t c memo united_states tax_court estate of donald h ray deceased patricia g ray independent executrix and patricia g ray petitioners v commissioner of internal revenue respondent cipriano dominguez and the estate of isabel dominguez deceased cipriano dominguez independent executor petitioners v commissioner of internal revenue respondent docket nos filed date thomas e redding for petitioners dennis m kelly for respondent memorandum findings_of_fact and opinion clapp judge respondent determined additions to petitioners' federal income taxes as follows docket no - estate of donald h ray deceased patricia g ray independent executrix and patricia g ray additions to tax sec sec sec sec sec year a a a -- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- determined as an alternative to sec_6659 docket no - cipriano dominguez and the estate of isabel dominguez deceased cipriano dominguez independent executor additions to tax sec sec sec sec year a a dollar_figure dollar_figure dollar_figure dollar_figure determined as an alternative to sec_6659 respondent assessed deficiencies in income taxes attributable to the settlement of petitioners' partnership items separate notices of deficiency upon which these cases are based were issued for additions to tax there is no dispute that petitioners settled the partnership items and having done so petitioners' share of those items became nonpartnership_items sec_6231 the only question is whether the notices of deficiency for additions to tax were issued prior to the expiration of the applicable_period of limitations for assessment we hold that respondent issued notices of deficiency as to the additions to tax at issue in these cases prior to the expiration of the period of limitations for assessment all section references are to the internal_revenue_code as in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact these cases are consolidated for trial briefing and opinion some of the facts have been stipulated and are found accordingly we incorporate by reference the stipulation of facts and attached exhibits petitioners are the estate of donald h ray mr ray deceased patricia g ray mrs ray independent executrix and patricia g ray and cipriano dominguez and the estate of isabel dominguez mrs dominguez deceased cipriano dominguez independent executor at the time the petition was filed in docket no mrs ray resided in arlington texas at the time the petition was filed in docket no the dominguezes resided in arlington texas in mr ray mrs dominguez and robert f breese breese began investing together in various entities breese is a certified_public_accountant with a bachelor's degree in business administration in accounting however he does not actively practice in accounting they formed rdb joint_venture rdb a texas general_partnership and breese managed rdb's investments mr ray died in date and prior to that time mrs ray did not actively participate in the rays' investments mrs dominguez died in date rdb was a partner of valley cable ltd valley cable a texas limited_partnership and valley cable was subject_to the unified_audit and litigation procedures set forth in sec_6221 through the tefra provisions enacted by the tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 and amended retroactively by the deficit_reduction_act_of_1984 publaw_98_369 sec p 98_stat_494 rdb was a pass-thru_partner as defined in sec_6231 mr ray mrs dominguez and breese were indirect partners of valley cable as defined in sec_6231 due to their ownership_interest in rdb in mr ray mrs dominguez and breese were partners in joint_venture a general_partnership and rdb transferred its interest in valley cable to r d b investments ii inc was not a partner in valley cable during the taxable years or and all references to r d b investments ii inc refer to rdb with respect to the taxable_year and refer to with respect to the taxable_year all actions taken in the name of r d b investments ii inc were intended to be treated as the actions of rdb and with respect to the taxable years and respectively for convenience we will refer to rdb and r d b investments ii inc as rdb respondent designated valley cable a litigation project case and assigned valley cable to a litigation project referred to as southern cable respondent assigned peter palka palka as the project appeals officer and albert balboni balboni as the project attorney on southern cable thomas e redding redding was a taxpayer_representative in the southern cable project and he is also counsel for petitioners in these cases on date respondent issued to valley cable a notice of final_partnership_administrative_adjustment fpaa for the taxable_year and on date respondent issued to valley cable an fpaa for the taxable_year after learning that respondent was challenging the tax deductions claimed by valley cable breese took the necessary steps to include rdb in a group formed to challenge respondent's determinations redding was counsel for that group victor m wilder wilder tax_matters_partner tmp for valley cable timely filed petitions for readjustment of partnership items under sec_6226 with respect to valley cable's and taxable years in a letter dated date palka letter palka mailed to wilder a form 870-l ad settlement agreement for partnership adjustments and affected items form 870-l ad with a corresponding schedule of adjustments for valley cable's taxable_year a separate palka letter sent to mr wilder dated date contained a form 870-l ad and corresponding schedule of adjustments for valley cable's taxable_year rdb also received a copy of the palka letter along with a copy of the form 870-l ad the relevant portion of the palka letter states dear mr wilder the appeals_office has completed settlement negotiations on the valley cable partnership and the results of those negotiations are shown on the enclosed form 870-l ad and attached schedule of adjustments we believe this settlement is a fair and equitable resolution of the adjustments as a partner in the partnership you have the right to participate in the settlement you may either agree to the settlement of both the penalties and the partnership items or agree to the settlement of only the partnership items penalties include interest under sec_6621 of the internal_revenue_code the following instructions explain how you should sign the settlement agreement form 870-l ad to show the extent of your agreement if you agree to both the partnership adjustments and penalties please sign parts i and ii of form 870-l ad this will allow us to close your case with finality on both the penalty and partnership items if you agree only to the settlement of the partnership items please sign part i of form 870-l ad this will allow us to close your case with finality for the partnership items only and will leave open any penalty issues a separate report on the penalties will be mailed to you later which will allow you to either file a petition to the united_states tax_court or to file a protest requesting further appeals consideration however it is unlikely that the offer shown in the agreement will be changed unless you are able to submit facts not previously considered by the appeals_office if you do not agree to the settlement of the partnership items a notice of final_partnership_administrative_adjustment will be mailed to you on these items this notice will allow you to file a petition with the united_states tax_court the claims_court or a federal district_court where the partnership's principal_place_of_business is located this notice will be mailed to you if we have not heard from you within days as we will assume you do not agree with the settlement if penalties have been asserted they will not be included in the notice but will be included in a separate report which will be mailed to you after the partnership proceedings are concluded if you wish to accept this settlement as explained above the signed agreement form with the attached schedule of adjustments must be returned within days from the date of this letter if a joint_return was filed both spouses must sign the form see instructions on the form the adjustments shown on the enclosed agreement form are partnership adjustments you may determine your share of these adjustments by multiplying your percentage of partnership profit of sic loss times the total adjustments once this settlement is accepted for the commissioner the service_center will compute your tax_liability and send you a bill for any additional_amounts please contact the person whose name and number are shown above if you have any questions regarding this settlement offer a copy of the form 870-l ad parts i and ii is attached to this opinion as an appendix breese reviewed the palka letter but it did not make sense to him at the time so breese contacted redding and asked what was going on in a letter dated date from redding to balboni redding highlighted what he perceived to be inaccuracies in the palka letter including the statement that if the partners do not agree to the settlement of the partnership items within days an fpaa will be issued when the palka letter was mailed respondent had already issued an fpaa and the tmp for valley cable had already filed a petition in this court in a letter to redding dated date balboni stated that the palka letter was computer generated that it was incorrect and it should not have been sent in that form in that same letter balboni stated in order to clear up any potential misunderstanding caused by the palka letter in these cases i am willing to write and send a letter to each of the partners of valley cable ltd or their known representative which clarifies the settlement offer and the deadline for its acceptance in an attempt to clarify the palka letter balboni sent a letter dated date balboni letter to the partners of valley cable that letter also was sent to redding as counsel for wilder the balboni letter stated dear sir madam i am the attorney representing the government in the above-referenced cases our records indicate that you are a partner in valley cable ltd it has just been brought to my attention that you have received a letter from the austin compliance center which communicates an offer by the government to settle the above-referenced cases because that form letter is not entirely correct i am taking