t c memo united_states tax_court william c beretta petitioner v commissioner of internal revenue respondent docket no filed date william c beretta pro_se andrew p crousore for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in petitioner's federal_income_tax and additions to tax and penalties for fraud as follows additions to tax and penalties sec year deficiency b a dollar_figure big_number big_number big_number dollar_figure - - - sec sec_6653 b b - dollar_figure - - - - - sec_6663 - - dollar_figure big_number in addition with respect to the taxable_year respondent has determined an addition_to_tax pursuant to sec_6653 in an amount equal to percent of the interest due on the underpayment attributable to fraud the issues for our consideration are whether petitioner was required to report as income money received from two restaurants during the years at issue whether petitioner failed to report dividend income from jointly held mutual funds for and whether petitioner received dollar_figure in unreported income as a result of preparing a u s individual_income_tax_return form_1040 in the name of chris arias whether respondent properly denied petitioner's claimed capital losses of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively whether petitioner was entitled to claim his mother as a dependent on his federal_income_tax return whether petitioner was entitled to certain claimed itemized_deductions for and respectively and whether any part of any underpayment_of_tax on petitioner's returns for the taxable years through was due to fraud findings of fact1 at the time the petition in this case was filed petitioner mr william beretta resided in salinas california petitioner claimed head_of_household filing_status for each of the years at issue skimmed proceeds mr beretta was employed by the internal_revenue_service irs collection_division from to as a revenue_officer mr beretta was trained to identify tax examination situations and to inform taxpayers of their obligation to pay taxes in particular mr beretta conducted investigations of taxpayers who had failed to file tax returns in addition to his employment with the irs mr beretta also invested in several restaurants during the years at issue petitioner owned an interest in three restaurants the salinas peppertree restaurant the seaside bobby rodgers steak and gourmet burgers and the atascadero peppertree restaurant mr beretta was a principal in a corporation known as hrb enterprises inc hrb enterprises the three principals in the corporation were randy hurst h bobby rodgers r and mr beretta b hrb enterprises operated various restaurants in atascadero fresno and salinas california on date the stipulation of facts and the attached exhibits are incorporated by this references mr beretta became an equity owner of a peppertree restaurant in salinas when the restaurant was purchased by hrb enterprises from denny's inc mr beretta provided the majority of capital to acquire the salinas peppertree restaurant in early mr beretta advanced an additional dollar_figure to hrb enterprises this advance was evidenced by two promissory notes from hrb enterprises that were payable on demand in late mr beretta discovered that randy hurst and bobby rodgers were embezzling money from several of the restaurants that were owned by hrb enterprises as a result of a negotiated settlement mr beretta received two restaurants that were previously owned by hrb enterprises the salinas peppertree restaurant and seaside bobby rodgers steak and gourmet burgers in date mr beretta entered into an agreement with william arias whereby a new corporation would be formed to take over the salinas peppertree restaurant mr beretta and mr arias formed dobra enterprises inc by recording articles of incorporation but they never completed the incorporation process mr beretta and mr arias agreed that mr arias would contribute the expertise and mr beretta would contribute the restaurant business for which they would each receive a share of the profits throughout the period to date mr beretta was fully involved in the operation and supervision of the salinas peppertree restaurant mr beretta reflected a 50-percent ownership of the salinas peppertree restaurant as a personal asset on a loan application mr beretta and william arias agreed that they would skim money directly from the restaurant's cash register the parties decided that mr beretta would receive the majority of the skimmed proceeds in the beginning the arrangement was for mr beretta to receive percent and william arias to receive percent of the skimmed proceeds during and during mr beretta and mr arias split the skimmed proceeds equally mr beretta instructed pat bartley the manager of the salinas peppertree restaurant to remove however much currency the restaurant could afford mr beretta ordered ms bartley to account for the skimmed proceeds as a miscellaneous expense in the daily sales book this column was also used to account for cash payments to employees ms bartley removed between dollar_figure and dollar_figure a day for mr beretta mr beretta instructed ms bartley to put the currency in an envelope and to place the envelope inside the safe at the restaurant mr beretta advised ms bartley that the money was repayment to him for the money that he had invested in the restaurant mr beretta came into the restaurant every or days and collected the currency in january of mr beretta invested dollar_figure to open a peppertree restaurant in atascadero california mr beretta's partner in this venture was garlo enterprises inc a wholly owned corporation of gary longfellow although the atascadero peppertree restaurant was owned by garlo enterprises inc mr beretta was the primary financial force behind the restaurant garlo enterprises inc and mr beretta formed a partnership to operate the atascadero peppertree restaurant mr beretta assisted in the preparation of garlo enterprises inc ’s corporate tax returns forms for the years through mr beretta and mr longfellow agreed to split the profits from the atascadero peppertree restaurant equally mr beretta suggested to mr longfellow that they skim money from the cash register in order to avoid paying taxes on any profits from the restaurant mr longfellow agreed and he began removing between dollar_figure and dollar_figure a day from the cash register depending on the restaurant's cash-flow at the end of the day mr longfellow would place mr beretta's money in a bag for mr beretta to come by and retrieve in order to account for the skimmed proceeds mr longfellow would make false overrings on the cash register and then remove an amount of cash equal to the false overring therefore the skimmed profits were not reported on the restaurant's books mr beretta would stop by the restaurant occasionally in order to retrieve his share of the skimmed proceeds on date mr beretta pleaded guilty to a federal criminal conflict of interest charge for abating a tax bill of the atascadero peppertree restaurant respondent conducted a bank_deposits analysi sec_2 in order to calculate the amount of unreported income including skimmed proceeds that mr beretta received the amount of unreported income calculated and determined for the years at issue is as follows year total skimmed proceeds dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dividend income during the years at issue petitioner maintained investment accounts with franklin money fund and strong total return funds the accounts were established with petitioner's funds petitioner held one of the accounts as custodian for his daughter jennifer beretta and three accounts in joint_tenancy with jennifer beretta on his tax_return petitioner the bank_deposits analysis is conducted by examining deposits into an individual's bank account reported income and any nontaxable items are subtracted from total deposits in order to determine unreported income reported a dollar_figure capital_loss with respect to one of the strong total return fund accounts he held in joint_tenancy with his daughter in addition petitioner listed said accounts as his assets on loan applications prepared and filed during the period at issue the accounts produced the following dividends for the years at issue account dividends dividends dividends franklin money fund acct no strong fund acct no strong fund acct no strong fund acct no dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dividends dollar_figure dollar_figure dollar_figure the dividend amounts shown above were reported on jennifer beretta's income_tax returns for the years at issue respondent determined that petitioner maintained control of the investment accounts and therefore included the dividend amounts in petitioner's income for taxable years and respectively income_tax refund petitioner participated in a scheme to defraud the u s government specifically petitioner and william arias fraudulently prepared and filed a federal tax_return claiming a refund under the name chris arias chris arias william arias' brother never received the dollar_figure refund check from the return that was filed on his behalf instead william arias received the check cashed it and delivered dollar_figure in cash to mr beretta for his participation in the scheme mr beretta did not report the dollar_figure as income on his federal individual_income_tax_return respondent included the dollar_figure in petitioner's income for the taxable_year capital losses on his tax_return petitioner claimed a capital_loss from the sale of stock in a strong total return fund in the amount of dollar_figure at trial petitioner presented documentary_evidence substantiating the claimed loss respondent disallowed the dollar_figure loss in his notice_of_deficiency petitioner claimed capital losses of dollar_figure dollar_figure dollar_figure and dollar_figure from bad_debts for the tax years and respectively the bad_debts were the result of petitioner's payments to creditors for obligations of the restaurants for which he was a guarantor in petitioner paid dollar_figure for liabilities owed to pg e an electrical supplier of one of the restaurants in which petitioner owned an interest in petitioner paid dollar_figure for liabilities