dated date acknowledging calculation errors in the notice_of_deficiency and reducing the income_tax deficiency for to dollar_figure petitioners timely filed a petition seeking a redetermination of the deficiency on the ground that respondent miscalculated income and deductions for at trial respondent raised the issue that irrespective of the potential reclassification of business_expenses from schedule c to schedule a petitioner lacked substantiation to support any deduction discussion i burden_of_proof in general the court presumes that the commissioner’s determination set forth in a notice_of_deficiency is correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 under sec_7491 the burden may shift to the commissioner regarding factual matters if the taxpayer produces credible_evidence and meets the other requirements of the section additionally the commissioner bears the burden_of_proof with respect to any new_matter that departs from the determinations in the notice_of_deficiency rule a 28_tc_54 an assertion is treated as a new_matter when it either increases the original deficiency or pertinent here requires the presentation of different evidence rule a 112_tc_183 93_tc_500 the flush language in the notice_of_deficiency suggests that petitioner satisfied the substantiation requirements regarding the expenses and that he merely needed to support their reclassification respondent now contends that the notice_of_deficiency was legally sufficient because the notice completely disallowed rather than reclassified the expenses respondent also insists that asserting lack of substantiation at trial was not a new_matter but was instead an alternate theory or an additional ground for disallowance within the ground that is stated in the notice_of_deficiency we are skeptical of respondent’s contentions however we need not and explicitly do not decide this issue because of the following legal principle in a situation in which both parties have satisfied their burden of production by offering some evidence then the party supported by the weight of the evidence will prevail regardless of which party bore the burden of persuasion proof or preponderance therefore a shift in the burden of preponderance has real significance only in the rare event of an evidentiary tie knudsen v commissioner t c ___ ___ slip op pincite quoting 394_f3d_1030 8th cir affg t c memo supplementing tcmemo_2007_340 the present case has no evidentiary ties therefore because we resolve the case on the preponderance_of_the_evidence and not on an allocation of the burden_of_proof the issue of burden_of_proof is moot see id cyman v commissioner tcmemo_2009_144 ii petitioner’s schedule c expenses a deductions in general_deductions are a matter of legislative grace and taxpayers must satisfy the statutory requirements for claiming the deductions 503_us_79 292_us_435 sec_6001 requires taxpayers to maintain records sufficient to establish the amount of each deduction see also 90_tc_74 sec_1_6001-1 e income_tax regs if a taxpayer can establish that he once had adequate_records but lost the records due to circumstances beyond his control such as a fire flood or other_casualty then the court will permit the taxpayer to reasonably reconstruct his expenses 65_tc_342 taxpayers may deduct ordinary and necessary expenses that they pay in connection with operating a trade_or_business sec_162 122_tc_305 generally the performance of services as an employee constitutes a trade_or_business 54_tc_374 to be ordinary the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite additionally the expenditure must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs for such expenses to be deductible the taxpayer must not have the right to obtain reimbursement from his employer see 788_f2d_1406 9th cir affg tcmemo_1984_533 sec_262 disallows deductions for personal living or family_expenses if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount we may estimate the amount bearing heavily against the taxpayer whose inexactitude is of his own making 39_f2d_540 2d cir the taxpayer must present sufficient evidence for the court to form an estimate because without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir 85_tc_731 sec_274 overrides the cohan_rule with regard to certain expenses sec_1_274-5t temporary income_tax regs fed reg date sec_274 requires more stringent substantiation for travel meals and listed_property defined under sec_280f to include passenger automobiles computers or peripheral equipment and cellular telephones sec_274 requires taxpayers to provide adequate_records or sufficient other evidence establishing the amount time place and business_purpose of the expense to corroborate the taxpayer’s statements thus even if such an expense would otherwise be deductible under cohan sec_274 may still prohibit a deduction if the taxpayer does not have sufficient substantiation sec_1_274-5t temporary income_tax regs supra b business_expenses v startup expenses while sec_162 generally allows a deduction for ordinary and necessary expenses paid in connection with carrying_on_a_trade_or_business the trade_or_business must be functioning as a business at the time the taxpayer incurred the expenses 93_tc_684 affd in part and remanded in part per order 10th cir date woody v commissioner tcmemo_2009_93 glotov v commissioner tcmemo_2007_147 sec_1_162-1 income_tax regs for this purpose a taxpayer is not carrying_on_a_trade_or_business under sec_162 until the business is functioning as a going concern and performing the activities for which it was organized glotov v commissioner supra until that time expenses related to the activity are not ordinary and necessary expenses deductible under sec_162 or sec_212 expenses_incurred for the production_of_income but instead are start-up or pre-opening_expenses hardy v commissioner supra pincite sec_195 governs the deductibility of startup expenses providing in pertinent part that the taxpayer must capitalize the expenditures and except as otherwise provided in this section no deduction shall be allowed for start-up_expenditures sec_195 the taxpayer may elect to amortize the capitalized startup costs evenly over a period of not less than months beginning with the month in which the active trade_or_business begins