the unusual step of writing to you in an attempt to clarify the terms of the settlement and also to set the final deadline for accepting the offer if you are represented in this matter please forward this letter to your representative at once the form letter states that if you do not agree to the settlement offer within days a notice of final partnership administrative adjustments will be issued this statement is incorrect because such a notice has already been issued for both the and taxable years both years are presently docketed before the united_states tax_court as referenced above although the balance of the compliance center letter is correct i want to clarify the terms of the settlement as well as the manner and time-frame for accepting the settlement first the settlement offer that you received may appear confusing at first glance because it is embodied in a schedule of partnership adjustments the bottom line of the settlement offer however is that all of the items reflected on your income_tax returns for the taxable years and which flow from your interest in valley cable ltd will be removed from those returns you will be allowed an ordinary deduction in equal to your partnership percentage of of the total cash invested in the partnership as determined at the partnership level second the settlement offer also contains certain concessions by the government with respect to the penalties which have been recommended by the examination_division in connection with your participation in valley cable ltd the penalties are not at issue in the partnership proceeding but be advised that the offer to settle them will expire at the same time as the offer for the partnership items in due course a statutory_notice_of_deficiency will be issued to you for the full amount of the recommended penalties if you choose not to accept the government's offer while it is available third the settlement offer can only be accepted by you if you and your spouse if a joint_return was filed execute the form 870-l ad previously sent to you by the compliance center and forward it to mr peter palka in an envelope postmarked no later than date which date is the final deadline for accepting the offer if the form 870-l ad is altered in any way or if it is accompanied by a cover letter containing any conditions to the settlement it will be considered a counter-offer and therefore a rejection of the government's offer mr palka's address is appeals_division - i r s richmond avenue suite houston texas the settlement agreement between you and the government will be consummated only upon the execution of the form 870-l ad by an authorized representative of the government as stated above the government's offer to settle the above-referenced cases including the penalty portion will expire on date this deadline will not be extended however if a partner of valley cable ltd properly accepts the offer by law you will be entitled to what is known as consistent settlement for a period of days after the government executes that partner's form 870-l ad i sincerely hope that this letter eliminates any confusion which may have been caused by the form letter as i am the attorney for the government i expect that you will consult someone before accepting my word for all of the above if you have any questions however please contact the undersigned when breese received the balboni letter he still was overseeing rdb's investment activities the partners of rdb met with william podsednik jr podsednik a certified_public_accountant who had advised them on various matters since to discuss what options were available and whether to accept respondent's proposal rdb through its partners decided to accept respondent's proposal mrs ray acting on behalf of rdb executed the form 870-l ad on date mrs ray executed the form 870-l ad because she held a majority interest in rdb rdb forwarded the executed form 870-l ad which applied to the and taxable years to redding who forwarded the document to respondent on date redding delivered to palka a letter dated date the relevant portion of the letter states dear mr palka attached are separate envelopes containing settlement acceptances for material redacted material redacted r d b investments ii send copies of each 870-l ad to me on behalf of victor m wilder as the tax_matters_partner so we can determine when each settlement is accepted and who remain partners for notice purposes etc on behalf of the tax_matters_partner send me a copy of the first settlement accepted by the i r s and your computation of the time period for tendering requests for consistent settlement offers i know several other of my clients do intend to accept but were not yet ready or able to submit an 870-l ad for various reasons redding also delivered to palka a cover letter dated date and the form 870-l ad executed by mrs ray as rdb's authorized representative the relevant portion of the cover letter states delivered by messenger mr peter palka appeals officer internal_revenue_service richmond avenue suite houston texas re valley cable ltd settlement acceptance r d b investments ii inc tin dear mr palka pursuant to mr balboni's letter of date enclosed is an executed form 870-l ad on behalf of the above-referenced taxpayers accepting the government's settlement offer please send me a copy of the fully executed l ad as soon as it is signed on behalf of the internal_revenue_service enclosed is my power_of_attorney please see that all further communication with the taxpayer regarding this matter is made through me respondent's authorized representative executed the form 870-l ad on date respondent assessed deficiencies in income taxes attributable to the settlement of the valley cable partnership items on date as to the rays' taxable years and respondent assessed a deficiency in income_tax attributable to the settlement of the valley cable partnership items on date as to the dominguezes' taxable_year respondent issued notices of deficiency dated date determining additions to tax attributable to the rays for the taxable years and respondent issued a notice_of_deficiency dated date determining additions to tax attributable to the dominguezes for the taxable_year on date the rays and dominguezes each made a payment in the amount of dollar_figure to respondent which was designated as a payment of income_tax for the taxable_year opinion under the tefra provisions the tax treatment of partnership items is decided at the partnership level in a unified partnership proceeding rather than separate proceedings for each partner 101_tc_365 and affected items items affected by the treatment of partnership items eg certain additions to tax can only be assessed following the conclusion of the partnership proceeding see sec_6225 87_tc_783 n the assessment of tax attributable to partnership items of a partnership subject_to the tefra provisions shall be made with respect to any partner during the period provided by sections a through f a settlement agreement converts partnership items to nonpartnership_items and the partner that enters into the settlement agreement is no longer treated as a party in the partnership proceeding sec_6226 sec_6231 the period for assessment shall not expire before year after the date on which the parties enter into a settlement agreement sec f rdb as a pass-thru_partner entered into a settlement agreement with respondent with respect to the partnership items of valley cable for the taxable years and the settlement agreement entered into by rdb binds indirect partners such as the rays and dominguezes with respect to the partnership items of valley cable sec c the dispute in these cases centers on when the parties entered into the settlement agreement petitioners argue that respondent made a settlement offer which they accepted when they delivered the executed form l ad to respondent on date respondent argues that the form 870-l ad embodies the settlement agreement and that the agreement became binding when executed by respondent's authorized representative on date respondent contends that the notices of deficiency dated date were issued prior to the expiration of the period of limitations we agree with respondent general contract law principles govern tax case settlements 52_tc_420 supplemented by 53_tc_275 smith v commissioner tcmemo_1991_412 where the intent of the parties to settle is evident and the terms of the settlement are otherwise ascertainable then a tax settlement agreement may be binding even if it consists only of letters of offer and acceptance 967_f2d_206 5th cir haiduk v commissioner tcmemo_1990_506 petitioners argue that the form 870-l ad is ambiguous as to which party is making an offer and which party is accepting the offer respondent argues that the form 870-l ad is not ambiguous and that it constitutes the settlement agreement between the parties contract law principles generally direct that we look within the four corners of the agreement unless it is ambiguous as to essential terms 100_tc_319 affd 47_f3d_168 6th cir petitioners contend that the form 870-l ad is ambiguous in that it sets forth two offers an offer to enter into a settlement agreement and an offer to waive the restrictions on the assessment and collection of any deficiency petitioners conclude that only the second offer is subject_to acceptance for the commissioner specifically petitioners argue the word offer in the second paragraph of the form 870-l ad refers to the last use of the word offer in the first paragraph which is the offer to waive the restrictions on assessment and collection simply stated this language meant that the assessment and collection of the agreed to liability could not take place until after the waiver of those restrictions was accepted on behalf of the commissioner fn ref omitted we find petitioners' interpretation unconvincing petitioners argue that the term undersigned as used in the form 870-l ad is ambiguous because the form 870-l ad contained a signature line for both the taxpayer and respondent's representative on date when mrs ray executed the form 870-l ad on behalf of rdb her signature was the only signature on the form 870-l ad and she became the undersigned we conclude that petitioners' arguments that the form 870-l ad is ambiguous are without merit petitioners argue that the palka and