owed to a local garbage company petitioner paid dollar_figure and dollar_figure in the years and respectively on a wells fargo bank loan that was taken out when petitioner acquired an interest in the bobby rodgers steak and gourmet burgers restaurant petitioner made those loan payments when the restaurant was unable to make the payments out of its own funds respondent disallowed the claimed capital losses for all years dependent petitioner claimed his mother edith beretta as a dependent on his income_tax return mrs beretta suffered a stroke in as a result of which she moved into petitioner's home mrs beretta resided with petitioner from date until date at which time she returned to the hospital respondent determined that mrs beretta was not a dependent of petitioner deductions petitioner claimed expenses for legal fees in connection with his ownership of various restaurants in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years and respectively petitioner expended dollar_figure dollar_figure dollar_figure and dollar_figure for legal expenses for the tax years and respectively the legal expenses were incurred in defending suits from the restaurants' creditors respondent disallowed the claimed expenses for all years in addition petitioner claimed medical_expenses in the amount of dollar_figure for amounts paid on behalf of his mother edith beretta in respondent determined that edith beretta was not a dependent of petitioner and accordingly denied petitioner's deduction for the claimed medical_expenses issue skimmed proceeds opinion initially we must decide whether petitioner's receipt of cash from the two restaurants constituted taxable_income the accuracy of respondent's bank_deposits analysis is not at issue because petitioner has conceded that he has received approximately dollar_figure in cash from the salinas and atascadero peppertree restaurants during the years at issue petitioner claims that the skimmed proceeds were repayment for amounts loaned to the two restaurants and therefore the receipt of the cash constituted a nontaxable repayment of the loan principal in addition mr beretta contends that he received no interest on the amounts lent respondent contends that the transfers of funds to the restaurants were not loans and that petitioner's receipt of the skimmed proceeds constituted taxable_income we agree with respondent although we are not deciding a debt versus equity question we find that the test used by this court in deciding that issue will be useful in deciding whether petitioner's transfers of funds to the restaurants constituted loans the question of whether a transfer of funds to a closely_held_business constitutes debt or equity must be decided on the basis of all relevant factors 74_tc_476 courts look to the following nonexclusive factors to evaluate the nature of transfers of funds to closely held businesses the names given to the documents evidencing the purported loans the presence or absence of fixed maturity dates with regard to the purported loans the likely source of any repayments whether the taxpayers could or would enforce repayment of the transfers whether the taxpayers participated in the management of the business as a result of the transfers whether the taxpayers subordinated their purported loans to the loans of the corporation's creditors the intent of the taxpayers and the corporations whether the taxpayers who are claiming creditor status were also shareholders of the corporations the capitalization of the corporations the ability of the corporations to obtain financing from outside sources at the time of the transfers how the funds transferred were used by the corporations the failure of the corporations to repay and the risk involved in making the transfers id these factors serve only as aids in evaluating whether transfers of funds to a closely_held_business should be regarded as capital contributions or as bona_fide loans boatner v commissioner tcmemo_1997_379 no single factor is controlling dixie dairies corp v commissioner supra as expressed by this court the ultimate question is was there a genuine intention to create a debt with a reasonable expectation of repayment and did that intention comport with the economic reality of creating a debtor-creditor relationship 61_tc_367 we find that mr beretta's transfers of funds to the entities that controlled the atascadero and salinas peppertree restaurants were not loans only the factors material to our decision will be discussed first the notes that evidenced the contributions to hrb enterprises had no maturity_date the absence of a maturity_date with respect to a note weighs against finding that the transfers were loans 730_f2d_634 11th cir affg tcmemo_1982_314 second the source of repayments for the transfers was highly unusual mr beretta had employees skim money directly from the cash registers on his behalf no repayment schedule existed for the purported loans and no record was ever kept of the amount of money that mr beretta was receiving from the two restaurants in addition the amount of money that mr beretta skimmed each month depended directly upon the earnings_of the restaurants these factors indicate that the transfers were not loans and that the repayments were not loan repayments id third mr beretta concedes that he never received interest payments on the alleged loans a true lender is concerned with interest 396_f2d_630 5th cir if the lender does not insist on interest payments he is therefore interested in the future earnings_of the corporation or the increased market_value of his interest id moreover while the notes evidencing the transfers called for interest payments none were actually made the absence of interest supports our ultimate finding that the advances were not loans based on all of the facts and circumstances surrounding the transfer of funds we hold that mr beretta's transfers to the restaurants were not loans further the skimming payments to petitioner were being divided with his coowners based on ownership in that regard there is no evidence that petitioner's coowners also had made any advances that could be considered loans finally petitioner disregarded the business form and entity of the respective restaurants and as relevant here used the assets and income of the restaurants as his own petitioner does not deny that the skimmed proceeds were converted to his own use he had complete and unfettered use of the skimmed proceeds and therefore the receipt of the skimmed proceeds constituted income within the meaning of sec_61 issue dividend income the next issue for our consideration is whether petitioner failed to report dividend income from certain jointly held mutual funds for and petitioner held one of the mutual_fund accounts as custodian for his daughter jennifer beretta and three accounts in joint_tenancy with her resolution of this issue turns on who is the true owner of the income-producing property the owner of property for federal_income_tax purposes is a question of fact to be determined from an examination of all the facts and circumstances 95_tc_74 in determining the identity of the owner of the property we may look to beneficial_ownership instead of mere legal_title 80_tc_1090 affd 765_f2d_1051 11th cir it i sec_3 unless otherwise indicated all section references are to the internal_revenue_code for the years in issue and all rule references are to the tax_court rules_of_practice and procedure command over the property or the enjoyment of its economic benefits that marks the real owner hang v commissioner supra the accounts were created with petitioner's personal funds when a parent holds an account in joint_tenancy with his child or as guardian for his child income from the account that is used to support the child is taxable to the person who is legally liable for such support garriss inv corp v commissioner tcmemo_1982_38 courts apply strict scrutiny to transactions between related parties to prevent the shifting_of_income into lower tax brackets doxey v commissioner tcmemo_1991_150 affd without published opinion 979_f2d_1534 5th cir mr beretta did not show whether he had a support obligation for his daughter or that he was not the beneficial_owner of the accounts we also find it persuasive that petitioner claimed losses from the accounts on his tax returns while the income from the accounts was reported on his daughter's returns accordingly mr beretta is taxable on the dividend income credited to the accounts during the taxable years at issue issue income_tax refund the next issue for our consideration is whether petitioner received dollar_figure in unreported income in connection with his preparation of a false u s individual_income_tax_return form_1040 in the name of chris arias mr beretta and william arias participated in a scheme to defraud the u s government by fraudulently preparing and filing a federal tax_return claiming a refund under the name of chris arias mr beretta received dollar_figure for his part in the scheme gross_income includes funds derived from legal and illegal sources 343_us_130 accordingly the dollar_figure should be included in petitioner's income for the taxable_year issue capital losses we next must decide whether petitioner is entitled to claimed capital losses for the years at issue on his tax_return petitioner claimed a dollar_figure capital_loss from the sale of stock in the strong total return fund we have already decided that petitioner was the owner of the mutual funds for federal tax purposes at trial petitioner presented documentary_evidence substantiating the claimed loss we find that petitioner is entitled to the dollar_figure capital_loss sec_165 petitioner claimed capital losses of dollar_figure dollar_figure dollar_figure and dollar_figure from bad_debts for the tax years and respectively the bad_debts were the result of payments made for liabilities to creditors of the restaurants for which mr beretta was a guarantor payments by an individual on a guaranty of a debt which are not then repaid to the guarantor may give rise to a bad_debt deduction if the debt to the guarantor is worthless tolzman v commissioner tcmemo_1981_689 sec_1_166-8 income_tax regs whether or not a debt