sec_195 when a taxpayer’s endeavor never rises to the status of an active trade_or_business the taxpayer may not amortize the startup costs see bernard v commissioner tcmemo_1998_20 therefore the threshold issue here is whether petitioner completed the startup phase and became actively engaged in a trade_or_business during courts have adopted a facts_and_circumstances_test focusing on whether the taxpayer has satisfied all of the following three factors whether the taxpayer undertook the activity intending to earn a profit whether the taxpayer was regularly and actively involved in the activity and whether the taxpayer’s activity has actually commenced see woody v commissioner supra mcmanus v commissioner tcmemo_1987_457 affd without published opinion 865_f2d_255 4th cir 1for startup expenses that were incurred after date sec_195 allows the taxpayer to elect to deduct a limited amount of the capitalized startup costs for the year of which the active trade_or_business begins and to deduct the remainder over months of amortization beginning with the month in which the active trade_or_business begins see sec_1_195-1t b d temporary income_tax regs fed reg date we find that petitioner intended to earn a profit however petitioner did not establish that he was regularly and actively engaged in his consulting efforts or that the business actually began in or petitioner failed to attract a single client or generate a single dollar or yuan in income in or petitioner acknowledged that his business model needed to be more thought out and well planned out than what i started to do adding well it just looked so easy when everybody else was doing it petitioner further acknowledged that he was going to try to launch the activity again at a later date thus petitioner’s own candid testimony together with the record as a whole establishes that petitioner was not carrying on an active trade_or_business in or therefore we sustain respondent’s characterization that the business_expenses petitioner reported for are not schedule c trade_or_business_expenses iii petitioner’s schedule a unreimbursed employee business_expenses the holding above however does not end the case as noted in respondent’s notice_of_deficiency some of the expenses that petitioner claimed on schedule c may qualify as schedule a unreimbursed employee business_expenses related to his job at leggett platt consequently we will now examine the business_expenses petitioner reported on schedule c for possible reclassification to schedule a as unreimbursed employee business_expenses a car and truck expenses petitioner deducted dollar_figure in car and truck expenses for for a lexus he placed_in_service on date the date he started his consulting efforts petitioner reported that in he drove the lexus big_number miles for business despite the mileage information petitioner used actual costs to determine his car expense deduction inputting the information regarding his automobile expenses into his computer and relying on his tax preparation software to determine the maximum deductions for depreciation and other car expenses because of the nondeductibility of petitioner’s startup expenses relating to his consulting efforts the only deductible use of an automobile would be in connection with his employment with leggett platt petitioner has not established that he used his car in connection with his employment with leggett platt even if the car expenses were employment related petitioner has also not shown that the expenses were not reimbursable by leggett platt therefore petitioner is not entitled to deduct any of the car and truck expenses as unreimbursed employee business_expenses for b travel and meals and entertainment_expenses petitioner reported dollar_figure of business travel_expenses away from home and dollar_figure of business meals and entertainment_expenses on his schedule c petitioner testified that he paid these expenses in connection with his consulting efforts during three trips he made to asia during we have already found that the expenses petitioner paid in conjunction with his consulting efforts are nondeductible startup expenses further some of the traveling expenses may have been for personal family_expenses petitioner’s mother lives in northern china and his wife’s mother recently moved back to china they also have other relatives in beijing and other cities moreover leggett platt reimbursed petitioner for all of his foreign_travel business_expenses including meals_and_lodging in summary none of petitioner’s traveling expenses are deductible as unreimbursed employee business_expenses instead petitioner’s travel and meals and entertainment_expenses were either nondeductible startup or personal expenses c office expenses and supplies petitioner deducted dollar_figure in office expenses and dollar_figure in supplies on his schedule c petitioner testified that about to percent of these expenditures were for his employment with leggett platt and the remainder were for his consulting efforts because leggett platt did not reimburse petitioner for expenses associated with working from home and because we find that these expenditures were ordinary and necessary business_expenses we apply cohan concluding that petitioner may deduct percent of the expenditures as unreimbursed employee business_expenses for as follows dollar_figure for office expense and dollar_figure for supplies the remaining percent of the expenses are nondeductible startup expenses d home_office expenses generally a taxpayer may not deduct expenses paid in connection with the business use of a home sec_280a however a taxpayer may deduct expenses allocable to a portion of his home if in pertinent part he uses the space exclusively on a regular basis as his principal_place_of_business or as a place of business where he meets patients clients or customers in the normal course of his business sec_280a and b the definition of principal_place_of_business for this purpose includes a portion of the home that the taxpayer uses for the administrative or management activities of his trade_or_business if there is no other fixed location for those activities sec_280a the exclusive use requirement of sec_280a is an all-or-nothing standard 94_tc_348 thus for example if a taxpayer uses his