balboni letters constitute an offer and signing the form 870-l ad was the specified method for accepting that offer respondent argues that by signing the form 870-l ad petitioners extended an offer of settlement and respondent accepted petitioners' offer on date respondent contends that the balboni and palka letters solicited an offer from petitioners and set a deadline for petitioners to submit the settlement agreement to the appeals_office the parties do not dispute that an agreement was reached but they interpret differently the palka letter the form 870-l ad and the balboni letter to parallel their respective arguments as to when the agreement was reached the parties argue at length how we should interpret the balboni letter and specifically the sentence that reads the settlement agreement between you and the government will be consummated only upon the execution of the form 870-l ad by an authorized representative of the government the balboni letter must be read in light of the form l ad which contains the following the undersigned offers to enter into a settlement agreement this offer is subject_to acceptance for the commissioner unless and until it is accepted it will have no force or effect if this offer is accepted for the commissioner and date accepted for commissioner after considering the balboni letter and the language in the form 870-l ad we agree with respondent's interpretation the form 870-l ad provided that petitioners submit an offer to respondent see gillilan v commissioner tcmemo_1993_366 h graphics access ltd v commissioner tcmemo_1992_345 brookstone corp v united_states aftr 2d ustc par big_number s d tex affd without published opinion 58_f3d_637 5th cir petitioners' reliance on 967_f2d_206 5th cir is misplaced the court in treaty pines described the record as sparse but had before it the taxpayer's letter purporting to accept the commissioner's settlement offer and the internal revenue service's letter purporting to confirm that the taxpayer had accepted the original settlement offer id pincite nothing reveals that the taxpayers in treaty pines had before them a document such as the form 870-l ad that indicated no settlement would be reached until the 870-l ad was accepted by the commissioner the court held that the exchange of letters was sufficient to constitute a settlement agreement id pincite petitioners on the other hand were required to return the executed form 870-l ad to respondent petitioners complied with this requirement the language set forth in the form 870-l ad did not coincide with petitioners' interpretation of the balboni letter the document that petitioners argue constitutes an acceptance the form 870-l ad is replete with statements that rdb was submitting an offer to respondent that did not become binding until accepted by respondent after petitioners returned the executed form 870-l ad to respondent petitioners never received any confirmation analogous to the confirmation received by the taxpayers in treaty pines the terms of the form 870-l ad and the circumstances under which the palka and balboni letters were created and exchanged belie petitioners' interpretation of those documents there is no doubt that balboni was not precise in his use of the terms offer and acceptance however after reviewing the entire record we find that the parties entered into the settlement agreement on date when respondent's authorized representative executed the form 870-l ad as such we conclude that the notices of deficiency issued on date were issued prior to the expiration of the applicable_period of limitations to reflect the foregoing and the concessions by the parties decisions will be entered under rule


t c memo united_states tax_court eric stephen gerencser petitioner v commissioner of internal revenue respondent docket no filed date eric stephen gerencser pro_se wesley j wong for respondent memorandum findings_of_fact and opinion buch judge eric stephen gerencser is a u s citizen who lived and worked in germany as a north atlantic treaty organization nato contractor during and the years in issue for his nato wages mr gerencser claimed both a sec_911 foreign_earned_income_exclusion and a foreign tax credit the commissioner allowed the foreign_earned_income_exclusion but disallowed the foreign_tax_credit because it would be an impermissible double benefit to exclude income and then claim a credit with respect to that same income as to other non-nato income mr gerencser argues that he is entitled to a foreign_tax_credit but his argument fails because he has not shown that he has paid_or_accrued any foreign taxes with respect to that income he also argues that the convention between the united_states of america and the federal republic of germany for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital and to certain other taxes as amended by the protocol treaty provide him relief because he qualifies as a german resident the treaty’s saving clause reserves the right of unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar see sec_911 see sec_901 and b b c date tax_treaties cch para see protocol amending the convention for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital and to certain other taxes u s -ger date tax_treaties cch para protocol the united_states to tax its citizens on their worldwide income regardless of their residence because mr gerencser is a u s citizen he is not entitled to treaty relief further he is liable for the sec_6662 accuracy-related_penalty because he negligently took an impermissible double benefit when he claimed both foreign_earned_income exclusions and foreign tax_credits on his nato wages findings_of_fact mr gerencser a u s citizen worked as a nato contractor in heidelberg germany during and the parties stipulated that he was subject_to the protocol on the status of international military headquarters set up pursuant to the north atlantic treaty under article paragraph of this agreement amounts paid for service as personnel of an allied headquarters are exempt from german tax to obtain an explanation of his tax situation mr gerencser wrote a letter dated date to the commissioner he did not receive a response after speaking with a colleague mr gerencser came to the understanding that he could owe a retroactive german income_tax once his contract with nato expired protocol on the status of international military headquarters set up pursuant to the north atlantic treaty date u s t because germany would retroactively treat him as a german resident who was subject_to german tax mr gerencser filed form sec_1040 u s individual_income_tax_return for and for he reported dollar_figure in nato wages and claimed a foreign_earned_income and housing exclusion of dollar_figure and a foreign_tax_credit of dollar_figure he also reported u s military pension income taxable interest dividends rental income and a capital_loss from securities transactions for that year similarly for he reported dollar_figure in nato wages and claimed a foreign_earned_income and housing exclusion of dollar_figure and a foreign_tax_credit of dollar_figure in addition he reported u s military pension income taxable interest dividends rental income and a capital_gain from securities transactions on date the commissioner issued to mr gerencser a notice_of_deficiency for taxable_year sec_2010 and sec_2011 the commissioner determined the following deficiencies in tax and accuracy-related_penalties year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number among other adjustments the commissioner determined that mr gerencser was not entitled to a foreign_tax_credit on his nato wages because he had claimed those wages were exempt under the foreign_earned_income_exclusion the commissioner also determined that mr gerencser had an additional capital_gain for of dollar_figure and was not entitled to dollar_figure in itemized_deductions for when mr gerencser received this notice_of_deficiency he had a case pending before our court involving his taxable_year on date the court entered a stipulated decision pursuant to an agreement of the parties that mr gerencser did not owe any additional tax or penalties for mr gerencser timely filed his petition while residing in germany and trial was held in las vegas nevada the parties have agreed that he is not liable for tax on the unreported capital_gain for and that he is entitled to the disallowed itemized_deductions for the parties further stipulated that he is not entitled to claim a foreign_tax_credit with respect to his wages from nato for taxable_year sec_2010 and sec_2011 mr gerencser has not paid any german income taxes for the or taxable_year as to either his nato or his non-nato income docket no opinion we must decide whether mr gerencser is entitled to foreign tax_credits or treaty benefits related to his non-nato income to do so we apply the foreign_tax_credit rules under the code and the treaty i burden_of_proof the commissioner’s determinations in the notice_of_deficiency are generally presumed correct and taxpayers bear the burden of proving otherwise allowing foreign tax_credits is an act of legislative grace and taxpayers must prove that they have met all the conditions to be entitled to any credit in limited situations the burden may shift to the commissioner under sec_7491 but there is insufficient information in the record to conclude that the burden should shift under sec_7491 and mr gerencser does not argue that the burden should shift accordingly the burden remains on him ii no foreign_tax_credit available to mr gerencser sec_901 allows taxpayers a foreign_tax_credit for foreign_income_war_profits_and_excess_profits_taxes they have paid_or_accrued during the taxable rule a 290_us_111 wilcox v commissioner tcmemo_2008_222 slip op pincite relying on 143_f2d_256 2d cir aff’g 1_tc_880 year taxpayers including cash_basis taxpayers may elect to take foreign tax_credits for the year the taxes accrued however no credit is allowed for accrued taxes that are not paid within two years after the close of the taxable_year to which they relate if taxpayers subsequently pay foreign taxes then they can file a claim for a credit or refund within years from the date prescribed by law for filing the return for the year for which such taxes were actually paiddollar_figure sec_911 allows