has become worthless within a particular year is a question of fact the burden of proving which rests upon the petitioner 97_tc_579 petitioner has offered no evidence that the restaurants' obligation to repay him for amounts paid became worthless in the years claimed by petitioner in addition petitioner's claim that the obligation to repay him became worthless contradicts his claim that he received thousands of dollars in loan repayments from the restaurants during the years at issue accordingly respondent's denial of the bad_debt deduction with respect to these guaranty payments is sustained issue dependent the next issue for our consideration is whether petitioner was entitled to claim his mother edith beretta as a dependent on his income_tax return sec_151 allows a taxpayer to claim an exemption for each dependent as defined in sec_152 whose gross_income is less than the exemption_amount sec_152 defines the term dependent to include the mother of a taxpayer who receives over one-half of her support from the taxpayer during the taxable_year petitioner bears the burden of showing that he is entitled to claim his mother as a dependent collins v commissioner tcmemo_1994_409 petitioner has failed to show that he is entitled to claim his mother as a dependent petitioner did not substantiate that he provided over one-half of his mother's support nor did he provide any evidence that his mother's gross_income was less than the exemption_amount thus we sustain respondent on this issue and hold that petitioner is not entitled to claim his mother as a dependent issue deductions we next consider whether petitioner is entitled to various claimed itemized_deductions for the years at issue petitioner claimed deductions for legal fees in connection with his ownership of several restaurants in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years and respectively sec_162 provides for a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business 50_tc_823 affd per curiam 412_f2d_201 2d cir an ordinary_and_necessary_expense is one that is appropriate and helpful to the taxpayer's business and that results from an activity which is a common and accepted practice 77_tc_1124 affd without published opinion 9th cir legal fees are deductible under sec_162 if they arise in connection with or proximately from the taxpayer’s trade_or_business peters gamm west vincent inc v commissioner tcmemo_1996_186 deductions are a matter of legislative grace and petitioner bears the burden of proving that he is entitled to the deductions claimed rule a 503_us_79 at trial petitioner presented testimony substantiating legal expenses in connection with his ownership of the restaurants of dollar_figure dollar_figure dollar_figure and dollar_figure for the tax years and petitioner incurred the legal expenses defending his business from creditors' suits accordingly petitioner is entitled to deduct legal expenses in the above-listed amounts we reach a different result with respect to the dollar_figure in medical_expenses that petitioner claimed on his return for amounts paid on behalf of his mother since we have determined that petitioner's mother is not a dependent of petitioner petitioner is not entitled to deduct medical_expenses paid on her behalf sec_213 therefore we sustain respondent's determination with respect to this issue issue fraud additions to tax and penalty finally we consider whether any part of the underpayment_of_tax required to be shown on petitioner's returns was due to fraud respondent determined that the underpayment_of_tax was due to fraud under the statute applicable for each taxable_year sec_6653 for and and sec_6663 for and these sections impose an addition_to_tax or penalty equal to percent of the portion of the underpayment which is attributable to fraud however if respondent proves that any portion of the underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud unless petitioner can establish by a preponderance_of_the_evidence that a portion is not attributable to fraud sec_6653 sec_6663 fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing 829_f2d_828 9th cir affg tcmemo_1986_223 respondent has the burden of proving fraud by clear_and_convincing evidence rule b to satisfy this burden respondent must prove that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 94_tc_654 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 96_tc_858 affd 959_f2d_16 2d cir fraud in addition with respect to the taxable_year respondent has determined an addition_to_tax pursuant to sec_6653 in an amount equal to percent of the interest due on the underpayment attributable to fraud is never presumed and must be established by independent evidence of fraudulent intent edelson v commissioner supra fraud may be shown by circumstantial evidence because direct evidence of the taxpayer's fraudulent intent is seldom available 67_tc_181 affd without published opinion 578_f2d_1383 8th cir the taxpayer's entire course of conduct may establish the requisite fraudulent intent 56_tc_213 53_tc_96 courts have developed several indicia of fraud or badges_of_fraud which include understatement of income inadequate books_and_records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of assets failure to cooperate with tax authorities filing false forms w-4 failure to make estimated_tax payments dealing in cash engaging in illegal activity and attempting to conceal illegal activity 796_f2d_303 9th cir affg tcmemo_1984_601 91_tc_874 this list is nonexclusive 94_tc_316 the strongest evidence of fraud in this case is the method in which petitioner received income from the restaurants petitioner instructed pat bartley the manager of the salinas peppertree restaurant to remove cash directly from the restaurant's cash register and place the money in an envelope mr beretta ordered ms bartley to account for the skimmed proceeds as a miscellaneous expense in the daily sales book in addition petitioner suggested to mr longfellow that they skim money directly from the atascadero peppertree restaurant cash register in order to account for the skimmed proceeds mr longfellow would make false overrings on the cash register and then remove an amount equal to the false overring we find that petitioner's entire course of conduct reveals that he willfully intended to conceal income and prevent the collection of tax he knew was owing on the skimmed income petitioner skimmed money directly from the cash registers in order to make it difficult to determine that he was receiving income from the restaurants and to ensure that no record existed of the amount of money that he was deriving from the restaurants in addition petitioner received all of his income from the restaurant in cash in order to make the detection of skimming activity more difficult petitioner also ensured that his name was not on any of the business records for any of the restaurants in which he was involved fraud may be inferred from conduct intended to conceal income gajewski v commissioner supra stone v commissioner supra pincite we also find it persuasive that the skimming from the restaurants continued for a number of years courts have held that consistent understatements of income in substantial amounts over a number of years by knowledgeable taxpayers are persuasive evidence of fraudulent intent to evade taxes 251_f2d_311 9th cir affg tcmemo_1956_112 otsuki v commissioner supra pincite another important factor in this case is mr beretta's knowledge of the tax laws the intelligence and sophistication of the taxpayer especially his knowledge of the tax laws is an important factor in determining whether he committed fraud 877_f2d_1364 8th cir affg tcmemo_1987_412 mr beretta was employed by the internal_revenue_service as a revenue_officer for nearly years mr beretta was trained to identify tax examination situations and to inform taxpayers of their obligation to pay taxes in addition he investigated taxpayers who had failed to file tax returns petitioner asserts that he honestly believed that the proceeds were repayment for interest-free loans made to the restaurants we find it difficult to believe that a person with petitioner's knowledge of tax law would not know that the receipt of cash directly from the cash registers of the restaurants he owned was not taxable there was no loan schedule nor were there any records of the amounts that petitioner was receiving nothing in the entire course of conduct surrounding these payments indicates that a legitimate loan was being repaid based upon these indicia we find that respondent has carried the burden of showing by clear_and_convincing evidence that petitioner's failure to report income for and was fraudulent with the intent to evade his tax because we have found that respondent has proven fraud with respect to portions of the underpayments the entire underpayments shall be treated as attributable to fraud because petitioner has not established by a preponderance_of_the_evidence that any portion is not attributable to fraud sec_6653 sec_6663 to reflect the foregoing decision will be entered under rule