den as the principal place for conducting his attorney business but also uses the den for personal purposes then the taxpayer may not deduct any expenses related to the den s rept pincite 1976_3_cb_49 congress’ intent in enacting sec_280a was to exclude taxpayers from converting otherwise ‘nondeductible personal living and family expenses’ into ‘deductible business expenses’ merely because they had some connection with a business activity hamacher v commissioner supra pincite quoting s rept supra pincite c b vol pincite where a taxpayer uses his home_office for more than one business the taxpayer satisfies the exclusive use test only if each business is one of the types described in sec_280a hamacher v commissioner supra pincite although we found that petitioner’s consulting activities were a nondeductible startup activity we are nonetheless satisfied that petitioner’s consulting activity is of the type described by sec_280a he met potential clients there it was the principal place of his activity and the consulting was not a personal family or living usage similarly as discussed below petitioner’s use of the basement for his work as an employee of leggett platt is also a type of business described by sec_280a accordingly petitioner satisfies the all-or-nothing exclusive use test a taxpayer such as petitioner who is an employee must also satisfy an additional requirement that his exclusive use is for the convenience of his employer sec_280a neither the code nor the regulations define that phrase caselaw however holds that an employee satisfies the requirement when the employee maintains the home_office as a condition of his employment or as necessary for the functioning of the employer’s business or as necessary for the employee to properly perform his duties hamacher v commissioner supra pincite in contrast the home_office must not be ‘purely a matter of personal convenience comfort or economy’ with respect to the employee id quoting 66_tc_515 affd 591_f2d_1273 9th cir petitioner’s activities were essential to leggett platt he was responsible for overseeing the corporation’s asian operations planning and budgeting work these responsibilities required that he conduct telephone calls late at night with leggett platt facilities in asia and that he maintain necessary records for his managerial and administrative duties though petitioner may have enjoyed the convenience and comfort of working from home leggett platt did not furnish him with an office cf tokh v commissioner tcmemo_2001_45 petitioner had nowhere else to regularly and properly perform these responsibilities therefore we conclude that petitioner’s home_office was for the convenience_of_the_employer and overall that petitioner has satisfied the requirements of sec_280a with respect to business use of the home for we must however continue our inquiry to separate the expenses between the deductible expenses he paid with respect to his employment with leggett platt and the nondeductible expenses he paid related to his startup consulting activities furniture repairs and maintenance and utilities petitioner reported on his schedule c that he spent dollar_figure for furniture dollar_figure for repairs and maintenance and dollar_figure for utilities in related to his business use of his basement petitioner testified that he paid these expenditures_for finishing the remodeling and maintaining his basement in as noted earlier petitioner divided about one-half of the basement space into a conference area for his consulting activities the record gives no indication that petitioner used the conference area for his employment with leggett platt accordingly one-half of the basement expenditures are nondeductible startup costs with respect to the other half of the expenditures petitioner testified further that he split his time in the basement office evenly between leggett platt and his consulting activities because we have already found that petitioner’s home_office was for the convenience of his employer petitioner is eligible to deduct the portion of his office expenditures pertaining to leggett platt consequently separating the conference room and excluding one-half of the office expenditures we apply 39_f2d_540 2d cir to conclude that for petitioner may deduct dollar_figure dollar_figure x ½ x ½ of his furniture purchases dollar_figure dollar_figure x ½ x ½ of his basement repairs and maintenance expense and dollar_figure dollar_figure x ½ x ½ of his basement utility expenses as unreimbursed employee business_expenses for the business use of his home the remainder of these expenses for are nondeductible startup expenses computer printer fax and telephone on his schedule c petitioner deducted dollar_figure for a new computer he purchased in dollar_figure in printer expenses dollar_figure for fax expenses and dollar_figure for telephone expenses petitioner testified that he used his computer and printer primarily for my consulting business and that his fax and telephone expenses were split roughly half and half between his consulting activities and his employment with leggett platt sec_280f includes computers and peripherals as listed_property however sec_280f provides an 2deductible in the first year under sec_179 election to expense certain depreciable business_assets exception for computer_or_peripheral_equipment used at a regular place of business including a portion of the home qualifying under sec_280a requiring in pertinent part that the portion of the dwelling_unit must be the principal_place_of_business for the trade_or_business verma v commissioner tcmemo_2001_132 petitioner qualifies for the exception of sec_280f because as noted above his home served as his principal_place_of_business for his employment with leggett platt with respect to the telephone expense a taxpayer may not deduct the cost of basic local_telephone_service for the first telephone line provided to a residence because the expenditure is a personal_expense sec_262 the record is silent as to the number of lines to petitioner’s home respondent made no assertion that petitioner’s telephone expenses related to a first telephone line given petitioner’s work circumstance of residing in massachusetts with responsibility for asian operations and his need to communicate regularly with corporate headquarters in missouri we conclude that a significant portion of the telephone use would have been for long distance calls moreover because of the number of people residing in his home the location of the telephone in an office in the basement beneath a big_number square- foot home and the volume of calls that petitioner made during the evenings and nights we find it highly probable that the telephone expenses petitioner claimed for were for a second telephone line that he maintained exclusively for business returning to the analysis of all of the equipment expenses we apply cohan finding that primarily for my consulting business mean sec_75 percent of the use and that roughly half and half mean sec_50 percent of the use thus petitioner may deduct as unreimbursed employee business_expenses the following items computer expenses of dollar_figure dollar_figure x percent printer expenses of dollar_figure dollar_figure x percent fax expenses of dollar_figure dollar_figure x percent and telephone expenses of dollar_figure dollar_figure x percent the remainder of petitioner’s equipment expenses are nondeductible startup expenses to reflect the foregoing decision will be entered under rule 3also deductible in the first year under sec_179


internal_revenue_service number release date index number ------------------------ --------------------------------------- -------------------------------------------- -------------------------- in re ------------------- ---------------------------------------------- --------------------- ------------------------- ------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b01 plr-137993-04 date date ------------------- ----------------------- -------- -------------------------- ------- ------- ------------------------- ------------- ------------- legend a country b country c year year date dear ------------------- this is in response to your letter dated date requesting a ruling that a's loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in letters dated september and date the information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in country b but became a citizen of country c at birth because of his father’s citizenship in country c a moved to the united_states in year and became a permanent resident_of_the_united_states for employment reasons in year a returned to country c in order to retire upon his return a became subject_to tax on his worldwide income in country c a relinquished his green card expatriated on date plr-137993-04 on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long- term resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that person is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a resident fully liable to income_tax in country b the country in which his father was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we plr-137993-04 conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a's expatriation had for one of its principal purposes the avoidance of such taxes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a's u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely m grace fleeman senior counsel branch office of associate chief_counsel international cc


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 tege eb hw plr-126222-09 date date legend taxpayer --------------------------------------------------- ------------------------ trust ------------------------------------------------------------------------------ ------------------------------------------------------ ------------------------------------ state county ------------ ---------------------- plan ------------------------------------------ ---------------------------------------------------------------------- dear ------------- this is in reply to your letter dated date and subsequent correspondence in which you request various rulings on behalf of taxpayer with respect to plan and trust taxpayer is a school board that oversees the operation of the public schools in county pursuant to state law taxpayer has been delegated the power of eminent_domain taxpayer is a political_subdivision of state plr-126222-09 taxpayer adopted plan as a means of providing medical and prescription drug benefits for its retirees and the survivors and eligible dependents of retirees plan provides benefits through insurance and self-insurance arrangements under plan taxpayer provides post-retirement health_insurance_coverage for retirees of taxpayer who have satisfied certain age service and other requirements taxpayer pays a portion of the premium for health_insurance_coverage for eligible retirees participants are responsible for the remainder of the premium taxpayer represents that there are no pre-tax salary reduction elections under the plan in addition taxpayer represents that plan does not permit a cash-out of unused amounts or a conversion of sick or vacation days to retiree health benefits participants may not salary-reduce to pay for any benefit taxpayer does not currently provide benefits to individuals who do not qualify as a spouse or as a dependent under sec_152 of the internal_revenue_code the code however if the taxpayer extends benefits to a non-spouse or non-dependent taxpayer will take reasonable steps to identify individuals who do not qualify as a spouse or dependent and in accordance with applicable tax law include in the income of related employees the fair_market_value of the coverage relating to any such individual's participation in plan plan provides that each benefit provided by taxpayer under a self-insured medical expense reimbursement plan shall comply with the nondiscrimination requirements of sec_105 and the income_tax regulations thereunder taxpayer created trust to provide a reserve to pay health benefits for its retirees taxpayer is the sole participating employer in trust the income of trust comes from contributions by taxpayer and investment_income employees and retirees do not contribute to trust the funds in trust can only be used for health benefits for retirees in accordance with plan administration costs and the accumulation of a reserve to fund taxpayer’s share of the cost of plan no part of trust’s net_earnings inure to the benefit of any private person private interests do not participate in