office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b07 kmmeola postf-129504-11 third party communication none date of communication not applicable uilc date date to senior attorney cleveland large business international from senior counsel branch income_tax accounting subject cooperatives and sec_267 and a this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend parent system state1 firm a b c d e f g h i date1 date2 date3 date4 ----------------------------------------------------- ----------------------------------- ------ --------------- ------ -------- ----- --------- ---------------------------- ------------------------------ --------------------------------- --- ---------------------------------------------- ------- ------- -------- ---------------------- postf-129504-11 date5 date6 date7 date8 date9 date10 date11 date12 date13 date14 date15 date16 date17 amount a amount b amount c amount d issue ---------- ------------------ ------------------ ------------------ ----------------------- ----------------------- ----------------------------- --------------- ------- --------------------- -------------------------- -------------------------- -------------------------- --------- ------------------ ------------------ ------------------ whether sec_267 and a of the internal_revenue_code irc apply to the patronage_dividends paid_by cooperative e to its related domestic and foreign patrons so that cooperative e may not deduct them under sec_1382 until the amounts are includible in the gross_income of its patrons conclusions sec_267 applies to the patronage_dividends paid_by cooperative e to its related domestic patrons so that it will not be able to deduct them until the amounts are includible in the domestic patrons’ gross_income sec_267 applies to the patronage_dividends paid_by cooperative e to its related foreign patrons so it will similarly not be able to deduct them until the amounts are includible in the foreign patrons’ gross_income subject_to the exceptions and special rules set forth in sec_267 and sec_1_267_a_-3 of the income_tax regulations facts taxpayer parent is the common parent of a consolidated_group of corporations that file a consolidated federal_income_tax return parent also has acquired several domestic corporations that are common parents of their own consolidated groups parent also has many foreign affiliates all of the group members the acquired domestic corporations who are not members of the parent consolidated_group and the foreign affiliates meet the sec_267 requirements for membership in the parent controlled_group postf-129504-11 parent is primarily a holding_company that operates a variety of businesses through its controlled_subsidiaries both domestic and foreign these subsidiaries design manufacture and sell industrial products with strong brand names and proprietary technology in date1 parent owned directly or indirectly approximately a subsidiaries as of date2 parent owned more than b subsidiaries during the late date3 parent hired a consultant to introduce a manufacturing system into one of its manufacturing plants in order to increase efficiency and reduce costs the manufacturing system was later introduced into all of parent’s manufacturing operations parent has further developed and refined this manufacturing system which is now called system the system central office is located in the parent’s headquarters in state1 the system central office is headed by a vice president and has more than c employees stationed across subsidiary plants to provide on-site system improvement services such employees may be reassigned from one subsidiary manufacturing plant to another as needed beginning in date1 parent began implementing the advice received from firm to transfer the system assets and operations out of parent’s consolidated_group and into cooperative e an entity that parent treats as a cooperative under subchapter_t of the irc formation of cooperative e prior to date4 i was a third-tier domestic subsidiary of parent and was part of parent’s consolidated_group i was an inactive corporation wholly-owned by f f was wholly-owned by g which was wholly-owned by parent parent filed a consolidated federal_income_tax return on a calendar_year basis on date4 parent implemented the d tax strategy i redeemed all but one of its common shares held by f i’s certificate of incorporation was then amended and restated to authorize its issuance of b shares of common_stock each of the domestic and foreign subsidiaries of parent that utilized system acquired one share of i’s common_stock for amount a and became shareholders of i after the stock issuance parent’s domestic subsidiaries owned approximately of i’s stock with the remainder owned by its foreign subsidiaries all of which were controlled_foreign_corporations accordingly i was no longer a member of parent’s consolidated_group i also changed its accounting_period from a calendar_year to a fiscal_year ending on date5 i also elected to be taxed as a cooperative under subchapter_t of the irc hereinafter referred to as cooperative e and i’s shareholders automatically became patrons of cooperative e parent’s domestic subsidiaries have never owned an percent or greater interest in cooperative e cooperative e and its patrons use an overall accrual_method of accounting the exam team has confirmed that cooperative postf-129504-11 e and its patrons are members of the same controlled_group as defined in sec_267 cooperative e charges its patrons three types of fees the first type of fee is a fixed fee for centralized services which is based on a formula developed by firm the second type of fee is a procurement fee for cooperative e purchases made on behalf of its patrons the third type of fee is an hourly service fee charged for actual application of the system to the patrons’ operations this hourly service fee is based on a multiple of the salaries and benefits of the system employees assigned to the patron’s operations cooperative e’s past h federal_income_tax returns disclose that the fees cooperative e charged its patrons far exceeded its costs almost of what cooperative e charged was returned as patronage_dividends throughout its h-year history cooperative e paid patronage_dividends to its patrons on date12 of the year following its date5 year end ie ½ months after the close of its fiscal_year with one exception in date13 cooperative e had extra cash and paid a portion approximately of its patronage_dividends in date14 with the remainder being paid on date10 a date after date14 accordingly most of cooperative e’s patronage_dividends were paid ½ months after the close of its fiscal_year for its fiscal years ended date6 date7 and date8 cooperative e deducted patronage_dividends in the amounts of amount b amount c and amount d respectively most of these amounts were not paid to or included in the income of parent’s consolidated_group until ½ months later on date9 date10 and date11 respectively accordingly most of these dividends were not reported as income on parent’s consolidated_returns until date15 date16 and date17 law and analysis sec_267 provides in relevant part that if a by reason of the method_of_accounting of the person to whom the payment is to be made the amount thereof is not unless paid includible in the gross_income of such person and b at the close of the taxable_year of the taxpayer for which but for this paragraph the amount would be deductible under this chapter both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of sec_267 then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross_income of the person to whom the payment is made or if later as of the day on which it would be so allowable but for this paragraph sec_267 provides that the secretary shall by regulations apply the matching principle of sec_267 in cases in which the person to whom the payment is to be made is not a united_states_person postf-129504-11 sec_267 provides that notwithstanding sec_267 in the case of any item payable to a controlled_foreign_corporation as defined in sec_957 or a passive_foreign_investment_company as defined in sec_1297 a deduction shall be allowable to the payor with respect to such amount for any taxable_year before the taxable_year in which paid only to the extent that an amount attributable to such item is includible determined without regard to properly allocable deductions and qualified deficits under sec_952 during such prior taxable_year in the gross_income of a united_states_person who owns within the meaning of sec_958 stock in such corporation sec_1_267_a_-3 of the income_tax regulations provides that except as provided in sec_1_267_a_-3 sec_267 requires a taxpayer to use the cash_method_of_accounting with respect to the deduction of amounts owed to a related_foreign_person an amount that is owed to a related_foreign_person and that is otherwise deductible under chapter thus may not be deducted by the taxpayer until such amount is paid to the related_foreign_person for purposes of this section a related_foreign_person is any person that is not a united_states_person within the meaning of sec_7701 and that is related within the meaning of sec_267 to the taxpayer at the close of the taxable_year in which the amount incurred by the taxpayer would otherwise be deductible sec_1_267_a_-3 provides that sec_1_267_a_-3 applies to otherwise deductible amounts that are of a type described in sec_881 or the rules of sec_1_267_a_-3 provide limited exceptions to the general_rule that requires a taxpayer to the use a cash_basis method_of_accounting sec_1_267_a_-3 provides that the provisions of sec_267 and the regulations thereunder and not the provisions of sec_1_267_a_-3 apply to an amount that is income of the related_foreign_person that is effectively connected with the conduct of a united_states trade_or_business of such related_foreign_person sec_1_267_a_-3 provides that except with respect to interest neither sec_1_267_a_-3 nor sec_267 or a applies to any amount that is income of a related_foreign_person with respect to which the related_foreign_person is exempt from united_states taxation on the amount owed pursuant to a treaty obligation of the united_states such as under an article relating to the taxation of business profits sec_1_267_a_-3 provides that sec_1_267_a_-3 applies to amounts that are income of a related_foreign_person with respect to which the related_foreign_person claims a reduced_rate of united_states income_tax on the amount owed pursuant to a treaty obligation of the united_states such as under an article relating to the taxation of royalties persons are related for purposes of sec_267 if they fall within any of the relationships specified in sec_267 under sec_267 two corporations are related_persons if they are members of the same controlled_group as defined in sec_267 postf-129504-11 sec_267 provides that for purposes of sec_267 the term controlled_group has the meaning given to such term by sec_1563 except that a more than percent shall be substituted for at least percent each place it appears in sec_1563 and b the determination shall be made without regard to subsections a certain insurance_companies and e c stock owned by certain employees' trusts described in sec_401 of sec_1563 sec_267 provides that in the case of any loss from the sale_or_exchange of property between members of the same controlled_group and to which subsection a applies subsection a and d shall not apply to such loss but such loss shall be deferred until the property is transferred outside such controlled_group and there would be recognition of loss under consolidated_return principles or until such other time as may be prescribed by regulations sec_1563 provides that the term controlled_group_of_corporations means any group of one or more chains of corporations connected through stock ownership with a common parent_corporation if a stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of each of the corporations except the common parent_corporation is owned by one or more of the other corporations and b the common parent_corporation owns stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations the regulations promulgated under sec_267 were revised in to harmonize with revisions to the intercompany_transaction regulations of sec_1_1502-13 see t d 1995_2_cb_147 thus sec_1_267_f_-1 uses the nomenclature and adopts many of the concepts underlying sec_1_1502-13 sec_1_267_f_-1 specifies that the purpose of the regulations under sec_267 is to prevent members of a controlled_group from taking into account a loss or deduction solely as the result of a transfer of property between a selling member s and a buying member b sec_1 f - a provides that s's loss or deduction from an intercompany sale is taken into account under the timing principles of sec_1_1502-13 treating the intercompany sale as an intercompany_transaction sec_1_267_f_-1 defines an intercompany sale as a sale exchange or other transfer of property between members of a controlled_group if it would be an intercompany_transaction under the principles of sec_1_1502-13 sec_1 b i defines an intercompany_transaction as a transaction between corporations that are members of the same consolidated_group immediately after the transaction sec_1_1502-13 defines intercompany_transaction as a transaction between corporations that are members of the same consolidated_group immediately postf-129504-11 after the transaction including distributions from subsidiary made to parent with respect to the stock of subsidiary dividend distributions sec_1_1502-13 defines intercompany items as income gain deduction and loss from an intercompany_transaction sec_446 provides that taxable_income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books sec_1_446-1 provides that the term method_of_accounting includes not only the overall_method_of_accounting of the taxpayer but also the accounting treatment of any item sec_1_446-1 states that a change in a method_of_accounting includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan of accounting sec_1_446-1 also provides that although a method_of_accounting may exist under this definition without the necessity of a pattern of consistent treatment of an item in most instances a method_of_accounting is not established for an item without such consistent treatment moreover sec_1 e ii a provides that a material_item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction the key characteristic of a material_item is that it determines the timing of income or deductions 743_f2d_781 11th cir if the accounting practice does not permanently affect the taxpayer’s lifetime taxable_income but does or could change the taxable_year in which taxable_income is reported it involves timing and is therefore a method_of_accounting see knight-ridder newspapers inc f 2d pincite 78_tc_705 revproc_91_31 1991_1_cb_566 at sec_3 sec_1382 provides in relevant part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as patronage_dividends as defined in sec_1388 with respect to patronage occurring during such taxable_year moreover the flush language to sec_1382 provides in relevant part that for purposes of this title any amount not taken into account under the preceding sentence shall in the case of an amount described in be treated in the same manner as an item_of_gross_income and as a deduction therefrom see also sec_1_1382-1 sec_1382 provides in relevant part that for purposes of sec_1382 the payment period for any taxable_year is the period beginning with the first day of such taxable_year and ending with the 15th day of the ninth month following the close of such year sec_1388 provides in relevant part that the term patronage_dividend means an amount_paid to a patron by a cooperative- on the basis of quantity or value of business done with or for such patron under an obligation of such postf-129504-11 cooperative to pay such amount which obligation existed before the cooperative received the amount so paid and which is determined by reference to the net_earnings of the organization from business done with or for its patrons sec_1385 provides that each person shall include in gross_income the amount of any patronage_dividend which is received by him during the taxable_year from a cooperative these amounts are includible in gross_income for the taxable_year in which they are received even though the cooperative organization was allowed a deduction for such amounts for its preceding_taxable_year because they were paid during the payment period for such preceding_taxable_year sec_1_1385-1 in the instant case the following must be established to determine whether sec_267 applies whether cooperative e and its patrons are related_persons within the meaning of sec_267 and whether the timing mismatch of cooperative e’s patronage_dividend deduction and its patrons’ income inclusion of such amount is by reason of the related parties’ methods_of_accounting exam has confirmed that cooperative e and its patrons are members of the same controlled_group for purposes of this analysis it is taken as fact that cooperative e and its patrons are related_persons within the meaning of sec_267 thus the sole issue presented is whether the matching_rule of sec_267 applies to the patronage_dividends paid_by cooperative e to its related domestic patrons and whether the matching_rule of sec_267 and a applies to the patronage_dividends paid_by cooperative e to its related foreign patrons such that cooperative e cannot deduct the amount of the patronage_dividends until the amount is includible in the gross_income of its patrons as an initial matter sec_267 provides that it applies to amounts deductible under this chapter chapter the rules relating to cooperatives are contained in subchapter_t of chapter of the irc moreover a cooperative to which subchapter_t applies is permitted to claim a deduction from gross_income for amounts paid during the payment period to patrons as a patronage_dividend patronage_dividends are to be treated as a deduction for purposes of applying the irc and the regulations thereunder see sec_1_1381-1 and sec_1_1382-2 sec_267 will apply if a transaction between related_persons within the meaning of sec_267 results in the related payor being allowed a deduction under the payor’s accounting_method in a taxable_year earlier than when the related payee is required to include the item in gross_income under the payee’s method_of_accounting in determining whether sec_267 applies cooperative e and its related patrons must have established a method_of_accounting for the treatment of patronage_dividends cooperative e and its related patrons use an overall accrual_method of accounting however the item patronage_dividends is accounted for under the rules of subchapter_t with one exception cooperative e has paid all qualifying patronage postf-129504-11 dividends ½ months following the close of its fiscal taxable_year for h years in accordance with sec_1382 cooperative e has deducted from its gross_income the qualifying patronage_dividends in the current fiscal taxable_year even if paid ½ months following the close of the current fiscal taxable_year for h years the related domestic patrons have included the patronage_dividends paid to them into taxable_income when the amount has been received as permitted under sec_1385 sec_1385 effectively places the related domestic patrons on the cash_method_of_accounting for the item patronage_dividends the accounting practices provided for patronage_dividends under sec_1382 and sec_1385 are methods_of_accounting within the meaning of sec_1_446-1 because they provide the rules for determining the proper time in which a patronage_dividend is allowable as a deduction and includible in gross_income respectively see sec_1 e ii a providing that a change in a method_of_accounting includes a change in the treatment of any material_item used in such overall plan of accounting a material_item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction id moreover cooperative e has established a method_of_accounting for the patronage_dividend deductions for purposes of sec_1_446-1 because it has consistently applied the timing rules of sec_1382 for h years see sec_1_446-1 providing that in most instances a method_of_accounting is not established for an item without such consistent treatment 120_tc_174 aff’d in part and vacated in part sub nom j p morgan chase co v commissioner 458_f3d_564 7th cir citing 53_tc_439 aff’d 443_f2d_965 6th cir describing a method_of_accounting as including a consistent treatment of any recurring material_item whether that treatment be correct or incorrect furthermore the related domestic patrons have established a method_of_accounting for the income item patronage_dividends for purposes of sec_1_446-1 because they have consistently applied the timing rules of sec_1385 for h years see sec_1_446-1 here the distortion in the taxable_year of cooperative e’s a fiscal_year taxpayer patronage_dividend deduction and its related domestic patrons’ calendar_year taxpayers patronage_dividend income inclusion is magnified because the parties have different accounting periods however distortion also arises because of cooperative e and its related domestic patrons’ methods_of_accounting therefore sec_267 is applicable to the instant facts sec_1382 and sec_1385 provide rules for the timing of a cooperative’s patronage_dividend deduction and its patrons’ patronage_dividend income inclusion respectively for example if a cooperative and its patrons both were calendar_year taxpayers a natural timing distortion results from the methods_of_accounting provided for patronage_dividends under subchapter_t therefore it is evident that a portion of the distortion is attributable to cooperative e’s and the related domestic patrons’ methods_of_accounting the legislative_history explains that congress was concerned with the unwarranted tax benefits that arise when related_persons have different postf-129504-11 methods_of_accounting persons who are related should be required to use the same method_of_accounting with respect to transactions between themselves in order to prevent the allowance of a deduction without the corresponding inclusion in income s rep no vol pincite thus sec_267 requires related_persons to use the same accounting_method with respect to transactions between themselves in order to prevent the allowance of a deduction without the corresponding inclusion in income moreover sec_267 and a apply to an amount owed to a related_foreign_person that is otherwise deductible under chapter of the irc and provide special timing rules to determine when this amount may be deducted sec_1_267_a_-3 and sec_267 cooperative e paid patronage_dividends to related foreign patrons ½ months after its fiscal_year end in its taxable years ending date6 date7 and date8 absent an applicable exception to sec_267 cooperative e may not deduct such amounts until its fiscal_year in which they were paid insufficient facts are available to determine if any of the exceptions set forth in sec_1_267_a_-3 - are available or if the special rule for amounts payable to controlled_foreign_corporations as defined in sec_957 in sec_267 applies no opinion is expressed as to the application of sec_1_267_a_-3 to cooperative e’s patronage_dividend deductions attributable to amounts paid to related foreign patrons no opinion is expressed as to whether cooperative e is appropriately treated as a corporation operating_on_a_cooperative_basis within the meaning of subchapter_t of the irc no opinion is expressed regarding the tax treatment of the patronage_dividends paid to the related foreign patrons under either the code or the provisions of any income_tax treaty in addition no opinion is expressed with respect to the potential application of sec_367 and sec_482 to the transactions and payments described herein application of sec_267 to defer cooperative e’s patronage_dividend deduction as an alternative to the sec_267 and a analysis described above cooperative e’s patronage_dividend deduction for amounts paid to related patrons will be deferred under sec_267 the issue is whether cooperative e must defer taking deductions for patronage_dividends that it pays to its related patrons until such time as those dividends are included in the income of its related patrons sec_267 applies here sec_267 defers losses and deductions from certain transactions ie intercompany sales between members of a controlled_group here cooperative e and postf-129504-11 its related patrons are members of parent’s controlled_group see a below moreover cooperative e’s payments of patronage_dividends constitute intercompany sales see b below therefore sec_267 mandates that cooperative e defer taking deductions for patronage_dividends paid until such time as those patronage_dividends are picked up in income by its related patrons a cooperative e and its patrons are members of a controlled_group to prevent tax_avoidance between members of a controlled_group sec_267 defines related parties to include two corporations that are members of the same controlled_group sec_267 sec_267 defines controlled_group for purposes of sec_267 without regard to the limitations of sec_1563 controlled_group has the meaning defined in sec_1563 substituting more than percent of the vote or value for the at least percent test of sec_1563 a controlled_group includes an fsc as defined in sec_922 and excluded members under code sec_1563 but does not include a disc as defined in sec_922 under sec_1563 as modified for this purpose by sec_267 a controlled_group includes a chain of corporations connected through stock ownership with a common parent if more than of the stock by voting power or value of each of the corporations except the common parent is owned by one or more of the other corporations and the common parent_corporation owns more than by voting power or value of the stock of at least one of the corporations here parent is the common parent exam has concluded that the group members the acquired domestic corporations who are not members of the parent consolidated_group and the foreign affiliates all meet the sec_267 requirements for membership in the parent controlled_group b payment of patronage_dividends constitutes intercompany sales sec_1_267_f_-1 defines intercompany sale for purposes of sec_267 as a sale exchange transfer of property between members of a controlled_group if it would be an intercompany_transaction under the principles of sec_1_1502-13 intercompany sale is defined broadly sec_267 applies to far more than sales transactions for example it applies to a loss on an intercompany distribution subject_to sec_311 and sec_1_1502-13 andrew j dubroff et al federal_income_tax of corporations filing consolidated_returns sec_31 a 2d ed in effect the regulatory definition of an intercompany sale conforms to the consolidated_return definition of an intercompany_transaction id at fn the payor’s deduction from an intercompany sale is taken into account under the timing principles of sec_1_1502-13 treating an intercompany sale as an intercompany_transaction under sec_1_1502-13 a distribution with respect to stock is an intercompany_transaction because sec_1_267_f_-1’s definition of intercompany sale conforms to sec_1_1502-13’s definition of intercompany_transaction the patronage_dividends at postf-129504-11 issue here constitute intercompany sales for purposes of sec_267 therefore any deductions taken by cooperative e for the payment of the patronage_dividends must be deferred until such patronage_dividends are taken into account by the related patrons under their method_of_accounting in conclusion because a cooperative e is a member of the parent controlled_group b cooperative e pays patronage_dividends to its related patrons all of whom are also members of the parent controlled_group c payments of patronage_dividends constitute intercompany sales as defined in sec_1_267_f_-1 d sec_1_267_f_-1 requires the payor’s loss or deduction from an intercompany sale to be taken into account under the timing principles of sec_1_1502-13 intercompany_transactions between members of a consolidated_group treating the intercompany sale as an intercompany_transaction and e the matching and acceleration rules of sec_1_1502-13 apply to intercompany_transactions and thus to intercompany sales for purposes of sec_267 sec_267 requires the matching of cooperative e’s deduction for patronage_dividends paid and the related patrons’ inclusion of the corresponding income to apply sec_267 to the facts presented here cooperative e must defer taking deductions for patronage_dividends paid to its related patrons until those related patrons take such patronage_dividends into income case development hazards and other considerations ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ postf-129504-11 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions associate chief_counsel income_tax accounting by ______________________ martin scully jr senior counsel branch income_tax accounting


internal_revenue_service number release date index number -------------------------- ---------------------------------------------- ---------------------------- ----------------------------------- -------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-132801-06 date november -------------------------- ------------------------------------------ ------------------------------------------ ------------------------------------------ legend x -------------------------------------------------- y -------------------------------------------------- z -------------------------------------------------- trust state dear -------------- this responds to a letter dated date submitted on behalf of x y and z by their authorized representatives requesting entity classification rulings under sec_7701 and sec_7704 of the internal_revenue_code the information submitted states that x is a life_insurance_company licensed in states and the district of columbia to provide various life_insurance products annuities mutual funds and other investment products y a wholly owned subsidiary of x is a life_insurance and annuity company that provides a variety of life_insurance products annuities and other investment products to individuals and businesses in all states and the district of columbia -------------------- plr-132801-06 trust is an open-end management investment_company organized under the laws of state the beneficial interests in trust’s property consist of transferable shares shares in multiple segregated portfolios of assets including portfolio z each with separate investments the portfolios support x’s and y’s variable_contracts shares of the portfolios may only be purchased by domestic life_insurance_companies either directly or through separate_accounts of such companies x has nine separate_accounts and y has four separate_accounts premiums received by x and y are allocated to their respective separate_accounts collectively the accounts of x and y own all of the shares of the portfolios and have the right to purchase additional shares or have shares redeemed at any time contract holders may specify in which separate_account the premium is to be invested the benefits x and y pay to the contract holder are determined by reference to the investment return associated with and the market_value of the relevant portfolio supporting the variable_contract however the benefits under the variable_contracts can vary significantly from the value of the shares in the portfolios especially where a contract holder dies before his or her life expectancy the contract holder is typically entitled to a minimum payment regardless of the portfolio’s performance typically a variable_contract cannot be redeemed within a specified period without a penalty nor sold at face value furthermore the shares in the portfolios are owned by the insurance_company issuing the variable_contract for federal_income_tax purposes the contract holder only has claims against the insurance_company issuing the variable_contract and not against the income gains losses or distributions of the portfolios each portfolio is currently a regulated_investment_company ric within the meaning of sec_851 z proposes to elect to be treated as a partnership z requests a ruling that it will be classified as a partnership and not a publicly_traded_partnership x and y make the following representations trust is a business_trust that has never held itself out to be a state law corporation each portfolio is currently a separate ric as defined in sec_851 z will have at least two members x and y investing through their separate_accounts and will elect to be treated as a partnership for federal tax purposes if shares are sold to other insurance_companies the shares will not be held by more than domestic life_insurance_companies if shares are sold to other insurance_companies the shares will only be issued to separate_accounts of domestic life_insurance_companies x and y are and will be treated as the owners of the shares in the portfolios for federal_income_tax purposes the assets of the separate_accounts will be adequately diversified within the meaning of sec_817 and sec_1_817-5 of the income_tax regulations allocations of taxable_income gain loss deductions and credits of the portfolios will be made in accordance with sec_704 and c and except as required by sec_704 plr-132801-06 each holder of a share will be allocated its share of each portfolio’s income or loss which will be composed of a proportionate share of each item of the portfolio’s income or loss public access to z is only available through the purchase of a variable_contract the shares are not and will not be traded on an established_securities_market the shares are not and will not be regularly quoted by any person such as a broker or dealer making a market in the shares no person regularly makes available and will not make available to the public including customers or subscribers bid or offer quotes with respect to the shares or stands ready or will stand ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others no holder of shares has or will have a readily available regular and ongoing opportunity to sell or exchange the shares through a public means of obtaining or providing information of offers to buy sell or exchange shares there is no plan or intention for the redemption of shares by z to be combined with the issuance of shares in z to a new partner partnership ruling sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes sec_301_7701-3 provides that unless it elects otherwise a domestic eligible_entity is classified as a partnership if it has two or more members x and y represent that z will have at least two members and will elect pursuant to sec_301_7701-3 to be classified as a partnership provided z ha sec_2 or more members and makes the entity classification election to be classified as a partnership z will be properly classified as a partnership for federal tax purposes publicly_traded_partnership ruling sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in such partnership are traded on an established_securities_market and interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 an interest in a partnership includes a any interest in the capital or profits of the partnership including the right to partnership_distributions and b any financial plr-132801-06 instrument or contract the value of which is determined in whole or in part by reference to the partnership including the amount of partnership_distributions the value of partnership assets or the results of partnership operations sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 a transfer of an interest in a partnership means a transfer in any form including a redemption by the partnership or the entering into of a financial_instrument or contract described in sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership that are not traded on an established_securities_market within the meaning of sec_7704 and sec_1_7704-1 are readily_tradable on a secondary market or the substantial equivalent thereof if taking into account all of the facts and circumstances the partners are readily able to buy sell or exchange their partnership interests in a manner that is comparable economically to trading on an established_securities_market sec_1_7704-1 provides that for purposes of sec_1_7704-1 interests in a partnership are readily_tradable on a secondary market or the substantial equivalent thereof if i interests in the partnership are regularly quoted by any person such as a broker or dealer making a market in the interests ii any person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to interests in the partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the holder of an interest in the partnership has a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers otherwise have the opportunity to buy sell or exchange interests in the partnership in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership are not traded on an established_securities_market within the meaning of sec_1_7704-1 and are not readily_tradable on a secondary market or the substantial equivalent thereof within the meaning of sec_1_7704-1 even if interests in the partnership are traded or readily_tradable in a manner described in sec_1_7704-1 or c unless the partnership participates in the establishment of the market or the inclusion of its interests thereon or the partnership recognizes any transfers made on the market by i redeeming the transferor partner in the case of a redemption or repurchase by the partnership or ii admitting the transferee as a partner or otherwise recognizing any rights of the transferee such as a right of the transferee to receive partnership_distributions directly or indirectly or to acquire an interest in the capital or profits of the partnership plr-132801-06 the shares sold by x to the segregated_asset accounts of other insurance_companies are interests in the capital or profits of the portfolios therefore the shares are partnership interests for purposes of sec_7704 see sec_1_7704-1 the sale of shares to the segregated_asset accounts of other insurance_companies does not fall within the definition of trading on an established_securities_market as defined in sec_7704 and sec_1_7704-1 additionally shares may only be sold to the segregated_asset accounts of other insurance_companies and i are not regularly quoted by any person such as a broker or dealer making a market in the interests ii no person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to the shares and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the unit holder does not have a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers do not otherwise have the opportunity to buy sell or exchange shares in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 the shares are not traded on an established_securities_market and the shares are not readily_tradable on a secondary market or substantial equivalent thereof therefore based solely on the information submitted and the representations made we conclude that after z elects to be classified as a partnership z will not be a publicly_traded_partnership except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-132801-06 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to z’s authorized representatives sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------- ------------------ ------------------------- in re ------------------------------------------ --------------------------- --------------------------------------------- department of the treasury washington dc person to contact --------------------------------------------- telephone number ------------------- refer reply to cc corp plr-146440-03 date date --------------- legend distributing ------------------------------------------------------------------- controlled --------------------------------------------------------------------------------------- controlled -------------------------------------------------------------------------------------- state x business a ----------------------- date date location location group group dear ---------------- ------------------ ------------- -------------------------- -------------------------- ------------------------------------------------ ----------------------------------- this letter responds to your date request for rulings submitted on behalf of distributing regarding certain federal_income_tax consequences of a proposed transaction additional information was received in a letter dated date the information submitted in date request and in the later correspondence is summarized below summary of facts primarily in business a which it carries on in location and location distributing owned a third location which was sold on date due to lack of profitability distributing has supplied financial information indicating that each location of business a has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years distributing was incorporated on date in state x distributing is engaged plr -146440-03 distributing has one class of stock which is owned equally by the group and group shareholders the group and group shareholders have had continuing disputes and disagreements with respect to the management and operation of business a as conducted by distributing these disputes adversely affect the normal operations of the business the shareholders of these groups have decided to engage in a split-up so that the shareholders may each go their separate way to effect the separation distributing proposes the following transaction distributing will transfer the operating_assets of location to controlled in exchange for all of its stock and the operating_assets of location to controlled in exchange for all its stock cash will be used to equalize differences if any in the net values of assets transferred to controlled or controlled distributing will exchange all of group sec_1’s stock in distributing for all of the stock of controlled and group will receive all of the stock of controlled in exchange for its distributing stock distributing will liquidate after the exchanges are complete controlled and controlled will each be formed as state x corporations the following representations have been made in connection with the proposed transaction a the fair_market_value of the stock of controlled and controlled to be received by the group and group shareholders will be approximately equal to the fair_market_value of the distributing_corporation stock surrendered by the group and group shareholders in the exchange b no part of the consideration distributed by distributing is being received by any shareholder as a creditor employee or in any capacity other than that as a shareholder of distributing c the five years of financial information submitted on behalf of distributing is representative of the corporation's present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted d following the transaction controlled and controlled will each continue independently and with its separate employees the active_conduct of the business conducted by distributing prior to the consummation of the transaction e the distribution of the stock of controlled and controlled is carried out for the following corporate business_purpose to eliminate shareholder disputes that if permitted to continue would jeopardize the operation and continued success of the corporate business by effecting a separation of ownership and management of business a through a split-up the group shareholders will exclusively own and plr -146440-03 operate controlled and the group shareholders will exclusively own and operate controlled the distribution is motivated in whole or substantial part by the forgoing corporate business_purpose f the gross assets of the part of the business to be conducted by controlled immediately after the distribution will have a fair_market_value that is greater than percent of the total fair_market_value of the gross assets of controlled the gross assets of the part of the business to be conducted by controlled immediately after the distribution will have a fair_market_value that is greater than percent of the total fair_market_value of the gross assets of controlled g there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in distributing controlled or controlled after the transaction h there is no plan or intention by distributing controlled or controlled directly or indirectly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 i there is no plan or intention to liquidate controlled or controlled to merge either controlled or controlled with any corporation or to sell or otherwise dispose_of the assets of controlled or controlled after the transaction except in the ordinary course of business distributing will be liquidated after the transaction j the total adjusted_basis and fair_market_value of the assets transferred to controlled and controlled respectively by distributing each equals or exceeds the sum of the liabilities assumed by controlled and controlled plus any liabilities to which the transferred assets are subject the liabilities assumed in the transaction and the liabilities to which the transferred assets were subject were incurred in the ordinary course of business and are associated with the assets being transferred k distributing neither accumulated its receivables nor made any extraordinary payment of its payables in anticipation of the transaction l no intercorporate debt will exist between distributing and either controlled_corporation or between controlled and controlled at the time of or subsequent to the distribution of controlled corporations’ stock m there will be no continuing transactions between controlled and controlled subsequent to the separation plr -146440-03 n no two parties to the transaction are investment companies as defined in sec_368 and iv o the distribution of the stock of controlled and controlled is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of any of distributing controlled1 or controlled or stock possessing or more of the total value of all classes of stock of any of distributing controlled or controlled p for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of 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 either controlled or controlled 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 distribution or ii attributable to distributions on 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 distribution based solely on the information submitted and the representations set forth above we rule as follows the transfer of the distributing assets to controlled and controlled in exchange for all of the stock of the controlled corporations followed by the distribution of the stock of controlled and controlled to the group and group shareholders respectively in exchange for the stock in distributing owned by those shareholders will be a reorganization within the meaning of sec_368 of the code distributing and both controlled corporations will each be a party to the reorganization within the meaning of sec_368 of the code distributing will recognize no gain_or_loss on the transfer of the assets to controlled and controlled sec_361 controlled and controlled will recognize no gain_or_loss on their receipt of the transferred assets sec_1032 plr -146440-03 the basis of the assets received by controlled and controlled will be the same as the basis of the assets in the hands of distributing immediately prior to the transaction sec_362 b the holding_period of the assets transferred to controlled and controlled will include the period during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized by and no amount will be included in the income of the shareholders of distributing upon receipt of the stock of controlled or controlled sec_355 a the basis of stock of controlled in the hands of the group shareholders and the basis of stock of controlled in the hands of group shareholders immediately after the distribution will be the same as the basis of the distributing stock held by those shareholders immediately before the distribution sec_358 a and b the holding_period of controlled stock in the hands of group shareholders and controlled 2’s stock in the hands of group shareholders will include the holding_period of their distributing stock exchanged provided that the distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between controlled and controlled in accordance with sec_312 and sec_1 a no opinion is expressed about the tax treatment of the transaction under any caveats other provision of the code or regulations or the tax treatment any condition existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements 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 the rulings contained in this letter are based upon information and this ruling is directed only to the taxpayer s requesting it sec_6110 of plr -146440-03 the code provides that it may not be used or cited as precedent the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is completed letter is being sent to your taxpayer each taxpayer involved in this transaction should attach a copy of this letter to in accordance with the power_of_attorney on file with this office a copy of this sincerely reginald mombrun reginald mombrun assistant to the branch chief branch corporate cc ------------------------------------------------------------------------------------ ---------------------------------------------------- --------- -------------------------------- ----------------------------


t c memo united_states tax_court julie a oderio petitioner v commissioner of internal revenue respondent docket no filed date julie a oderio pro_se kaelyn j romey for respondent memorandum findings_of_fact and opinion haines judge respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under all amounts are rounded to the nearest dollar sec_6662 for there are two issues for decision the first issue is whether petitioner is entitled to a rental loss deduction for the second issue is whether petitioner is liable for the accuracy-related_penalty findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts together with the attached exhibits is incorporated herein by this reference petitioner resided in california when the petition was filed petitioner was married to and lived with jason oderio at all relevant times during petitioner worked full time as an employee for rreef a real_estate investment_company and did not own more than a interest in rreef also in petitioner had a rental property in san jose california rental property petitioner filed an income_tax return for on the return she claimed a filing_status of married_filing_separately and a deduction for a rental loss of dollar_figure rental loss with respect to the rental property john deboni prepared petitioner’s return mr deboni did not testify and the record does not otherwise reflect his credentials unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the taxable_year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent issued petitioner a deficiency_notice disallowing the claimed rental loss deduction petitioner filed a petition with this court challenging respondent’s determination i burden_of_proof opinion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving otherwise rule a see 290_us_111 the burden_of_proof may shift to the commissioner if the taxpayer proves that he or she has satisfied certain requirements sec_7491 see 122_tc_143 petitioner has neither claimed that the burden shifts to respondent nor shown that she complied with the requirements of sec_7491 the burden_of_proof therefore remains on petitioner see rule a ii disallowed rental loss deduction taxpayers are allowed deductions for certain business and investment_expenses under sec_162 and sec_212 however sec_469 generally disallows the current 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 d a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 rental_activity is generally treated as per se passive regardless of whether the taxpayer materially participates sec_469 however the rental_activity of a taxpayer is not treated as per se passive if the taxpayer satisfies the requirements of sec_469 sec_469 a taxpayer meets the requirements of sec_469 if he or she establishes the following 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 in the case of a joint_return the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements for purposes of the preceding sentence activities in which a spouse materially participates shall be determined under subsection h sec_469 and ii petitioner concedes that she does not separately satisfy the requirements of sec_469 however she argues that her spouse does and therefore she satisfies them too petitioner relies on sec_1_469-9 income_tax regs and sec_1_469-5t temporary income_tax regs fed reg date as support for her argument she contends that under those regulations her spouse’s efforts are attributable to her for purposes of satisfying the requirements of sec_469 regardless of whether the spouses file a joint_return we disagree sec_1_469-5t temporary income_tax regs supra treats the participation of a taxpayer’s spouse in an activity as participation by the taxpayer for purposes of sec_469 and its regulations without regard to whether the spouses file a joint_return sec_1_469-9 income_tax regs clarifies the scope of attribution as it relates to satisfying the requirements of sec_469 it provides in pertinent part spouses filing a joint_return are qualifying taxpayers only if one spouse separately satisfies both requirements of sec_469 in determining the real_property trades_or_businesses in which a married taxpayer materially participates but not for any other purpose under this paragraph c work performed by the taxpayer’s spouse in a trade_or_business is treated as work performed by the taxpayer under sec_1_469-5t regardless of whether the spouses file a joint_return for the year emphasis added the rental real_estate activity of a qualifying taxpayer under sec_1_469-9 income_tax regs is exempt from per se passive_activity_loss treatment sec_1_469-9 income_tax regs the parenthetical but not for any other purpose under this paragraph c limits the use of spousal attribution under sec_1_469-5t temporary income_tax regs supra for purposes of satisfying the sec_469 requirements to the material_participation requirements of that section thus while the sections petitioner cites do allow for spousal attribution with respect to the material_participation requirements of sec_469 they do not as she contends allow for spousal attribution for purposes of meeting its other requirements namely that a taxpayer perform more than one half of his or her personal services and more than hours in real_estate trades_or_businesses respondent argues that because petitioner did not file a joint_return with her spouse she cannot satisfy the sec_469 requirements through her spouse and must separately satisfy them herself we agree the flush language of sec_469 generally states that a taxpayer must separately satisfy its requirements it provides an exception to this general_rule i n the case of a joint_return sec_469 in that special circumstance a taxpayer’s rental_activity is not treated as a per se passive_activity if either spouse meets its requirements id we are mindful of the statutory canon of construction expressio unius est exclusio alterius meaning that if a statute provides specific exceptions to a general_rule we may infer that congress intended to exclude any further exceptions ‘in the absence of contrary legislative intent ’ 499_us_160 quoting 446_us_608 68_tc_413 aff’d sub nom 589_f2d_123 3d cir petitioner does not cite any contrary legislative intent nor do we find any consequently the canon expressio unius est exclusio alterius applies and allows us to infer that congress did not intend any further exceptions to the requirements under sec_469 it follows that taxpayers not filing a joint_return must separately satisfy the requirements of sec_469 our interpretation of sec_469 is bolstered by another well- accepted statutory canon of construction that a statute ought to be construed so that no clause sentence or word is rendered superfluous void or insignificant 533_us_167 see also 412_us_609 a ll parts of a statute if at all possible are to be given effect petitioner’s interpretation of sec_469 would render meaningless the words i n the case of a joint_return that is if a married taxpayer satisfies the sec_469 requirements by virtue of his or her spouse’s satisfying them irrespective of a joint return’s being filed then the words i n the case of a joint_return would not limit modify or otherwise perform any function in the statute we hold that a married taxpayer filing separately must separately satisfy the requirements of sec_469 to avoid per se passive_activity_loss treatment because petitioner has conceded that she does not separately meet all the requirements of sec_469 we sustain respondent’s determination disallowing the rental loss deduction iii accuracy-related_penalty we now turn to respondent’s determination that petitioner is liable for an accuracy-related_penalty on her underpayment for substantially understating her income_tax_liability 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 we note that petitioner is not entitled to deduct her rental losses under sec_469 because she was married and living with her spouse in see sec_469 respondent also determined that petitioner was liable for the accuracy- related penalty because her underpayment was attributable to negligence or disregard of rules or regulations we need not address this ground for imposing the penalty because of our holding that petitioner substantially understated her income_tax for greater of of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 respondent bears the burden of production with respect to petitioner’s liability for any accuracy-related_penalty to meet this burden respondent must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty see 116_tc_438 once respondent sustains his burden of production however petitioner bears the burden of proving that the penalty is unwarranted by establishing an affirmative defense such as reasonable_cause or substantial_authority see id pincite petitioner’s understatement of income_tax as reflected in the notice_of_deficiency is greater than both dollar_figure and of the tax required to be shown on the return for accordingly respondent has met his burden of production the accuracy-related_penalty is not imposed 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 burden is upon the taxpayer to prove reasonable_cause see higbee v commissioner t c pincite we determine whether a taxpayer acted with reasonable_cause and in good_faith by considering the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the taxpayer’s knowledge and experience and the reliance on the advice of a professional sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess the proper tax_liability id petitioner seeks to defend against the accuracy-related_penalty by asserting that she relied on a tax professional in filing her return reliance upon the advice of a professional may demonstrate a taxpayer acted with reasonable_cause and in good_faith 115_tc_43 aff’d 299_f2d_221 3d cir 89_tc_849 aff’d 904_f2d_1011 5th cir aff’d 501_us_868 see sec_1_6664-4 income_tax regs however a taxpayer’s reliance upon the advice of a professional does not automatically constitute reasonable_cause neonatology assocs p a v commissioner t c pincite see sec_1_6664-4 income_tax regs for a taxpayer to reasonably rely on the advice of a professional the taxpayer must show the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite petitioner contends that she relied on mr deboni to prepare her return correctly however petitioner did not call mr deboni as a witness nor did she introduce evidence which would establish that mr deboni possessed the requisite expertise even assuming he did petitioner did not show that she sought or received specific advice concerning her decision to claim the rental loss deduction on a separately filed tax_return for the mere fact that because a tax professional has prepared a tax_return does not mean that he or she has opined on any or all of the items reported on the return see id pincite finally assuming mr deboni advised petitioner on her decision to claim the rental loss deduction petitioner has failed to show among other things that any such advice was based on all the facts and circumstances all the relevant facts were disclosed and any such advice was based on reasonable factual or legal assumptions we find petitioner has not met her burden to show she reasonably relied in good_faith on advice from mr deboni in claiming the rental loss deduction on her return accordingly we sustain respondent’s accuracy-related_penalty determination for 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 decision will be entered for respondent


department of the treasury internal_revenue_service washington d c date feb contact person contact number ope edit o uniform issue list legend d fo t m xx dear sir or madam this is in reply to your letters of date and date for rulings that the transactions described below will not constitute any act of self-dealing under sec_4941 of the internal_revenue_code or any taxable_expenditure under sec_4945 of the code f is exempt from federal_income_tax under sec_501 of the code and is a private_foundation under sec_509 of the code f was created pursuant to the will of decedent d who died in a living_trust created by d during d’s lifetime that is not a part of d's probate_estate m is a trustee of f and of t t is m as of t excepting any against such liabilities incurred t will wind up its affairs by distributing all of its remaining assets of about x dollars to f pursuant to d's will under the state probate code a distributee of amounts from trust t can be required to return amounts distributed to it to the extent that claims arise against the trust including taxes and other claims against the estate or the decedent from which the trust f and t will enter into an agreement whereby f will indemnify t and its acquired its property trustees such such administration intentional misconduct no indemnity payment wili be made unless and until a court with jurisdiction over t under the probate code such as the california probate_court issues its order approving t's entering into this agreement and the payments satisfy such agreement and court order f's taking of such assets will be subject_to a statutory lien by operation of the state probate law pursuant to which f may have to return some or all of the assets received from t to one or more not assets subsequent claims including back taxes could possibly be asserted against t or its transferee f you represent that reasonable efforts have been made to determine any claimant s of t's assets and there are no known substantial claims pending or fiduciaries such as m following t's distribution of its assets to by them in connection with claimants who might establish yet known possible gross negligence or resulting claims from such right the to f gab f t and m request rulings that no act of self-dealing under sec_4941 of the code will arise on account of entering into the agreement or the foundation making payments required under california probate code section under the agreement or otherwise there will not be a taxable_expenditure under sec_4945 of the code with respect to any probate code section under the agreement or california payment made under otherwise sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or the other exempt purposes stated in that section sec_509 of the code describes organizations exempt from federal_income_tax under sec_501 of the code that are private_foundations subject_to the private_foundation provisions of chapter of the code sec_4941 of the code imposes an excise_tax to be paid_by a disqualified_person under sec_4946 of the code as to a private_foundation who participates in an act of self- dealing with such private_foundation section a of the code imposes an excise_tax to be paid_by a private_foundation manager who participates in a disqualified_person where the foundation_manager knows that such act is an act of self-dealing under sec_4941 of the code of self-dealing between a private_foundation and act an sec_4941 of the code provides that an act of self-dealing includes a transfer to or use by a disqualified_person of any assets of a private_foundation sec_4941 of the code and sec_53_4941_d_-2 of the foundation and similar excise_taxes regulations provide that the transfer of or personal_property by a disqualified_person to a private_foundation will be an act of self-dealing if the private_foundation takes the property subject_to a mortgage or similar lien which a disqualified_person placed on the property within the 10-year period ending on the private_foundation the term similar lien includes but is not limited to deeds of trust and vendors’ liens but does not include any other lien if such lien is insignificant in relation to the fair_market_value of the property transferred the date of the transfer to real sec_53 d -2 f of the regulations provide that the existence of an incidental or tenuous benefit to a disqualified_person from the use of the assets of a private_foundation does not constitute an act of self-dealing under sec_4941 of the code x the f_supp n of the contribution as v united_states individual's contribution to in george m underwood jr d texas date an individual made a contribution to a private_foundation subject_to the condition that he could deduct all a charitable donation the the foundation exceeded the service determined that maximum_deductible_amount and disallowed part under the donor's condition of the gift the private_foundation returned to the donor the amount of the contribution that was disallowed as a deduction with the understanding that the individual would contribute the funds to the court held that because the individual's donation was conditioned on the deductibility of the contributions the private foundation's refund of the nondeductible amount to the donor was a return of the amount which the foundation was not entitled to keep and thus such return of the donated pursuant to the conditional gift did not constitute any use of the assets by the foundation or the donor in any act of self-dealing under sec_4941 of the code a donee qualified for the further deductible amount his claimed deduction of sec_4945 a of the code imposes excise_tax to be paid_by a private_foundation that makes a taxable_expenditure under sec_4945 of the code sec_4945 a of the code imposes excise_tax to be paid_by a private_foundation manager who knowingly agrees to make a private foundation's taxable_expenditure under sec_4945 of the code unless such agreement is not willful and is due to reasonable_cause sec_4945 of the code provides that a taxable_expenditure includes any amount expended by a private_foundation for purposes other than purposes under sec_170 b of the code which includes charitable and other exempt purposes sec_53_4945-6 of the regulations provides that a taxable_expenditure under sec_4945 of the code is directed to the type of expenditure for a nonexempt purpose that would cause loss of the private foundation's tax exemption sec_53_4945-6 of the regulations provides that a taxable_expenditure under sec_4945 of the code is not directed to a foundation's reasonable expenses with respect to obtaining funds for its exempt purposes private_foundation f will take the assets from decedent's living_trust t subject_to the condition in the agreement for indemnity that f will return any portion of the assets to any existing but now unknown valid claimant of t's assets for whom there would be a statutory lien on the assets by operation of the state probate law you represent that reasonable efforts over time have been made on behalf of f t and m to determine any claimant s of t's assets and there are no known substantial claims pending a valid claimant arises f's return of some or all of the assets to such valid claimant will be an action required by state law taken with approval by the state court if ie f's duty to refund and indemnify t and or m under the agreement does not constitute a on the property transferred under the agreement within the mortgage or similar lien meaning of sec_4941 of the code although the agreement constitutes a lien on the property in the ordinary sense of the term the term mortgage or similar fien generally involves a volitional act the property whereas the equitable lien arises by operation of law since the agreement merely restates and clarifies the terms of the equitable lien and since any refund will be made only upon a court determination before the refund is made that the trustee has an enforceable lien regardless of the agreement for these expenses against the trust property transferred to f the agreement and any refund under it will not involve a transfer to or use by or for the benefit of a disqualified_person of the income or assets of f the benefit to t or m is incidental to their legal right to indemnification under state law by the disqualified_person in placing the lien on similarly any refunded assets under the agreement will code be expenditures_for noncharitable purposes under will necessary administrative expenses any such refunds will not constitute grants and thus f need not exercise expenditure_responsibility under sec_4945 of the code with respect to them not but section the be of accordingly we rule that as to t and m the making of the agreement and any refund by f to t or m of all or a portion of the distribution f receives in accordance with the agreement will constitute neither an act of self-dealing under sec_4941 of the code nor a taxable_expenditure under sec_4945 of the code and f will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to any refunded assets f except as we have ruled above we express no opinion as to the tax consequences of these transactions under the cited provisions of the code or under any other provisions of the code because this ruling letter could help to resolve any questions please keep it in your permanent records this ruling letter is directed only to the persons who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely signed garland a carter garland a carter manager exempt_organizations technical group on


tax_exempt_and_government_entities_division date sep department of the treasury internal_revenue_service washington d c contact person identification_number telephone number tie c4 8e- employer_identification_number u i l nos legend x y dear sir or madam this is in response to a letter from your authorized representative dated date which amends your letter dated date requesting a series of rulings on your behalf regarding the tax consequences associated with the transactions described below the amended letter you have amended ruling_request number three as set forth and withdrawn ruling requests number four and five in you were established by congress by enabling legislation your purposes as identified in the enabling legislation are to encourage accept and administer private gifts of property for the benefit of or in connection with the activities and services of x and y for the conservation and management of natural_resources to undertake and conduct such other activities as will further the conservation and management of the resources of the united_states and its territories and possessions for present and future generations of americans and to participate with and otherwise assist foreign governments entities and individuals in undertaking and conducting activities that will further the conservation and management of the resources of other countries among the powers granted to you under the enabling legislation are these to invest any funds provided to you by the federal government in obligations of the united_states or in obligations of the united_states or in obligations or securities that are guaranteed or insured by the united_states to deposit any funds provided to you by the federal government into accounts that are insured by an agency_or_instrumentality of the united_states to make use of any interest of investment_income that accrues as a consequence of actions taken under or to carry out your purposes to use federal funds to make payments under cooperative agreements entered into with willing private landowners to provide substantial long-term benefits for the restoration or enhancement of natural_resources on private land unless otherwise required by the instrument of transfer to sell donate lease invest reinvest retain or other wise dispose_of any property or income therefrom to enter into contracts for other arrangements with public agencies and private organizations and persons and to make such payments as may be necessary to carry out its function and to do any and all acts necessary and proper to carry out your purposes your bylaws state that you shall hold and may exercise all such powers as conferred upon you by the enabling legislation and as may be necessary or expedient for the administration of the affairs and attainment of your purposes you received your determination_letter as a sec_501 organization effective date on date you state that in furtherance of your exempt purposes you conduct projects related to conservation education habitat protection and restoration and natural resource management two of your funding sources are from permit fees and enforcement generated funds where selected environmental laws require a party to apply for and receive a permit or license from a government agency that has regulatory authority over affected natural_resources an agency may choose to have money received for the permit fees and licenses deposited into accounts controlled by you rather than into the government’s general fund the agency enters into a contractural agreement fund agreement with you governing the receipt administration and expenditure of the funds at issue you agree to disburse the fund at the direction of the government party or parties to accomplish conservation objectives identified in the fund agreement you invest the funds under the fund agreement typically subject_to investment limitations approved or specified by the government agency federal and state agencies may also choose to have payments of civil or criminal damages or restitution resulting from the enforcement of environmental laws directed to you funds delivered to you are generally used to fund restoration and conservation projects related to the underlying violations the ultimate funding decision is made by the government party consistent with the court order the contractural arrangements used to administer enforcement- generated funds may be in the form of fund agreements similar in form and implementation to the fund agreements for permit fees or trust agreements a fund agreement may cover only permit fees or enforcement-generated funds or it may cover both some fund agreements relate to payments from a single payor while others consist of payments from a number of payors under a_trust agreement a federal or state government agency creates a_trust in most circumstances under the supervision of a court and appoints you as trustee to invest and disburse the trust funds the purpose of each trust is to receive manage and disburse funds for restoration projects related to the underlying incident the trusts may involve one or more state government agencies and some may also involve one or more federal government agencies each trust agreement provides that all interest and earnings accruing to the trust are to be reinvested in the trust and used for the purpose of the trust you have historically retained a one-time payment equal to a modest percentage of the amount_involved which you use to defray your operating costs you had stated that for fund agreements related to permit fees you may modify this feature in the future to provide for multiple payments and differing amounts more reflective of your operating costs you submitted a draft copy of a memorandum of agreement that is to serve as a template for agreements that you enter into with agencies this document which may be modified based upon the circumstances will replace the various fund agreements and trust agreements previously used by you based on the foregoing facts and representations the following rulings have been requested your participation in the agreements does not adversely affect your exempt status your participation in the agreements is substantially related to your exempt purposes earnings on amounts held under the agreements to be expended at the direction of federal and state government agencies are income derived from and related to an exempt_function and not unrelated_business_taxable_income sec_501 of the internal_revenue_code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_501 of the code provides in part for the exemption from federal_income_tax of organizations that are organized and operated exclusively for religious charitable scientific or educational_purposes provided no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 sec_512 of the code defines the term unrelated_business_taxable_income generally as the gross_income received by an exempt_organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_512 of the code excludes from unrelated_business_taxable_income dividends and interest sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by an organization of the purpose or function constituting the basis for its exemption sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish such purposes an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes lessening the burdens of government sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activity has a causal relationship to the achievement of an exempt_purpose and is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for income from a trade_or_business to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations provides that gross_income derived from charges for the performance of exempt functions does not constitute gross_income from the conduct of an unrelated_trade_or_business revrul_67_292 1967_2_cb_184 holds that an organization formed for the purpose of purchasing and maintaining a sanctuary for wild birds and animals for the benefit of the public may qualify as exempt from federal_income_tax under sec_501 revrul_70_186 1970_1_cb_128 holds that an organization formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features qualifies for exemption under sec_501 of the code revrul_76_204 1976_1_cb_152 holds that a nonprofit organization formed for the purpose of preserving the natural environment by acquiring by gift or purchase ecologically significant undeveloped land and either maintaining the land itself with limited public access or transferring the land to a government conservation agency by outright gift or being reimbursed by the agency for its cost qualifies for exemption under sec_501 of the code revrul_85_2 1985_2_cb_178 holds that an organization is lessening the burdens of government if its activities are activities that a governmental_unit considers to be its burdens and the activities actually lessen such governmental burden to determine whether an activity is a burden of government the question to be answered is whether there is an objective manifestation by the government that it considers such activity to be part of its burden the enabling legislation provides for you to undertake and conduct activities that further the conservation and management of natural_resources of the united_states such activities are considered to be charitable within the meaning of sec_501 of the code see revrul_67_292 supra revrul_70_186 supra and revrul_76_204 supra you have been granted recognition for exemption as an organization described in sec_501 of the code in order for you to continue to meet the requirements for recognition of your exemption you must be organized and operated exclusively for charitable purposes sec_1_501_c_3_-1 of the regulations under your bylaws you have the authority to exercise all such powers as may be necessary or expedient for attaining your charitable purposes your agreements with the federal and state governments are the type of activities contemplated by the enabling legislation you assist federal and state agencies in creating funds for managing the monies that the agencies receive for conservation programs the agreements allow you to use your expertise and experience to effectively manage the funds for conservation purposes in addition by assuming responsibility for administering the funds some of which may involve multiple payors or several government agencies you advance the charitable purpose of lessening the burden of the participating government agencies sec_1_501_c_3_-1 of the regulations revrul_85_2 supra thus the activities undertaken by you in connection with the agreements come within the charitable purposes under which you are organized and operated organizations exempt under sec_501 of the code are subject_to a tax on their unrelated_business_income under sec_511 sec_513 of the code defines an unrelated_trade_or_business as one whose conduct is not substantially related to the organization’s exercise or performance of the purpose or function constituting the basis for its exemption the agreements that you enter into with the government agencies are substantially related the accomplishment of your exempt purposes and contribute importantly to the accomplishment of these purposes sec_1_513-1 of the regulations the money deposited into the funds by the government agencies are specifically identified for use in activities related to the conservation of natural_resources such activities are in furtherance of the charitable purposes for which you are organized and operated the payments withheld by you are received in exchange for your management of the funds and are used to defray operating costs therefore your participation in the agreements does not constitute an unrelated_trade_or_business under sec_513 of the code and so does not subject it to tax under sec_511 sec_1_513-1 of the regulations sec_1_513-1 of the regulations the income generated by your investment activity is earned from the exercise or performance of exempt functions and therefore is not subject_to the unrelated_business_income_tax sec_1_513-1 of the regulations you are required to invest the money in the funds the investments generally are subject_to investment limits specified or approved by a government agency or you may be required to reinvest the interest and earnings and use them for the purposes for which a particular fund was established accordingly based on all the facts and circumstances described above we rule as follows your participation in the agreements does not adversely affect your exempt status your participation in the agreements is substantially related to your exempt purposes earnings on amounts held under the agreements to be expended at the direction of federal and state government agencies are income derived from and related to an exempt_function and not unrelated_business_taxable_income these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described we are informing your key district_office of this action please keep a copy of this ruling in your permanent records - this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent because this letter could help resolve any future questions about tax consequences of your activities you should keep a copy of this ruling in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely qvirettl ww brptesiatky terrell m berkovsky manager exempt_organizations technical group