qualified individuals as defined in subsection d to exclude from their gross_income a portion of their foreign_earned_income and housing costs for any amount of foreign_earned_income that is excluded under sec_911 taxpayers cannot take a double benefit by claiming tax_credits on sec_901 and b sec_1_901-1 income_tax regs sec_905 sec_1_901-1 income_tax regs notably once taxpayers elect accrual they must follow this treatment for subsequent tax years sec_905 sec_905 sec_6511 see sec_911 and c adair v commissioner tcmemo_1995_493 slip op pincite nato employees are not considered employees of the united_states and accordingly qualify for the sec_911 foreign_earned_income_exclusion the same income if taxpayers elect the foreign_earned_income and housing exclusion treatment for their foreign_earned_income they likewise cannot take a foreign_tax_credit for any_tax paid on the foreign_earned_income that was excludeddollar_figure a mr gerencser is not entitled to a foreign_tax_credit on his nato earnings mr gerencser is not entitled to a foreign_tax_credit on his nato wages for the years in issue because he has already excluded them from income using the foreign_earned_income and housing_cost_exclusion of sec_911 for the commissioner allowed mr gerencser to exclude dollar_figure total which includes dollar_figure of housing costs and dollar_figure of foreign_earned_income for the commissioner allowed mr gerencser to exclude dollar_figure total which includes dollar_figure of housing costs and dollar_figure of foreign_earned_income and even if mr gerencser had paid_or_accrued foreign tax on these wages which he has not he would not be entitled to a foreign_tax_credit because it would violate the sec_911 sec_911 e sec_1_911-6 c income_tax regs see also 92_tc_1204 s ection d makes clear that no such credit would be available to the extent that it is allocable to amounts excluded from gross_income under sec_911 letourneau v commissioner tcmemo_2012_45 slip op pincite impermissible double benefit rule_of sec_911 the parties further agreed that he is not entitled to a foreign_tax_credit for his nato wages b mr gerencser is not entitled to a foreign_tax_credit on his non- nato income mr gerencser is not entitled to a foreign_tax_credit relating to his non- nato income because he has not paid any foreign tax for and he reported u s military pension income taxable interest dividends rental income and capital losses from securities transactions but he has not paid any german income taxes for or even if mr gerencser had elected a credit for accrued foreign tax_credits he cannot receive the benefit of accrued foreign taxes because he did not pay any taxes within two years after the close of the or tax_year accordingly he is not entitled to any foreign tax_credits on his other income streams at this time iii no treaty relief available for mr gerencser mr gerencser argues that because he is a resident of germany his income should be exempt from u s tax under the treaty he is wrong the united see sec_905 see convention for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital and to certain other taxes u s -ger date tax_treaties cch para states reserves the right to tax its citizens on their worldwide income regardless of their residence and mr gerencser is a u s citizen the treaty reflects this approach in the saving clause except to the extent provided in paragraph this convention shall not affect the taxation by the united_states of its residents as determined by article residence and its citizens we have previously explained that the united_states insists on the inclusion of a ‘savings clause’ in its tax_treaties the effect of this clause is to reserve the right of the united_states to tax its citizens and residents on the basis of the provisions of the internal_revenue_code without regard to the provisions of the treaty none of see eg 85_tc_376 the united_states was historically and continues to be virtually unique in taxing its citizens wherever resident on their worldwide income solely by reason of their citizenship 74_tc_406 although many foreign countries tax their residents on their worldwide income the united_states taxes its citizens as well as its residents on their worldwide income protocol art i a filler v commissioner t c pincite see also 142_tc_405 86_tc_971 cf crow v commissioner t c pincite holding that the saving clause did not apply to an individual who had relinquished his u s citizenship the income that mr gerencser had during the years in issue is exempt from the saving clausedollar_figure although the saving clause does not affect the treaty rules for relief from double_taxation found in article this article provides that the united_states will allow a credit for income taxes paid to germany but mr gerencser has not paid any income taxes to germany mr gerencser further argues that the treaty and the code are in conflict and that he should be entitled to treaty relief despite not filing treaty-based returns for the years in issue it is well established that neither a treaty nor a law takes precedence merely by virtue of its status as a treaty or law if there is a conflict between a code provision and a treaty provision then the provision that was enacted later in time controls but there first must be an irreconcilable conflict because when a treaty and a statute relate to the same subject courts will always article i of the protocol provides the exceptions to the saving clause found in article i a and these exceptions do not include any of the provisions that would otherwise cover mr gerencser’s income protocol art xii adding a new article see sec_7852 98_tc_672 aff’d without published opinion 15_f3d_1160 d c cir attempt to construe them so as to give effect to both mr gerencser’s conflict arguments fail because the saving clause of the treaty bars him from obtaining relief there is no conflict between the code and the treaty iv sec_6662 accuracy-related_penalties sec_6662 and b and imposes a accuracy-related_penalty on any portion of an underpayment_of_tax required to be shown on a return if the underpayment is due to among other reasons negligence disregard of rules or regulations or any substantial_understatement_of_income_tax the commissioner bears the burden of production as to penalties penalties will not apply to any portion of the underpayment for which a taxpayer establishes that he or she had reasonable_cause and acted in good faithdollar_figure as defined in the code negligence includes any failure to make a reasonable attempt to comply with the provisions of title_26 and the term 80_tc_705 aff’d without published opinion 734_f2d_3 3d cir see also nw life assurance co of can v commissioner 107_tc_363 sec_7491 sec_6664 disregard includes any careless reckless or intentional disregard negligence has been further defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances additionally a taxpayer is negligent if he fails to maintain sufficient records to substantiate the items in questiondollar_figure the commissioner satisfied his burden of production because he showed that mr gerencser negligently took foreign tax_credits for his nato wages that he had also claimed were excluded from his gross_income by the foreign_earned_income and housing_cost_exclusion a double benefit that is directly and expressly prohibited by the code if a taxpayer takes a return position that would seem too good to be true to a reasonable person and fails to make further reasonable inquiries to verify that the return position is correct then this is a strong indication that the taxpayer is sec_6662 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir aff’g in part remanding in part 43_tc_168 and t c memo 116_tc_438 sec_1_6662-3 income_tax regs negligent taxpayers are required to take reasonable steps to determine the law and to comply with it and must exercise due care when claiming a deduction here a reasonable person would have thought the double benefit of a foreign_tax_credit and a foreign_earned_income_exclusion on the same income seemed too good to be true and mr gerencser had a duty to inquire further before taking this position after hearing about his colleague’s predicament mr gerencser sent a letter to the commissioner to further inquire but never received a response instead of seeking out competent advice from a tax professional he prepared his returns and explained that he had to come up with my own way to file those taxes that would cover so to speak the waterfront and capture my sec_1_6662-3 income_tax regs see eg viralam v commissioner 136_tc_151 explaining further inquiry was required because a reasonable or prudent person would have perceived as ‘too good to be true’ a deduction for a supposed charitable_contribution where the amounts deducted could be used to fund student loans for his own children hansen v commissioner tcmemo_2004_269 wl at when an investment has such obviously suspect tax claims as to put a reasonable taxpayer under a duty_of inquiry a good_faith investigation of the underlying viability financial structure and economics of the investment is required aff’d 471_f3d_1021 9th cir 99_tc_202 82_f3d_918 9th cir aff’g tcmemo_1994_217 situation because he did not make a reasonable inquiry to determine whether his return position was correct he was negligent mr gerencser did not prove he acted with reasonable_cause and in good_faith although mr gerencser wrote to the commissioner to ask for guidance he never received a response instead he believed that he would be taxed at some time in the future by germany because of the conversations he had with his colleague who was not a tax professional he then reported both the foreign_income and housing_cost_exclusion and foreign_tax_credit for his nato wages his position is not reasonable because it would provide him a double benefit further mr gerencser did not show that he had paid_or_accrued any foreign taxes to entitle him to offset his u s tax with foreign tax_credits mr gerencser appears to argue that the stipulated decision entered in for his taxable_year should affect the outcome of this proceeding or at least should prove that his position was reasonable to the extent that he is making a collateral_estoppel argument this argument fails because the previous stipulated decision entered for was