internal_revenue_service index number number release date department of the treasury p o box ben franklin station washington dc contact person telephone number refer reply to cc dom p si - plr-120226-98 date date legend partnership agency project state city a b c d plr-120226-98 e f g h i j k l m dear this letter responds to your letter dated date that was submitted on behalf of agency and partnership requesting a letter_ruling under sec_42 of the internal_revenue_code and sec_1_42-13 of the income_tax regulations to correct an administrative error in an allocation of the low-income_housing_credit dollar amounts agency and partnership represent that the facts are as follows facts partnership is a state limited_partnership that was formed on a partnership is engaged principally in the business of developing land and constructing and operating the project consisting of b units located in city partnership expects that all of the units in the project will qualify for low-income_housing credits pursuant to sec_42 on c partnership submitted an application to agency for a reservation of d low- income housing credits in the amount of dollar_figuree the application reflected a site plan calling for b units in f buildings on g the project received a reservation letter from agency tentatively reserving low-income_housing credits in the amount of dollar_figuree to f buildings in the project on h the project received dollar_figuree in carryover allocation credits from agency for f buildings subsequent to the date of the i carryover allocation and following construction of the project the certified_public_accountant retained by partnership to cost certify the cost of the project noted that j of the buildings in the project served as community plr-120226-98 buildings and contained no residential units therefore the number of buildings with low-income units for which building identification numbers bins should have been given was k instead of f buildings as a result of this mistake the number of buildings that are to be used on the certificates of occupancy will no longer match the number assigned by agency for purposes of providing a carryover allocation thus the forms low-income_housing_credit allocation certification to be issued to the project will not reflect the correct number of buildings agency and partnership at the time of the i carryover allocation intended for b units to be constructed in the project the existing building-by-building allocation pursuant to the carryover allocation does not allow partnership to maximize the credits allocated to the project and seriously affects the project’s financial feasibility thus the i carryover allocation inaccurately reflects the intent of agency and partnership at the time the carryover allocation document was prepared the mistake with respect to the number of qualified low-income buildings was not discovered until l when partnership’s accountant was preparing documentation for the audit of the project’s costs as of the placed_in_service_date in order to receive forms for each building upon discovery of the problem partnership’s accountant immediately contacted partnership to prepare a letter_ruling request to correct the error or omission the project manager provided a narrative to agency of the project reconfiguration on m the correction of the administrative error or omission will have no affect on the low-income_housing credits allocated to the entire project the correction however will affect the credits allocated to each building furthermore the correction of the administrative error or omission will have no effect on the housing_credit ceiling under sec_42 or on agency’s unused housing_credit carryover that is assigned to the secretary under sec_42 in connection with the above statement of facts agency represents that it intended to make a project-based allocation to the project pursuant to sec_42 the number of buildings in the project was not material to the carryover allocation for the project and the fact that the project had k residential buildings rather than f would not have affected a the amount of low-income_housing tax_credit allocated to the project b the ranking of the project in agency’s i allocation round or c any other aspect of the carryover allocation for the project ruling requested agency and partnership request the internal_revenue_service to rule that agency can amend the i carryover allocation to allocate the appropriate amount of low- plr-120226-98 income housing_credit to each of the k buildings in the project not exceeding dollar_figuree for the entire project as required under sec_1_42-13 agency and partnership hereby agree to such conditions as the secretary considers appropriate if the above ruling_request is granted law and analysis under sec_42 state and local housing_credit agencies may correct administrative errors and omissions concerning allocations and recordkeeping within a reasonable period of time after their discovery sec_1_42-13 defines an administrative error or omission as a mistake that results in a document that inaccurately reflects the intent of the agency at the time the document is originally completed or if the mistake affects a taxpayer a document that inaccurately reflects the intent of the agency and the affected taxpayer at the time the document is originally completed sec_1_42-13 however provides that an administrative error or omission does not include a misinterpretation of the applicable rules and regulations under sec_42 in the present case partnership committed an administrative error when the d credit application referenced f buildings when the actual number of residential buildings was k this error was not a misinterpretation of the applicable rules and regulations under sec_42 however this error did result in a document ie i carryover allocation that did not accurately reflect the intent of agency and partnership at the time the document was executed the intent of agency was to allocate the same amount of credit to the project notwithstanding the number of the buildings in the project further the change does not affect the amount of housing_credit_dollar_amount allocated to the project the ranking of the project in agency’s i allocation round nor any other aspect of the carryover allocation for the project thus a correctable administrative error occurred in this situation under the represented facts the i carryover allocation is the credit allocating document under sec_1_42-13 the secretary must pre-approve a correction of an administrative error or omission if the correction is not made before the close of the calendar_year of the error or omission and the correction requires a numerical change to the credit_amount allocated for the building or project in the present case the correction would involve a numerical change to the credit_amount allocated to the k buildings that properly received bins based solely on the representations and the relevant law and regulations set forth above we conclude as follows plr-120226-98 partnership committed an administrative error when it failed to correctly identify the actual number of residential buildings in the project in its d credit application to agency because of that administrative error the i carryover allocation inaccurately reflects the intent of agency and partnership when the i carryover allocation was executed agency will correct the administrative error within a reasonable period of time after agency became aware of the administrative error agency will remove the j bins that were assigned in error to accurately reflect that there are k residential buildings in the project and agency will allocate low-income_housing tax_credit to each of the k residential buildings in the project not exceeding dollar_figuree for the entire project to correct this administrative error agency must do the following amend the i carryover allocation to remove the j bins erroneously assigned to the community buildings in the project and to allocate the appropriate amount of low-income_housing tax_credit to each of the k residential buildings in the project not exceeding dollar_figuree for the entire project on the amended i carryover allocation agency should indicate that it is making the correction under sec_1_42-13 and attach a copy of the amended i carryover allocation to an amended form_8610 annual low-income_housing_credit agencies report for i and file the amended form_8610 with the service when completing the amended form_8610 agency should follow the specific instructions on the form_8610 under the heading amended reports no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 nor the validity of the project’s costs included in eligible_basis in accordance with the power_of_attorney filed with this request we are sending a copy of this letter_ruling to agency’s authorized representative plr-120226-98 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours kathleen reed kathleen reed senior technician reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date --------------------- number release date cc ita conex-120100-16 uil 36b the honorable lee m zeldin member u s house of representative sec_31 oak street suite patchogue ny attention dear representative zeldin i am responding to your email dated date on behalf of your constituent -------- ----------------------------------------------------------------------------------------- who indicated that the town had difficulties complying with the june deadline for filing certain information returns with the irs have prevented the town from meeting the deadline for the filing of form 1095-b health coverage form 1095-c employer-provided health insurance offer and coverage and the transmittal forms that accompany those forms when they are filed with the irs the law requires health insurance providers and certain employers to send information to the irs and to individuals concerning health care coverage or offers of health care coverage health insurance providers send form 1095-b to individuals and to the irs to report information about who was covered by their health insurance and the months of coverage certain employers must send form 1095-c to employees with information about what coverage the employer offered and for employers that offer self-insured coverage who was covered and the months of coverage these forms assist with compliance with the requirement under the law that individuals have qualifying health care coverage qualify for an exemption or make a payment when filing their tax_return although the law required electronic filers of these forms to submit them to the irs by date for coverage the irs stated that filers missing the deadline will not generally be assessed late_filing_penalties if the reporting entity wrote that various complications may ------------------ conex-120942-16 made legitimate efforts to register with the affordable_care_act information returns air system and file its information returns continues to make efforts and completes the process as soon as possible in addition consistent with existing information reporting rules filers that are assessed penalties may still meet the criteria for a reasonable_cause waiver from the penalties your constituent may get information concerning the air system at www irs gov by entering air status page in the search box i hope this information is helpful if you need further assistance please call ----------------- ------------------------------------ -------------------- or me at sincerely scott k dinwiddie associate chief_counsel income_tax and accounting


