t c summary opinion united_states tax_court travis l williams and eddie j williams petitioners v commissioner of internal revenue respondent docket nos 23497-11s 23498-11s filed date travis l williams and eddie j williams pro sese shannon edelstone for respondent summary opinion haines judge these consolidated cases were heard pursuant to sec_7463 of the internal_revenue_code in effect when the petitions were filed unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the taxable years at issue and all rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decisions to be entered are not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioners’ federal_income_tax for and years at issue of dollar_figure and dollar_figure respectively and accuracy- related penalties under sec_6662 of dollar_figure and dollar_figure respectively after concessions the issues for decision are whether petitioners are entitled to deduct certain losses from their rental real_estate activity for the years at issue and whether petitioners are liable for accuracy-related_penalties background some of the facts have been stipulated and are so found those exhibits attached to the stipulations which were found admissible are incorporated by this reference petitioners resided in california when the petition was filed in and mr williams worked as a real_estate appraiser and mrs williams worked full time as a supervisor at a technology company mr and mrs all amounts are rounded to the nearest dollar respondent also determined that petitioners were not entitled to deductions for meals and entertainment_expenses medical_expenses and a mortgage interest_expense claimed for either or additionally respondent determined petitioners failed to include in income taxable interest and dividends for petitioners did not address these issues at trial therefore the issues are deemed conceded see rule b the remaining issues are computational and need not be addressed williams together owned real properties including rental properties rental properties during the years at issue several of the rental properties were in arizona and nevada and petitioners used a management company to provide certain services for the rental properties petitioners elected to treat the rental properties as a single activity rental property activity under sec_469 and sec_1_469-9 income_tax regs for the years at issue petitioners timely filed joint federal_income_tax returns for the years at issue on their return petitioners claimed a rental real_estate loss deduction of dollar_figure and on their return they claimed a rental real_estate loss deduction of dollar_figure petitioners’ adjusted_gross_income without the claimed rental real_estate losses exceeded dollar_figure for each year at issue respondent issued a notice_of_deficiency disallowing the claimed rental real_estate loss deductions petitioners timely filed a petition with this court challenging the determinations respondent also made several other determinations that have been conceded see supra note discussion i burden_of_proof generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect see rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving his entitlement to any deductions claimed see 503_us_79 292_us_435 ii passive_activity_losses taxpayers are allowed deductions for certain business and investment_expenses under sec_162 and sec_212 however sec_469 generally disallows the deduction of any passive_activity_loss a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for that year over the aggregate income from all passive activities for the year sec_469 a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 rental_activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 however the rental activities of a taxpayer who is a real_estate_professional under sec_469 are not treated as per se passive activities sec_469 to qualify as a real_estate_professional a taxpayer must satisfy both of the following requirements i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 for couples filing a joint_return the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements id sec_1_469-5t temporary income_tax regs fed reg date sets forth the requirements necessary to establish the taxpayer’s hours of participation as follows the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries although reasonable means may be interpreted broadly a postevent ballpark guesstimate will not suffice 135_tc_365 even if taxpayers fail to qualify as real_estate professionals under sec_469 and must therefore treat losses from their rental properties as passive_activity_losses they may still be eligible to deduct a portion of their losses under sec_469 sec_469 provides a limited exception to the general_rule that passive_activity_losses are disallowed a taxpayer who actively participates in a rental real_estate activity may deduct a loss of up to dollar_figure per year related to the activity the deduction is phased out as adjusted_gross_income modified by sec_469 exceeds dollar_figure with a full phaseout occurring when modified_adjusted_gross_income equals dollar_figure sec_469 petitioners contend that mr williams satisfies the real_estate_professional requirements under sec_469 mr williams testified he spent over hours and more than one-half of his time performing personal services in the rental property activity for each year at issue petitioners failed to introduce documentation or other credible_evidence corroborating mr williams’ testimony petitioners prepared certain logs to substantiate the time mr williams spent performing services in the rental property activity respondent objected to the evidentiary admissibility of the logs on hearsay grounds and the court sustained respondent’s objection after mr williams testified the logs were continued moreover respondent’s cross-examination of mr williams revealed that his testimony was inconsistent with other credible_evidence and unreliable