not a conclusive determination on the merits by our court moreover we look at whether the position taken by mr gerencser on his see o’sullivan v commissioner tcmemo_1994_395 holding that a stipulated decision for another taxable_year does not have preclusive affect under continued return was negligent mr gerencser filed his returns for and before he commenced his case and years before he entered into a stipulated decision mr gerencser’s underpayment_of_tax was due to his negligence and he is liable for the sec_6662 accuracy-related_penalties for both years v conclusion mr gerencser is not entitled to any foreign tax_credits because he has not paid_or_accrued any foreign tax accordingly we sustain the commissioner’s disallowance of the foreign tax_credits mr gerencser claimed for and and find him liable for the sec_6662 accuracy-related_penalties for those years continued the doctrine_of collateral_estoppel because there has been no determination by the court aff’d 95_f3d_1158 9th cir see also 464_us_165 as commonly explained the doctrine_of collateral_estoppel can apply to preclude relitigation of both issues of law and issues of fact if those issues were conclusively determined in a prior action 333_us_591 but if the later proceeding is concerned with a similar or unlike claim relating to a different tax_year the prior judgment acts as a collateral_estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si plr-112040-99 date date company x dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_29 of the internal_revenue_code company represents that the facts are as follows company leases the right to collect landfill_gas from the owner of the landfill company owns and operates a facility that collects and processes the landfill_gas the landfill_gas is a qualified_fuel under sec_29 company sells the landfill_gas to unrelated persons the facility was originally placed_in_service after date and before date the facility consists of pipes wells headers a condensate knock-out vessel blowers and a meter an addition to the facility was placed_in_service after date and before date pursuant to a binding written contract in effect before date the addition to the facility consists of pipes wells headers and condensate knock-out vessels the addition is connected to the original pipes blowers and meter the addition by itself is incapable of producing filtering compressing and measuring the gas the addition constitutes only x percent of the total facility cost sec_29 of the code allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the tax_year the production of which is attributable to the taxpayer the credit for the tax_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 and f of the code provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before -2- date sec_29 of the code modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include gas produced from biomass sec_29 provides that for purposes of sec_29 such a facility is to be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 is to be applied by substituting for the date therein date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 accordingly based on the facts as represented by company we conclude that sales to unrelated persons of qualified_fuel produced because of an addition to company’s landfill_gas facility which was placed_in_service after date and before date are entitled to the sec_29 credit through date provided that the addition was built pursuant to a binding written contract in effect before date and was placed_in_service before date however no credit will be allowed for sales of fuel produced because of any later addition to company’s facility not built pursuant to a binding written contract in effect before date and placed_in_service before date except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when company’s facility and the addition to the facility were placed_in_service for purposes of sec_29 or whether company’s facility and the addition to the facility are producing a qualified_fuel this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusions in the ruling see section dollar_figure of revproc_2000_1 2000_1_irb_4 -3- however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office the original of this letter is being sent to you and copies are being sent to your authorized representatives sincerely yours charles b ramsey branch chief branch office of assistant chief_counsel passthroughs and special industries


ee t t department of the treasury internal_revenue_service washington d c é date may uf l sd o3-i employer_identification_number area office contact person id number telephone number t eo b1 o - e l w_i o i o m i u m i z i i t a z i z r i l z o i m o i d m i h c i a o y a a t a n i r dear sir or madam this is in response to a letter from your authorized representative requesting a series of rulings on your behalf regarding the tax consequences associated with the affiliation of two hospital systems g0 _ ais exempt from federal_income_tax under sec_501 of the internal_revenue_code and is classified as a nonprivate foundation under sec_509 a was organized to promote health by acting as the parent of a nonprofit healthcare system by raising funds and otherwise supporting the system a is controlled by a community-based board_of directors and both prior to and following the proposed affiliation a has acted as the parent of various health care corporations g is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation under sec_509 and sec_170 it owns and operates an acute care hospital h is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation under sec_509 it provides outpatient medical services to communities in the service area of g m is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation under sec_509 it provides home health services including free or discounted care based on the ability of the patient to pay whose name has been changed to j as part of the affiliation is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation sec_509 is the sole member of l which is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation sec_509 l has a controlling_interest in and operates an outpatient surgical center is also the sole shareholder of q a business corporation k whose name has been changed to p is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation under sec_509 n o and r which is presently inactive are exempt from federal_income_tax under sec_501 of the code and are classified as nonprivate foundations under sec_509 m is the sole member of these entities e is exempt from federal_income_tax under sec_501 of the code and is classified as a nonprivate foundation under sec_509 prior to the affiliaition its mission was to promote health care by acting as the parent of a sec_501 health care system u is a for-profit corporation which was wholly owned by e prior to the affiliation operates a diagnostic testing center and three retail pharmacies its stock was it lee transferred to d as part of the affiliation prior to the affiliation e was the sole member of d and f which are exempt from federal_income_tax under sec_501 of the code and are classified as nonprivate foundations under sec_509 d owns and operates an acute care hospital while fe supports it by raising funds and making contributions to or for the benefit of d prior to the affiliation a then named c and e operated separate health care systems in their respective service areas they concluded that by combining their systems they could benefit the community by among other things achieving new operating efficiences consolidating redundant functions and thereby reducing costs you have stated that a and e entered into an affiliation agreement as a result e became a membership nonprofit corporation the sole member of which is d d became the sole member of f and the sole shareholder of u a having changed its name from b and c became the sole member of d following the affiliation a maintained its relationship as either the sole member or shareholder or the indirect member or shareholder of each of its pre-affiliation affiliates you have stated that a as sole member of d exercises broad and substantial control and supervision over d and its affiliates as the parent of the integrated health care system of which g and its affiliates are also a part a supports benefits and carries out the purposes of d and the other affiliates coordinates and directs the health care related activities of d and the affiliates and plays an active supervisory and long- range planning role in their affairs and provides management support services to d and the other affiliates system members may hold funds and assets for the system and its members and may make grants distributions and transfers to or for the benefit of the affiliated entities in addition a may conduct fundraising activities in support of the you have stated that a’s articles of incorporation and bylaws have been amended to facilitate its request for a change in its nonprivate foundation classification from sec_509 to sec_509 specifically d g and the other sec_509 and organizations in the new a system have been specifically named as organizations which a is operated to support in addition the articles of incorporation and bylaws of d g and other affiliated entities have been or will be amended to reflect the fact that their charitable purposes include supporting the health care related activities of a and the other nonprofit tax-exempt health care organizations comprising the system you have stated that pursuant to the affiliation agreement a has become the parent of d and remains the direct or indirect parent of the s sec_501 affiliates zr lee while d retains a separate corporate identity and board_of directors and has become the sole member of f and e and sole shareholder of u parental authority has been transferred to a’ s board_of directors a’s parental responsibilities and duties include the following with respect to those affiliates of which a is the sole member or shareholder including d a is entitled to exercise all rights vested in members under state nonprofit corporation law or in shareholders under state business corporation law except in the limited instances described below moreover except in those limited instances with respect to each affiliate in