internal_revenue_service number release date index number ------------------------- ------------------------ --------------------------- -------------------------- in re -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ -------- telephone number -------------------- refer reply to cc psi b09 plr-114091-06 date october ------------------------- ------------------------ ------------------------------------------- ------- ------- ------------- --------- legend legend taxpayer spouse trust year year x y dear ---------------------------- this is in response to your letter dated date and subsequent correspondence requesting an extension of time under ' g of the internal_revenue_code and and of the procedure and administration regulations to make allocations of generation-skipping_transfer gst_exemption to a_trust in year taxpayer created trust trust has gst potential in year taxpayer made a gift taxpayer valued at dollar_figurex to trust taxpayer and spouse retained an accountant to prepare their year form sec_709 united_states gift and generation-skipping_transfer_tax returns on these returns taxpayer and spouse elected under ' to treat the gifts made by either of them in year as made one-half by both of them in preparing the form sec_709 accountant inadvertently failed to allocate taxpayer’s and spouse’s gst_exemption to the year gift to trust in year taxpayer and spouse made a gift they valued at dollar_figurey to trust on their year form sec_709 taxpayer and spouse elected under ' to treat the gifts made by either of them in year as made one-half by both of them though taxpayer and spouse did not affirmatively allocate gst_exemption to this gift ' c automatically allocated taxpayer’s and spouse’s gst_exemption to this gift plr-114091-06 taxpayer and spouse are requesting an extension of time pursuant to sec_2642 and sec_301_9100-1 and sec_301_9100-3 to allocate their available gst exemptions to the transfer taxpayer made to trust in year and that the gst exemptions allocated to the transfer will be effective as of the date of the transfer law and analysis sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio sec_2631 in effect at the time of the transfer provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter to a gst_trust sec_2032 is effective for transfers subject_to chapter or made after date see p l sec_561 sec_2632 provides that any portion of an individual's gst_exemption which has not been allocated within the time prescribed by sec_2032 shall be deemed to be allocated as follows-- a first to property which is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death plr-114091-06 sec_26_2632-1 provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_26_2632-1 provides that a decedent's unused gst_exemption is automatically allocated on the due_date for filing form_706 to the extent not otherwise allocated by the decedent's executor on or before that date the automatic allocation occurs whether or not a return is actually required to be filed unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the value of the property as finally determined for purposes of chapter chapter value first to direct skips treated as occurring at the transferor's death the balance if any of unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the chapter value of the non-exempt portion of the trust property or in the case of trusts that are not included in the gross_estate on the basis of the date of death value of the trust to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made the automatic allocation of gst_exemption is irrevocable and an allocation made by the executor after the automatic allocation is made is ineffective sec_2642 provided that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under ' b or c b a the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an etip its value at the time of the close of the etip and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an etip on and after the close of such etip sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant sec_2642 further provides that for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute plr-114091-06 sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of the gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of the gst tax notice_2001_50 2001_2_cb_189 provides that under sec_2624 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer and spouse are granted an extension of time of sixty days from the date of this letter to allocate their available gst exemptions to the transfer taxpayer made to trust in year the allocations will be effective as of the date of transfer the allocations should be made on supplemental form sec_709 for year and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the returns plr-114091-06 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied as to the value for federal transfer_tax purposes of any gifts taxpayer and spouse made to trust this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely william p o’shea william p o'shea acting associate chief_counsel passthroughs special industries enclosures copy for ' purposes copies of the letter


t c summary opinion united_states tax_court bruce r hoffman and debra s hoffman petitioners v commissioner of internal revenue respondent docket no 21050-10s filed date bruce r hoffman and debra s hoffman pro_se christopher a pavilonis and a gary begun for respondent summary opinion goeke judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code code in effect when the petition was filed michael p tyson represented petitioners at trial mr tyson entered his appearance in date and filed a motion to withdraw on date which the court granted on date bruce r hoffman submitted all briefs for petitioners unless otherwise indicated section references are to the internal revenue continued pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies and accuracy-related_penalties for and as follows year deficiency dollar_figure big_number big_number after concessions the issues for decision are penalty sec_6662 dollar_figure big_number big_number continued code in effect at all relevant times rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded to the nearest dollar respondent concedes that petitioners are entitled to a reduction in other income reported on schedule c profit or loss from business of dollar_figure for additionally respondent determined that petitioners are entitled to additional deductions on schedules c for taxes and licenses of dollar_figure dollar_figure and dollar_figure for and respectively we note that respondent listed these additional deductions as an issue on brief but did not provide any argument because respondent allowed the deductions in the notice_of_deficiency made no argument against the deductions and presented no evidence that petitioners were not entitled to additional deductions for taxes and licenses this issue is deemed conceded by respondent see also rule the notice_of_deficiency also included an itemized_deduction computational adjustment and self-employment_tax computational adjustments these issues are to be resolved in the parties’ rule_155_computations consistent with the court’s opinion whether petitioners are entitled to various deductions in excess of those respondent allowed from petitioners’ schedules c for the years at issue we hold that they are not whether petitioners have unreported schedule c gross_receipts or sales for the years at issue we hold that they do whether petitioners are liable for sec_6662 accuracy-related_penalties for the years at issue we hold that they are and whether mrs hoffman is entitled to relief from joint_and_several_liability under sec_6015 we hold that she is background petitioners resided in south carolina at the time they petitioned this court for redetermination of the determined deficiencies and accuracy-related_penalties petitioners filed form sec_1040 u s individual_income_tax_return claiming married_filing_jointly status for and mr hoffman obtained a bachelor’s degree in history from the university of maryland a law degree from southwestern university school of law and a master’s in tax law from new york university mr hoffman has been practicing law since and is admitted to practice in south carolina california district of columbia and before this court during the years at issue mr hoffman was the sole member and manager of the law office of bruce r hoffman llc law office the law office is a general practice with an emphasis in tax estate_planning probate business and real_estate mrs hoffman holds a bachelor’s degree in political science and has no background in finance in and she was a substitute teacher and in she did some work for a newspaper she was not involved with the finances or business operations of the law office during the years at issue sometime in petitioners applied for a residential_loan mr hoffman estimated his monthly income at dollar_figure on the application mrs hoffman signed all relevant loan documents notice_of_deficiency petitioners reported the revenue and expenses attributed to the law office on schedules c of form sec_1040 for the years at issue petitioners reported schedule c gross_receipts or sales attributable to the law office of dollar_figure dollar_figure and dollar_figure for and respectively petitioners reported schedule c total expenses attributable to the law office of dollar_figure dollar_figure and dollar_figure for and respectively on the basis of a bank_deposits analysis respondent determined that petitioners had unreported income in addition respondent disallowed certain deductions that petitioners had claimed on schedules c of the and tax returns schedule c unreported income during the years at issue petitioners maintained bank accounts with bb t and lowcountry national bank in and petitioners maintained a bank account with first citizens bank and in petitioners maintained a bank account with regions bank the bb t account appears to have been the primary account for the law office for and the regions bank account appears to have been the primary account for the law office for respondent subpoenaed petitioners’ bank statements because petitioners did not provide them when requested after reviewing bank statements and interviewing mr hoffman respondent performed a bank_deposits analysis and removed nontaxable items relevant nontaxable items removed include a dollar_figure bb t credit line and dollar_figure in bb t credit card advances for a dollar_figure credit line advance and a dollar_figure in credit card advances for and a dollar_figure first citizens bank advance loan for cumulatively credit card advances after removing nontaxable items respondent determined that petitioners had failed to report additional schedule c gross_receipts or sales of dollar_figure dollar_figure and dollar_figure for and respectively schedule c deductions deductions for the law office for the years at issue include the following expense supplies meals and entertainment insurance other than health travel repairs and maintenance bad_debt office dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number -0- dollar_figure big_number big_number big_number big_number during the audit mr hoffman mailed respondent boxes with copies of checks and invoices in a folder labeled business_expenses for each year at issue the boxes contained no general ledger or spreadsheet or any other document that indicated which expense was deducted under each category in addition mr hoffman testified to substantiate schedule c expenses for the years at issue because documents provided for and were undifferentiated and unorganized respondent allowed expense deductions for and on the basis of the substantiated expenses for after the audit was completed respondent returned all boxes of documents to petitioners respondent allowed deductions for the following schedules c expenses in the amount specified for each year at issue expense supplies meals and entertainment insurance other than health travel repairs and maintenance bad_debt office amount dollar_figure big_number big_number big_number big_number on date respondent issued petitioners a notice_of_deficiency determining deficiencies of dollar_figure dollar_figure and dollar_figure and penalties of dollar_figure dollar_figure and dollar_figure for and respectively petitioners timely petitioned this court for redetermination of the determined deficiencies and accuracy-related_penalties for the years at issue document production on date respondent sent petitioners a letter requesting that they provide documentation to substantiate the expenses disallowed in the notice_of_deficiency and a lso identify which deposits are nontaxable for and petitioners did not provide the information and documents requested on date respondent filed a motion to compel production of documents petitioners objected to respondent’s motion stating that t he irs having already received and had the opportunity to review all this documentation and information it is burdensome and oppressive on petitioners in an order dated date this court found petitioners’ objections to be groundless and ordered them to produce the documents requested in a facsimile dated date respondent informed petitioners that if they needed additional records such as credit card statements they may issue a subpoena to obtain those records and t he tax_court website contains information for issuing a subpoena to third parties petitioners did not subpoena any additional records on date petitioners moved for reconsideration of the date order in their request for reconsideration petitioners sought a protective_order and an extension of time to comply with the date order this court then issued an order dated date denying a protective_order and granting an extension of time the date order stated in relevant part if respondent does not have copies of petitioners’ credit card statements petitioners must obtain those records from their credit card companies or find other evidence to support their position in order to satisfy petitioners’ burden of proving that some of the deposits are nontaxable petitioners first must produce the documents to respondent their failure to do so may result in the court’s refusing to allow petitioners to introduce the requested documents as evidence at trial on date respondent filed a second motion to compel production of documents requesting that petitioners provide documents to substantiate the schedule c expenses for which deductions were disallowed in the notice_of_deficiency for the years at issue petitioners responded that they are analyzing their records beginning in tax_year and moving forward and will provide the documentation requested as they progress before trial this court ordered the parties to exchange any documents or materials they expected to offer into evidence at trial at least days before the first day of the trial session petitioners did not exchange any documents respondent made a motion in limine to exclude petitioners’ documents not exchanged pursuant to the court’s pretrial order at trial this court granted respondent’s motion in limine in part to exclude documents that relate to sec_274 expenses and allowed the introduction of documents that specifically relate to nontaxable income and other deductible expenses continuances petitioners’ case at docket no 12727-10l was originally set for trial beginning date on date petitioners moved to consolidate the case at docket no 12727-10l with the case at hand and moved to continue this court granted petitioners’ motions and set trial for the week of date on date petitioners again moved to continue this court granted petitioners’ motion and set trial for the week of date on date petitioners moved to continue a third time additionally petitioners moved for voluntary dismissal in docket no 12727-10l we granted petitioners’ motion to dismiss on date petitioners moved to have this case conducted as a small_tax_case pursuant to sec_7463 petitioners also reasserted their motion to continue and moved to have this case tried at an upcoming small case trial session rather than the regular case trial session scheduled this court granted petitioners’ motion to have the proceedings conducted as a small_tax_case and denied the motion to continue discussion i presumption of correctness as a general_rule the court will not look behind a notice_of_deficiency to examine the evidence used the propriety of the commissioner’s motives or administrative policy or procedure used in making the determination 79_tc_185 62_tc_324 the rationale for this rule is that a trial before the tax_court is a de novo proceeding and our decision is based on the merits of the record before us and not on the merits of the administrative record 73_tc_394 greenberg’s express inc v commissioner t c pincite we have however recognized two limited exceptions to the general_rule where there is substantial evidence of unconstitutional conduct by the commissioner and in the so-called naked assessment cases involving unreported income where the commissioner introduces no evidence but rests on the presumption of correctness and the taxpayer challenges the notice_of_deficiency on the grounds that it is arbitrary 82_tc_299 aff’d 770_f2d_381 3d cir see also 428_us_433 in neither circumstance has this court held the notice_of_deficiency invalid graham v commissioner t c pincite see riland v commissioner t c pincite jackson v commissioner t c pincite greenberg’s express inc v commissioner t c pincite 61_tc_61 the thrust of petitioners’ argument is that the notice_of_deficiency is invalid because respondent did not summon petitioners’ credit card records and respondent based expense deductions for and on substantiated expense deductions for petitioners contend that the notice_of_deficiency falls into the narrow category of a naked assessment requiring that audit results must be thrown out because no real audit was done we disagree on the basis of petitioners’ income_tax returns for the years at issue records petitioners supplied subpoenaed bank statements and oral testimony respondent determined the deficiencies for the years at issue respondent issued a report explaining that because limited records were provided oral testimony was accepted for numerous items and amounts that were substantiated for were allowed for and because the expenses were recurring respondent’s determination does not constitute a naked assessment and we will not look behind the notice moreover courts have approved the commissioner’s use of estimates assumptions extrapolations and the like in calculating a taxpayer’s income see eg 745_f2d_541 9th cir aff’g tcmemo_1982_371 713_f2d_496 9th cir aff’g davies v commissioner tcmemo_1981_438 extrapolation of information from an earlier year to determine the extent of unreported income for a later year may not be an unreasonable approach depending upon all the facts and circumstances see 975_f2d_534 8th cir aff’g in part rev’g in part tcmemo_1991_140 796_f2d_303 9th cir aff’g tcmemo_1984_601 555_f2d_27 2d cir jackson v commissioner t c pincite further respondent’s use of extrapolation to allow recurring deductions for and was more favorable to petitioners than denying deductions for those years in full the commissioner’s deficiency determination ordinarily is entitled to a presumption of correctness see 324_f3d_1289 11th cir aff’g tcmemo_2001_43 however when the commissioner determines that a taxpayer received unreported income the determination in the notice_of_deficiency must be supported by an evidentiary foundation linking the taxpayer to an income-producing activity see 994_f2d_1542 11th cir aff’g tcmemo_1991_636 the commissioner need only provide a minimal showing that the taxpayer failed to report income id the presumption of correctness applies once the court determines that the commissioner provided the minimal evidentiary showing and the taxpayer bears the burden of proving that the notice_of_deficiency is arbitrary or erroneous see 596_f2d_358 9th cir rev’g 67_tc_672 jackson v commissioner t c pincite dunne v commissioner tcmemo_2008_63 respondent introduced evidence that mr hoffman was the sole member and manager of the law office and deposited proceeds from his law practice into petitioners’ bank accounts with bb t for and and regions for see 87_tc_74 holding that bank_deposits evidence receipt of income accordingly we conclude that respondent laid the requisite minimal evidentiary foundation for the contested unreported income adjustments and that respondent’s determinations are entitled to a presumption of correctness therefore petitioners bear the burden of proving that the notice_of_deficiency was arbitrary or erroneous ii burden_of_proof generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the determinations are erroneous rule a 290_us_111 if however a taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s tax_liability and satisfies the requirements of sec_7491 the burden_of_proof on any such issue shifts to the commissioner sec_7491 sec_7491 requires a taxpayer to demonstrate that he complied with the substantiation requirements maintained all records required under the code and cooperated with reasonable requests for witnesses information documents meetings and interviews see also 116_tc_438 petitioners have neither alleged that sec_7491 applies nor established that they complied with the requirements of sec_7491 to substantiate items to maintain required records and to fully cooperate with respondent's reasonable requests rather petitioners argue that because bank deposit records were used to estimate income when there were income logs and other documentation of income available for all three years means that the presumption of correctness accorded notices of deficiency do not apply here and that the burden should shift to respondent petitioners rely on 58_tc_792 to argue that the burden shifted to r espondent to prove that petitioners had unreported income suarez unlike this case involved a notice_of_deficiency determination based on illegally acquired records from the taxpayer petitioners’ reliance on suarez here is misplaced as respondent’s determination was based on petitioners’ bank deposit records which were lawfully obtained by subpoena thus the burden remains with petitioners to prove that the determinations are erroneous iii unreported income gross_income includes all income from whatever source derived sec_61 taxpayers are required to maintain books_and_records sufficient to establish the amount of their gross_income sec_6001 if the taxpayer fails to do this then the commissioner may reconstruct the taxpayer’s income through the use of any reasonable method see 348_us_121 54_tc_1530 the commissioner’s reconstruction need not be exact but it must be reasonable in the light of all the surrounding facts and circumstances 92_tc_661 a bank_deposits method the bank_deposits method has long been upheld as a reasonable means of determining income where a taxpayer is unwilling or unable to provide adequate books_and_records 96_tc_858 aff’d 959_f2d_16 2d cir fisher v commissioner tcmemo_1997_450 bank_deposits are deemed prima facie evidence of income and the taxpayer bears the burden of showing that the deposits were not taxable_income but were derived from a nontaxable source see 591_f2d_1243 9th cir 94_tc_654 citing tokarski v commissioner t c the commissioner must take into account any nontaxable source or deductible expense of which he has knowledge in reconstructing income using the bank_deposits method see 102_tc_632 after the commissioner reconstructs a taxpayer’s income and determines a deficiency the taxpayer bears the burden of proving that the bank_deposits analysis is unfair or inaccurate see id pincite dileo v commissioner t c pincite the taxpayer must prove that the reconstruction is in error and may do so in whole or in part by proving that a deposit is not taxable see clayton v commissioner t c pincite using the bank_deposits method respondent determined that petitioners had unreported income for the years at issue respondent determined that mr hoffman received dollar_figure dollar_figure and dollar_figure of unreported income related to the law office for and respectively the record indicates that petitioners’ income logs and other documentation of income were not readily understandable petitioners did not produce bank statements when they were requested thus respondent summoned the bank records directly from petitioners’ banks we conclude from the record that respondent reasonably relied on the bank_deposits method to determine petitioners’ income and petitioners bear the burden of proving that respondent’s bank_deposits analysis is unfair or inaccurate see sec_446 petzoldt v commissioner t c pincite sec_1 b income_tax regs b bank_deposits analysis petitioners argue that respondent’s bank_deposits analysis is inaccurate mr hoffman contends that all income was correctly reported and that any additional deposits were from credit card advances mr hoffman however has not provided any documentation or other credible_evidence supporting his contention at trial mr hoffman was asked how he knew specific items were not taxable in response mr hoffman testified that the credit card statements would’ve showed that if respondent summonsed those like i asked respondent removed dollar_figure dollar_figure and dollar_figure in credit card advances from taxable_income for and respectively petitioners offered no objective evidence that any deposits identified by respondent were nontaxable for the years at issue sec_7602 authorizes the commissioner to issue an administrative_summons to compel the taxpayer and third parties with relevant information to produce books_and_records and testify nothing in sec_7602 requires the commissioner to issue a summons petitioners were informed by both respondent and this court that if they wished to obtain their credit card records they had to personally get them from their credit card companies petitioners chose not to subpoena their credit card records and now attempt to rely on records they themselves failed to maintain and subsequently failed to acquire we decline to accept mr hoffman’s self-serving and unverified testimony that certain deposits were nontaxable see tokarski v commissioner t c pincite iv schedule c expenses deductions are a matter of legislative grace with the taxpayer bearing the burden of proving entitlement to the deductions claimed 503_us_79 292_us_435 taxpayers bear the burden of substantiating the amount and purpose of any claimed deduction see 65_tc_87 aff’d 540_f2d_821 5th cir taxpayers are required to maintain sufficient records to establish the amounts of income and deductions sec_6001 higbee v commissioner t c pincite sec_1_6001-1 income_tax regs in some circumstances this court may apply the cohan_rule to estimate an expense that a taxpayer establishes is deductible but does not otherwise substantiate the precise amount of see 39_f2d_540 2d cir this court may apply the cohan_rule however only if the record supplies a basis upon which to estimate the deductible expense see 85_tc_731 sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see 122_tc_305 certain deductions including those relating to travel meals and entertainment are subject_to heightened substantiation requirements see sec_274 in deciding whether a taxpayer has satisfied his or her burden of substantiating a deduction we are not required to accept the taxpayer’s self-serving testimony tokarski v commissioner t c pincite petitioners argue that they have numerous boxes of documents in support of their claim that expenses underlying all their claimed deductions were adequately substantiated and that these boxes should have been admitted into evidence petitioners’ own counsel described the boxes as containing a range of somewhat organized to not organized at all expense information receipts checks their cancelled checks bank statements respondent first requested these substantiating documents from petitioners in date and continued to request documents up until trial in date petitioners however did not comply with respondent’s requests because petitioners did not exchange any documents respondent made a motion in limine to exclude all documents not exchanged we granted respondent’s motion in part stating that we would consider specific documents that are tied to specific points of testimony or that relate to r espondent’s income determinations or would in fact support specific well organized discussions of schedule c expenses that are not subject_to code sec_274 we provided petitioners the opportunity to include documents related to schedule c expenses in a supplemental stipulation of facts to make an offer of proof at trial and to testify as to their expenses petitioners did not avail themselves of this opportunity at trial mr hoffman provided limited testimony regarding expenses which did not establish the general total amount of the business_expenses to allow an estimation under cohan see 200_f3d_785 fed cir we therefore sustain respondent’s disallowance of the claimed deductions in excess of the amounts allowed v sec_6662 penalty the commissioner bears the burden of production on the applicability of an accuracy-related_penalty in that he must come forward with sufficient evidence indicating that it is proper to impose the penalty see sec_7491 see also higbee v commissioner t c pincite once the commissioner meets this burden the burden_of_proof remains with the taxpayer including the burden of proving that the penalty is inappropriate because of reasonable_cause and good_faith see higbee v commissioner t c pincite circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs sec_6662 and b and imposes a accuracy-related_penalty if any part of an underpayment_of_tax required to be shown on a return is due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax the penalty is of the portion of the underpayment_of_tax to which the section applies sec_6662 respondent determined that petitioners are liable for an accuracy-related_penalty under sec_6662 because their underpayments for the years at issue resulted from negligence or disregard of rules or regulations and were due to substantial understatements of income_tax as defined by sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard sec_6662 sec_1 b and income_tax regs ‘negligence’ also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs respondent argues that petitioners’ failure to keep and produce documentation substantiating income and expenses supports the imposition of the accuracy-related_penalty for negligence for the years at issue respondent also argues that as an attorney with specialized knowledge in tax law mr hoffman should have been aware of his duty to maintain adequate_records of income and expenses petitioners do not contend that they acted with reasonable_cause and in good_faith in the preparation of their income_tax returns rather petitioners argue that they had legitimate arguments for all deductions claimed however petitioners failed to present any documentation supporting their claim and petitioners did not present any arguments in brief or at trial relating to specific deductions claimed we agree with respondent consequently we hold that petitioners are liable for accuracy-related_penalties under sec_6662 for the years at issue with the amounts of those penalties to be determined by the parties in their rule_155_computations vi relief from joint_and_several_liability in general married taxpayers who file a joint_return are jointly and severally liable for the tax arising from the return sec_6013 sec_6015 allows a spouse to obtain relief from joint_and_several_liability in certain circumstances except as otherwise provided in sec_6015 the taxpayer bears the burden of proving that she is entitled to sec_6015 relief rule a both the scope and standard of review in cases requesting relief from joint_and_several_liability are de novo 132_tc_203 a taxpayer may seek relief from joint_and_several_liability under sec_6015 if the taxpayer has filed a joint_return for the taxable_year on the return there is an understatement_of_tax attributable to the other taxpayer the taxpayer establishes that in signing the return she did not know and had no reason to know of the understatement taking into account the facts and circumstances it is inequitable to hold the taxpayer liable for the deficiency attributable to the understatement and the taxpayer elects relief from joint_and_several_liability within two years of the beginning of the collection activities these conditions are stated in the conjunctive and the taxpayer must satisfy all five in order to be awarded relief 119_tc_306 aff’d 101_fedappx_34 6th cir respondent contends that mrs hoffman failed to satisfy the third requirement if this case were appealable appeal would lie in the fourth circuit because the court_of_appeals for the fourth circuit has not spoken on this issue we will apply the standard of whether a reasonably prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the tax_liability stated was erroneous or that further investigation was warranted 94_tc_126 quoting 872_f2d_1499 11th cir aff’g t c memo aff’d 992_f2d_1132 11th cir in establishing that she had no reason to know the taxpayer must show that she was unaware of the circumstances that gave rise to the error and was not merely unaware of the tax consequences id pincite 86_tc_228 aff’d 826_f2d_470 6th cir this standard applies to an understatement_of_tax resulting from underreporting income and from improperly claiming deductions bokum v commissioner t c pincite respondent argues that mrs hoffman knew or had reason to know of the understatement_of_tax attributable to the underreporting of gross_receipts on the schedules c because she had signature_authority over the family’s bank accounts and she signed a mortgage application which estimated mr hoffman’s monthly gross_income higher than was reported on the income_tax returns for and mrs hoffman was not involved with the law office business and had no knowledge of the law office income additionally we are not persuaded that an estimate of income on the loan application gave mrs hoffman reason to know of the underreported income a review of the return would have revealed mr hoffman’s reported gross_receipts and claimed business_expense deductions however a review of these items on the return would not necessarily have revealed that mr hoffman’s gross_receipts were underreported or that his expense deductions were overstated see phemister v commissioner tcmemo_2009_201 taking into account all of the facts and circumstances that may be drawn from the record we conclude that it would be inequitable to hold mrs hoffman liable for the deficiencies in tax attributable to mr hoffman accordingly mrs hoffman has satisfied all the requirements for relief under sec_6015 with respect to the understatements of tax for the years at issue we hold that she is entitled to relief under sec_6015 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 because of concessions and computational adjustments decision will be entered under rule


an a a ye ae department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division number release date uil date legend org organization name xx date address address org address identification_number contact telephone number in reply refer to te_ge review staff ein certified mail - return receipt last date for filing a petition with the tax_court march 20xx dear a final adverse determination_letter as to your exempt status under sec_501 c this is of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance the manner in which you operate demonstrates you are transactions operated primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition you operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 you failed to meet the requirements of sec_501 and sec_1 c -1 d in that you failed to establish that you were operated exclusively for an exempt oe purpose rather you were operated for the benefit of private interests and a part of your net_earnings inured to the benefit of outsiders your founder and board members contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter you have appropriately provided forms for december 20xx through 20xx processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by or writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc ‘the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service ms dal kt commerce street dallas tx date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeais office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha a ramirez director eo examinations letter catalog number 34809f schedule no or exhibit year period ended oe 886a department of the treasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items legend org organization name issue xx date xyz state motto motto whether org operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 during 20xx facts overview org org is a xyz not-for-profit corporation chartered on may 20xx the articles of incorporation were amended on july 20xx org applied for recognition as a tax-exempt_organization under sec_501 of the internal_revenue_code irc on form_1023 application_for recognition of tax-exempt status on may 20xx based on the information that org provided in its application_for exemption and on the assumption that org would operate in the manner represented in its application org was recognized as of july 20xx as a tax-exempt_organization as described in sec_501 letter granting an advanced ruling of foundation status classification of a was issued july 20xx the advance_ruling period ended december 20xx application_for recognition of tax-exempt status on its form_1023 org stated its purpose as follows to provide charitable motto to home purchasers that lack the necessary funds to make a down payment but otherwise quality for a mortgage the majority of the recipients of the motto will be first time home purchasers that qualify for a hud mortgage regarding sources of financial support the application stated the following the organization will initially receive a dollar_figure loan from its president direct ongoing future sources of financial support will be derived from fees received by mortgage companies federal returns org filed forms for the calendar years ended 20xx through 20xx org also filed form 1099-misc according to the form_990 that org filed for 20xx revenues received in 20xx consisted of indirect public contributions amounting to dollar_figure payments to mortgage companies for down payments were dollar_figure form 886-acev department of the treasury - internal_revenue_service page -1- schedule no or exhibit year period ended ern 886a department of the ‘i'reasury - internal_revenue_service name of taxpayer 20xx12 org explanation of items legend org organization name xx date xyz state motto motto in 20xx and 20xx org’s only reported activity was that of operating its motto motto program as described in more detail below on part ill of its form_990 for 20xx org states that during 20xx org provides charitable motto to approximately home buyers in 20xx and 20xx org reported that it received dollar_figure and dollar_figure respectively in gross revenue from amounts paid to it by sellers participating in org’s motto program org reported the seller's payments as indirect public donations org also reported that it distributed dollar_figure and dollar_figure respectively in motto to homebuyers for use as down payments and or to pay for closing costs in 20xx and 20xx org’s form_990 part iv line shows that as of december 20xx org had total net assets of dollar_figure operation of org’s motto program motto org through its website flyers advertising and other methods promotes its motto program to builders lenders loan officers mortgage brokers real_estate agents title insurers buyers and sellers many of the participants in org's motto utilize federal housing administration fha financing for their home purchase to qualify for a federally insured mortgage a buyer must make a down payment in a specified minimum amount generally equal to of the purchase_price to qualify under applicable department of housing and urban development hud rules such a buyer may receive gifts to use for the down payment only from a relative employer labor_union charitable_organization close friend governmental agency or public entity the org explains how the motto program works as follows homebuyer obtains approval for a home loan allowing gift funds from a charitable_organization seller builder completes a participating home agreement thi sec_2 decision may be made at anytime by the seller builder org welcomes the enrollment of properties into the program homebuyer chooses a participating home and enters into a contract with seller builder the buyer completes the gift letter and gift funds request forms at this time the lender or realtor normally assists the homebuyer with the completion of these forms the lender ensures that the buyer and seller have properly completed the gift letter participating home agreement and gift funds request and faxes the forms to the org org reviews the forms for completeness and upon approval will countersign and fax the gift letter to lender org wires gift funds to closing office form 886-acrev department of the treasury - internal_revenue_service page -2- schedule no or exhibit year period ended form 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items 20xx12 org legend org organization name xx date xyz state motto motto closing office wires the seller contribution to org within days of successful closing of the loan and faxes a copy of the hud-1 settlement statement to org the closing agent agrees to and the home buyer authorizes the closing agent to return gift funds to org if the sale of the property for which the gift funds were advanced has not closed within four days of the specified date of closing in addition org charges the seller a fee for each property sold seller contributes in the amount of gift funds plus dollar_figure the majority of gifts will be not more than or dollar_figure of the sales_price of the home through org’s motto program buyers receive a gift of the funds that they use for the down payment a house buyer was eligible to participate in org’s motto program only if the buyer purchased a house from a seller that agreed to org’s contractual terms org and sellers entered into agreements that required sellers to pay org an amount equal to the down payment gift that the buyer received under org’s motto program org claimed that the seller’s contribution was not used to provide motto directly to the buyer but the gift funds provide to the buyer are obtained from pre-existing org funds n addition to requiring the seller to pay an amount equal the amount_of_the_gift provided to the house buyer org required sellers to pay org a dollar_figure contribution for general and administrative purposes and to further its efforts to market its down payment gift program educate the general_public about affordable housing opportunities and to provide down payment and or closing cost assistance to other qualified buyers in essence these transactions result in a circular flow of the money org wires gift funds down payment directly to the settlement office designated account on or before the closing date then the seller contribution in the amount of gift funds plus dollar_figure will be delivered to org by wire or overnight mail org does not have any income limitations for its motto program and did not screen applicants for motto based on income the records provided by org did not include data on the buyers’ incomes and gave no indication that org screened on such data rather org’s motto program provided gifts to any homebuyers who qualified for a loan on the stated that there are no income limits imposed by org org org s promotional material and advertising make it clear that anyone is eligible to participate in the program and it is not limited to first-time homebuyers the homebuyers automatically qualify for motto if they qualify for eligible loans such as fha will be owner-occupants of the properties being purchased and the homes being purchased are enrolled in the org program an eligible_loan is any loan program provided by a lender that allows a charitable_organization to provide the homebuyer with gift funds for down payment and or closing costs purposes form 886-a cev department of the treasury - internal_revenue_service page -3- department of the vreasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items 20xx12 org legend org organization name xx date xyz state motto motto any home may enter into the org gift program all that is required is that the seller executes a participating home agreement form agreeing to the seller's responsibilities to participate in the program the seller agrees to make a contribution only when and if their home is sold to a participant in the org gift program in its contract with each seller org labeled the seller's payment to org as both a gift and a contribution these contracts obligate the seller in consideration for participating in org’s program to pay org an amount equal to the amount of the motto received by the buyer the participating home agreement contract which was required to be signed by each participating seller states seller agrees to make a total contribution to org in the amount of __ - this total contribution includes the gift funds for down payment in the amount of payment plus a separate contribution of dollar_figure contributions are made through escrow upon the closing of the above referenced org participating home this participating home agreement shall serve as demand upon the close of escrow down org clearly stated that org and any of its authorized agents do not evaluate or warrant the condition of the property or the value of the property and have made no representations either expressed or implied as to property condition or value homebuyer to determine the property condition and value the property being purchased must meet lender loan requirements all lenders required repairs if any must be completed in accordance with applicable guidelines and as agreed to between the seller and buyer it is the sole responsibility of the the parties to the real_estate agents builders and lenders benefited more than incidentally from org’s operations the promotional material of org quoted below clearly demonstrates this benefit real_estate transactions including sellers buyers lenders e e e e increases the number of people who can qualify for a home increases your marketing opportunities brings additional buyers to the marketplace increases your originations and fundings real_estate agents increases the number of people who can qualify for a home increases your marketing opportunities brings additional buyers to the marketplace increases your sales and listings e e e builder seller increases the number of people who can qualify for your home increases your exposure decreases your marketing time maximizes your net_proceeds e e e form 886-a crev department of the treasury - internal_revenue_service page -4- form 886a department of the t'reasury - internal_revenue_service schedule no or name of taxpayer 20xx12 exhibit year period ended explanation of items org legend org organization name law and analysis xx date xyz state motto motto sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual see sec_501 sec_1_501_c_3_-1 of the income_tax regulations provides that an organization operates exclusively for exempt purposes only if accomplish exempt purposes specified in sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of a single exemption regardless of the number or importance of truly exempt purposes nonexempt purpose if substantial in nature will destroy the it engages primarily in activities that sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests sec_1_501_c_3_-1 defines the term charitable for sec_501 purposes as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education id sec_1 c -1 d i provides in part that the term educational for sec_501 purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 if the trade_or_business furthers an exempt_purpose and if the organization’s primary purpose does not consist of carrying on an unrelated_trade_or_business in easter house v unied states cl_ct aff'd 846_f2d_78 fed cir the u s court of federal claims considered whether an organization that provided prenatal care and other health-related services to pregnant women including delivery room assistance and placed children with adoptive parents qualified for exemption under sec_501 the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health-related services were merely incident to the form 886-aev department of the treasury - internal_revenue_service page -5- schedule no or exhibit year period ended ean 886a department of the reasury - internal_revenue_service name of taxpayer explanation of items 20xx12 org legend org organization name xx date xyz state motto motto organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization’s sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits in addition although the organization provided health care to indigent pregnant women it only did so when a family willing to adopt a woman's child sponsored the care financially accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite in 92_tc_1053 the court held that an organization that operated a school to train individuals for careers as political campaign professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization's graduates worked in campaigns for the party's candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non- profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization’s activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 c form 886-a ev department of the treasury - internal_revenue_service page -6- form 886a department of the treasury - internal_revenue_service schedule no or name of taxpayer exhibit year period ended explanation of items 20xx12 org legend org organization name xx date xyz state motto motto in 283_fsupp2d_58 d d c 20xx the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir holding that a religious_organization which ran restaurants and health food stores in furtherance of its health ministry did not qualify for tax-exempt status because it was operated for substantial commercial purposes and not for exclusively exempt purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged in revrul_67_138 the organization carried on several activities directed to assisting low-income families obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_70_585 1970_2_cb_115 discussed four situations of organizations providing housing and whether each qualified as charitable within the meaning of sec_501 situation described an organization formed to construct new homes and renovate existing homes for sale to low-income families who could not obtain financing through conventional channels the organization also provided financial aid to low-income families who were eligible for loans under a federal housing program but did not have the necessary down payment the organization made rehabilitated homes available to families who could not qualify for any type of mortgage when possible the organization recovered the cost of the homes through very small periodic_payments but its operating funds were obtained from federal loans and contributions from the general_public the revenue_ruling held that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation described an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open-occupancy basis the housing was made available to members of minority groups who were unable to obtain adequate housing because of local discrimination the housing units were located to help reduce racial and ethnic imbalances in the community as the activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions the revenue_ruling held that the organization was engaged in charitable activities within the meaning of sec_501 form 886-a crev department of the treasury - internal_revenue_service page -7- borin 886a department of the ‘l'reasury - internal_revenue_service schedule no or exhibit year period ended name of taxpayer 20xx12 org explanation of items legend org organization name xx date xyz state motto motto situation described an organization formed to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community the median income level in the area was lower than in other sections of the city and the housing in the area generally was old and badly deteriorated the organization developed an overall plan for the rehabilitation of the area sponsored a renewal project and involved residents in the area renewal plan the organization also purchased an apartment building that it rehabilitated and rented at cost to low and moderate income families with a preference given to residents of the area the revenue_ruling held that the organization was described in sec_501 because its purposes and activities combated community deterioration situation described an organization formed to alleviate a shortage of housing for moderate- income families in a particular community the organization planned to build housing to be rented at cost to moderate-income families the revenue_ruling held that the organization failed to qualify for exemption under sec_501 because the organization’s program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revenue_ruling 20xx-27 20xx-21 c b in part discusses whether motto organizations described in situations operate exclusively for charitable purposes those described in situation sec_1 and are relevant to this discussion the organization described in situation helps low-income families to purchase decent and safe homes in the metropolitan area in which it is located individuals are eligible to participate if they have the employment history and financial history to qualify for a mortgage with the exception that they do not have the funds necessary for down payments the organization in situation offers financial seminars conducts educational activities to prepare the individuals for home ownership and requires a home inspection report before providing funds for motto to fund the program the organization conducts broad based fundraising that attracts gifts grants and contributions from the general_public organization has policies in place to ensure that the grant making staff does not know the identity or contributor status of the home seller or other parties who may benefit from the sale and does not accept contributions contingent on the sale of particular properties further the because the organization described in situation relieves the poor and distressed requires a home inspection to ensure the house is habitable conducts educational seminars had a broad based funding program and has policies to ensure that the organization is not beholden to particular donors the service held that the organization is operated exclusively for charitable purposes and qualifies for exemption from federal taxation as an organization described in sec_501 the organization described in situation is similar to the organization described in situation except that its staff knows the identity of the party selling the home and may know the identity of the parties involved in the sale the organization receives a payment from the seller the amount of which bears a direct correlation to the amount of motto provided in substantially_all the cases in which the organization provides assistance to the home buyers form 886-acev department of the treasury - internal_revenue_service page -8- department of the treasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items 20xx12 org legend org organization name xx date xyz state motto motto and most of its financial support comes from home sellers and related businesses that may benefit from the sale of homes to buyers who receive assistance from the organization because the organization described in situation provides motto amounts that directly correlate to the amounts provided by home sellers and relies primarily on payments from home sellers and real_estate related businesses that stand to benefit from the transactions to finance the program the service held that the organization described in situation is not operated exclusively for exempt purposes and does not qualify for exemption from federal_income_tax as an organization described in sec_501 effective date of revocation an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq 20xx-1 c b an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued sec_601_201 revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1_501_a_-1 revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601_201 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq although org documents state that the down payment gift to a buyer comes from preexisting org funds rather than from the seller's contribution in the transaction org does not solicit outside public contributions or have any other source of funds other than contributions from sellers and related fees because the amount of the contribution is always equal to the amount of the motto provided to the buyer plus the service fee in fact the actual source of the motto is the seller's contribution government’s position org does not qualify as an organization described in sec_501 because it operates a program that does not exclusively serve an exempt_purpose described in sec_501 and provides substantial private benefit to persons who do not belong to a charitable_class moreover the organization did not operate in accordance with its representations on form_1023 charitable purposes include relief of the poor and distressed see sec_1 c - d org ’s motto program does not operate in a manner that establishes that its primary purpose is to address the needs of low-income people by enabling low-income individuals and families to obtain decent safe housing see revrul_70_585 situation and rev_rul 20xx- form 886-a crev department of the treasury - internal_revenue_service page -9- ern 886a department of the ‘treasury - internal_revenue_service schedule no or exhibit year period ended name of taxpayer 20xx12 org explanation of items legend org organization name xx date xyz state motto motto 20xx-21 c b the motto program did not serve exclusively low-income persons org did not screen applicants for motto based on income instead the program is open to anyone without any income limitations who otherwise qualified for these loans only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose as the supreme court held in better business bureau of washington d c inc v united_states supra the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the manner in which org operated its motto program shows that the private benefit to the participating home sellers homebuyers real_estate professionals and other individuals related to the real_estate transactions org facilitated was the intended outcome of org’s operations org’s motto procedures are designed to channel funds in a circular manner from the sellers to the buyers to finance its motto activities org relies exclusively on sellers and other real- estate related businesses that stand to benefit from the transactions it facilitates org secures an agreement from the seller stipulating to this arrangement prior to the closing no motto transactions take place unless org is assured the amount of the down payment plus the fee is or will be paid_by the seller after closing in order to qualify for exemption under sec_501 an organization must be both organized and operated to achieve a purpose which is described under that code section org’s motto program is not operated in accordance with the internal_revenue_code and regulations which govern qualification for tax exemption under sec_501 of the code org provides motto purportedly in the form of a gift to individuals and families for the purchase of a home org offers its motto to interested buyers regardless of the buyers’ income level or need org’s motto activities do not target neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination org operates in the manner that is substantially_similar in all respects to the organization described in situation of rev_rul 2oxx-27 org has not operated exclusively for exempt purposes and accordingly is not entitled to exemption under sec_501 org operates in a manner indistinguishable from a commercial enterprise org’s primary activity is brokering transactions to facilitate the selling of homes org’s brokering services are marketed to homebuyers sellers realtors lenders home builders and title companies regardless of the buyers’ income level or need and regardless of the condition of the community in which the home is located alliances are built with the realtors lenders home builders and title companies to assure future business for the mutual benefit of the participants org does not engage in any educational activities counseling or any other activities that further charitable purposes because org’s primary activity is not conducted in a manner designed to further sec_501 purposes org is not operated exclusively for exempt purposes within the meaning of sec_501 taxpayer’s position the organization agreed with the revocation the organization signed form_6018 and filed forms for years ending december 20xx 20xx 20xx 20xx and 20xx form 886-a cev department of the treasury - internal_revenue_service page -10- form 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended 20xx12 name of taxpayer org legend org organization name xx date xyz state motto motto conclusion based upon the information noted above it is proposed that the exempt status of the organization be revoked effective january 20xx form_1120 u s_corporation income_tax return should be obtained for the year ended december 20xx and for future tax years form 886-acev department of the treasury - internal_revenue_service page -11-


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date conex-142323-10 uilc the honorable donald a manzullo u s house of representatives washington dc attention ---------------- dear mr manzullo i am responding to your letter dated date on behalf of your constituent ------------------------------ she asked about the deductibility of litigation costs that law firms pay when representing clients on a contingent gross fee basis the ninth circuit_court of appeals in 56_f3d_1016 9th cir held that a law firm was entitled to deduct the litigation costs it paid under a contingent gross fee contract in fsa lexi sec_442 we announced that we would not follow boccardo outside the ninth circuit over the years several members of the congress have asked us to clarify or change this litigating position we continue to follow the fsa and at this time have no plans to change our position on this issue members of the congress and the public have asked whether the department of the treasury intends to publish formal guidance on the deductibility of litigation costs in contingent gross fee cases the treasury_department and the irs have not yet determined whether additional guidance on this issue is appropriate conex-142323-10 i hope this information is helpful please contact me or --------------------- at ----------------------if you need further assistance sincerely thomas d moffitt chief branch income_tax and accounting


internal_revenue_service number release date uil index no date cc it a plr-112917-00 do legend x ein no m n o y dear sir or madam this is in response to your authorized representative’s letter and submissions of date requesting certain rulings regarding the proper federal_income_tax treatment including any reporting and or withholding obligations for certain fellowship grants and stipends paid_by you x to individuals in connection with the fellowship training programs and activities briefly described below you x are a tax-exempt non-profit educational_organization organized under the laws of state m and accredited by n a federally recognized agency responsible for the accreditation of curricula in the area of your expertise your mission is to prepare graduates in this area_of_interest for leadership roles in the field and to further the training experience and expertise of outstanding and talented individuals through study rehearsals class training coaching and performance opportunities community education outreach and training activities are also conducted in furtherance of your mission you x conduct various fellowship and training programs to develop the full range of skills and qualifications required for such leadership roles prospective fellows are invited to join the program on a season-by- season basis subject_to ongoing review for up to a three-year period availability of fellowship opportunities in your programs is advertised and widely known to become a fellow an applicant must have completed his or her undergraduate degree requirements there are currently approximately y participants in your primary fellowship program plus a number of additional fellows in two ancillary audio engineering and orchestra library programs x’s faculty and staff counsel fellows provide extensive instrumental coaching including master classes lessons and sectionals help define and develop individual goals and provide career guidance to participants participants in the programs are provided extensive professional-level performance opportunities through rehearsals concerts tours and public speaking and stage-presence opportunities you x pay participants in these fellowship training programs certain stipends to help defray general living_expenses during their periods of fellowship training these stipends consist of a weekly living allowance paid during the typical nine-month fellowship session a certain travel grant to assist fellows in locating to your facility an amount to cover certain professional fees paid in connection with membership in o and the value of contributed room or housing at facilities owned and operated by you sec_61 of the internal_revenue_code provides that gross_income means all income from whatever source derived the federal tax treatment of qualified scholarships and fellowship grants is addressed in sec_117 of the code sec_117 provides that gross_income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in sec_170 describing generally a school to be considered a scholarship or fellowship_grant an amount need not be formally designated as such generally a scholarship or fellowship_grant is any amount_paid or allowed to or for the benefit of an individual to aid such individual in the pursuit of study or research a scholarship or fellowship_grant may for example be in the form of a reduction in the amount owed by the recipient to an educational_organization for tuition room and board or any other fee we have determined that the described amounts paid_by x to participants in its various fellowship programs constitute scholarship or fellowship grants within the contemplation of sec_117 of the code only qualified scholarships may be excluded from income a qualified_scholarship is defined as an amount expended for qualified_tuition_and_related_expenses qualified_tuition_and_related_expenses are tuition and fees required for the enrollment or attendance of a student at an educational_institution and fees books supplies and equipment required for courses of instruction at such an educational_organization amounts of scholarship or fellowship grants received for room board travel and incidental living_expenses are not related expenses thus scholarship receipts that exceed expenses for tuition fees books supplies and certain equipment are not excludable from a recipient’s gross_income under sec_117 sec_117 of the code implementing changes made by the tax_reform_act_of_1986 pub_l_no provides that the exclusion for qualified scholarships shall not apply to that portion of any amount received which represents payment for teaching research or other services by the student required as a condition for receiving the qualified_scholarship or fellowship regulations governing the includibility of compensatory grants in income have been upheld by the supreme court of the united_states which has described excludable grants as relatively disinterested ’no-strings’ educational grants with no requirement of any substantial quid pro quo from the recipient 394_us_741 a scholarship or fellowship_grant represents payment for services when the grantor requires the recipient to perform services in return for the granting of the scholarship or fellowship a requirement that the recipient pursue studies research or other activities primarily for the benefit of the grantor is treated as a requirement to perform services a scholarship or fellowship_grant conditioned upon either past present or future services by the recipient or upon services that are subject_to the direction or supervision of the grantor represents payment for services a scholarship or fellowship_grant that is includible in gross_income under sec_117 of the code is considered wages for purposes of sec_3401 the grantor of such an amount is subject_to certain withholding and reporting requirements respecting wages including withholding for income taxes and the filing of forms w-2 the application of federal_insurance_contributions_act fica and federal_unemployment_tax_act futa taxes depends on the nature of the employment and the status of the grantor see notice_87_31 1987_1_cb_475 although scholarship and fellowship grants that represent payment for services are not excludable under current law not all grants that are subject_to conditions or limitations or constitute payment for research or training activities represent payment for services under the statute the code and regulations make clear that a scholarship includes any amount_paid or allowed to aid an individual in the pursuit of study or research accordingly research and training activities by a student may qualify for exclusion_from_gross_income to no less an extent than formal classroom studies it is only where the activities required by the grantor fall within the ambit of sec_117 that inclusion in income is required determining whether a particular awards program makes compensatory payments within the contemplation of sec_117 of the code is an inherently factual matter requiring a consideration of the nature and extent of the impositions and duties imposed upon the participants and of all other relevant facts and circumstances of the program based on the information presented and representations furnished and assuming x’s fellowship training programs are conducted substantially as described we have determined that the scholarship and or fellowship stipends awarded thereunder including the value of contributed room or housing allowances do not represent compensation_for services within the meaning of sec_117 of the code the awards are not paid for or in_connection_with_the_performance_of_services and appear to be relatively disinterested grants to participants to enable them to pursue programs of independent development training and original study focusing on the experience to be gained by the recipient rather than on any grantor benefit accordingly such amounts do not constitute wages for purposes of sec_3401 additionally such amounts are not subject_to sec_3402 relating to withholding for income taxes at source sec_3102 relating to withholding under the federal_insurance_contribution_act fica or sec_3301 relating to the federal_unemployment_tax_act futa x is not required to file forms w-2 or any returns of information under sec_6041 with respect to such grants finally since x’s training stipends do not represent payment for services such amounts are also not subject_to self employment contribution act seca taxes imposed by sec_1401 of the code see 102_tc_394 see also revrul_60_378 1960_2_cb_38 which states the service’s position that noncompensatory scholarship and fellowship grants do not constitute income from a trade_or_business whether or not such amounts are required to be included in gross_income the recipient of a scholarship or fellowship_grant is responsible for determining whether such grant is in whole or in part includible in gross_income for federal_income_tax purposes where participants are degree candidates such grants will ordinarily be excludable from the recipients’ gross incomes to the extent of their qualified_tuition_and_related_expenses in the case of non-degree candidates the entire amount of scholarship or fellowship awards is includible in gross_income you may wish to advise participants in your fellowship programs that the amount of their scholarship or fellowship stipends that exceeds their qualified_tuition_and_related_expenses if any is generally includible in gross_income for federal_income_tax purposes this letter_ruling is based on the facts and representations provided by x and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by adoption of final regulations to the extent the regulations are inconsistent with any conclusions in this ruling see section dollar_figure of revproc_2000_1 i r b pincite however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances because it could help resolve federal tax issues a copy of this letter should be maintained with x’s permanent records a copy of this letter is being furnished to x’s district_director pursuant to a power_of_attorney currently on file with this office the original of this letter is being sent to x’s authorized representative and copies are being furnished to x this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely yours associate chief_counsel income_tax accounting by william a jackson chief branch