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s contact person telephone number identification_number employer_identification_number release number release date date date se t eo ra t2 legend a b c d e f g h we have considered your ruling_request dated date in which a ruling was requested regarding the proposed changes to your articles of incorporation facts a is a b not-for-profit corporation recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code the code and is classified as other than a private_foundation under sec_509 of the code as more fully set forth below a was originally formed to conduct scientific research for the understanding measurement and prevention of problems caused by inadequate indoor environments a’s board_of directors is comprised of prominent members from the local business industry and academic community more than c companies as well as numerous academic medical and research institutions are involved with a poor indoor environmental quality ieq has been identified as having a dramatic negative impact on human health the compounds causing the indoor pollution include volatile organic chemicals vocs which are seeping out of building materials furniture office equipment carpet paint and pesticides in addition many buildings do not draw fresh air from outside but rather re-circulate stale air or draw air through intake ducts located near parking lots or loading docks thereby circulating carbon monoxide and other contaminants throughout the buildings according to the d research institute the negative impact on human health has been exacerbated by the following people spend as much a sec_90 of their time indoors during the past years energy efficient building designs use of synthetic building materials and chemically formulated personal products have produced poor indoor environmental quality in office buildings schools and homes of u s schools have ieq problems of u s households need ieq improvement and of u s commercial buildings are sick the world health organization estimates that one out of every three workers may be working in buildings that are damaging their health currently over million people in the united_states have asthma including over million children the prevalence of pediatric asthma has increased from to research has indicated that this increase may be due in part to ieq problems poor ieq is attributed to poorly constructed buildings research has been conducted to develop ieq systems to both correct sick buildings and to build new buildings which avoid or eliminate ieq problems ieq systems include technologies for smart buildings which enhance the health and productivity of occupants through systems that monitor and control a was initially formed to conduct research to both identify the effect of poor ieq on human health and develop new technologies to correct or mitigate the sources of poor ieq the focus of the research has included the following temperature humidity and energy air pollution by vocs and particulates noise and lightings drinking water and services for basic needs of the occupants identify and study ieq - related health problems to increase public awareness about the hazards of poor ieq and increase awareness of new products services that remedy control and prevent the problems develop and transfer technologies for commercialization into new products that assess control correct and prevent poor ieq identify new ieq applications for current products and services to optimize develop new designs construction methods and building operation specifications improve worker health and productivity and integrate all facets of design engineering and construction when assessing and remediating environmental quality in existing buildings to reduce energy consumption and capital expenditures ieq and a has and will continue to make the results of the research including sponsored research available to the public on a nondiscriminatory basis by publishing research results in in december e a amended its certificate of incorporation to expand its purposes specifically it added as one of its stated purposes to use its research and the results thereof scientific journals journals which are reviewed by research peers website of the granting agency eg the u s environmental protection agency and the website for a which is accessible to the general_public t o inter alia transform c into an acknowledged leader in the areas of research and applications of new research developments to improve the quality of both indoor and outdoor environments facilitate public and private business collaborations in such areas increasing the viability of such ventures and encourage industry public and private institutions to locate new facilities or expand existing facilities in c in order to increase the employment opportunities of residents within areas of underemployment offering solutions to the loss of industry and related jobs the purpose of the expanded purpose clauses is to allow a to become a vehicle to attract companies generate new investments and bring high-paying jobs to the c region by transforming the area into an innovative leader in the field of environmental research it is anticipated that the c region will become a magnet for industries interested in indoor environmental air quality because the area will have the research expertise and scientists that are vital to this type of environmental work a will not provide private industry any monetary incentive to locate in the region rather a plans to collaborate with numerous b educational medical and research institutions along with private industry to establish a nationally known indoor environmental research center which will spur economic development and create jobs in the c area in the field of urban and built environments a believes that its research will serve as a catalyst for the facilitation of relationships between industry and academic institutions which will advance high tech environmental research projects which promote the development of the indoor environmental air quality industry it is anticipated that this collaborative effort between industry and academia will result in new designs construction methods products and building specifications that will improve indoor air quality a believes that the natural result of this collaborative effort will be the influx of new opportunities in the c area as new and existing companies take steps to exploit the research in this new emerging field of scientific study although a will continue with the research initiative described above it will also pay closer attention to economics and market results of this research this involves a change in the emphasis of the mission of a rather than a change in structure of the organization specifically a will make a greater effort to ensure that the results of the research it undertakes or sponsors will develop and encourage industry in c with the goal of transforming c into the acknowledged leader in the field of indoor air quality a’s research is primarily funded through federal state and local funding a pursues publicly funded contracts and grants and gifts that support and further scientific research federal agencies provide monies which are selectively distributed to various institutions to fund research projects concerning indoor environmental quality and its effects on human health and welfare in line with its expanded purposes a will seek to ensure that these research funds are strategically placed in industries and projects that will serve as a catalyst for the development of the indoor air quality sector in the c area a will continue to create requests for proposals pertaining to the improvement of indoor air quality from research institutions the proposals will be required to emphasize the marketability of the project and the benefit to the region grants will be awarded to various institutions based on technical quality and the likelihood the proposals will have an impact on encouraging industry to choose to locate in the area additionally a will encourage local academic programs to focus their research agendas on areas of environmental research which will produce products that are marketable because of their usefulness in business and industry a is also involved in a larger statewide initiative to attract developing industry to b in governor f formed the g’s initiative with the goal of bringing well-paying high- tech jobs to b by enhancing the state’s leadership role in the critical fields of high technology and biotechnology h as been designated as the g in environmental and energy systems in addition to its independent activities a is also a member of the h g federation its role is to catalyze collaborative efforts between research institutions and industry to attract environmental air quality businesses and create high-tech jobs in central b ruling requested a’s expansion of its purposes as set forth in the amendments of its articles of incorporation will not adversely affect its tax exempt status under sec_501 law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for scientific purposes sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on otherwise than as an insubstantial part of its activities activities that are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 and ii of the regulations state as follow scientific defined i since an organization may meet the requirements of sec_501 only if it serves a public rather than private interest a scientific_organization must be organized and operated in the public interest therefore the term scientific as used in sec_501 includes the carrying on of scientific research in the public interest research when taken alone is a word with various meanings it is not synonymous with scientific and the nature of particular research depends upon the purpose which it serves for research to be scientific within the meaning of sec_501 it must be carried on in furtherance of a scientific purpose the determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical ii scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations as for example the ordinary testing or inspection of materials or products or the designing or construction of equipment buildings etc sec_1_501_c_3_-1 a - c of the regulations provides that scientific research will be regarded as carried on in the public interest under the following circumstances a if the results of such research including any patents copyrights processes or formulae resulting from such research are made available to the public on a nondiscriminatory basis b if such research is performed for the united_states or any of its agencies or instrumentalities or for a state or political_subdivision thereof or c if such research is directed toward benefiting the public the following are examples of scientific research which will be considered as directed towards benefiting the public and therefore will be regarded as carried on in the public interest aiding in the scientific education of college or university students obtaining scientific information which is published in a treatise thesis trade publication or in any other form that is available to the interested public discovering a cure for a disease aiding a community or geographic area by attracting new industry to the community or area or by encouraging the development of or retention of an industry in the community or area scientific research described in this subdivision c will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents copyrights processes or formulae resulting from such research revrul_76_296 1976_2_cb_142 states that commercially sponsored research otherwise qualifying as scientific research under sec_501 the results of which including all relevant information are timely published in such form as to be available to the interested public constitutes scientific research carried on in the public interest research the publication of which is withheld or delayed significantly beyond the time reasonably necessary to establish ownership rights however is not in the public interest and constitutes the conduct of unrelated_trade_or_business within the meaning of sec_513 analysis the amendment of a’s articles of incorporation to allow it to engage in scientific research into indoor environmental quality in order to attract industry or encourage industrial and economic development in c will not affect the tax-exempt status of a under sec_501 of the code substantially_all research conducted by c is scientific research carried on in the public interest for a number of reasons the research i is performed for a government instrumentality ii is published in a treatise thesis trade publication or other form available to the interested public or iii aids c and the surrounding states by attracting industry or by encouraging industrial and economic development the scientific character of a’s research is not changed by the fact that a’s amended articles allow it to focus its research efforts toward aiding a geographic area by attracting new industry to the area or by encouraging the development of an industry in the area see sec_1_501_c_3_-1 of the regulations holding based on all of the facts submitted by a we rule that the amendments to a’s articles of incorporation will not adversely affect its exempt status under sec_501 this ruling only applies to the facts and code sections cited herein this ruling does not determine whether any activity gives rise to unrelated_business_income this ruling is based on the understanding there will be no material changes in the facts upon which it is based any changes that may have a bearing on your tax status should be reported to the service please keep a copy of this ruling in your organization's permanent records this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter a copy of this ruling is being sent to your legal_representative under the provisions of a power_of_attorney authorization and declaration or other proper authorization currently on file with the internal_revenue_service sincerely technical group enclosure notice debra j kawecki manager exempt_organizations


department of the treasury internal_revenue_service washington d c 2uugz8026 we tax_exempt_and_government_entities_division apr uniform issue list sestier rat legend taxpayer a company b custodian c amount plan x account y dear this is in response to your request dated date as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that he received a distribution from plan x totaling amount taxpayer a asserts that his failure to accomplish a rollover to an individual_retirement_arrangement ira within the 60-day period prescribed by code sec_402 was due to the confusing nature of custodian c’s on-line new account registration web page and the failure of custodian c to recognize taxpayer a’s direct_rollover from plan x which led to amount being placed into a non-ira taxpayer a further represents that amount has not been used for any account purpose taxpayer a represents that prior to his retirement he participated in plan x as an employee of company b on date company b’s benefits manager notified taxpayer a that under the plan’s terms he had to transfer his retirement_funds from plan x to another eligible_retirement_plan on date taxpayer a completed an on-line application with custodian c to establish what he believed was an ira in fact account y was a non-ira individual_account on date taxpayer a completed a form electing a direct_rollover from plan x to a traditional_ira and indicated account y as the recipient ira by check dated date plan x transmitted amount to custodian c which was deposited into account y a non-ira account on date taxpayer a having attained age contacted custodian c to inquire about mandatory distributions for that might be required from account y on date custodian c informed taxpayer a that account y was not an ira and on december custodian c informed taxpayer a that it was not possible to change account y from an individual to an ira account documentation submitted by taxpayer a indicates that custodian c has changed its on-line new account registration web page to no longer default to an individual_account screen and added non-retirement to the individual and joint_tenants selections based on the facts and representations you request a ruling under the terms of sec_402 of the code that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or 2uu62z8 other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code sec_401 provides the rules for governing direct transfers of eligible rollover distributions sec_1 a of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by the confusing nature of custodian c’s on-line web page and custodian c’s failure to recognize the distribution of amount as a direct_rollover from plan x therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from plan x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount less required minimum distributions for and into a rollover ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contribution amount less required minimum distributions for and will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations that may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent 2uvu62z8 if vou wish to inquire about this ruling please contact please address all correspondence to se t ep ra t1 sincerely campo wire carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice notice of intention to disclose


id office uilc cca-670431-11 ------------- number release date from ----------------- sent tuesday june pm to ------------------------ cc ------------------- subject re question re summons last chance letters ----------- where the summoned person has a poa a last chance letter by chief counsel's office should be sent to the poa and should request that the summoned person appear the last chance letter should not be sent to the taxpayer bypassing the poa for the reasons set forth in the memorandum cca200027045 that you forwarded to me please contact me if you have further questions


internal_revenue_service number release date index number ----------------------------- ------------------------------------- -------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-149017-09 date date legend x ------------------------------------------ -------------------------------------- country ---------------- date ------------------- dear ----- ----------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 the information submitted states that x was formed on date under the laws of country x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity for u s income_tax purposes however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a disregarded_entity effective date sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 plr-149017-09 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for u s income_tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective date to the extent appropriate these returns must include but are not limited to forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-149017-09 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by __________________________ melissa c liquerman branch chief branch office_of_chief_counsel enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c cc dom fs october uilc number release date internal_revenue_service national_office field_service_advice memorandum for assistant regional_counsel lc cc ser from assistant chief_counsel field service subject this field_service_advice responds to your memorandum field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend s t u v w ww x xx y z state state date date date date date date date date date date date year year year year dollar_figurex1 dollar_figurex2 dollar_figurex3 dollar_figurex4 dollar_figurex5 dollar_figurex6 dollar_figurex7 dollar_figurex8 dollar_figurex9 issues whether the payment option granted in the asset purchase agreement between s and t should be treated as a valid option whether s’s change in treatment of the dollar_figurex1 payment in date from treatment as capitalized expense and amortized over years pursuant to sec_197 to treatment