the a system other than f including g d and e a as parent is empowered pursuant to the terms of the affiliation agreement and the bylaws of each a affiliate to initiate and implement any of the following actions and if such action is otherwise initiated by any such affiliate such action shall not become effective unless approved by a in its capacity as parent the adoption amendment or revocation of the affiliate’ s articles of incorporation or bylaws the termination liquidation reorganization division conversion or dissolution of the affiliate or the merger consolidation or combination of the affiliate with another person any change or transfer of a’s membership or shareholder interest in the affiliate or the creation or issuance of any additional membership or shareholder interest in the affiliate the investment of the affiliate’ s assets other than in accordance with a’s investment policy or in the absence of a current policy any investment other than in the ordinary course of business the incurrence by the affiliate of indebtedness in excess of such amounts as may reasonably be designated by a from time to time except pursuant to a budget approved by a or ordinary course indebtedness such as routine trade payables in amounts less than the amounts designated by a the conveyance transfer lease or sale of any of the affiliate’ s assets with a fair_market_value in excess of such aggregate amount as may be designated by a from time to time except pursuant to a budget approved by a or the conveyance transfer lease or sale of any of the affiliate’ s assets to a or another affiliate the making of any capital_expenditure or the incurrence of any capital obligations by or on behalf of the affiliate in excess of such annual aggregate amounts as may be designated by a from time to time except pursuant to a budget approved by a the incurrence of any obligation whether actual or contingent by the affiliate to guarantee or be responsible for the debts or obligations of any person in excess of such amounts as may be designated by a from time to time except pursuant to a budget approved by aor ordinary course obligations in amounts less than the amounts designated by a the approval of the affiliate’ s operating and capital budgets or any material changes thereto the voluntary granting of any lien or encumbrance with respect to the affiliate’ s assets except in the ordinary course of business the surrender of or material_change in any permit approval or license of the affiliate the selection of the affiliate’ s outside auditors general legal counsel or investment advisors the requirement that a make any capital_contribution to or purchase the shares of the affiliate the ratification of appointments and reappointments to the board_of directors of each affiliate the approval of the affiliate’ s strategic and operating ee plans or any changes thereto the approval of the affiliate’ s statements of purpose vision or mission or any changes thereto the creation by the affiliate of any new lines of business sites of business subsidiary corporations or partnerships or other joint ventures or any material changes in existing services or participation by the affiliate in any key strategic relationships outside the a system and all health care services contracting by the affiliate that could materially impact a or the system during the first three years following the affiliation a action with respect to certain matters listed below requires the affirmative vote of at least two-thirds of the board_of following the first directors of a including at least two of the d appointed directors three years only those actions specified in and require a two-thirds vote the matters requiring a two-thirds vote are changes to the articles of incorporation or bylaws of a the acquisition transfer or sale of material assets stock or membership interests of or the dissolution of a or any affiliate whether done in a single transaction or a series of related transactions which in the aggregate involve material assets the affiliation of additional health systems with a in a transaction which results in a change in a governance removal for cause of d appointees to the board_of directors of a changes in the number of d appointees to the board_of directors of a or the maximum number of directors permitted on the a board approval of d e and u’s annual strategic objectives and budget including appointment of a’s corporate officers including a’s ceo capital and operating budgets and in addition during the first three years of the affiliation a is not permitted to take certain action with respect to d e and or u without the approval of d’s board_of directors following the first three years only those actions specified in and below require approval of d’s board_of directors changes to the name of d the merger of d e or u into another operating a affiliate or a dissolution of any of those entities which has the same effect as a merger into another a affiliate elimination or material reduction of clinical services provided as of the date of the affiliation in the area served by d and or u in order to assure the maintenance of needed community health services amendments to the articles of incorporation or bylaws of d relating to the appointment term and removal of d’s directors approval of an annual capital budget for d in an amount less than dollar_figure million disapproval of the development of new clinical services which have been determined by d’s board to be necessary to meet the community’ s needs up to an aggregate operating cost of dollar_figure per fiscal_year dissolution of d and selection of the initial six d appointees to the a board_of directors you have stated that while a’ s authority is limited in those few instances described above the parental authority expressly granted to a under the affiliation agreement and those powers granted a as sole member of d under state nonprofit corporation law effectively permit a to take any_action other than those described above with respect to d and e with or without the approval of those entities moreover even in those areas in a - which d reserves the right to approve proposed action by a the affiliates of d are powerless to act without a’ s approval you have stated that in order to achieve greater operating efficiencies whenever feasible d and e and to an insubstantial extent u will receive management support services from a including planning finance human resources community relations purchasing billing collections biomedical engineering managed care contracting medical and management information risk management insurance and legal services under the affiliation agreement it is the parties’ intent to make a management support services available to f in the same manner as with respect to d and e in order to achieve greater system-wide operating efficiences but not to require f to accept such services to the extent a provides such services to d and e they will generally receive these services at cost while any for-profit subsidiaries such as u will be charged fair_market_value you have stated that following the first three years of the affiliation the affiliation may not be unilaterally terminated by any party during the first three years a and d have a limited termination right subject_to a substantial financial penalty as described below during the first three years either party desiring to terminate the affiliation must give notice of its intent to the other party thereafter the parties will make their best efforts to determine how the affiliation can be preserved if following such action either party still desires to terminate the affiliation that party must pay damages to the other party the agreement requires the terminating party to pay liquidated_damages to the non-terminating party in the amount of dollar_figure unless the termination is the result of a material breach of the agreement which remains uncured by the breaching party following notice of the breach and an opportunity to cure or is the result of an inability to obtain private letter rulings from the internal_revenue_service in connection with the affiliation you have stated that the following proposed transactions are planned subject_to governing board and where applicable regulatory approval l whose sole member is currently will be merged into with renamed j the surviving entity e will be merged into k renamed p whose sole member is j following the merger p will perform most of the activities and functions previously performed by e p’s articles of incorporation and bylaws will be amended to provide that it is organized and operated exclusively for charitable scientific and educational_purposes for the benefit of d in addition to g and h of its governing board members are required to be governing board members of d in addition the bylaws of p will be amended to provide that certain you have requested the following rulings in connection with the affiliations and subsequent activities and transactions described above 0s the affiliation and subsequent activities and transactions do not adversely affect the tax-exempt status under sec_501 of the code of a and the s sec_501 affiliates and d e and f the t sec_501 affiliates the affiliation and subsequent activities and transactions do not adversely affect the status of a the t sec_501 affiliates and the sec_501 affiliates as public_charities described in sec_509 of the code and following the affiliation a p and f will each qualify as a public charity described in sec_509 of the code the transfer of assets or sharing or provision of services between and among the tax-exempt organizations in the new a system including a and the s and t sec_501 affiliates and including the transfer of stock of u from e to d will not constitute an unrelated_trade_or_business or produce unrelated_business_income under sec_511 through of the code sec_501 of the code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense revrul_69_545 1969_2_cb_117 acknowledges that the promotion of health is a charitable purpose within the meaning of sec_501 of the code revrul_78_41 1978_1_cb_148 concludes that a_trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital is operated exclusively for charitable purposes and is exempt under sec_501 of the code sec_1_509_a_-4 of the regulations provides that sec_509 of the code sets forth three different types of relationships one of which must be met in order to meet the requirements of the subsection one of those relationships is operated supervised or controlled in connection with sec_1_509_a_-4 of the regulations provides that in the case of supporting organizations which are supervised or controlled in connection with one or more publicly supported organizations the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved such as the presence of common directors sec_511 of the code imposes a tax on the unrelated_business_income of organizations described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of the trade_or_business with certain modifications sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for funds or the use it makes of the profits derived to the exercise of the organization's exempt purposes or functions sec_1_513-1 of the regulations provides in part that a trade_or_business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of exempt purposes providing management and consultants’ services to other unrelated exempt_organizations for a fee sufficient to produce a small profit does not further an exclusively exempt_purpose see 70_tc_352 an organization providing laundry services on a centralized basis to exempt hospitals does not qualify for exemption under sec_501 see hcsc-laundry v united_states u s sec_513 of the code provides that in the case of a hospital the term unrelated_trade_or_business does not include the furnishing of one or more of the services described in sec_501 to one or more hospitals if such services are furnished solely to such hospitals which have facilities to serve not more than inpatients such services if performed on its own behalf by the recipient hospital would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption and such services are provided at a fee or cost which does not exceed the actual cost of providing such services revrul_77_72 1977_1_cb_157 provides that indebtedness owed to a labor_union by its wholly owned tax-exempt subsidiary is not acquisition_indebtedness within the meaning of sec_514 of the code since the parent and subsidiary relationship ot sa l i shows the indebtedness to be merely a matter of accounting in geisinger health plan v united_states f 3rd 3rd cir geisinger the court recognized that an organization may qualify for exemption based on the integral_part_doctrine which arises from an exception to the feeder_organization rule set forth in sec_1_502-1 of the regulations which states that if a subsidiary_organization of a tax-exempt_organization would itself be exempt on the ground that its activities are an integral part of the exempt_activities of the parent organization its exemption will not be lost because as a matter of accounting between the two organizations the subsidiary derives a profit from its dealings with the parent organization the court also noted that an entity seeking exemption as an integral part of another cannot primarily be engaged in activity which would generate more than insubstantial unrelated_business_income if engaged in by the other entity in this regard the court followed the reasoning of sec_1_502-1 which contains an example of a subsidiary_organization that is not exempt from tax because it is operated for the primary purpose of carrying_on_a_trade_or_business which would be an unrelated_trade_or_business that is unrelated to exempt_activities if regularly carried on by the parent organization the example states that if a subsidiary_organization is operated primarily for the purpose of furnishing electric power to consumers other than its parent organization and the parent's tax-exempt subsidiary organizations it is not exempt because such business would be an unrelated_trade_or_business if regularly carried on by the parent organization similarly if the organization is owned by several unrelated exempt_organizations and is operated for the purpose of furnishing electric power to each of them it is not exempt since such business would be an unrelated_trade_or_business if regularly carried on by any one of the tax-exempt organizations accordingly the court in geisinger determined that application of the integral_part_doctrine requires at a minimum that an organization be in a parent and subsidiary relationship and that it not be carrying_on_a_trade_or_business which would be an unrelated_trade_or_business that is unrelated to exempt purposes if regularly carried on by the parent an affiliation between previously independent hospitals to provide corporate services among the participants raises exemption qualification and unrelated_trade_or_business issues with respect to exemption qualification the courts have been clear that exemption under sec_501 of the code is not generally available where an organization is established to provide corporate services to unrelated exempt_organizations other than through the application of sec_501 of the code for cooperative_hospital_service_organizations see bsw group inc supra and hcsc- laundry supra furthermore exemption under the integral_part_doctrine requires a parent and subsidiary relationship and the absence of unrelated_trade_or_business see geisinger supra and revrul_78_41 supra with respect to unrelated trade or 0s _ a business sec_513 of the code makes clear that if a hospital provides regularly carried on corporate services to another unrelated exempt_organization for a fee then such services are unrelated_trade_or_business unless they fall within the exception for certain hospital services provided by sec_513 however if the participating exempt_organizations are in an affiliated system of organizations with common_control then corporate services provided between them necessary to their being able to accomplish their exempt purposes are treated as other than an unrelated_trade_or_business and the financial arrangements between them are viewed as merely a matter of accounting see revrul_77_72 supra at issue then is whether the affiliation established an affiliated system with sufficient common_control such that corporate services and payments provided between the participating affiliates will not be treated as unrelated_trade_or_business income based on all the facts and circumstances we conclude that the affiliation effectively binds the participating affiliates under the common_control of a so that the participating entities are within a relationship analogous to that of a parent and subsidiary pursuant to the authority of a’s governing board although all of the facts and circumstances are relevant to this conclusion importantly the participating affiliates have ceded authority to a's governing body as sole member of d under state nonprofit corporation law and under the affiliation agreement and applicable bylaws to take any_action other than those previously stated with respect to d and its affiliates with or without the approval of those entities a exercises control with respect to strategic plans operating budgets capital budgets provided they are not less than certain specified amounts during the first three years of the affiliation rate schedules and charges for goods and services and use of facilities furnished by the t affiliates and the incurrence of indebtedness by those organizations a has effective_control with respect to policies and procedures for health care services to the indigent write-offs for uncollectible accounts and over pricing with third-party payors in addition a is empowered to execute and deliver third party payor contracts on behalf of the t affiliates and to cause the development of new services and new strategic alliances and affiliations responsibility for operational decisions and to monitor the affiliates’ compliance with its decisions therefore the transfer or sharing or provision of assets or services between and among the tax-exempt organizations in the system is treated as other than an unrelated_trade_or_business in addition a’ s board_of directors meets regularly to exercise overall contributions to organizations exempt from federal_income_tax under sec_501 of the code do not fall within the definition of unrelated_business_income under sec_512 nor create taxable gain_or_loss to the transferor or transferee of tes l f the participating affiliates will not adversely affect their tax exempt status under sec_501 of the code by reason of the affiliation and subsequent activities as they will continue to promote health within the meaning of revrul_69_545 the participating entities will continue to qualify as nonprivate foundations under sec_509 of the code because they will continue to maintain the relationships and or activities serving as the basis for their nonprivate foundation status and f qualify as nonprivate foundations under sec_509 because they now have the appropriate relationships and or activities serving as the basis for this classification in addition a p accordingly based on all the facts and circumstances described above we rule the affiliation and subsequent activities and transactions do not adversely affect the tax-exempt status under sec_501 of the code of a and the s sec_501 affiliates and d e and f the t sec_501 affiliates the affiliation and subsequent activities and transactions do not adversely affect the status of a the t sec_501 affiliates and the s sec_501 affiliates as _ public_charities described in sec_509 of the code and following the affiliation a p and f each qualify as a public charity described in sec_509 of the code the transfer of assets or sharing or provision of services between and among the tax-exempt organizations in the new a system including a and the s and t affiliates and including the transfer of stock of u from e to d will not constitute an unrelated_trade_or_business or produce unrelated_business_income under sec_511 through of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings are directed only to the organizations that requested them sec_6110 of the code provides that they may not be used or cited by others as precedent these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described - i we are informing your area office of this action please keep a copy of these rulings in your permanent records sincerely signed marvin friedlander marvin friedlander manager exempt_organizations technical group