in particular on cross-examination respondent showed that mr williams claimed credit for services actually performed by mrs williams in estimating the number of hours he spent in the rental property activity on cross-examination mr williams also contradicted himself when he claimed that he did not use a management company for the rental properties as petitioners’ tax returns for the years at issue indicated that he had paid a management company for certain services related to the rental properties finally on cross-examination mr williams could not answer how many hours he spent performing services related to his real_estate appraisal business but answered that he definitely spent hours for and hours for in the rental property activity in the absence of corroborating evidence we find his testimony regarding the time he spent performing services in the rental property activity to be self-serving and unreliable see 87_tc_74 see also continued prepared for trial see fed r evid c rule b provides that any evidence deemed by the court to have probative value shall be admissible in a small_tax_case because the logs were prepared for trial and not contemporaneously we find that the logs lack probative value the court thus concludes that the logs are inadmissible chapman glen ltd v commissioner t c __ __ slip op pincite date in short mr williams’ estimates of the time he spent in the rental property activity are at best postevent ballpark guesstimates to which we attach no weight as for the active_participation exception to the passive_loss_rules it is irrelevant because the dollar_figure amount begins to phase out when the taxpayer’s adjusted_gross_income determined without regard to any passive_activity_loss exceeds dollar_figure and is phased out entirely when the taxpayer’s adjusted_gross_income reaches dollar_figure sec_469 without the passive_activity_losses petitioners’ adjusted_gross_income for each year at issue exceeded dollar_figure see moss v commissioner t c pincite therefore they are not entitled to deduct any passive_activity_losses under sec_469 iii accuracy-related_penalties we now turn to the accuracy-related_penalties respondent determined sec_6662 and b imposes a accuracy-related_penalty upon any underpayment_of_tax resulting from a substantial_understatement_of_income_tax an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 respondent bears the burden of production with respect to petitioners’ liability for the accuracy-related_penalties determined in the notice_of_deficiency and must therefore produce evidence that it is appropriate to impose the penalties see sec_7491 see also 116_tc_438 petitioners’ understatement of income_tax as reflected in the notice_of_deficiency is greater than dollar_figure and of the tax required to be shown on the return for each year at issue accordingly respondent has met his burden of production the accuracy-related_penalty is not imposed however with respect to any portion of the underpayment_of_tax if the taxpayer can establish that he acted with reasonable_cause and in good_faith with respect to that portion sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances indicating that a taxpayer acted with reasonable_cause and in good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id petitioners did not address their liability for the accuracy-related_penalty at trial moreover petitioners maintained no contemporaneous books logs or records that substantiate the hours mr williams claims he spent managing the rental properties nor did petitioners otherwise show that they acted with reasonable_cause or in good_faith with respect to the underpayments for the years at issue given the circumstances we find that they did not act with reasonable_cause and in good_faith and therefore we hold petitioners are liable for the accuracy-related_penalties for the years at issue in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decisions will be entered for respondent


department of the treasury internal_revenue_service washington d c usd te ob on date oct o pp ‘es eoot contact person id number telephone number employer_identification_number legend m dear sir or madam this is in reply to your letter requesting several rulings regarding the transfer of the assets of a tax exempt health and welfare fund back to you you have been recognized as exempt from federal_income_tax under sec_501 c of the internal_revenue_code and are a public charity within the meaning of sec_509 a of the code you previously operated a hospital you stopped operating the hospital several years ago and at that point in time you entered into an operating_agreement with several other unrelated health care providers to continue to provide health care in the area and transferred your operations to them these entities have since merged and are now operating as m m has been recognized as exempt under sec_501 of the code and currently is an active medical_care provider and a public charity for purposes of sec_509 you continue to support m in carrying out its mission to provide health care in the region your responsibilities under the operating_agreement include providing funding for capital expenditures and improvements needed for the existing health_care_facility including capital equipment although you intend to continue to operate as a charity you expect to ultimately need few or no employees to carry on your exempt charitable activities while you operated the hospital you established a voluntary employees’ beneficiary association veba to provide for the payment of health and welfare benefits to your hospital employees the veba has been recognized as exempt from federal_income_tax under sec_501 of the code you intend to have the trustees of the veba trust amend its governing instruments to provide that the veba be terminated after the payment of any outstanding claims the remaining funds will be transferred to you and certain of your former