as a sec_1234 deduction in the year incurred is a change in method_of_accounting for which the permission of the commissioner is required conclusions given the facts that we have received we conclude that the agreement creates valid options however further factual development in this regard will be necessary if further factual development supports our conclusion with respect to issue s should have originally treated the dollar_figurex1 payment to terminate the payment option as an ordinary_income deduction pursuant to sec_1_1234-1 the change from classification of dollar_figurex1 payment in date from intangible goodwill to repurchase of an option involves an issue of timing and thus involves a change in method_of_accounting although s is changing from an impermissible to a permissible method_of_accounting such change still requires the commissioner’s consent facts in early year t which operated a in state concluded that its current facilities could no longer satisfy the needs of t’s board determined that a new facility was necessary accordingly the board began to explore the possibility of selling its current facilities ultimately on date t and s entered into an asset purchase agreement pursuant to the agreement t agreed to sell to s all of the assets of the contingent on s agreeing to construct and maintain a replacement facility s leased the old facility from t and assumed responsibility for its operations the parties closed the sales transaction on date s paid t dollar_figurex2 at closing which after certain adjustments resulted in t receiving dollar_figurex3 with respect to the old s agreed to pay rent real_estate_taxes insurance premiums utilities cost of repairs and maintenance the agreement contained additional covenants and provisions for example s agreed to retain all current employees and staff limit provide for on the board provide services grant t design approval of the new expend at least dollar_figurex4 for the construction of the new and allow t to designate eight of the nine members of the board on date s received a for the construction of the new facility s purchased real_property and began construction of a replacement the new opened on date pursuant to the asset purchase agreement t held options to repurchase the new facility from s specifically the agreement granted t the option to acquire the assets of the new beginning five years after the new commenced operations at a price representing the depreciated book_value it is significant to note that if t subsequently transferred the assets within five years of exercising the option t was obligated to pay to s any profit received upon the subsequent disposition of the assets section of the asset purchase agreement the agreement granted t a second option to purchase the assets of the new beginning years after the new commenced operations at a price representing the fair_market_value of the assets section of the asset purchase agreement by letter dated date t notified s of its intention to exercise its first option to purchase the assets of the replacement on date the parties however entered into a modification agreement pursuant to which s agreed to pay t dollar_figurex1 to terminate t’s options s originally reported the dollar_figurex1 payment on its year tax_return as a purchase of goodwill and amortized this amount over years pursuant to sec_197 s however subsequently filed an informal claim with respect to its year tax_year asserting that the payment was made to terminate an option and thus is deductible as an ordinary_expense pursuant to sec_1_1234-1 law issue you have requested our assistance regarding whether t held valid options to acquire the assets of the new to answer this question we must first determine when the original sale occurred if the sale occurred in year then sections of the asset purchase agreement dated date arguably provide t with call options to purchase the assets of the new if the sale of assets did not occur until then the dollar_figurex1 payment could potentially be viewed as a payment by s to acquire a residual_interest the issue turns on when the benefits_and_burdens_of_ownership passed from t to s some of the benefits and burdens that courts consider include whether and when legal_title was transferred how the parties treated the transaction whether the purported purchaser acquired any equity in the property whether the contract created a present obligation on the purchaser to make payments whether and when the right of possession was vested in the purchaser which party bore the risk of loss or damage to the property and which party received the opportunity for gain see 77_tc_1221 89_tc_986 and 108_tc_507 analysis based on the facts that we have received we conclude that several of the benefits_and_burdens_of_ownership appear to have shifted to s in year for example a review of the asset purchase agreement indicates that the risk of loss and opportunity for gain shifted to s in year s purchased the assets of the old and assumed responsibility for operating and maintaining both the old and new if the assets decreased in value or the proved to be unprofitable s bore the risk of loss there is nothing in the purchase agreement or other documents that we received that would indicate that t guaranteed s a specific return on its investment or a contribution of money in the event of revenue shortfalls moreover if the assets depreciated in value t was not obligated to purchase the assets from s t retained the right but not the obligation to purchase the assets of the new in addition as between t and s s received the opportunity for gain t could exercise its option to purchase the assets of the new at depreciated book_value beginning five years after the commenced operations however if within five years of exercising its option t subsequently transferred the new assets at a profit t was obligated to surrender the profits to s asset purchase agreement section if t chose to exercise the second option the option described in section of the agreement t was obligated to pay s fair_market_value for the assets another criterion is whether the contract created a present obligation on the purchaser to make payments here the asset agreement imposed present obligations on s to make payments for example the asset purchase agreement imposed on s the obligation to pay t dollar_figurex2 at closing in addition s was obligated under the agreement to spend at least dollar_figurex4 construct a new s was also obligated to pay the costs associated with operating and maintaining both the old and the new the next criterion is whether and when the right of possession was vested in the purchaser pursuant to the sales transaction s entered into an agreement on date to manage the old although it is unclear from the facts that we have been provided it appears that s took immediate possession of the old and operated it consistent with the terms of the various agreements if further factual development shows that the benefits_and_burdens_of_ownership of the facilities and assets shifted to s in year we would conclude that the asset purchase agreement gave rise to a sale in year with options to purchase the assets of the new in subsequent years we would further conclude that the dollar_figurex1 payment that s paid to t in year was paid to terminate the options as a result s should have originally treated the dollar_figurex1 payment as an ordinary deduction pursuant to sec_1_1234-1 issue law a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan is a change in method_of_accounting a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 a method_of_accounting for a particular item which is properly treated is established once it is on one tax_return sec_1 e ii a revrul_90_38 1990_1_cb_57 in contrast an item must be treated incorrectly for a minimum of two years before a method_of_accounting is established sec_1_446-1 revrul_90_38 1990_1_cb_57 891_f2d_1579 fed cir thus consistent but erroneous treatment of a material_item constitutes a method_of_accounting sec_1_446-1 examples - see also 292_f2d_225 3d cir cert_denied 368_us_898 356_f2d_975 6th cir cert_denied 385_us_822 the correction of a mathematical or posting error or errors in the computations of tax_liability does not constitute a method_of_accounting sec_1 e ii b likewise changes that affect lifetime income such as correction of items that are deducted as interest or salary but are in fact payment of dividends are not changes in method_of_accounting sec_1_446-1 if the accounting practice does not permanently affect the taxpayer's lifetime taxable_income but does or could change the tax_year in which the taxable_income is reported it involves timing and therefore is considered a method_of_accounting 743_f2d_781 11th cir where the correction of an erroneous treatment results in a change in accounting_method the requirements of sec_446 are applicable 88_tc_1069 a taxpayer which changes its method_of_accounting on the basis of which it keeps its books must prior to changing to a different method secure the consent of the commissioner sec_446 sec_1_446-1 consent must be secured regardless of whether the method a taxpayer is changing is proper or permitted sec_1_446-1 292_f2d_225 3d cir cert_denied 368_us_898 891_f2d_1579 fed cir correcting an error in the selection of accounting methods however is not exempted from the consent requirement 93_tc_500 a change in method_of_accounting occurs even when there is a change from an incorrect to a correct method_of_accounting analysis the treatment of the dollar_figurex1 payment as either a sec_197 intangible amortized over years or as a sec_1234 option payment deduction in year incurred affects the timing of the deduction over the life of s’s purchase s’s original treatment as a sec_197 intangible resulted in amortization of of the dollar_figurex1 in year presumably s used identical treatment in s now wants to treat the dollar_figurex1 payment as deductible in the year paid year pursuant to sec_1234 thus the taxpayer is changing the timing of the tax_year in which expenses and income are reported although not changing the lifetime income of the taxpayer accordingly s is changing a method_of_accounting because s is changing its method_of_accounting it must secure the consent of the commissioner to make its change s is attempting an unauthorized retroactive change from one method_of_accounting treatment as sec_197 intangible to another method treatment as sec_1234 option deductible when paid without securing the permission of the commissioner under the provisions of sec_446 and the regulations thereunder under the code and regulations the commissioner may deny such a change in method_of_accounting in addition consent is required when a taxpayer in a court_proceeding retroactively attempts to alter the manner in which he accounted for an item on his tax_return if the alteration constitutes a change in s’s method_of_accounting s cannot prevail if consent for the change has not been secured 75_tc_497 supplemented by 82_tc_122 citations omitted see also 101_tc_1 v and z issues whether the anti-churning_rules pursuant to sec_197 apply to the intangible assets s acquired from v whether the anti-churning_rules pursuant to sec_197 apply to the intangible assets s acquired from z conclusion given the facts that we have received we can not determine at this time if the anti-churning_rules will prevent s from deducting certain sec_197 intangible assets eg goodwill and going concern that were acquired from v further factual development is needed on this issue yes it appears that the anti-churning_rules prevent s from deducting the sec_197 intangible assets acquired from z the facts we received show that s held and used these intangibles assets during the tainted period as set out in sec_197 facts v based upon the facts we received as of date u a limited_partnership owned v also as of date both u and w a corporation were affiliates of ww w was a wholly owned subsidiary of s on date u sold the assets of v for dollar_figurex5 to w s allocated dollar_figurex6 of the purchase_price to intangible assets on its returns for the taxable_year s amortized the intangible assets under sec_197 and deducted approximately dollar_figurex7 as an amortization expense z based upon the facts we received on date s x and several formed a limited_partnership called y x was the general_partner and the limited_partnership interests were owned by certain s was the special limited_partner on date y became the owner and operator of a facility in state which had been owned and operated by xx an affiliate of s until date also on date y became involved with financing and building a replacement facility in state s contributed certain assets including the facility operating license and the use of the facility land building and equipment to y on date after the opening of the replacement facility s was responsible for selling the old facility building and land paying all costs associated with the sale and would receive the proceeds of the sale until these events occurred s was to retain the risk of ownership of the old building and equipment on date y entered into an asset purchase agreement with z an affiliate of s z would buy the general partner’s and the limited partners’ interests in the assets and assume all liabilities of the and its affiliates as of the closing date for dollar_figurex8 the asset purchase agreement provided for s’s interest in the property to continue uninterrupted the special limited_partner s received no proceeds from the transaction sec_1 of the agreement reads buyer and s acknowledge and agree that the entire purchase_price shall be distributed by seller to the partners of seller other than s its affiliates or successors in interest and s and buyer waive any claim to any part of the purchase_price in addition the buyer shall assume the assumed_liabilities sec_3 of the agreement reads buyer acknowledges that s an affiliate of buyer was the owner of the facility prior to its acquisition by seller and that at all times during seller’s ownership of the facility s has been the manager and operator thereof pursuant to the terms of the management agreement on its federal_income_tax return for the taxable_year ended date s amortized the intangible assets under sec_197 and deducted dollar_figurex9 as an amortization expense law sec_197 allows an amortization deduction for the capitalized costs of an amortizable sec_197 intangible the deduction is allowed on a straight-line basis over a 15-year period in general an amortizable sec_197 intangible is a sec_197 intangible ie goodwill going_concern_value workforce in place information base customer based supplier based covenants not to compete franchises trademarks trade names licenses patents and etc acquired after date or after date if a valid retroactive election has been made held in connection with the conduct_of_a_trade_or_business or an income- producing activity described in sec_212 which is not created by the taxpayer sec_197 sets forth anti-churning_rules to limit the application of sec_197 under the authority of sec_197 the regulations contain anti-churning_rules to prevent taxpayers from converting existing goodwill going_concern_value and other sec_197 intangibles for which a depreciation or amortization deduction would not have been available prior to the omnibus_budget_reconciliation_act_of_1993 into amortizable sec_197 intangibles pursuant to sec_197 and proposed treas reg the anti-churning_rules apply if the previously nonamortizable sec_197 intangible was acquired by a taxpayer after date or date if a valid retroactive election has been made and any one of the following applies i the taxpayer or related_person held or used the intangible asset or interest therein at any time during the transition_period i e between date and date ii the taxpayer acquired the intangible from a person that held the intangible at any time during the transition_period i e between date and date and as part of the transaction the user of the intangible does not change or iii the taxpayer grants the right to use the intangible to a person or a person related to that person that held or used the intangible at any time during the transition_period for purposes of the anti-churning_rules parties are related if they bear a relationship specified in sec_267 or sec_707 but with a percent threshold substituted for the percent threshold for those sections or the parties are engaged in trades_or_businesses under common_control within the meaning of sec_41 sec_197 in addition parties are considered related if the relationship exists either immediately before or after the acquisition of the intangible asset transferred sec_197 analysis v based upon the facts we received at this time we can not determine whether the anti-churning_rules under sec_197 would apply to the intangible assets acquired from the v acquisition further factual development is necessary to show what type of related_party affiliation u had with s in other words we do not know if s’s relationship with u meets the related_party percent threshold test as set out in sec_197 and ii additionally the facts do not indicate whether u actually held and used the subject intangible assets during the tainted period that began on date thus if it can be established that u met the percent test and also that u held and used the property during the tainted period we will conclude that s is not entitled to the sec_197 amortization deductions reported on its year tax_return for goodwill going concern and other intangibles not amortizable under prior_law see sec_197 the anti-churning_rules are designed to prevent related parties from taking advantage of the amortization provisions of sec_197 by converting nonamortizable intangibles under prior_law into amortizable intangibles without changing the ultimate user of the acquire assets z based upon the facts we received for purposes of the anti-churning_rules it appears that s held and used the intangible assets acquired in state during the tainted period date through date sec_3 of the purchase agreement in fact specifically notes that s was the manager and operator of these assets in z during this time frame this mere fact alone that s used and held the intangible asset during the tainted period prevents s from claiming an amortization expense on its tax_return for goodwill going concern and other intangibles not amortizable under prior_law the anti-churning_rules are designed to prevent taxpayers from taking advantage of the amortization provisions of sec_197 by converting nonamortizable intangibles under prior_law into amortizable intangibles without changing the ultimate user of the acquire assets case development hazards and other considerations if you have any further questions about this advice please contact this office at deborah a butler by harve m lewis chief passthroughs and special industries branch field service division


internal_revenue_service number release date index number --------------------------------------------------- -------------------------------- --------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-140194-08 date date legend trust -------------------------------------------------- ---------------------------------------------------- date -------------------- dear ------------- this letter responds to your letter dated date submitted on behalf of the trust requesting a ruling under sec_1361 of the internal_revenue_code that the service consent to revoke the trust’s electing_small_business_trust esbt election the information submitted states that the trust was created on date the trustee of the trust elected to treat the trust as an esbt effective date the trustee requests that the service consent to revoke the trust’s esbt election as of date sec_1_1361-1 of the income_tax regulations provides that an esbt election may be revoked only with the consent of the commissioner the application_for consent to revoke the election must be submitted to the irs in the form of a letter_ruling request under the appropriate revenue_procedure based on the facts submitted and the representations made we conclude that the trust may revoke its esbt election effective date 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 plr-140194-08 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 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc