department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh number release date date date legend college x high school y z university b city c trustee dear we have considered your request of date for advance approval of your grant-making program under sec_4945 of the internal_revenue_code our records indicate that you were recognized as exempt from federal_income_tax under sec_501 of the code and were classified as a private_foundation as defined in sec_509 you are administered by c and you were formed to provide scholarships to deserving young women graduates of x who will attend z originally y which is a part of z also was specified you indicated that a stipulation by the probate_court deleted the specification of y the stipulation also expanded the eligible recipients to include as a candidate a worthy young woman who is a resident of b and is a graduate of any other public high school including magnet charter or other equivalent high schools as may be prescribed by state law located in or serving b or its corporate successor and who shall matriculate at z this was further amended to encompass women residents of b who graduate from the public high schools of other municipalities under the ‘project choice’ program as well as women residents of b who graduate from private high schools within or without b’ the scholarship selection committee consists of the principal of x the superintendent of schools of b and the senior trust officer of c the committee members acknowledge that they have an understanding of the internal_revenue_code provisions concerning private_foundations self dealing and the requirement that the scholarships cannot be given to any of their relatives the committee shall each year award a scholarship to a female graduate of x who is admitted to and will attend z the scholarship shall continue for so long as each recipient is attending z and maintains a satisfactory academic and disciplinary record and shall be renewed each academic year upon completion of the work of the preceding academic year up to a total of four years the total amount of the scholarship awards for any year shall be limited by the annual net_income of the trust estate which funds the scholarships and the individual scholarship awards for each year shall be nearly equal in amount as the committee determines to be practicable and equitable there shall be no more than one scholarship recipient in any college class or year unless the annual net_income of the trust estate exceeds the aggregate cost of tuition room board books and other miscellaneous fees for four scholarship recipients ie one in each of the four college class years if the annual net_income exceeds this amount then an additional partial or full scholarship may be awarded each year the scholarship committee reminds the three schools in b of the availability of the scholarship and mails the applications to the guidance offices the trust submits press releases to local newspapers the united way’s regional website and other local public giving foundations and non profit organizations that work with youth in b eligible recipients will be any worthy young women graduates of x who are sincerely desirous of attending z and who are qualified and have been admitted as students at z the stipulation approved by the probate_court indicated that if there isn’t a graduate of x who qualifies for the scholarship in two consecutive years any young woman who is a resident of b and a graduate of one of the public schools that are located in or services b will be eligible for the scholarship if she shall matriculate to z it further indicates that if in two consecutive years there isn’t a graduate of x or resident of b that is qualified then any young woman who is a resident of b and a graduate of any other high school and shall matriculate to z will be eligible for the scholarship preference shall always be given to a graduate of x in order to remain within the intention of the will that created the scholarship the founder of the trust felt that relatively few girls who graduated from x had the opportunity to attend college because the poverty level in b is high the founder was a graduate of x and y and set the eligibility requirements and selection criteria for the program because of the high academic requirements of z the number of eligible applicants may be limited you indicated that the group of eligible applicants qualified as a charitable_class because the charitable purpose of the grant was maintained e e e e the selection criteria include character academic record extracurricular activities sincerity of purpose e e application to and acceptance into z preference is given to graduates of x and the public high schools of b the eligible applicants must complete the application consisting of personal information school information small essay question and indication that they have been accepted and plan to attend z the selection committee will review the application of each of the applicants interviewing the girls if they deem necessary and then based on the information determine which one or more of the girls would be awarded scholarships the admission office of z also may be consulted the procedure would be similar to that used by the admission office of any college in deciding which of many applicants will be admitted a letter is sent to inform individuals selected to receive a scholarship the recipient is asked to complete and return a form in which she acknowledges that she is a recipient and agrees to permit c to verify continuing enrollment during the term of the scholarship z will send to c a transcript as to the student’s performance for the college year just completed