or benefit from the income of trust investment authority over trust is vested in its trustees the original trustees are employees of taxpayer trustees can be removed and replaced by taxpayer at any time for any reason the trust agreement provides that trustees may participate in an investment pool pursuant to which assets of the trust may be invested with funds of the other trusts created by other governmental employers for the purpose of funding health benefits for current or future retirees trust may be amended or terminated by taxpayer at any time for any reason upon termination of trust assets of trust will be transferred to one or more trust funds provided such trust funds are for the purpose of providing health benefits under plan in plr-126222-09 the event the assets of trust are not transferred to one or more trust funds established for the purpose of providing health benefits in accordance with plan the funds will be transferred to taxpayer in no event will the assets be transferred to an entity that is not a state a political_subdivision of state or an entity the income of which is excluded from taxation under sec_115 of the code law analysis sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of taxpayer a political_subdivision of state providing health benefits to current and former employees of a political_subdivision constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to taxpayer its sole participating employer no private interests participate in or benefit from the operation of trust any distribution of remaining funds in trust to participating retirees upon the dissolution of trust satisfies plr-126222-09 an obligation the participating employers have assumed with respect to providing health benefits to their employees the benefit to the participating employees is incidental to the public benefit see revrul_90_74 sec_301_7701-1 of the procedure and administration regulations provides that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 unless a provision of the code provides for special treatment of that organization sec_301_7701-4 provides that in general an arrangement will be treated as a_trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit if an entity has both associates and a business_purpose it cannot be classified as a_trust for federal_income_tax purposes sec_6012 of the code provides that every trust having for the taxable_year any taxable_income or having gross_income of dollar_figure or over regardless of the amount of taxable_income shall make a return with respect to income taxes under subtitle a sec_61 of the code and sec_1_61-21 of the regulations provide that except as otherwise provided in subtitle a of the code gross_income includes compensation_for services including fees commissions fringe_benefits and similar items sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan sec_1_106-1 of the regulations provides that the gross_income of an employee does not include contributions which his employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries or sickness incurred by him his spouse or his dependents as defined in sec_152 the employer may contribute to an accident_or_health_plan either by paying the premium or a portion of the premium on a policy of accident_or_health_insurance covering one or more of his employees or by contributing to a separate trust or fund including a fund referred to in sec_105 which provides accident and health benefits directly or through insurance to one or more of his employees however if the insurance_policy trust or fund provides other_benefits in addition to accident or health sec_106 applies only to the portion of the contributions allocable to accident or health benefits coverage provided under an accident_and_health_plan to former employees and their spouses and dependents is excludable from gross_income under sec_106 see revrul_62_199 1962_2_cb_38 revrul_82_196 1982_2_cb_53 sec_105 provides that except as otherwise provided in sec_105 amounts received plr-126222-09 by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer sec_105 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts referred to in subsection a if such amounts are paid directly or indirectly to the taxpayer to reimburse the taxpayer for expenses_incurred by him for the medical_care as defined in sec_213 of the taxpayer his spouse and his dependents as defined in sec_152 of the code based on the information submitted and representations made by taxpayer we conclude as follows the income of trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income is excludable from gross_income under sec_115 of the code trust is classified as a_trust for federal_income_tax purposes under sec_301_7701-4 no annual income_tax return is required to be filed by trust pursuant to sec_6012 since any income realized by the trust is excluded from gross_income under sec_115 contributions paid to plan and payments made from plan which are used exclusively to pay for the accident or health coverage of retired employees and their spouses and dependents as defined in sec_152 of the code are excludable from the gross_income of retired employees and retired employees' spouses and dependents under sec_106 and sec_105 of the code no opinion is expressed concerning the federal tax consequences of plan or trust under any other provision of the code other than those specifically stated herein in particular sec_3 of revproc_2009_3 i r b provides that the service will not issue a ruling concerning whether a self-insured_medical_reimbursement_plan satisfies the requirements of sec_105 for a plan_year accordingly no opinion is expressed concerning whether plan satisfies the nondiscrimination requirements of sec_105 of the code and sec_1_105-11 of the regulations this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-126222-09 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely harry beker chief health and welfare branch office of division counsel associate chief_counsel tax exempt and government entities cc


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 b03 plr-139007-16 date date ty ------- legend taxpayer parent_corporation tax_return_preparer date date date date taxable_year dollar_figurex dear --------------- --------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------------------- --- ---------------------------- -------------------------- ------------------- ----------------------- ----------------------- ------- ------------------ this responds to a letter_ruling request dated date submitted on behalf of taxpayer taxpayer requests an extension of time under sec_301_9100-1 and sec_301 of the procedure and administration regulations to make a late election concerning the treatment of success-based fees in accordance with revproc_2011_29 2011_1_cb_746 which requires that a statement be attached to taxpayer's original federal_income_tax return for taxable_year facts on date taxpayer and parent agreed to consummate a transaction with corporation whereby corporation would acquire all of the outstanding_stock in taxpayer the transaction included a series of related and interdependent steps and closed on date as a result of the transaction corporation acquired of the outstanding_stock of plr-139007-16 taxpayer immediately following the transaction taxpayer was related to corporation within the meaning for sec_267 of the internal_revenue_code corporation and its various corporate subsidiaries elected to file a consolidated tax for federal_income_tax purposes as a result taxpayer filed a short tax_year federal_income_tax return for the period ended date pursuant to sec_1_1502-76 of the income_tax regulations the taxable_year tax_return incorrectly stated that it was for the short_period ended date instead of date in the process of investigating or otherwise pursuing the transaction taxpayer engaged the services of certain financial advisers to facilitate the acquisition the financial advisers agreed to be paid only upon successful consummation of the acquisition the success-based fees taxpayer paid the financial advisers dollar_figurex upon the closing taxpayer engaged tax_return_preparer to prepare and timely file the taxable_year federal_income_tax return taxpayer capitalized percent of the success-based fees under sec_263 and treated the remaining percent of the success-based fees as deductible trade_or_business_expenses under sec_162 pursuant to the safe_harbor election under sec_4 of revproc_2011_29 tax_return_preparer however failed to attach the election statement required by sec_4 of the revenue_procedure to taxpayer’s federal_income_tax return subsequently tax_return_preparer discovered that taxpayer’s election statement was not attached to its timely filed original federal_income_tax return as required by revproc_2011_29 tax_return_preparer notified taxpayer in response taxpayer engaged tax_return_preparer to prepare a relief request law sec_263 provides generally that no deduction is allowed for any amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate or any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made sec_1_263_a_-1 of the income_tax regulations provides that no deduction is allowed for an amount_paid to acquire or create an intangible which under sec_1 a - c i and a -4 d i a includes an ownership_interest in a corporation or other entity see also sec_1_263_a_-4 in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized see 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate the business plr-139007-16 acquisition or reorganization transactions described in sec_1_263_a_-5 in general an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances sec_1_263_a_-5 sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 ie a success-based_fee is an amount_paid to facilitate the transaction except to the extent the taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction this documentation must be completed on or before the due_date of the taxpayer's timely filed original federal_income_tax return including extensions for the taxable_year during which the transaction closes section dollar_figure of revproc_2011_29 provides a safe_harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction described in sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 a taxpayer may elect to allocate a success-based_fee between activities that facilitate the transaction and activities that do not facilitate the transaction by treating percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and by capitalizing the remaining percent as an amount that does facilitate the transaction in addition the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized it is this last requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission with this ruling_request to attach the statement required by section dollar_figure of revproc_2011_29 to its return by amending its original filed return and superseding it with a return with the proper election statement completed and attached sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 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 plr-139007-16 requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for extensions of time for regulatory elections other than automatic changes covered under sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the service ii inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer - i 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 ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief 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 plr-139007-16 years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been 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 election provided for in rev pro is a regulatory election as defined under sec_301_9100-1 the commissioner has the authority under sec_301_9100-1 and sec_301_9100-3 to grant an extension of time to file a late regulatory election the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith taxpayer reasonably relied on tax_return_preparer a qualified_tax professional to prepare its federal_income_tax return for taxable_year in addition taxpayer is applying for relief before the missed election statement was discovered by the service taxpayer is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time relief is requested furthermore this is not a situation where taxpayer affirmatively chose not to make the election after having been informed in all material respects of the required election and related tax consequences rather taxpayer intended to take advantage of the safe_harbor provisions in revproc_2011_29 and filed its return for taxable_year reflecting those provisions but failed to include the required election statement finally taxpayer is not using hindsight in requesting relief as no facts have changed since the due_date of the election that now make the election advantageous further based on the facts of the case provided granting an extension will not prejudice the interests of the government taxpayer will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election at this time than taxpayer would have had if the election had been timely made in addition the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected by the election had it been timely made will not be closed by the period of limitations on assessment under sec_6501 before taxpayer's receipt of the ruling granting an extension of time to make a late election ruling based upon our analysis of the facts as represented we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been met plr-139007-16 taxpayer is granted an extension of days from the date of this ruling to file the statement required by sec_4 of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and the proper year- end date and stating the success-based_fee amounts that are deducted and capitalized the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 including whether taxpayer properly included the correct costs as its success-based fees subject_to the election or whether taxpayer's transaction was within the scope of revproc_2011_29 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling should be attached to taxpayer's federal_income_tax returns for the tax years affected alternatively taxpayers filing returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter to the appropriate operating division director enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 sincerely jamie j kim assistant to the branch chief branch income_tax and accounting enclosure copy of the letter for purposes


department of the treasury internal_revenue_service washington d c government entities number release date date january uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a the letter letter in response to your application that proposed an adverse determination explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code section c donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention fo disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you shoutd follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with cade sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements ifyou have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sinoerely robert choi director exempt_organizations rulings agreements enclosures notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person ldentification number contact number fax number employer_identification_number ul tak exempt and covernment entities division date january legend a officer of m b officer of m c officer of m d owner of n m applicant n for-profit business o state p area of state q date r date2 dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 c the basis for our conclusion is set forth below issues does the applicant hereinafter ‘m’ qualify for exemption under sec_504 c of the code facts you m were formed as an unincorporated association in the state of o on date q the preface to your constitution states that you were formed by the parents and teachers of children enrolled at n the principal activity of your group will be fo conduct meetings fundraisers and other not-for-profit functions all money reaised from your endeavors will be used to purchase equipnient and materials and provide activities for children registered at n atticle il of your bylaws states that your purposes are to establish good relations among parents teachers and school administration to provide a vehicle for communication among parents teachers and school administration and to serve the educational process at n by means of moral financial and volunteer support and to enhance the educational opportunities and environment for the students of n per your response dated on r your organization is associated with n a for-profit facility owned by d aand b are officers of m and directors of n cis an officer of m and an employee of n n has four locations in p you are a membership_organization per article ill of your bylaws all parents and guardians teachers aides administrative staff and directors of n are eligible to become a member of m participation in your organization is voluntary as stated by your response of r your activities consist primarily of holding fundraisers to raise revenues as indicated in your statement of activities you will be running fundraisers throughout the year part vill of your application states you will run at least fundraisers a year the parents and employees of n sel the items and you collect the funds the attachment to part iv of your application states that your fundraisers have included sales of candy cosmetics and home decorating items bake sales car washes and christmas programs your revenues are deposited into one account separate from n members attend your meetings to vate on fundraisers and the use of your funds prior to disbursement your revenues are dispersed to purchase equipment and materials and to provide activities for the children at n an attachment to part iv of your application indicates your funds have been used for extra activities and to enhance your curriculum past activities have included fiald trips bus costs rugs materials for special holiday crafts and field days for the children you have already purchased carpets and an outdoor playset for n per your response of r you are providing activities not covered by n and without your organization the extras would not be provided the extras you provide include equipment above what tha company is willing fo provide ’ your response states that parents had been responsible for the costs of the field trips in the past your response also states that you do not have sole discretion over which activities are performed and how funds are used the owner of n approves which activities and equipment purchases will be funded law sec_501 c of the code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious charitable or other purposes as specified in the statute no part of the net eamings may inure to the benefit of any private_shareholder_or_individual regulation c -1 a states thet in order to be exempt as an organization described in sec_501 c of the cade 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 itis not exempt regulation c -1 c provides that an organization will be regarded as ‘operated it engages primarily in activities which exclusively’ for one or more exempt purposes only if 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 regulation c -1 c provides that an organization is not operated exclusively for one of more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals regulation c -1 d ii provides that an organization is not organized and operated exclusively for educational_purposes unless it serves a public rather than a private interest it must not be operated for the benefit of designated individuals or the persons who created it revrul_69_175 1969_1_cb_149 describes an organization formed by the parents of pupils attending a private school exempt under sec_501 of the code all control aver the organization resis in the parents the organization provides bus transportation to and from the school for those children who parents belong to the organization when a group of individuals associate to provide a cooperative service for themselves they are serving a private interest by providing bus transportation for school children under the circumstances described the organization enabies the participating parents to fulfil their individual responsibility of transporting their children to school thus the organization serves private rather than public interests accordingly the organization does not qualify for exemption under sec_501 c revrul_70_533 1970_2_cb_112 the organization was formed to operate a work related child care and development center the center operates in conjunction with an industrial company to provide pre-school age children of factory workers with an educational program and care during the work day company children of parents employed in nearby factories and children of parents recommended through contacts with antipoverty and welfare agencies employment with the company does not give any employee the right to have his child enrolled at the center children are selected on the basis of the financial need of the family and the need of a child for the care and development pragram accordingly it is held that this organization is exempt from federal_income_tax under sec_501 c3 of the cade the center enrolls pre-schaol age children of employees of the the ruling states that in 326_us_279 the supreme court of the united_states interpreted the requirement in sec_501 that an organization be operated exclusively by indicating that in order to fail within the claimed exemption an organization must be devoted to exempt purposes exclusively this plainly means that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number and importance of truly exempt purposes application of law you are made up of a group of parents teachers and directors who have joined together to work cooperatively for the primary objective of providing funds to defray the costs of providing equipment and activities to students attending daycare these costs would otherwise have to be paid for by the parents or guardians of the students therefore your operation indicates that you are primarily serving the interests of the parents and guardians in this way you are similar to the organization described in revrul_69_175 1969_1_cb_149 held to be primarily engaged in activities designed fo fulfil the parental responsibility of its parent members you are distinguishable from the organization described in revrul_70_533 while that organization provided benefits to any child based on financial need your benefits are limited to children of individuals wha have a personal_interest in your organization in addition you provide a private benefit fo n by raising money to buy equipment for n and to pay for activities for students at n thereby promoting its business this private benefit is evident from the fact that n has final approval authority over your disbursements by serving primarily private interests you are not operated exclusively for an exempt_purpose see sec_1_501_c_3_-1 c and c -1 d i of the regulations see also better business bureau supra conclusion based on the facts presented in your application we conclude that you are not tax exempt under sec_501 of the code because you do not meet the aperatianal test cuttined in sec_1 c - of the regulations sec_1 c -1 d i of the income_tax regulations provides that an organization is not organized and operated exclusively for educational_purposes unless it serves a public rather than a private interest an organization will not be so regarded if its net eaming inure in whole or in part ta the benefit of private shareholders or individuals based on the information provided we are not able to conclude that you are operated exclusively for public rather than private purposes despite any charitable purposes your activities may achieve you cannot qualify for tax exemption because more than an insubstantial part of your activities is not in furtherance of exempt purposes accordingly you do not qualify for exemption under sec_501 of the code ‘you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not pravide a basis to reconsider aur determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading ‘regional office appeal must be accompanied by the following dectaration the statement of facts item under penalties of perjury deciare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are trre correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power of attorey and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney allforms and publications mentioned in this letter can be found at www irs gov forms and publications ifyou do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service rs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters mail to deliver to internal_revenue_service eo determinations quality assurance reom p o box cincinnati oh nternal revenue service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements enctosure publication