employees the amounts to be transferred are based on the amounts originally contributed to the veba by each party you have represented that percent of the funds were contributed by you and percent were contributed by your former employees re as represented in your letter of date the veba will distribute percent of the funds it is holding representing the amount employees contributed to the veba in to m and m will distribute a lump sum payment on a pro_rata basis to each eligible_employee the employees eligible to participate in this transaction are those individuals who were employed by you as of the last day of who are now on the payroll of m or any other organization related directly to m which is still providing services to m your former employees who are not now on the payroll of the new hospital or a similarly situated related employer wili not receive any benefit from this transfer health care plans will not receive any benefit in addition a former employee who does not currently have to contribute to their current you have represented that the new hospital will not receive any benefit from the distribution but will receive a nominal savings on its administrative fee you also represent that the employees who shall benefit from the distribution of assets from the veba have been selected in a manner which does not provide for disproportionate benefits to officers shareholders or highly compensated employees you expect to use the remaining percent of the fund representing your contributions to the veba in to carry on your charitable program as previously stated under the operating_agreement you have with m among other responsibilities you are required to provide the funding for capital expenditures and improvements needed for the healthcare facility including capital equipment you have requested the following rulings whether the adoption of the proposed amendment and subsequent transfer of assets to you and your former employees will cause a retroactive revocation of your veba’s exempt sec_501 designation and whether the percent excise_tax allowed by sec_4976 of the code will apply to the proposed transfer of assets from the veba back to you sec_501 a of the code provides an exemption from federal_income_tax for organizations described in sec_501 sec_501 c of the code describes a voluntary employees’ beneficiary association veba providing for the payment of life sick accident or other_benefits to its members or their dependents or designated beneficiaries and in which no part of its net_earnings inure other than through such payments to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-4 of the income_tax regulations provides that no part of the net_earnings of an employees’ association may inure to the benefit of any private_shareholder_or_individual other than through the payment of permissible benefits whether prohibited inurement has occurred is a question to be determined with regard to all the facts and circumstances re sec_1 c -4 d of the regulations provides that a distribution to members upon the dissolution of the association will not constitute prohibited inurement if the amount distributed to members are is determined pursuant to the terms of a collective bargaining agreement or on the basis of objective and reasonable standards which do not result in either unequal payments to similarly situated members or in disproportionate payments to officers shareholders or highly compensated employees of an employer contributing to or otherwise funding the employees’ association written instrument by which the association was created as amended from time to time provides that on dissolution its assets will be distributed to its members‘ contributing employers or in the absence of such provision the law of the state in which the association was created provides for such distribution to the contributing employers the association is not described in sec_501 c if the association’s corporate charter articles of association trust instrument or other sec_4976 of the code imposes an excise_tax on an employer equal to percent of any disqualified_benefit provided by an employer-maintained welfare_benefit_fund sec_4976 b c of the code defines disqualified_benefit to include any portion of a welfare_benefit_fund reverting to the benefit of the employer sec_4976 of the code provides that sec_4976 does not apply to any amount attributable to a contribution to the fund that is not allowable as a deduction under sec_419 for the taxable_year or any prior taxable_year the information submitted establishes that you intend to terminate the veba you had established to provide for the payment of health and welfare benefits to the employees who worked for you while you operated a hospital you intend to have the veba transfer percent of the funds through m to certain of your former employees and transfer the remaining percent to you to be used to carry on your charitable program you have represented that the employees benefitting from the distribution of assets from the veba have been selected in a manner which does not provide for disproportionate benefits to officers shareholders or highly compensated employees of the employer sec_1 c -4 d of the regulations recognizes that distributing funds to the participants in a terminating veba is an accepted manner of terminating a sec_501 veba -the eligible employees have been selected in a reasonable manner and the transfer will not provide for the payment of disproportionate benefits to the owners or highly compensated employees accordingly it is clear that the transfer of percent of the funds held by the veba to the eligible employees is permissible upon termination of this veba therefore based on the submitted information we have concluded that this aspect of the proposed termination of your veba does not constitute inurement and will not affect in any manner the tax-exempt status of the veba prior to the transfer 09d re because the proposed amendment will provide that on dissolution of the trust trust assets will be distributed to you the veba will be disqualified under sec_501 when the proposed amendment is adopted see section c -4 d of the regulations additionally when the assets are transferred to you the veba will be disqualified under sec_501 c although the adoption of the proposed amendment and transfer of assets will affect the tax-exempt status of the veba they will not affect in any manner the tax-exempt status of the veba prior to the adoption of the proposed amendment and subsequent transfer of assets you also intend to have the veba transfer the remaining percent of the funds in the trust thi sec_67 percent represents the contributions you made into the veba on behalf back to yourself of your employees when you operated a hospital these funds are to be used by you to carry on your current charitable programs which support the operations of m when you transferred these funds to the veba you were acting as an employer and were making contributions to the veba to provide for the payment of health and welfare benefits to your employees as a general_rule the return of any portion of a welfare_benefit_fund for the benefit of an employer is a disqualified_benefit and subject_to the a excise_tax however under sec_4976 the excise_tax does not apply if the amount reverting to the employer is attributable to contributions that were not allowable as a deduction under sec_419 for any_tax year in considering how this provision applies to a tax-exempt employer we note that the sec_4976 excise_tax was enacted to establish a meaningful sanction that would prohibit an employer from deducting contributions to a qualifying trust accumulating the assets in the trust on a tax free basis and subsequently distributing the assets to itself or otherwise misapplying them it was felt that the previously existing sanctions joss of exemption or deductions for future contributions were an insufficient deterrent organization for a contribution to a veba other than in connection with an unrelated_trade_or_business and earnings on amounts held by the tax-exempt employer are not taxed whether or not transferred to a veba in the case of a tax-exempt employer therefore we conclude that amounts contributed to a fund unless directly connected with an unrelated_trade_or_business are not allowable as a deduction under sec_419 within the meaning of sec_4976 accordingly sec_4976 b c does not apply to any assets that may revert to you but no tax deduction is possible for an exempt similarly any savings m could realize by reason of this transfer are not inconsistent with the accomplishment of its exempt purposes accordingly based on the information you have submitted we have concluded that the adoption of the proposed amendment and subsequent transfer of assets to you by the veba and your former employees will not cause a retroactive revocation of the veba’s exempt status under sec_501 of the code and the percent excise_tax allowed by sec_4976 of the code will not apply to the proposed transfer of assets from the veba back to you this ruling is directed only to the organization that requested it sec_6110 j of the code provides that it may not be used or cited as precedent re we are informing your key district_director of this ruling because this letter could help resolve any question about your exempt status you should keep it in your permanent records if you have any question about this ruling please contact the person whose name and telephone number are shown in the heading of this letter reporting requirements please contact your key district_director for other matters including questions concerning sincerely yours signed garland carter garland a carter chief exempt_organizations technical branch


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 corp plr-107989-10 date date legend parent ----------------------------------------------------------- ------------------------------------------------------------- --------------------------- distributing ----------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------ sub ----------------------------------------------------------- ------------------------------------------------------------- ------------------------------------ sub ----------------------------------------------------------- ------------------------------------------------------------- ------------------------------ sub ----------------------------------------------------------- -------------------------------------------------------------- ------------------------------------------------------------- sub ----------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------- sub ----------------------------------------------------------- ---------------------------------------------- plr-107989-10 ------------------------------------------------------------- controlled ------------------------ ----------------------------------------------------------- ------------------------------------------------------------- exchange industry x business a business b business c state a state b a b c ----------------------------------- ------------------------------- ------------------------ ----------------------------------------------------- --------------------------------------------------------------------------------- --------------------------- ------ ------------- ----------------- ---------------- ---------------- dear ------------------ this letter responds to your date request submitted by your authorized representatives for rulings on certain federal_income_tax consequences of the proposed transactions described below the information provided in that request and in later correspondence is summarized below the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the internal distribution and the external distribution each as defined below i satisfy the business_purpose requirement of plr-107989-10 sec_1_355-2 ii are being used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 statement of facts parent is a state a holding_company and the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return parent has approximately a shares of common_stock outstanding which is publicly traded on the exchange it has no other classes of stock and no securities outstanding parent directly owns all of the stock of distributing sub and sub distributing is a state a holding_company that directly owns all of the stock of sub sub sub and controlled distributing has approximately dollar_figureb of notes the notes outstanding which were issued in four separate series because the proposed transactions will likely result in a change_of control and a credit-rating downgrade of distributing under the terms of the notes each note holder will have the right to require distributing to repurchase all or any part of such holder’s note parent through its separate_affiliated_group as defined in sec_355 the parent sag operates three different businesses that are segments of industry x sub and sub are engaged in business a distributing through its separate_affiliated_group as defined in sec_355 the distributing sag is engaged in business b controlled a wholly owned subsidiary of distributing is engaged in business c financial information has been submitted indicating that each of business a business b and business c have had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years because controlled’s economic model is more closely aligned with that of business a and its business is largely dedicated to supplying sub pursuant to the terms of a comprehensive agreement the controlled agreement entered into by sub controlled and certain state regulatory agencies there are significant operational and managerial reasons why parent wants to continue to own and operate controlled after the proposed transactions plr-107989-10 proposed transactions for what are represented to be valid business reasons parent has proposed the following transactions the proposed transactions i ii iii iv v vi parent will issue up to dollar_figurec of new debt distributing will merge with and into a newly formed state b corporation that is wholly owned by distributing the distributing reincorporation the newly formed state b corporation will hold no more than a nominal amount of assets prior to the merger parent has represented that the distributing reincorporation qualifies as a reorganization within the meaning of sec_368 references to distributing will be to the reincorporated entity unless the context otherwise requires distributing will effect a stock split in which each share of distributing common_stock held by parent will be exchanged at a specified conversion ratio for a greater number of shares resulting in parent holding the same number of shares of distributing stock immediately prior to the external distribution as the number of outstanding shares of parent stock at that time the distributing recapitalization in connection with the distributing recapitalization cash will be distributed for any fractional share of distributing stock parent has represented that the distributing recapitalization qualifies as a reorganization within the meaning of sec_368 distributing will distribute all of its controlled stock to parent the internal distribution parent will transfer up to dollar_figurec of cash to distributing the contribution in order to establish the appropriate capital structure for distributing and to assist distributing in satisfying its repurchase obligations under the notes parent will distribute all of its distributing stock to parent’s shareholders the external distribution because of differing retirement benefits certain employees who perform services at controlled are employed by a subsidiary of distributing in connection with the proposed transactions these employees will be transferred to controlled or an indirect subsidiary of parent pursuant to the controlled agreement sub owns certain economic interests with respect to real_property governed by the controlled agreement while controlled owns all other interests and rights with respect to the property notwithstanding that title to plr-107989-10 the real_property is held by sub parent has consistently operated the property in accordance with the terms and conditions of the controlled agreement and the ownership rights described above and for tax purposes has treated sub as owning an economic_interest in the property and controlled as holding beneficial_ownership of all other interests and rights with respect to the property since the execution of the controlled agreement parent intends to correct the title to controlled’s interests and rights in the real_property but any_action taken will not affect how ownership of the interests and rights is reported for tax purposes following the proposed transactions parent distributing controlled and their subsidiaries will continue to provide certain operating services to other members of the parent group and the distributing group that are now being provided between the companies under existing contracts all such services will be provided pursuant to arm’s length contracts in addition in connection with the proposed transactions distributing anticipates entering into a tax_sharing_agreement and a transition services agreement with parent and its subsidiaries further to reassure investors and facilitate a smooth transition following the proposed transactions parent and distributing may share a common chairman of the board for a period of time at a minimum parent expects the chairman’s term to be consistent with the guidance provided in revrul_2003_74 2003_2_cb_77 representations internal distribution the following representations are made regarding the internal distribution 1a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing 1b the five years of financial information submitted on behalf of business b conducted by the distributing sag is representative of the present operations of the business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 1c the five years of financial information submitted on behalf of business c conducted by controlled is representative of the present operations of the business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted plr-107989-10 1d the distributing sag neither acquired_business b nor acquired control of an entity conducting business b during the five-year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part excluding in each case acquisitions that constitute expansions as contemplated by sec_1_355-3 of business b throughout the five-year period ending on the date of the internal distribution the distributing sag will have been the principal_owner of the goodwill and significant assets of business b and it will continue to be the principal_owner following the internal distribution 1e controlled neither acquired_business c nor acquired control of an entity conducting business c during the five-year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the internal distribution controlled will have been the principal_owner of the goodwill and significant assets of business c and it will continue to be the principal_owner following the internal distribution 1f 1g following the internal distribution the distributing sag and controlled will each continue the active_conduct of its business independently and with its separate employees the internal distribution is carried out for the following corporate business purposes to facilitate the external distribution the internal distribution is motivated in whole or substantial part by one or more of these corporate business purposes 1h the internal distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both 1i 1j for purposes of sec_355 immediately after the internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal distribution for purposes of sec_355 immediately after the internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired plr-107989-10 by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal distribution or ii attributable to distributions on distributing stock that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal distribution 1k no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the internal distribution 1l immediately before the internal distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d 1m immediately before the internal distribution distributing will not have an excess_loss_account within the meaning of sec_1_1502-19 in controlled’s stock 1n payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length 1o no two parties to the internal distribution are investment companies as defined in sec_368 and iv 1p the internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation 1q immediately after the internal distribution either no person will hold a percent or greater interest within the meaning of sec_355 in the stock of distributing or controlled who did not hold such an investment immediately before the transaction or neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 1r there is no regulatory legal contractual or economic compulsion or requirement that the contribution be made as a condition of the internal distribution the fact that the value of distributing will decrease as a result of plr-107989-10 the internal distribution was not a consideration in the decision to contribute property to distributing the internal distribution is not contingent on there being contributed to distributing assets having a specified or a roughly specified value contribution and external distribution the following representations are made regarding the contribution and external distribution 2a no part of the consideration to be distributed by parent will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of parent 2b the five years of financial information submitted on behalf of business a conducted by the parent sag is representative of the present operations of the business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 2c the five years of financial information submitted on behalf of business b conducted by the distributing sag is representative of the present operations of the business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted 2d the parent sag neither acquired_business a nor acquired control of an entity conducting business a during the five-year period ending on the date of the external distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the external distribution the parent sag will have been the principal_owner of the goodwill and significant assets of business a and it will continue to be the principal_owner following the external distribution 2e the distributing sag neither acquired_business b nor acquired control of an entity conducting business b during the five-year period ending on the date of the external distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part excluding in each case acquisitions that constitute expansions as contemplated by sec_1_355-3 of business b throughout the five-year period ending on the date of the external distribution the distributing sag will have been the principal_owner of the goodwill and significant assets of business b and it will continue to be the principal_owner following the external distribution plr-107989-10 2f 2g following the external distribution the parent sag and the distributing sag will each continue the active_conduct of its business independently and with its separate employees the external distribution is carried out for the following corporate business purposes to facilitate equity and debt financing by distributing to capitalize on a number of significant growth opportunities available to business b and to improve the fit and focus of business a and business b by resolving inherent internal managerial and operational conflicts the external distribution is motivated in whole or substantial part by one or more of these corporate business purposes 2h the external distribution is not used principally as a device for the distribution of the earnings_and_profits of parent or distributing or both 2i 2j for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of parent stock entitled to vote or percent or more of the total value of shares of all classes of parent stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution or ii attributable to distributions on parent stock that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution 2k the total adjusted_basis of the assets that will be transferred to distributing in the contribution will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by distributing and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by parent from distributing and transferred to parent’s shareholders or creditors pursuant to the plan_of_reorganization plr-107989-10 2l the total fair_market_value of the assets transferred to distributing in the contribution will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by distributing in the contribution and external distribution ii the amount of any liabilities owed to distributing by parent that are discharged or extinguished in the contribution and external distribution and iii the amount of any cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by parent in the contribution and external distribution the fair_market_value of the assets of distributing will exceed the amount of its liabilities immediately_after_the_exchange 2m any liabilities assumed within the meaning of sec_357 by distributing in the contribution were incurred in the ordinary course of business and are associated with the assets being transferred 2n no intercorporate debt will exist between parent and distributing at the time of or subsequent to the external distribution 2o immediately before the external distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further parent’s excess_loss_account if any with respect to the distributing stock will be included in income immediately before the external distribution see sec_1_1502-19 2p payments made in connection with all continuing transactions if any between parent and distributing will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length 2q no two parties to the external distribution are investment companies as defined in sec_368 and iv 2r the external distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in parent or distributing including any predecessor or successor of any such corporation 2s immediately after the external distribution either no person will hold a percent or greater interest within the meaning of sec_355 in the stock of parent or distributing who did not hold such an investment plr-107989-10 immediately before the transaction or neither parent nor distributing will be a disqualified_investment_corporation within the meaning of sec_355 rulings internal distribution based solely on the information and representations submitted we rule as follows on the internal distribution no gain_or_loss will be recognized by distributing on its distribution of the controlled stock in the internal distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of parent upon its receipt of the controlled stock in the internal distribution sec_355 the aggregate basis of the distributing stock and the controlled stock in the hands of parent immediately after the internal distribution will be the same as the basis of the distributing stock in the hands of parent immediately before the internal distribution sec_358 and sec_1_358-1 such basis will be allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and c the holding_period of the controlled stock received by parent in the internal distribution will include the holding_period of the distributing stock with respect to which the internal distribution will be made provided that such distributing stock is held as a capital_asset on the date of the internal distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 contribution and external distribution based solely on the information and representations submitted we rule as follows on the contribution and external distribution the contribution together with the external distribution will constitute a reorganization under sec_368 parent and distributing will each be a_party_to_a_reorganization under sec_368 plr-107989-10 no gain_or_loss will be recognized by parent on the contribution sec_361 no gain_or_loss will be recognized by distributing on the contribution sec_1032 no gain_or_loss will be recognized by parent on the external distribution sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of the shareholders of parent upon the receipt of the distributing stock in the external distribution sec_355 the aggregate basis of the parent stock and the distributing stock in the hands of each parent shareholder immediately after the external distribution will be the same as the basis of the parent stock in the hands of such parent shareholder immediately before the external distribution sec_358 and sec_1_358-1 such basis will be allocated between the parent stock and the distributing stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and c if a parent shareholder that purchased or acquired shares of parent stock on different dates or at different prices is not able to identify which particular share of distributing stock or portion thereof is received with respect to a particular share of parent stock the shareholder may designate which share of distributing stock is received with respect to a particular share of parent stock provided the terms of the designation are consistent with the terms of the external distribution sec_1_358-2 the holding_period of the distributing stock received by parent shareholders in the external distribution will include the holding_period of the parent stock with respect to which the external distribution will be made provided that such parent stock is held as a capital_asset on the date of the external distribution sec_1223 earnings_and_profits will be allocated between parent and distributing in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of the proposed transactions under other provisions of the code or the regulations or the tax treatment of any conditions existing at the time of or effects plr-107989-10 resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding i ii whether the internal distribution and the external distribution satisfy the business_purpose requirement of sec_1_355-2 whether the internal distribution and the external distribution will be used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both and iii whether the internal distribution and the external distribution will be part of a plan or series of related transactions under sec_355 procedural statements 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 your authorized representatives a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely frances l kelly assistant to the branch chief branch office of associate chief_counsel corporate cc


tin department of the treasury north summit st room toledo oh taxpayer_identification_number person to contact id number -------------------------------------- contact telephone number --------------------- contact address internal_revenue_service attn tege eo ------ last date for filing a petition with the united_states tax_court date internal_revenue_service director exempt_organizations number release date uil date date organization addre sec_1 legend tin organization date date date date addre sec_1 addre sec_2 phone no certified mail - return receipt requested dear ------------------ under sec_501 of the internal_revenue_code code as an organization described in sec_501 of the code internal_revenue_service recognition of your status as an organization described in sec_501 of the code is revoked effective date this is a final adverse determination that you do not qualify for exemption from income_tax our adverse determination is made for the following reason s it has not been shown that you are operated exclusively for exempt purposes within the meaning of sec_501 of the code and sec_1_501_c_3_-1 specific facts that contributed to this determination included we requested information and documentation regarding your activities and your finances to determine if you are operated exclusively for qualifying purposes under sec_501 of the code however financial records prior to date are missing the missing records are the subject of a criminal investigation the organization is in chapter bankruptcy and will not resume any charitable operations since its assets are being liquidated to pay creditors sec_1_6001-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 operational_test provides in part primary activities -an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose distribution of earnings -an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals for the definition of the words private_shareholder_or_individual see paragraph c of sec_1_501_a_-1 sec_1_501_a_-1 provides the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization for periods prior to date for which records were missing you failed to provide information to show that you were operated exclusively for exempt purposes and otherwise qualify as an organization described in sec_501 of the code accordingly we concluded that you no longer qualify as an organization described in sec_501 of the code contributions made to you are no longer deductible as charitable_contributions by donors for purposes of computing taxable_income for federal_income_tax purposes see revproc_82_39 1982_2_cb_759 for the rules concerning the deduction of contributions made to you between date and the date a public announcement such as publication in the internal_revenue_bulletin is made stating that contributions to you are no longer deductible you are required to file income_tax returns on forms for the tax years ended -------------- ---------- --------------- --------------- and --------------- they should be filed with this office within days of the date of this letter unless a request for an extension of time is granted send such returns to the following address internal_revenue_service te_ge mc4920dal commerce dallas tx identified in the instructions for those returns income_tax returns for subsequent years are to be filed with the appropriate service_center the processing of income_tax returns and assessment of any taxes due will not be delayed because a petition for declaratory_judgment has been filed under sec_7428 of the code you did not file a request to appeal the proposed revocation to the office_of_regional_director_of_appeals within days of the date of our proposed revocation letter dated date your failure_to_file an appeal constitutes a failure to exhaust your available administrative remedies for purposes of a declaratory_judgment under sec_7428 of the code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the 91st day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the following address united_states tax_court second street nw washington d c the last day for filing a petition for declaratory_judgment is date you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate office located nearest you by calling the number below or by writing to taxpayer_advocate office addre sec_2 phone no not toll free taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate cannot reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling the code we will notify the appropriate state officials of this action as required by sec_6104 of this is a final revocation letter if you have any questions please contact the person whose name and telephone number are shown above enclosures pub sincerely yours r c johnson director eo examinations