id office uilc cca_2011120209500137 ---------- number release date from ------------------- sent friday december am to --------------------- cc --------------------------------------------------------------------------- subject re potential underassessed tefra investor since we completed a timely tefra proceeding under section e the statute is held open for unidentified indirect partners up until one year after their identifying information is furnished to the service thus we may still be able to assess the unidentified indirect partners ----------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------


internal_revenue_service number release date index number --------------------------------- ----------------------------------------- ------------------------------ ------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-100307-06 date date --------------------------------------------- legend x ------------------------------------ d1 ----------------- dear -------------- this responds to the letter dated date submitted on behalf of x requesting relief under ' b of the internal_revenue_code facts x was incorporated on d1 the shareholders of x intended that x be treated as an s_corporation effective on d1 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under ' b however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed plr-100307-06 sec_1362 provides that if no ' a election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and ' b shall not apply x did not timely file an election to be treated as an s_corporation under ' a x has however established reasonable_cause for not making a timely s election and is entitled to relief under ' b conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-138142-07 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities subject railroad_retirement_tax_act status ----------------------------------------------------- in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business ceased to be an employer under the jurisdiction of the railroad retirement act and the railroad unemployment insurance act effective --------------------- ------- ----------------------------- --------------------------------------------------- --------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that -----------------------------------------------------ceased to be an employer under the railroad_retirement_tax_act effective -------------------------- the date on which it dissolved as a corporation please take the appropriate action regarding this business _______________________ janine cook cc ---------------------------------------


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi 3-plr-146450-01 date date number release date index number legend company subsidiary shareholders state date plr-146450-01 date date date date date date y x dear we received your letter dated date submitted on behalf of company requesting rulings under sec_1361 and sec_1362 of the internal_revenue_code this responds to your request facts company represents the following facts company a bank_holding_company was incorporated on date under the laws of state company along with other minority shareholders owned the stock of subsidiary a bank on date subsidiary effected a reverse_stock_split so that company became the sole shareholder of subsidiary in compliance with federal_law company then sold x of capital stock of company to each of subsidiary’s directors on date for dollar_figurey the directors signed an agreement regarding their shares of company stock in part the agreement restricted the transfer of the shares by the directors to anyone other than company the agreement also provided for the sale back of each director’s shares to company in consideration for dollar_figurey upon the director’s ceasing to hold the office of director finally the agreement provided that each director assigned to company any and all dividends or distributions of whatsoever kind or nature on date company filed a timely election under sec_1362 to be treated as an s_corporation effective date and a timely election under sec_1361 to treat subsidiary as a qualified_subchapter_s_subsidiary qsss effective date in date company and its representatives determined that due to the agreement company may have inadvertently created a second class of stock as a result company possibly was not in compliance with sec_1361 on date the agreement was amended and restated to remove the limitation on dividends and plr-146450-01 distributions and to provide for the payment of fair_market_value to the directors upon their sale of the stock back to company the amended agreement is now in effect company represents that it did not intend to create more than one class of stock as soon as company realized the potential problem caused by the agreement it acted to correct the agreement by creating the amended agreement company and its shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as might be required by the secretary company requests the following rulings under sec_1361 of the internal_revenue_code the amended agreement does not create a second class of stock under sec_1362 company’s s_corporation_election was inadvertently invalid therefore company will be treated as an s_corporation effective date and subsidiary’s status as a qsss is effective date law and analysis sec_1361 provides that for purposes of the code the term s_corporation means with respect to any_tax year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other things have more than one class of stock sec_1_1361-1 provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1_1361-1 provides that buy-sell agreements among shareholders agreements restricting the transferability of stock and redemption agreements are disregarded in determining whether a corporation’s outstanding shares of stock confer plr-146450-01 identical distribution and liquidation rights unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 and the agreement establishes a purchase_price that at the time the agreement is entered into is significantly in excess of or below the fair_market_value of the stock agreements that provide for the purchase or redemption of stock at book_value or at a price between fair_market_value and book_value are not considered to establish a price that is significantly in excess or below the fair_market_value of the stock and thus are disregarded in determining whether the outstanding shares of stock confer identical rights sec_1_1361-1 provides that bona_fide agreements to redeem or purchase stock at the time of death divorce disability or termination of employment are disregarded in determining whether a corporation’s shares of stock confer identical rights sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the tax_year for which made by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents the secretary determines that the circumstances resulting in the ineffectiveness were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness steps were taken so that the corporation is a small_business_corporation or to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to that period then notwithstanding the circumstances resulting in the ineffectiveness the corporation shall be treated as an s_corporation during the period specified by the secretary the conference_report on the small_business job protection act of p l provides that the service should be reasonable in exercising this authority and apply standards that are similar to those applied under present law to inadvertent subchapter_s terminations h_r conf_rep no 104th cong 2d sess 1996_3_cb_741 according to the legislative_history of sec_1362 f -- if the internal_revenue_service determines that a corporation's subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a plr-146450-01 termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenue without undue_hardship to taxpayers for example it may be appropriate to waive the terminating event when the one class of stock requirement was inadvertently breached but no tax_avoidance had resulted it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 sec_1_1362-4 of the income_tax regulations provides that for purposes of sec_1_1362-4 the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election or the fact that the event took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event tends to establish that the termination was inadvertent sec_1361 defines the term qualified_subchapter_s_subsidiary as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsss conclusion based on the facts represented and the information submitted by company we conclude that company’s election to be treated as an s_corporation was inadvertently invalid within the meaning of sec_1362 because it had more than one class of stock we also conclude that the amended agreement does not create a second class of stock under sec_1361 consequently we conclude that company will be treated as an s_corporation beginning date and thereafter unless company's s election otherwise terminates under sec_1362 moreover we conclude that because company’s s_corporation_election is effective as of date subsidiary will be treated as a qsss beginning date and thereafter unless company’s s_corporation_election otherwise terminates under sec_1362 or subsidiary fails to meet the requirements of a qsss under sec_1361 this ruling is contingent on company and its shareholders treating company as an s_corporation for the period beginning date and thereafter and on company treating subsidiary as a qsss for the period beginning date and thereafter company and its shareholders must make any adjustments that are necessary to comply with this ruling except for the specific ruling above we express or imply no opinion concerning the plr-146450-01 federal_income_tax consequences of the facts of this case under any other provision of the code including whether company or subsidiary is otherwise eligible to be an s_corporation or a qsss respectively under power_of_attorney on file with this office we are sending a copy of this letter to company and company’s second authorized representative 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 sincerely s christine ellison branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc