t c summary opinion united_states tax_court gerry m griggs petitioner v commissioner of internal revenue respondent docket no 9068-04s filed date gerry m griggs pro_se portia n rose for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code unless otherwise indicated section references are to the internal_revenue_code as in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined for a deficiency in petitioner's federal_income_tax of dollar_figure and additions to tax of dollar_figure under sec_6651 an uncomputed amount under sec_6651 and dollar_figure under sec_6654 the parties agree that petitioner a received wages of dollar_figure and unemployment_compensation of dollar_figure b is entitled to a filing_status of single and to claim one personal_exemption c is entitled to deduct property taxes paid to the harris county tax assessor and the houston independent school district in the amounts of dollar_figure and dollar_figure d is entitled to deduct as a charitable_contribution a dollar_figure donation to the rice university owl club and e is not liable for the addition_to_tax provided by sec_6651 the issues for decision are whether petitioner is entitled to claim itemized_deductions and business_losses in excess of those allowed by respondent is liable for the addition_to_tax under sec_6651 for failure_to_file timely a federal_income_tax return for the year without reasonable_cause and is liable for the addition_to_tax under sec_6654 for failure to pay estimated_tax the exhibits received into evidence are incorporated herein by reference at the time the petition was filed petitioner resided in houston texas background administrative history the form_4340 certificate of assessments payments and other specified matters for petitioner’ sec_2001 tax_year shows that the internal_revenue_service irs has no record of receiving a tax_return from petitioner for the year respondent determined in the statutory_notice_of_deficiency that petitioner had failed to file a federal_income_tax return for after the petition for redetermination was filed the case was assigned to the office of appeals the appeals_office requested that petitioner provide a copy of a completed income_tax return petitioner did not do so the case was subsequently transferred to respondent’s counsel for trial or settlement document request by counsel respondent’s counsel requested that petitioner provide a completed income_tax return and supporting documentation for the items on the return there was no response respondent served petitioner with a request for production of documents request the request asked for books_and_records that petitioner intended to introduce into evidence at trial for business and personal bank statements for the year documents evidencing the receipt of income documents evidencing the expense reimbursement policy of petitioner’s employer and documentary_evidence bearing on the additions to tax for failure_to_file timely and the failure to pay estimated_tax after several months during which petitioner failed to respond to respondent’s request respondent moved to compel production of the requested items order of the court on date the court granted respondent’s motion to compel production of the requested documents and ordered that they be provided to respondent on or before date the order warned petitioner that upon his failure to fully comply the court would be inclined to impose sanctions under rule including dismissal of his case on date petitioner transmitted hundreds of pages of electronic facsimiles of some documents to respondent’s counsel on date the court filed petitioner’s motion to extend time to produce documents in which he requested additional time to fully comply with the august order petitioner’s motion to extend time was denied on date petitioner’s documents using copies of the documents transmitted to her on date that were legible respondent’s counsel prepared a proposed stipulation of facts for trial petitioner however refused to stipulate any of the documents that he had transmitted including a copy of the statutory_notice_of_deficiency a copy of which was attached to his petition at the beginning of trial petitioner produced a form 1040x amended u s individual_income_tax_return for that he stated he wanted to file the document was received into evidence over the objection of respondent’s counsel petitioner also attempted to introduce into evidence a stack of miscellaneous receipts reports checks statements handwritten notations invoices and other documents respondent’s counsel was able to determine that the documents had not been provided to her on date in response to the court’s order compelling production respondent’s counsel objected to the introduction into evidence of any document petitioner had not produced by date the court sustained the objection of respondent’s counsel discussion petitioner has made no argument that the burden_of_proof shifting provisions of sec_7491 apply to this case nor has he offered any evidence that he has complied with the requirements of sec_7491 itemized_deductions among the documents that petitioner provided to respondent in response to the date order was a copy of a schedule a itemized_deductions for in addition to the schedule a deductions allowed by respondent petitioner argues that he is entitled to deductions for points from a mortgage refinancing a casualty_loss and an additional_amount for charitable_contributions points petitioner presented a copy of a settlement statement to substantiate a deduction for dollar_figure in points as a mortgage interest_deduction petitioner testified that this was his third refinancing personal_interest is generally not allowed as a deduction sec_163 qualified_residence_interest however is not treated as personal_interest sec_163 qualified_residence_interest includes interest_paid on home_equity_indebtedness with respect to any qualified_residence sec_163 home_equity_indebtedness is indebtedness other than acquisition_indebtedness secured_by a qualified_residence to the extent that it does not exceed the fair_market_value of the residence reduced by the amount of the acquisition_indebtedness sec_163 acquisition_indebtedness is the indebtedness secured_by the residence that was incurred in acquiring constructing or substantially improving the qualified_residence sec_163 the maximum amount that can be treated as home_equity_indebtedness is dollar_figure sec_163 petitioner’s loan amount was dollar_figure petitioner has provided no evidence of the amount of the acquisition_indebtedness if any or the fair_market_value of the residence he has failed to show that his points are qualified_residence_interest casualty_loss petitioner testified that he suffered a casualty_loss consisting of two items a flat tire on his automobile and a broken vase or bottle perfume bottle large one that my dog broke that was a gift petitioner submitted to respondent’s counsel a form_4684 casualties and thefts listing the cost of the tire as dollar_figure and the cost of the vase or perfume bottle as dollar_figure losses may be deductible under sec_165 to the extent not_compensated_for_by_insurance_or_otherwise in the case of an individual sec_165 allows a taxpayer to claim as a deduction any loss from theft or casualty sustained during the taxable_year the loss is allowed only to the extent that it exceeds dollar_figure and the net_casualty_loss is in excess of percent of adjusted_gross_income sec_165 the amount of the loss is the lesser_of the fair_market_value of the property immediately before the casualty reduced by the fair_market_value after the casualty or the adjusted_basis of the property 1were the points qualified_residence_interest petitioner would be required to amortize the points over the life of the loan unless he provided sufficient evidence that the loan proceeds were used to purchase or improve the residence sec_461 and 305_us_468 sec_1_165-7 income_tax regs the basis_of_property acquired by purchase is its cost sec_1012 the basis_of_property acquired by gift is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift if such basis is greater than the fair_market_value of the property at the time of the gift however the basis for determining loss is the fair_market_value of the property sec_1015 in order for the court to determine whether petitioner is entitled to a casualty_loss petitioner’s basis in the property damaged or destroyed must be known where a taxpayer fails to prove that basis the court is unable to determine the amount of the loss that is deductible 79_tc_714 affd on other grounds 731_f2d_1417 9th cir 46_tc_751 affd 387_f2d_420 8th cir petitioner offered no evidence of either the fair_market_value of the property at the time of the loss or his basis in the items further it appears that petitioner cannot meet the requirement of sec_165 that the net_casualty_loss exceed percent of adjusted_gross_income the court therefore sustains respondent’s determination that petitioner is not entitled to deduct on schedule a a casualty and theft_loss charitable_contributions petitioner offered only his testimony that he gave dollar_figure in out-of-hand contributions at church services to people on the street et cetera to support his claim of an additional charitable deduction taxpayers are required to keep records of charitable_contributions of money sec_1_170a-13 income_tax regs a taxpayer must maintain one of the following a canceled check a receipt or letter from the donee charitable_organization showing the name of the donee the date and the amount of the contribution or other reliable records showing the name of the donee the date and the amount of the contribution id petitioner’s church and charity donations do not meet the recordkeeping requirements of sec_1_170a-13 income_tax regs see blair v commissioner tcmemo_1988_581 petitioner is not entitled to a deduction for charitable_contributions in an amount greater than that allowed by respondent schedule c losses petitioner submitted a schedule c profit or loss from business to respondents’s counsel for four putative businesses supporting documents relating to only one of them were provided in response to the court’s date order on date petitioner purchased a one-third interest in a luxury suite at enron field minute maid park for houston astros baseball games for dollar_figure the business as described by petitioner was the resale of the luxury suite tickets petitioner argues that he is entitled to claim a loss of dollar_figure from this business petitioner’s evidence that he was carrying on a ticket resale business is a receipt for purchase or use of the luxury suite a receipt for catering services in the suite and one invoice to one person for nights enron box at dollar_figure per night sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business generally no deduction is allowed for personal living or family_expenses see sec_262 the taxpayer must show that any claimed business_expenses were incurred primarily for business rather than social reasons see rule a 72_tc_433 to show that the expense was not for personal reasons the taxpayer must show that the expense was incurred primarily to benefit his business and there must have been a proximate relationship between the claimed expense and the business see walliser v commissioner supra petitioner provided no business records or other evidence that he resold tickets to anyone other than to one person for nights enron box petitioner has not provided sufficient evidence to show that there was a business or that the claimed expenses were paid primarily for business reasons sec_183 permits a deduction for expenses that would be deductible only if the activity were engaged in for profit but only to the extent that the gross_income derived from the activity exceeds the deductions allowed by sec_183 petitioner is entitled to the deductions allowed by sec_183 for his luxury suite activity additions to tax respondent bears the burden of production with respect to an addition_to_tax sec_7491 in order to meet this burden respondent must produce evidence sufficient to establish that it is appropriate to impose the addition_to_tax 116_tc_438 addition_to_tax under sec_6651 respondent produced a certified copy of form_4340 showing that the irs has no record of petitioner’s having filed a federal_income_tax return for the year respondent has met his burden of production under sec_7491 with respect to imposing the addition_to_tax under sec_6651 see downey v commissioner tcmemo_2005_215 petitioner testified that i filed my return i filed it by regular mail so i don’t have any evidence that i filed it the court is not required to accept the unverified and undocumented testimony of petitioner see 65_tc_87 affd 540_f2d_821 5th cir see also 786_f2d_1382 9th cir affg in part and revg in part tcmemo_1984_197 the court finds that petitioner did not timely file his return petitioner has the burden of proving that he had reasonable_cause and lacked willful neglect in not filing his return timely see 469_us_241 higbee v commissioner supra pincite sec_301_6651-1 proced admin regs because petitioner failed to offer any evidence of reasonable_cause and lack of willful neglect for his failure_to_file timely respondent’s determination that petitioner is liable for the addition_to_tax under sec_6651 is sustained addition_to_tax under sec_6654 petitioner underpaid his estimated_tax for the year and respondent has carried his burden of production to show that it is appropriate to impose the addition_to_tax the sec_6654 addition_to_tax applies in a mathematical fashion unless it is shown that any of certain statutory exceptions apply see 75_tc_1 goers v commissioner tcmemo_1999_354 petitioner has not shown that any exceptions apply accordingly respondent’s determination that petitioner is liable for an addition_to_tax under sec_6654 is sustained reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court thomas butti petitioner v commissioner of internal revenue respondent docket no 11084-02l filed date thomas butti pro_se kevin m murphy for respondent memorandum findings_of_fact and opinion colvin judge respondent sent a notice_of_determination concerning collection action s under section lien and or levy to petitioner in which respondent determined that it was appropriate to sustain respondent’s collection action with section references are to the internal_revenue_code as amended and in effect for the years in issue respect to petitioner’s unpaid income taxes for and the parties dispute whether respondent provided petitioner an opportunity for a hearing as required by sec_6330 and whether petitioner received a notice_of_deficiency for and we conclude that respondent did not provide petitioner an opportunity for a hearing and that petitioner did not receive the notice_of_deficiency we will remand the case to respondent to provide an opportunity for a hearing as required by sec_6330 findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner was incarcerated in the wyoming correctional facility attica new york when the petition was filed he lived in the state of new york before and after he was incarcerated before he was incarcerated petitioner was a licensed chiropractor practicing in yonkers new york on date he pleaded guilty to offering a false instrument for filing in the first degree insurance fraud in the second degree grand petitioner’s tax_liability for is no longer at issue larceny in the second degree and attempted grand larceny in the third degree b the notice_of_deficiency for and respondent sent article no z by certified mail to petitioner at the gowanda correctional facility p o box gowanda ny gowanda and article no z by certified mail to petitioner pincite malverne road scarsdale ny on date respondent recorded the mailing on a u s postal service form_3877 acceptance of registered insured c o d and certified mail or its equivalent a certified mail list which stated at the top statutory_notice_of_deficiency for the years indicated have been sent to the following taxpayers gowanda received that item on date petitioner was not housed at gowanda from date to date gowanda maintained a log for mail pertaining to inmates’ legal proceedings petitioner signed that log in order to receive two items of certified mail on date the log does not state the certified mail numbers of the items he received petitioner received various articles of certified mail from respondent while he was incarcerated at gowanda c the sec_6330 hearing respondent issued a final notice notice_of_intent_to_levy and notice of your right to a hearing on date in the final notice respondent stated that petitioner owed dollar_figure for dollar_figure for and dollar_figure for on date petitioner sent to respondent a form request for a collection_due_process_hearing petitioner was incarcerated at the wyoming correctional facility at that time he attached an explanation in which he said he had not received the notice_of_deficiency and that he was not liable for tax in the amounts stated in the notice one of respondent’s appeals officers was assigned to petitioner’s case on date the appeals officer kept an activity log for the case in which he said the case is very complex petitioner claims that he had no prior opportunity to contest the underlying liability and he did not receive the notice_of_deficiency and the administrative file indicates that a defaulted notice_of_deficiency is in the administrative file on date the appeals officer sent a letter to petitioner at the wyoming correctional facility stating in part we scheduled the conference you requested on this case for a m date at room broadway new york new york please let me know within days from the date of this letter whether this is convenient if it is not i will be glad to arrange another time our meeting will be informal and you may present facts arguments and legal authority to support your position if you plan to discuss new material please send me copies at least five days before our meeting you should prepare statements of fact as affidavits or sign them under penalties of perjury the appeals officer knew that petitioner was incarcerated when he sent that letter on date petitioner wrote the following to the appeals officer i received your date correspondence affixed hereto and i respond accordingly i was transferred to the facility listed below and wyoming did not forward your correspondence expeditiously therefore i apologize for the delayed response but it is with just cause i commence by thanking you for scheduling a conference on this case unfortunately i am faced with two challenges i am confined to solitary until date and i do not have access to a telephone legal documents and or transportation to even meet with you at this time furthermore and due to my indigency status as granted by both federal and state courts i am unable to retain an attorney certified_public_accountant or person enrolled to practice before the internal_revenue_service i am currently petitioning a professional willing to assist pro bono i humbly request a moratorium until i can either access my complete file post date obtain a pro bono accountant or attorney or complete my due process right to a full and fair opportunity to appeal my criminal case petitioner did not meet with the appeals officer in new york on date on that day the appeals officer wrote in his activity log that he had reviewed respondent’s transcripts of account for petitioner’s tax_year and including forms certificates of assessments payments and other specified matters and concluded that respondent had followed proper administrative and procedural requirements the appeals officer received and read petitioner’s date letter on date even though he told petitioner he would reschedule the hearing at petitioner’s request the appeals officer did not do so on date respondent issued a notice_of_determination concerning collection action s under sec_6320 and or in it respondent determined that respondent’s collection action with respect to petitioner’s tax years and was proper opinion a whether respondent provided petitioner an opportunity for a hearing under sec_6330 respondent contends that petitioner was given an opportunity to have a hearing in this case we disagree the appeals officer invited petitioner to attend a hearing and said he would reschedule it if it were inconvenient for petitioner to attend petitioner timely requested that it be rescheduled as a result of telling petitioner he would reschedule the hearing at petitioner’s request and then not doing so the appeals officer denied petitioner the opportunity for a hearing on the issues petitioner had identified in his request for a hearing the appeals officer knew that petitioner had raised numerous issues none of which the appeals officer characterized as frivolous we conclude that petitioner did not have an opportunity for a hearing as required by sec_6330 b whether petitioner received the notice_of_deficiency for and a taxpayer may challenge the existence or amount of the underlying tax_liability if he or she did not receive a notice_of_deficiency or otherwise have an opportunity to dispute that tax_liability sec_6330 114_tc_176 petitioner contends that he did not receive the notice_of_deficiency for and and that he is not liable for tax in the amount stated in the notice_of_determination respondent points out that the form_3877 states that respondent mailed a notice_of_deficiency to petitioner gowanda records state that gowanda received the item of mail listed in the form_3877 and that petitioner signed for two articles of certified mail on date respondent contends based on the presumption of official regularity that petitioner received the notice_of_deficiency petitioner testified that he did not receive the notice_of_deficiency respondent asks us to disregard petitioner’s testimony because he has a criminal record we disagree petitioner’s habit is to aggressively assert his rights in dealings with the u s government it appears from his litigating history that he responds to notices as required to preserve his litigating rights respondent does not contend otherwise we conclude that petitioner did not receive the notice_of_deficiency or have any other opportunity to dispute his underlying tax_liability for or c conclusion in appropriate circumstances we may remand a case to the appeals_office to provide a hearing under sec_6330 see 117_tc_183 harrell v commissioner tcmemo_2003_271 we will remand this case with petitioner is litigious frequently as the plaintiff or appellant see eg butti v goord n y s 2d people v butti n y s 2d people v butti n y s 2d butti v goord n y s 2d butti v goord n y s 2d people v butti n y s 2d u s bank trust natl association trustee v butti n y s 2d app div u s bank trust natl association trustee v butti n y s 2d app div butti v goord n y s 2d app div people v butti n y s 2d app div butti v goord n y s 2d app div state v butti n y s 2d app div butti v goord n y s 2d app div people v butti n y s 2d app div butti v goord n y s 2d app div butti v goord n y s 2d app div people v butti n y s 2d app div butti v angiolillo n y s 2d app div butti v butti n y s 2d app div petitioner apparently vigorously asserted his rights in these cases and appealed every adverse_ruling petitioner also has tenaciously asserted his rights in this case if he received the notice_of_deficiency as respondent asserts we believe he would have taken action to challenge it instructions to respondent to offer petitioner an opportunity for hearing under sec_6330 an appropriate order will be issued


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 b04 plr-106041-19 date date legend date decedent bank daughter ------------------ ----------------------- ------------------------ ------------------------ ------------------------ ----------------------------- ---------------------- trust --------------------------------------------------------------------------------------------------------------- date spouse ------------------------------------------------------------------------ ------------------------ ----------------------- ------------------ date gst non-exempt trust ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- -------------------------------------------------------------------- dollar_figurea state statute state statute -------------- --------------------------------- ----------------------------------- plr-106041-19 dear --------------- this letter responds to your authorized representative’s letter dated date and subsequent correspondence requesting rulings concerning the federal gift and estate_tax treatment of the proposed severance of a marital trust and the proposed renunciation by spouse of her interest in one of the divided marital trusts facts the facts submitted and the representations made are summarized as follows on date decedent created trust a revocable_trust trust was amended by decedent several times prior to his death on date at which time trust became irrevocable decedent was survived by spouse under article eight sec_1 of trust at decedent’s death the trustee is directed to divide trust into a family share family share and a marital share marital share the marital share is held in accordance with the provisions of article nine of trust under article nine in relevant part the trustee shall pay to or apply for the benefit of spouse at least annually all of the net_income of the marital share in addition the trustee may distribute to or for the benefit of spouse as much of the principal of the marital share as the trustee considers necessary or advisable for spouse’s education health maintenance and support upon spouse’s death the marital share shall be held in further trust for decedent’s issue the current trustees of the marital share are spouse bank and daughter on date decedent’s executor timely filed form_706 united_states estate and generation-skipping_transfer_tax return for decedent’s estate on schedule m bequests etc to surviving_spouse attached to the return the executor made an election to treat the marital share as qualified_terminable_interest_property qtip under sec_2056 of the internal_revenue_code the trustee severed the marital share into two shares one with a gst tax inclusion_ratio of zero gst exempt trust and the other with a gst tax inclusion_ratio of one gst non-exempt trust the trustee proposes to sever the gst non-exempt trust into two trusts trust a and trust b_trust a will contain approximately dollar_figurea in cash and trust b will contain the remaining gst non-exempt trust property following the bifurcation of the gst non- exempt trust into trust a and trust b spouse will renounce her entire_interest in trust a by making a non-qualified disclaimer of her interest in trust a and subsequently trust a will be held in further trust for decedent’s issue in accordance with the provisions of article xii of trust as if spouse had predeceased decedent state statute provides that after notice to the qualified beneficiaries a trustee may plr-106041-19 divide a_trust into two or more separate trusts if the result does not materially impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust state statute provides in relevant part that a person may disclaim any interest in or power over property including an interest in a_trust even if its creator imposed a spendthrift provision or similar restriction on the transfer or a limitation on the right to disclaim the disclaimed interest will then pass as if the disclaimant had died immediately before the interest was created you have requested the following rulings after the gst non-exempt trust is severed into two trusts trust a and trust b as permitted by state law and spouse renounces her entire_interest in the property in trust a such actions will have no effect on the election under sec_2056 by the estate to qualify the gst exempt share and the gst non-exempt share for the federal estate_tax_marital_deduction or on the status of trust a and trust b as qtip trusts after the gst non-exempt trust is severed into trust a and trust b and spouse renounces her entire_interest in the property in trust a the subsequent distribution and termination of trust a will not cause trust b or the gst exempt trust to fail to be qualified_terminable_interest_property under sec_2056 after spouse disclaims her entire_interest in the property in trust a spouse will be deemed to have made a transfer of all of the property of trust a under sec_2519 other than the value of her qualifying_income interest and spouse will be deemed to have made a transfer of her qualifying_income interest under sec_2511 after spouse disclaims her entire_interest in the property in trust a spouse will not be deemed to have made a transfer of the property in trust b or in the gst exempt marital trust under sec_2519 or a transfer of her qualifying_income interest in the property of trust b or the gst exempt marital trust under sec_2511 after spouse disclaims her entire_interest in the property in trust a the value of spouse’s income_interest in trust b or the gst exempt trust will not be valued at zero under sec_2702 after spouse disclaims her entire_interest in the property in trust a the property in trust a that is deemed to be transferred under sec_2519 will not be included in spouse’s gross_estate under sec_2044 provided spouse survives three years from the date of the transfer law and analysis ruling sec_1 and plr-106041-19 sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that except as limited by sec_2056 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate under sec_2056 a marital_deduction is not allowable for an interest in property passing to the surviving_spouse that is a terminable_interest an interest passing to the surviving_spouse is a terminable_interest if it will terminate or fail on the lapse of time or on the occurrence of an event or contingency or on the failure of an event or contingency to occur and on termination an interest in the property passes to someone other than the surviving_spouse sec_2056 allows an estate_tax_marital_deduction for qualified_terminable_interest_property under sec_2056 the term qualified_terminable_interest_property means property that passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which the qualified terminable_interest election under sec_2056 applies sec_2056 provides that the surviving_spouse has a qualifying_income_interest_for_life if the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals and no person has a power to appoint any part of the property to any person other than the surviving_spouse during the surviving spouse’s life pursuant to the terms of marital trust and with respect to the qualified_terminable_interest_property election made by decedent’s estate the assets of the gst non- exempt trust are treated as qualified_terminable_interest_property under sec_2056 spouse has a qualifying_income_interest_for_life in the gst non-exempt trust after the proposed division of the gst non-exempt trust into trust a and trust b pursuant to the applicable state law spouse will have a qualifying_income_interest_for_life in both trust a and trust b the severance of the gst non-exempt trust into trust a and trust b does not materially impair the rights of any beneficiary or adversely affect the achievement of the purposes of the trust therefore based on the facts submitted and the representations made after the gst non-exempt trust is severed into two trusts trust a and trust b as permitted by state plr-106041-19 law and spouse subsequently disclaims trust a such action will have no effect on the election under sec_2056 by the estate to qualify the gst exempt trust and the gst non-exempt trust for the federal estate_tax_marital_deduction nor the status of trust a and trust b as qtip trusts moreover after the gst non-exempt trust is severed into trust a and trust b and spouse disclaims her interest in trust a the subsequent distribution and termination of trust a will not cause trust b or the gst exempt trust to fail to be qualified_terminable_interest_property under sec_2056 ruling sec_3 and sec_2501 imposes a tax on the transfer of property by gift sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that the gift_tax applies to gifts indirectly made thus any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax sec_25_2511-2 provides that the gift_tax is a primary and personal liability of the donor is an excise upon his act of making the transfer is measured by the value of the property passing from the donor and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable sec_2519 provides that any disposition by the surviving_spouse of all or part of a qualifying_income_interest_for_life in any property for which a deduction was allowed under sec_2056 is treated as a transfer by the surviving_spouse of all interests in the property other than the qualifying_income interest the transfer of the qualifying_income interest is a transfer subject_to gift_tax under sec_2511 sec_25_2519-1 provides that the amount treated as a transfer under sec_2519 upon a disposition of all or part of a qualifying_income_interest_for_life in qualified_terminable_interest_property is equal to the fair_market_value of the entire property subject_to the qualifying_income interest determined on the date of the disposition including any accumulated income and not reduced by any amount excluded from total gifts under sec_2503 with respect to the transfer creating the interest less the value of the qualifying_income interest in the property on the date of the disposition the gift_tax consequences of the disposition of the qualifying_income interest are determined separately under sec_25_2511-2 in this case spouse will disclaim her entire_interest in trust a and spouse will retain plr-106041-19 her income_interest in trust b therefore after spouse disclaims her entire_interest in the property in trust a spouse will be deemed to have made a transfer of all of the property of trust a under sec_2519 other than the value of spouse’s qualifying_income interest and spouse will be deemed to have made a transfer of her qualifying_income interest under sec_2511 as stated above pursuant to state law and the representations made herein after the division of the gst non-exempt trust spouse’s interest in trust a will be separate and distinct from her interest in trust b therefore after spouse renounces her entire_interest in the property in trust a spouse will not be deemed to have made a gift of the property in trust b or the gst exempt trust under sec_2519 ruling sec_2702 provides that solely for the purpose of determining whether a transfer of an interest in trust to or for the benefit of a member of the transferor’s family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest which is not a qualified_interest as defined in sec_2702 shall be treated as being zero and the value of any retained_interest that is a qualified_interest as defined in sec_2702 shall be determined under sec_7520 under sec_25_2702-2 the term retained means held by the same individual both before and after the transfer in trust in this case the gst non-exempt trust will be divided into two separate trusts trust a and trust b we have concluded above that spouse’s disclaimer of her entire_interest in trust a will not result in a transfer under sec_2519 with respect to any interest in trust b accordingly spouse will not be treated as making a deemed gift under sec_2519 with respect to trust b sec_2702 does not apply to the division of the gst non- exempt trust and the disclaimer by spouse of her entire income_interest in trust a therefore after spouse disclaims her interest in the property in trust a neither the value of spouse’s income_interest in trust b nor the gst exempt trust will be valued at zero under sec_2702 ruling sec_2044 provides that the value of the gross_estate shall include the value of any property in which the decedent had a qualifying_income_interest_for_life sec_2044 provides that sec_2044 applies to any property if a deduction was allowed with respect to the transfer of such property to the decedent under sec_2056 and sec_2519 did not apply with respect to a disposition by the decedent of part or all of such property plr-106041-19 when spouse renounces her interest in the property in trust a spouse will be deemed to have made a transfer of all of the property of trust a other than her qualifying_income interest therein under sec_2519 sec_2044 provides that sec_2044 does not apply to any property if sec_2519 applies to the disposition of part or all of that property prior to spouse’s death therefore after spouse disclaims her entire_interest in the property in trust a the property in trust a that is deemed to be transferred under sec_2519 will not be included in spouse’s gross_estate under sec_2044 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized 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 melissa c liquerman melissa c liquerman branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number ---------------------------- --------------------------- ------------------------------- 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 b4 plr-104166-14 date date legend settlor grandchild trust date ----------------------- ------------------ ---------------------- ---------------------------- ------------------------- --------------------------------------------------------------------------- dear --------------- this letter responds to your letter dated date submitted on your behalf by your authorized representative requesting a ruling on application of sec_2041 of the internal_revenue_code facts settlor died on date grandchild is the beneficiary of trust a_trust created under article 9c of settlor’s last will paragraph of article 9c provides that during grandchild’s life the trustees of trust are to make discretionary payments of the net_income and principal to or for the benefit of grandchild and grandchild’s issue paragraph of article 9c provides that upon the death of grandchild the trustees of trust are to pay over the principal as then constituted and any accumulated or undistributed_income to such among settlor’s issue as grandchild shall validly appoint in grandchild’s last will any balance of trust remaining and not effectively appointed by grandchild in grandchild’s last will is disposed of pursuant to paragraph sec_2 and of article 9c of settlor’s last will plr-104166-14 rulings requested grandchild has requested the following rulings that the testamentary_power_of_appointment granted to grandchild in trust does not constitute a general_power_of_appointment within the meaning of sec_2041 and the existence exercise failure to fully exercise or partial or complete release of grandchild’s power to appoint the principal and any accumulated or undistributed_income of trust will not cause the value of the property in trust to be included in grandchild’s gross_estate under sec_2041 law and analysis sec_2041 provides that the value of the gross_estate includes the value of all property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment is considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised sec_2041 provides with exceptions not relevant here that the term general_power_of_appointment means a power that is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 of the estate_tax regulations provides that the term general_power_of_appointment as defined in sec_2041 means any power_of_appointment exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent’s estate or the creditors of his estate in this case grandchild may appoint by will the principal and accumulated or undistributed_income of trust to the class consisting of settlor’s issue because grandchild’s power_of_appointment is a testamentary power grandchild may not appoint any part of trust to grandchild or to grandchild’s creditors during grandchild’s life in addition based on the terms of trust the reference to such among settlor’s plr-104166-14 issue as a permissible class of appointees of grandchild’s testamentary power is properly viewed as not including grandchild’s estate or the creditors of grandchild’s estate after grandchild’s death accordingly based on the information submitted and the representations made we conclude that grandchild’s testamentary_power_of_appointment over the principal and accumulated or undistributed_income of trust does not constitute a general_power_of_appointment within the meaning of sec_2041 and the existence exercise failure to fully exercise or partial or complete release of grandchild’s power to appoint the principal and accumulated or undistributed_income of trust will not cause the value of the property in trust to be included in grandchild’s gross_estate under sec_2041 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized 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 melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b04 wtsullivan posts-126965-15 uilc date date to thomas f harriman attorney chicago large business international from rebecca l baxter senior technician reviewer branch financial institutions products third party communication none date of communication not applicable subject application of sec_847 in closed years this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue sec_1 can taxpayer amend its ------ tax_return to reduce its taxable_income by the aggregate amount of the special loss discount account slda that was incorrectly taken into income over its -------------- tax years how should the service correct the errors that occurred in accounting for the sec_847 election in closed years conclusion sec_1 taxpayer is barred by sec_6511 from amending its ------ tax_return to reduce its taxable_income by the aggregate amount of the slda which includes amounts from closed years that was incorrectly taken into income over its -------------- tax years the service can make adjustments in an open_year to address errors that occurred in accounting for sec_847 in closed years facts taxpayer is a property and casualty insurance_company taxable under sec_831 taxpayer is required to discount its reserves for unpaid_losses under sec_846 taxpayer elected to posts-126965-15 deduct additional loss deductions under sec_847 taxpayer added the sec_847 deductions to a slda and made corresponding special estimated_tax payments setps equal to the tax benefits attributable to the sec_847 deductions in subsequent years as taxpayer paid losses and the related sec_846 discount declines corresponding amounts were subtracted from the slda and included in taxpayer’s gross_income any additional tax_liability resulting from the inclusion of the previously deducted sec_847 amounts was covered through taxpayer’s previously made setp taxpayer kept track of slda and setp accounts for each accident_year separately on forms special loss discount account and special estimated_tax payments for insurance_companies during examination of taxpayer’s deposits made into the setp it was discovered that there are numerous discrepancies between the setp yearly deposits withdrawals per the sec_847 control card and the setp yearly deposits withdrawals per taxpayer’s forms the discrepancy is partially due to the effect of a net_operating_loss nol_carryback in ------ taxpayer had a nol that it elected to carry back five years as a result of the nol_carryback taxpayer was refunded both the tax that it paid for ----------- ------ and the setp account as of ------ however taxpayer did not adjust its forms to take this refund into consideration and as a result taxpayer continued to take back into income over the years the sec_847 deductions that were initially deducted on the filed tax returns for -------------- as taxpayer took into income the reductions from the slda the corresponding increase in tax was paid through reductions of the setp therefore the setp was refunded to taxpayer twice first when taxpayer filed amended returns as a result of the nol_carryback and a second time over the years as it took into income the amounts previously deducted under sec_847 taxpayer agrees that there is a shortage in the setp however taxpayer argues that the shortage in the setp was caused by taxpayer incorrectly taking into income the slda from ---------------over the ---------------tax years taxpayer argues it should be allowed to amend its ------ tax_return to reduce its taxable_income by the aggregate amount of the slda that was incorrectly taken into income and the resulting refund should be deposited back into the setp however the statute_of_limitations is expired for most of the years in which taxpayer took the amount slda back into income taxpayer argues that because sec_847 is supposed to be revenue_neutral if the service does not allow taxpayer to reduce its income by the slda amount that were incorrectly taken into income taxpayer would have a permanent adjustment to its taxes law and analysis sec_832 requires that property and casualty insurance_companies discount their deductions for insurance loss_reserves in order to take into account the time_value_of_money sec_846 provides the methodology for computing the discount and determining the amount of the discounted loss deduction sec_847 permits an insurance_company an additional deduction for the amount of the discount computed under sec_846 thus by claiming a deduction for discounted posts-126965-15 losses in accordance with sec_846 and the additional deduction for the amount of the discount in accordance with sec_847 a taxpayer may essentially deduct its full undiscounted reserve for losses sec_847 was not intended to give the taxpayer an additional tax_benefit the purpose of sec_847 is to offset the negative effects on financial_accounting reporting caused by the discounting requirement of sec_846 thus the legislative_history indicates that congress intended sec_847 to be revenue_neutral see h_r conf_rep no 100th cong 2nd sess while sec_847 allows the taxpayer an additional deduction sec_847 offsets the tax_benefit of that deduction by requiring that the taxpayer make a setp in an amount equal to the tax_benefit derived from the sec_847 deduction taxpayers who are allowed a deduction under sec_847 are required by sec_847 to establish and maintain a slda to keep track of the unreversed discount for each year for which a sec_847 deduction was claimed the amount of the discount claimed as a deduction for any taxable_year is added to the account pursuant to sec_847 amounts are subtracted from the account and simultaneously included in the taxpayer's gross_income as time passes and the unreversed discount decreases assuming this inclusion in income gives rise to an additional tax_liability sec_847 provides that the special estimated_tax payments previously made are used to pay the additional tax_liability sec_847 provides that the tax_benefit attributable to the sec_847 deduction shall be determined by taking into account tax benefits that would arise from the carryback of any net_operating_loss for the year as well as current_year tax benefits sec_6511 provides that a claim_for_refund of an overpayment of any_tax shall be filed within three years from the time the return was filed or two years from the time the tax was paid whichever of those periods expires the later section b provides that no refund shall be allowed or made after the expiration of the period prescribed in sec_6511 the period prescribed in sec_6511 for most of the years in which taxpayer took the slda back into income has expired sec_847 does not extend any of the normal rules under sec_6511 therefore taxpayer may not amend its ------ turn to reduce its taxable_income by the aggregate amount of the slda which includes amounts from closed years that was incorrectly taken into income over its -------------- tax years nor can the service carryback any additional net operating losses from ------ to offset income from -------------- and give an additional refund for those years such a refund would also be precluded by sec_6511 sec_6511 states that no refund can be paid if the taxpayer failed to file a claim within three years from the time the return was filed or two years from the time the tax was paid whichever is later those periods have long passed for the -------------- taxable years there is an exception for net_operating_loss carrybacks under sec_6511 but that only extends the period that a claim can be made until years after the due_date of the return for the year of the nol in this case posts-126965-15 that would be ------ and therefore that period too has long passed therefore there can be no refund based on the carryback from the ------ year to the -------------- taxable years although a refund may be barred under sec_6511 and similarly assessment of an underpayment may be barred by sec_6501 neither provision bars the actual adjustment to taxpayer’s return there is no statute of limitation that bars the adjustment to the return see revrul_56_286 c b 95_tc_437 therefore if it is determined that the closed years were not calculated correctly the service may make adjustments to those years those adjustments could affect accounting for the sec_847 election in open years case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


department of the treasury internal_revenue_service washington d c tax exempt and government entities aniston number release date date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax under internal revenue cade sec_501 as an organization described in code sec_501 we made this determination for the following reason s you are not operated for fraternal purposes you are not operated under the lodge_system and you do not devote your net eamings to exclusively charitable or fraternal purposes you must file federal inoome tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file with their instructions and do nat send them to this office result in a penalty file the returns in accordance failure_to_file the returns timely may we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of infention to disclose and review the two attached letters that show our proposed deletions if you disagree with aur prapased deletions follow the instructions in notice action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you agree with our deletions you do not need to take any further if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely robert choi director exempt_organizations rulings agreements enclosure notice redacted proposed acverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date uil date contact person dentification number telephone number employer_identification_number g n o t g e e q i d i i irter fe s s i facts ‘we have considered your application_for recognition of exemption from federal_income_tax under intemal revenue code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_601 the basis for our conclusion is set forth below ‘you were incorporated in under the laws of the state in which you are located your articles of incorporation charter states that you are organized exclusively for charitable and fraternal purposes including for such purposes the making of contributions to organizations that qualify as exempt_organizations under sec_501 of the internal_revenue_code or corresponding section of any future federal tax code article of your charter states that you are organized to provide a private club for your members for social fratemal and community purposes and all other lawful purposes you claim to be affitiated with fraternal and article of your bylaws states that you are a subordinate under parent to promote the social and moral welfare of your members article ii of your bylaws states that your objectives are to encourage human and spiritual values of life to cooperate in all charitable and civic appeals to provide a practical means to form meaningful friendships altruistic services and to build better communities to promote true patriotism to our country and to be a loyal fratemal to cooperate in creating and maintaining sound public opinion and high standards which make possible the promotion af goodwill and community concem for others and to promote education for your members their family and for the community your narrative description of your activities and operations states that you plan to operate a social_club where members can meet for sccializing dining and entertainment you state that entertainment will include music card games chess video games dancing and billiards these activities will be available on a daily basis monday through saturday from a m to midnight and on sunday from p m to midnight you state that socializing dining and entertainment will be your primary daily activities your application states that these activities will further your exempt purposes by encouraging members and their guests to buy food and beverages which are income producing activities that aid in your ability to donate to charities and the community in further describing your activities you state that you may sponsor annual holiday parties for children of the community you state that at each of these events food will be served and food and clothing may be provided for needy children you will also promote activities that benefit the moral education and welfare of your members and their communities your application states you state that you will hold organizational meetings on a monthly basis that your activities will generally be held at your facilities and all activities will be conducted by your members you state there will be no fees charged to participate in your activities with the exception of annual membership dues of twanty-dollars dollar_figure article vi of your bylaws states that applicants for membership shall be any person not less than twenty-one years of age and of geod moral character applications for membership must be received in writing signed by the applicant and by a member of fratemal in good standing who recommends the applicant and gives the applicant's name age residence occupation and such other information as the chartered club may prescribe on date you stated in response to an irs letter seeking further information that effective in the near future all individuals entering the premises will be members each member will pay their dues on a quarterly basis and obtain membership cards to gain access to the premises prior to this time anyone could enter your facility whether or not they were members to engage in your social and entertainment activities your application states that you operate under the lodge_system and your parent organization is parent subordinates there are no classes of persons required to join members have the right to use all of your facilities and have full voting privileges on date in response to an irs letter asking for a further description of how you planned to achieve your objectives you responded that you will specifically focus your charitable efforts on local schools and local sports organizations n addition to regular donations you state that you will host at least two public events per year for charitable purposes you state that these events will possibly include an evening meal event and a sports toumament you state that dues are paid quarterly to parent who operates for the benefit of its additional ‘on date in response to another irs letter requesting additional information regarding your activities and operations you state that no member of the organization's governing body will have a business relationship with the organization in your reply to the date correspondence you state that a is your president and also president of b correspondence from you to the irs ragarding your exemption application states that bis your landlord and a your president is now sole owner of b you state that leasehold improvements have been made to the property that you lease from such improvements include expansion of the building and the sidewalk and parking lot addition while thera is controversy as to who paid for these improvements you represent that b paid for the improvements in the amount of x and that you did net pay for the improvements nor are expected to reimburse b for making the improvements also despite your having stated that no member of the organization's governing body will have a business relationship with the organization you state in your reply to the irs letter dated date that you presently have two outstanding loans payable to aand b these loans include xy payable to a your president as start-up capital for your organization and xyv payable to b as initial capital for all facility equipment initial legal fees and the charter fee paid_by you to parent you state that due to current financial conditions payments are not being made on these ioans from a and b you state that these loans were made as verbal agreements-no written documentation exists and when payments are made the monthly amounts will be at an interest rate of six percent you have video lottery machines on your premises you pay parent of the lottery machine income quarterly and also pay parent dollar_figure per member per quarter finally in support of your application you have made the following assertions f d e a b c effective date all individuals entering the premises must be active members of your organization effective date members must show their membership cards to gain entry effective date the members of the board_of directors will review bi-monthly the meeting attendance and participation in your activities by each member should the board determine that any member is not active tha board will first issue a warning letter to said member if said member remains inactive the board will recommend their membership termination effective date you will place a suggestion box on the premises for members to voice their opinions as to donations and activities effective date you will hold informal member social hours at least three times per week and keep informal minutes of said social hours the purpose of these sessions is for members to socialize and offer suggestions as to donations and activities effective date a membership log will indicate all individuals entering the premises to include the date and signature this log will be used by the directors when reviewing the active_participation of members sec_601 c of the intemal revenue code the code provides for the exemption of fratemal beneficiary societies orders or associations operating under the ladge system or for the exclusive benefit of the members of a fraternity itself operating_under_the_lodge_system and providing for the payment of life sick accident or other_benefits to the members of such society order or association or their dependents sec_501 c of the code provides for the exemption from federal_income_tax of domestic law fraternal societies orders or associations operating_under_the_lodge_system the net_earnings of which are devoted exclusively to religious charitable scientific literary educational and fraternal purposes and which do not provide for the payment of life sick accident or other_benefits sec_1_501_c_10_-1 of the income_tax regulations the regulations provides that an organization will qualify for exemption under sec_501 of the code if it is a domestic fraternal beneficiary society order or association described in sec_501 and the regulations thereunder except that it does not provide for the payment of life sick accident or other_benefits to its members and devotes its net_earnings exclusively to religious charitable scientific literary educational and fratemal purposes the leading judicial pronouncement as to what constitutes a fraternal beneficiary society contained in the follawing extract from national union v marlow 374_f_775 is a fratemal-beneficial society would be one whose members have adopted the same or a very similar calling avocation or profession or who are working in union to accomplish some worthy object and who for that reason have banded themselves together as an association or society to aid and assist one another and to promote the common cause the term ‘fraternal’ can properly be applied te such an association for the reason that the pursuit of a common object calling or profession usually has a tendency to create a brotherly feeling amang those who are thus engaged many of these associations make a practice of assisting their sick and disabled members and of extending substantial ald to the families of deceased members their work is at the same time of a beneficial and fraternal character because they aim to improve the condition of a class of persons who are engaged in a common pursuit and to unite them by a stronger bond of sympathy and interest the national union did not fit this definition because it was an association of individuals who were associated for the purpose of obtaining insurance the court concluded that in its practical operations therefore the defendant company cultivates fraternity and confers benefits in the same manner that every insurance_company doing business on the mutual plan cultivates feelings of fratemity and confers benefits upon its members or in other words when the defendant is stripped of all disguises and judged by the standard of what it is engaged in doing and what it was most likely organized to do it is simply an insurance_company which carries on an extensive business on the assessment plan central to the concept of fraternal beneficiary societies whether described in sec_501 or sec_504 of the code is the requirement of a fraternal element a common bond among members the requirement of a fraternal element is set forth in philadelphia and reading relief association 4_bta_713 in that case an organization composed of railroad employees organized to administer a relief fund for the payment of benefits to its members in case of sickness accident or death fell short of this requirement because it lacked the required fraternalistic element the court noted that the association’s membership consisted of individuals whose vocations were as numerous and diverse as the classifications of jabs of a railroad company that the only motive for the existence of the association was a mercenary one to provide insurance benefits that the erganization did not have rituals ceremonial and regalia commonly associated with fraternal associations and that it was not operated on the lodge_system in another case the u s tax_court held that an organization cannot be classified as fraternal when the only common bond between the majority of its members is their membership in that organization 24_tc_891 affirmed as to nonexempt status 236_f2d_509 only percent of the members fiad common ties in that they were polish war veterans or children of such veterans who had served in the armed_forces of the western alliance all other dues-paying members were admitted indiscriminately as long as they were elected to membership by a majority vote of members present at any meeting ‘the question as to the meaning of fraternai’ was also explored in wheeler v ben hur life ass'n w 2d the court concluded that the organization was not fratemal the association's constitution and by-laws duly provide for a lodge_system ritualistic form of work and representative form of government it has no capital stock and is ostensibly organized solely for the mutual benefit of its members but actually while giving superficial attention to these requirements the ‘association has been engaged in the life_insurance business the association draws a salary and receives as a commission of the first premium on all insurance policies he receives a smaller percentage of subsequent premiums the association's constitution and by-laws provisions relative to ritualistic work are observed only perfunctorily we are convinced from the evidence in this record that the primary function of the ben hur life association is to sell insurance and that the association actually is an insurance_company operating under the guise of a fraternal benefit society the local agent of te qualify for recognition of exemption as a fraternal beneficiary organization under sec_501 or sec_501 of the code an organization must also be operated under the lodge_system sec_1 -1 of the regulations states that operating_under_the_lodge_system means carrying on its activities under a form of organization that comprises local branches chartered by a parent organization and largely self-governing called lodges chapters or the like at a minimum this requires separate subordinate lodges that operate under the general control and supervision of a parent lodge and are subject_to the laws and edicts of the parent lodge n 2_f2d_367 the district_court for the eastern district of missouri defined lodge_system as follows by the lodge_system is generally understood an organization which holds regular meetings at a designated place adopts a representative form of government and performs its work according to a ritual that does not seem to be a harsh definition of what is usually understood as the lodge_system and is not so strict in its requirements as the definitions often stated in the statute books revrul_73_165 c b concerns an organization that was operated under the lodge_system was engaged in conducting fraternal activities but whose predominant activity was the provision of benefits to its members the ruling concludes that the organization was described in sec_501 c because there is no requirement that either the fraternal or the insurance features predominate so long as both are present the ruling is clear however that in order for an organization to be described in sec_501 it must contain substantial fratemal features and conduct substantial fraternal activities the courts have described fraternal activities as a grouping together of like-minded individuals to accomplish a commen purpose the group must be bound by more than membership in the organization and motivated by purposes other than solely the provision of insurance benefits revrul_77_258 1977_2_cb_195 provides that a domestic fratemal society operating_under_the_lodge_system which does not provide life sick accident or other_benefits whose members are interested in the use of and philosophy behind a method of attempting to divine the future and whose net_income is used to provide instruction on the use of the method maintain a reference library and supply information on the method to the public qualifies for exemption under sec_501 of the code rationale the information you provided fails to establish that you are a domestic fraternal society order or association that qualifies for exemption from federal_income_tax under sec_501 c of the code you are not operated for fraternal purposes you are not operated under the lodge_system and you do not devote your net_earnings to exclusively charitable or fraternal purposes fraternal purposes a although there is no definition of fraternal purpose in the internal_revenue_code we presume that congress used the term in the ordinary sense and according to its legal significance in when sec_501 was added the courts in the cases cited above were clear in requiring at a minimum that the members of a fratemal organization have a common tie that is more substantial than the desire to purchase insurance or engage in social activities fraternal-beneficiary society would be one whose members have adopted the same or a very similar calling avocation or profession or who are working in union to accomplish some worthy ‘object and who for that reason have banded themselves together as an association or society to aid and assist one ancthar and to promote the common cause national union y marlow supra an organization cannot be classed as fraternal where the only common bond between the majority of the members is thair membership in that organization polish army veterans post evidence of fraternal activities such as rituals ceremonial and regalia helps to establish that an organization has a fraternal purpose philadelphia and reading relief association supra revrul_73_165 echoes congress and the courts in holding that to establish exemption a fraternal_organization must have substantial fraternal features and conduct substantial fraternal activities lastly we look to substance over form the fact that an organization’s constitution and bylaws may provide for a lodge_system a ritualistic form of work and representative form of government is not enough if actual operations establish a primary function that is not fraternal wheeler v ben hur life association supra you do not have substantial fraternal features your mambership is open to anyone over years of age willing to pay a nominal membership fee similar to a cover charge your bylaws do not require and you submitted no evidence to establish that your members have a specific calling avocation or profession or a ‘common tie unlike the organization described in revrul_77_258 whose members had a single pursuit your activities do not illustrate how your members have joined together or worked in unison to accomplish ary worthy objective the only common bond among your members appears to be their membership further you stated that you have an open guest policy and do nat keep a guest log or other records you have not established that your members pay for the entertainment of their guests without further documentation we are unable to conclude that you are not open to the general_public in the same manner as a commercial tavern nor have you submitted evidence that your listed members have actually participated in substantial fraternal activities your operation of a public tavern and conduct of gaming is not inherently a fraternal or a charitable activity your charter and bylaws do not provide for rituals ceremonials or regalia commonly associated with fraternal associations you have had a few member meetings but you have not engaged in any member activities in furtherance of your stated objectives accordingly yau are not operated for fraternal purposes lodge_system n organization is operating under the lodge system’ if it operates under the general control and supervision of a parent iodge and is subject_to the laws and edicts of the parent lodge itis generally understood that such an organization holds regular meetings at a designated place adopts a representative form of government and performs its work according to a ritual the courts look to substance over form wheeler v ben hur life association supra a similar result was reached in western funeral benefit association v hellmich supra we cannot conclude on the basis of this record that you are property chartered and under the general control and supervision of a parent lodge you submitted a signed affiliation agreement with parent assigning you a lodge number although your stated purposes are identical to that of parent you submitted no information regarding parent's activities or its rules regarding your participation the agreement is devoid of any operational or oversight requirements regarding your activities you are required to pay parent a substantial chartering fee and a percentage of all gaming revenue to use parent's name the only oversight parent exercises is to audit your financial statements to be sure it is paid the proper amounts operation of a commercial franchise we also cannot conclude that parent exercises supervision and control aver other independent lodges this does not satisfy the requirement that a parent control and supervise separate independent subordinate lodges that are operating under the ladge system is similar to the purchase and this further you have had only a few membership meetings since you are totally controlled by your founders and do not follow your bylaws as to member input we cannot conclude that you have a representative form of gaverament in addition since you have held only a few member meetings and have not commenced fraternal activities we cannot conclude that you perform your work according to a ritual accordingly you are not operated under the lodge_system devotion of net eamings to exclusively charitable or fratemal purposes the information you submitted shows that b paid your chartering fee and all additional expenses associated with your formation organization wholly owned by a your president to rent and operate your facility we conclude therefore that your net_earnings are used predominately to engage in business undertakings in addition we are unable to conclude from the information submitted that your net_earnings do in retum you have contracted with b an in the form of inflated payments for services rendered through his company not inure to a since your net eamings are used predominately to engage in business undertakings that enhance the financial wall being of a we cannot conclude that your net_earnings are used exclusively for religious charitable scientific literary educational and fraternal purposes as tequired by sec_501 of the code conclusion you are not described in sec_504 c of the code because you are not operated for fraternal purposes you are not operated under the lodge_system you do not devote your net_earnings to exclusively charitable or fraternal purposes you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalty of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains alll the relevant facts and such facts are true correct and complete please send your protest statement form_2848 and any supporting documents to this address if you do not intend to protest this determination you do not need to take any further action if we do not here from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters you also have a right to request a conference to discuss your protest this request should be mace when you file your protest statement an attorney certified_public_accountant or an if you individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power of attomey form_2848 power of attomey and declaration of representative if you have not already done for more information about representation see publication practice_before_the_irs and power of attomey all forms and publications mentioned in this letter can be found at wow its gov forms and publications you may alse fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this fetter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter constitution ave n w washington dc intemal revenue service teige se t eo ra t if in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely director exempt_organizations rulings and agreements


department of the treasury internal_revenue_service washington d c date uil number info release date the honorable kay bailey hutchison united_states senator north central expressway suite lb dallas tx attn mary fae kamm dear senator hutchison this letter replies to your inquiry dated date on behalf of several of your constituents from the concerned about advice from the internal_revenue_service irs that water district directors are employees of the districts they represent the district the district is the district is concerned because that advice conflicts with previous advice provided by the irs the advice requires the district to report the amounts paid to the water district directors on form_w-2 and to withhold and pay federal employment_taxes on those amounts the district is concerned about the additional cost and record keeping that will require while i cannot discuss an individual’s tax information without his or her permission i can provide the following general information which i hope will assist you in responding to your constituents amounts paid to water district directors from a government fund are properly treated as wages any advice provided by the irs to the contrary was in error the district should report amounts paid to the employees on forms w-2 and the employees should report the amounts as wages on form sec_1040 the letters you forwarded to this office state that water district directors are typically residents of the water districts that they represent they are elected by their neighbors to oversee the water and wastewater services thus they are elected public officials various internal_revenue_code code provisions govern whether an elected official is subject_to employment_taxes in general when a public official receives payment directly from the members of the public with whom he does business sec_1402 of the code provides that the public official is engaged in a trade_or_business and is subject_to self-employment contribution act seca taxes the payments are considered fees not wages and are properly reported on form_1099 however when a public official receives remuneration or salary from a government fund and may not keep amounts he collects from the public in his course of duties the payments are wages and are properly reported with form_w-2 see empl tax reg sec_31 a - b revrul_74_608 1974_2_cb_275 thus the source of a public official’s payments determines whether the amounts received constitute fees or wages because water district directors are compensated from a government fund the amounts they are paid are properly treated as wages reported with form_w-2 wages reported with form_w-2 may be covered by social_security insurance and medicare insurance subject_to limited exceptions state and local_government employees are subject_to medicare_tax and state and local_government employees who are not covered by a public retirement program are subject_to social_security_tax a detailed explanation of social_security and medicare coverage of state and local_government employees is provided in code sec_3121 and sec_3121 and the regulations corresponding to those code sections this letter will be made available for public inspection after names addresses and other identifying information have been deleted as appropriate under the freedom_of_information_act i am sorry for the confusion the previous irs letter has created i hope this information is helpful to you in responding to the district as requested i am enclosing a copy of your letter if you have questions regarding this letter or if i can be of further assistance please contact linda alsalihi id no of my staff at sincerely mary oppenheimer assistant chief_counsel employee_benefits and exempt_organizations enclosure


internal_revenue_service p o box cincinnati oh number release date date date legend b program c country d geographic region dear department of the treasury employer_identification_number contact person - id number contact telephone number uil you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program called b the purpose of your program is to facilitate the introduction of international art professionals to artists and art professionals living and working in c thus fostering greater awareness of and knowledge about contemporary c art in the international art community you will periodically select a group of individuals each of whom must be actively engaged in the field of contemporary art for travel as a group to c trips will be scheduled for no longer than one week on each trip the group will meet with contemporary artists and other art professionals residing in c visiting their studios galleries and other artistic and cultural venues the director and curator of your program will develop an itinerary for each group and be the trip leader you will publicize this program through your website press releases and newsletters sent to a dedicated mailing list and individually focused emails the number of grants will be determined by fund availability and by the quality of applications received your grant to each individual will consist of its payment or reimbursement of the costs of each individual's i round-trip airfare to and from c ii meals_and_lodging while in c and iii local transportation within c the amount of each grant will not exceed the funding of each individual's travel costs because individual travel costs can vary depending upon for example the availability of group lodging rates or the different air fare charges for flights between each individual's residence and c the total amount of each grant cannot be forecast at this time however in no event will that amount exceed total travel costs paid directly on behalf of each individual or reimbursed to each individual as substantiated by expense records eligibility requirements be at least years of age actively work as an arts professional in the contemporary art field an arts professional is defined as a curator artist critic and arts administrator agree to prepare a short written report upon completion of the trip describing your experience and its potential impact on your creative endeavors possess a passport and the appropriate visas at time of airline ticket purchase in order to travel to c relatives of your board_of directors council members staff and contributors are not eligible to apply grants are awarded to individuals only once in their lifetime a prior recipient is not eligible to apply to apply applicants must submit the following information resume including a list of your art-related affiliations pages a description of why a trip to c would benefit your creative endeavors no more than words a description of what you hope to bring to the c art community both during the trip and after no more than words a list of artists and other art professionals you would like to meet and cultural venues you would like to visit during the trip to c your founders are permanent members of your board_of directors the initial b director is selected by your board_of directors to establish and run the program on a continuing basis should the director leave the program for any reason the board_of directors will seek to engage a similarly-qualified individual as a successor in consultation with the b council the council members have volunteered to be advisors to the program and have key expertise in the contemporary art field each member is serving for a one-year term the term of each member can be renewed for additional one-year periods by agreement between the board_of directors and the member should a member cease to serve the board_of directors will seek to engage a similarly-qualified individual as the member's successor in consultation with the b director letter catalog number 58222y the award to any recipient will be made by the director of the program in consultation with the members of the council specifically the director will screen all submitted applications into potentially qualifying applicants then review these with council members to obtain their views this review will take into consideration the criteria set forth below the final selection of the recipients will be based on the collective judgment of the director and the council members there will be no discrimination on the basis of race national origin sexual orientation religion or gender the specific criteria used to select individuals will be based on experience and expertise in the field of contemporary art as it relates to key themes pertinent to d particularly c as evidenced by the following exhibitions of their work published articles blog pieces and other writing examples work and educational backgrounds art-related organizational affiliations and reputations within the contemporary art community once accepted the individual will be required to sign an agreement confirming his or her participation the individual will be obligated to submit a short written report about his or her experience describing in particular what impact if any that the trip will have on the individual's current and future creative endeavors the written report will be due within days of completion of the trip trips will be based upon a budget prepared by the director in collaboration with your board_of directors the director will prepare an itinerary of activities in advance of each trip the itinerary will be circulated to all participants in advance it is expected that each participant will attend all of the scheduled activities the director will then coordinate travel arrangements with the participants once a trip is underway the director will lead and supervise the trip participants who fail to comply with the requirements prior to departure will forfeit their trip it is not anticipated that a participant will have an opportunity to misuse or to divert funds either before or during the trip given the director's coordination and supervision of the trip if a participant submits a reimbursement request without adequate substantiation reimbursement will be denied following the receipt and review of the participants' reports the director will submit a report to the board_of directors summarizing the experience and the participants' reactions the director will further make recommendations as to whether you should engage in any follow-up publicity about the trip and the c artists with whom the participants interacted you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes and take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds letter catalog number 58222y held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees' assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversion from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - a scholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 a ii or - a prize or award subject_to the provisions of section b if the recipient of the prize or award is selected from the general_public or - to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent letter catalog number 58222y you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements letter catalog number 58222y