including any disciplinary issues the committee will review the report to determine whether a scholarship will be renewed for the next year scholarships would not be renewed if the recipient ceased to be a student at z or had an unsatisfactory record it is understood that z will promptly notify the trustee if any recipient ceases to be a student at z funds are paid directly to z the scholarship committee relies on z to determine that the funds have been appropriately expended for the benefit of the scholarship recipients annual reports will be sent from z as to the performance of the scholarship recipient and the completion of the requirements of her scholarship the bursar’s office at z would refund any monies not used by the student back to the trust should a scholarship recipient withdraw from z the trust will cease funding the student and the institution will be asked to return a proportionate amount of the award to the trust representing the portion of the tuition payment made that was not utilized based on the length of attendance by the student since z operates on a semester system and since charges for a semester are determined in advance it is possible that the repayment of the funds to the trust would be made on a semester basis appropriate reports on the awardees are required the trust would investigate any actual or potential misuse of the funds awarded and would seek to recover any funds which have not been used properly you agree to maintain records that include the following i ii information used to evaluate the qualification of potential grantees identification of the grantees including any relationship of any grantee to the private_foundation all grantee reports and other follow-up data obtained in administering the private foundation’s grant program the amount and purpose of each grant and iii iv sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i ii its grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to provide objectivity and nondiscrimination in making the awards we have determined that your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours robert choi director exempt_organizations rulings and agreements


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 b03 plr-144665-11 date february x ----------------------------------------------------------- ----------------- trust ---------------------------------------------------------- -------------------------------------------- trust ---------------------------------------------------------- ------------------------------------------------ d1 ------------------- dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code x made an election to be treated as an s_corporation x’s election was inadvertently terminated effective d1 when trust ceased to qualify as an eligible shareholder by failing to make an electing_small_business_trust esbt election trust transferred its x stock to trust which held the x stock until it transferred the stock to two eligible shareholders x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of plr-144665-11 sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the 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 such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election on d1 was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d1 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 moreover each of trust and trust will be treated as an esbt during the period for which it held x stock provided each trust files income_tax returns for such period consistent with an esbt election having been made this ruling is conditioned upon x and all its shareholders treating x as having been an s_corporation for the termination period and thereafter moreover the shareholders of x must include their pro_rata share of the separately_stated and nonseparately computed items of income loss deduction or credit as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void plr-144665-11 except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file we are sending a copy of this letter to x’s authorized representatives sincerely s richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court ray e mason petitioner v commissioner of internal revenue respondent docket no filed date kevin d watley and b david sisson for petitioner william f castor for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and determined that petitioner was liable for the addition_to_tax of 1all dollar amounts are rounded to the nearest dollar dollar_figure under sec_6651 f for fraudulent_failure_to_file a timely income_tax return for and alternatively under sec_6651 for failure_to_file timely after concessions the issue to be decided is whether petitioner is liable for the addition_to_tax under sec_6651 for fraudulent_failure_to_file timely an income_tax return for we hold that petitioner is liable we therefore do not need to decide alternatively whether petitioner is liable for the addition_to_tax under sec_6651 findings_of_fact some of the facts have been stipulated and are incorporated by this reference petitioner and his late wife4 the masons resided in noble oklahoma when they filed the petition the masons owned interests in various business enterprises during the year at issue they held a 50-percent interest in an s_corporation named eagle enterprise inc eagle which 2all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 3the deficiency in the statutory notice dollar_figure was based on four adjustments a capital_gain adjustment of dollar_figure which respondent conceded a schedule a investment_expense adjustment of dollar_figure which petitioner conceded a computational schedule a miscellaneous expense adjustment and a computational alternative_minimum_tax adjustment 4petitioner’s wife ellen m mason died on date the court dismissed the est of ellen m mason from this action for lack of jurisdiction on date did business as a smoke shop in oklahoma they also owned el dorado investments inc el dorado and cornerstone capital resources inc cornerstone two s_corporations that held interests in four sonic drive-in restaurants sonic restaurants located in tennessee kentucky and kansas the masons also owned two commercial properties that they leased to sonic restaurants located in tennessee sometime before the masons met dan meador meador the chairman of a tax-protester group that questions the legality of the federal_income_tax system meador was convicted of felony obstruction of justice charges relating to a federal investigation of two other oklahoma-based tax protesters when respondent initiated a collection action during against mrs mason regarding her tax_liability petitioner and his wife each sent a letter to respondent on date attempting to revoke their status as united_states citizens mrs mason then sent an additional letter on date advancing other frivolous tax-protester type arguments the masons also during transferred their residence and business interests to various trusts they controlled petitioner did not maintain a bank account in his name but rather used accounts in his wife’s name and in the name of el dorado in addition petitioner did not make estimated_tax payments in the masons consistently filed timely income_tax returns for almost years then stopped in they did not file their income_tax return for until date and did not file another income_tax return after that until date when they filed an income_tax return for they did not file timely income_tax returns for through despite having significant taxable_income in each of these years when the masons eventually filed these income_tax returns they reported adjusted_gross_income of dollar_figure in dollar_figure in and dollar_figure in the masons did not file their income_tax return for until years after it was due and then only after respondent initiated a criminal investigation for the masons’ failure_to_file petitioner pleaded guilty in date to willfully failing to file a federal_income_tax return for under sec_7203 respondent determined a deficiency and a fraudulent_failure_to_file addition_to_tax under sec_6651 for petitioner timely filed a petition with this court for a redetermination the parties stipulated that there is a deficiency in income_tax for of dollar_figure the only issue we have to decide is whether petitioner’s failure_to_file an income_tax return for was fraudulent 5because the stipulated deficiency amount is different from the deficiency amount in the statutory notice a rule computation must be done opinion individuals whose gross_income exceeds certain levels for a taxable_year are required to file an income_tax return sec_6012 if an individual fails to file an income_tax return the commissioner may impose an addition_to_tax of up to percent per month of the amount required to be shown up to a maximum of percent sec_6651 if the failure_to_file is fraudulent the addition_to_tax i sec_15 percent per month of the amount required to be shown up to a maximum of percent sec_6651 petitioner stipulated that he did not file a timely income_tax return for we must determine whether his failure_to_file timely was fraudulent within the meaning of sec_6651 in determining whether a taxpayer’s failure_to_file is fraudulent we consider the same elements that are considered in imposing the fraud_penalty under sec_6663 102_tc_632 fraud is an intentional wrongdoing designed to evade tax known or believed to be owing 829_f2d_828 9th cir affg tcmemo_1986_223 796_f2d_303 9th cir affg tcmemo_1984_601 respondent has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b clayton v commissioner supra the existence of fraud is a question of fact to be resolved upon consideration of the entire record 96_tc_858 affd 959_f2d_16 2d cir 69_tc_391 fraud is never presumed and must be established by independent evidence that establishes fraudulent intent edelson v commissioner supra 55_tc_85 fraud may be proven by circumstantial evidence because direct evidence of the taxpayer’s fraudulent intent is seldom available 317_us_492 80_tc_1111 67_tc_181 affd without published opinion 578_f2d_1383 8th cir the taxpayer’s entire course of conduct may establish the requisite fraudulent intent 99_tc_202 56_tc_213 53_tc_96 courts have developed several indicia or badges_of_fraud from which the requisite fraudulent intent can be inferred they include failing to file income_tax returns understating income concealing assets failing to cooperate with tax authorities making frivolous arguments failing to make estimated_tax payments giving implausible or inconsistent explanations of behavior and being convicted of willful failure_to_file an income_tax return 899_f2d_164 2d cir bradford v commissioner supra 91_tc_874 this list is nonexclusive niedringhaus v commissioner supra although no single factor is necessarily sufficient to establish fraud the existence of several indicia may constitute persuasive circumstantial evidence of fraud see bradford v commissioner supra a taxpayer’s filing of income_tax returns in prior years is evidence that the taxpayer was aware of his or her obligation to file such returns 92_tc_661 see also stalker v commissioner tcmemo_1981_544 here the masons had a history of consistently filing income_tax returns for almost years they did not file their joint income_tax return for until date after that they did not file an income_tax return until date when they filed a return for while the record does not reflect petitioner’s educational background he was experienced in business affairs he and his wife held interests in four sonic restaurants and owned two commercial properties respondent contends and we agree that given petitioner’s business background and other facts in the record he was aware of his obligation to file income_tax returns failure_to_file income_tax returns even over an extended period of time does not per se establish fraud 75_tc_1 coulter v commissioner tcmemo_1992_224 an extended pattern of failing to file income_tax returns however may be persuasive circumstantial evidence of fraud 544_f2d_883 5th cir affg tcmemo_1975_368 398_f2d_1002 3d cir grosshandler v commissioner supra coulter v commissioner supra further when a taxpayer’s failure_to_file for several years is viewed in light of his or her previous filing of income_tax returns for prior years the taxpayer’s nonfiling weighs heavily against him or her because the taxpayer is aware of the requirement 84_tc_405 as discussed in the preceding paragraph the masons did not file income_tax returns after their return for until they filed their return for in date they failed to file their income_tax return for until date and then only after respondent began a criminal investigation against the masons for failure_to_file the masons’ pattern of failing to file when viewed in light of their history of filing timely income_tax returns for almost consecutive years is evidence of petitioner’s fraudulent intent to evade tax_liability further given the masons’ association with meador we reject petitioner’s argument that their failure_to_file was reasonable because they lacked sufficient funds to pay the tax and they believed taxpayers were only required to file if they could pay the tax owing respondent contends and we are persuaded that petitioner’s failure_to_file an income_tax return for is evidence of fraud consistent failure to report substantial amounts of income over a number of years is standing alone highly persuasive evidence of fraudulent intent see 232_f2d_678 6th cir affg tcmemo_1955_31 temple v commissioner tcmemo_2000_337 affd 62_fedappx_605 6th cir here when the masons’ income_tax returns for and were eventually filed they reported adjusted_gross_income of dollar_figure dollar_figure and dollar_figure respectively respondent argues and we agree that this failure to report such substantial income is evidence of fraud concealing assets or income is also an indicium of fraud douge v commissioner supra 796_f2d_303 9th cir recklitis v commissioner supra pincite respondent contends and we agree that petitioner took affirmative steps to conceal his income and assets petitioner had no bank account in his name he used bank accounts solely in his wife’s name or in the name of el dorado he also transferred all of his various business interests and his residence to various trusts to conceal his assets and frustrate respondent’s collection efforts we next consider petitioner’s level of cooperation with respondent failure to cooperate with the internal_revenue_service irs is an indicium of fraud douge v commissioner supra bradford v commissioner supra pincite recklitis v commissioner supra petitioner did not cooperate with respondent’s investigation during the masons responded to respondent’s inquiries with tax_protester rhetoric and submitted numerous letters to respondent that advanced tax_protester arguments although tax_protester arguments may not be evidence of fraud in and of themselves they may be indicative of fraud if made in conjunction with affirmative acts designed to evade paying federal_income_tax see 86_tc_1253 fleischner v commissioner tcmemo_1995_389 here petitioner took or made affirmative acts designed to evade his tax_liability they include failure_to_file an income_tax return failure to make estimated_tax payments for the year at issue concealment of assets and understatement of substantial income accordingly we find that petitioner’s affirmative acts are evidence of fraud petitioner claims that the transfer of his personal_residence and his various business interests to different trusts over which he retained complete control is not evidence of fraud petitioner’s explanation that the transfers were made as part of his estate plan does not withstand scrutiny however petitioner’s explanation is implausible in light of his testimony that he does not have a will and his wife did not have a will when she died removing assets from respondent’s reach by transferring them to a_trust has been held to be an affirmative act of fraud see simmons v commissioner tcmemo_1997_269 we find that the transfer of the personal_residence and business interests to the trusts and his implausible explanation are both evidence of fraud petitioner next argues that transferring his assets to various trusts was not fraudulent because he used his own social_security_number as the trusts’ taxpayer_identification_number and he continued to live in the residence after the conveyance to the trust these contentions do not persuade us however that petitioner’s intent was to comply with respondent’s collection efforts when considered in conjunction with all of petitioner’s actions during the relevant period we find that petitioner transferred his assets to various trusts to hinder respondent’s collection efforts and such action therefore is evidence of fraud most of the badges_of_fraud that this court customarily relies on are present in this case there is a pattern of failing to file income_tax returns understating income failing to cooperate with tax authorities making frivolous arguments failing to make estimated_tax payments concealing assets and income giving implausible explanations and pleading guilty to willful failure_to_file an income_tax return under sec_7203 considering all of the facts and circumstances of this case we find that respondent has proven by clear_and_convincing evidence that petitioner’s failure_to_file an income_tax return for was fraudulent accordingly petitioner is liable for the sec_6651 addition_to_tax for because of our holding regarding the addition_to_tax under sec_6651 for fraudulent_failure_to_file we need not address whether petitioner is liable for the addition_to_tax under sec_6651 for failure_to_file timely we have considered petitioner’s other arguments and find them to be irrelevant moot or meritless to reflect the concessions of the parties decision will be entered under rule


t c summary opinion united_states tax_court nicholas s farris and kirstin b farris petitioners v commissioner of internal revenue respondent docket no 19100-12s filed date chris economou for petitioners jamie m stipek for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and in effect for rule references are to the tax_court rules_of_practice and procedure reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and imposed a dollar_figure accuracy-related_penalty the issues for decision are whether petitioners are entitled to a deduction for a loss from their rental real_estate activity the resolution of which depends upon whether sec_469 applies to mrs farris petitioner and whether petitioners are liable for the sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in oklahoma petitioner was hired as the marketing director for excel therapy specialists llc excel on date and was so employed during according to a letter dated date offer letter excel offered petitioner an annual salary of dollar_figure based on a minimum of hours a week in the year in issue petitioner a deficiency and accuracy-related_penalty for now conceded by petitioners are also determined in the notice_of_deficiency mr farris does not claim to be a taxpayer so described earned dollar_figure from her employment with excel at all times relevant petitioner was considered a part-time_employee of excel petitioner did not maintain a time log or other written record of the time she spent performing personal services for excel during taking into account vacation time petitioner estimates that she worked approximately big_number hours for excel for that year in addition to her part-time job with excel petitioner performed personal services in connection with two rental real_estate properties rental properties that petitioners owned in the rental properties are in tulsa oklahoma one pincite south jamestown jamestown property and the other pincite e 3d street 3d street property mr farris had purchased the jamestown property before and apparently before petitioners were married the jamestown property was managed by a property management company in petitioners purchased the 3d street property on date as between petitioners petitioner was primarily responsible for managing and maintaining the rental properties although mr farris contributed as well among other things petitioner met with prospective tenants corresponded with tenants negotiated and prepared leases and collected rent due from tenants of the 3d street property the management company collected rent and oversaw maintenance requests for the jamestown property petitioner personally made repairs and renovations to the rental properties including repairing damage caused by dry rot patching holes in walls sanding and painting doors and walls pulling wallpaper laying and cutting kitchen tiles and sanding and painting cabinet doors on or around date during respondent’s examination of petitioners’ federal_income_tax return petitioner prepared a log initial log of the hours allegedly devoted to the rental properties during according to the initial log petitioners spent hours performing services for their rental real_estate activity petitioner created the initial log using notes she had jotted down at or around the time she performed services for the rental properties most of the hours reported on the original log are attributable to petitioner on or around date petitioner prepared a second log revised log that includes additional hours not reported in the initial log according to petitioners the additional hours included in the revised log are based on notes that mr farris took at or around the time that petitioners performed services for the rental properties according to the revised log petitioners spent big_number hours performing personal services for their rental real_estate activity as with the initial log most of the hours reported on the revised log are attributable to petitioner the entries in the logs provide generalized descriptions of the work that petitioners performed on a specific day or over a specified period and the amount of time that petitioners or one of them spent on the activity described the logs do not identify the specific rental property to which the services relate nor do the logs identify which of them performed the services many if not most of the entries in the logs relate to research petitioners conducted on the housing market according to the logs that research was performed by searching the internet and or by what was described in the logs as prospect by car petitioners’ timely filed joint federal_income_tax return was prepared by a paid income_tax_return_preparer on that return petitioners reported income and expenses attributable to the rental properties on a schedule e supplemental income and loss taking into account the income and expenses the schedule e shows a net_loss of dollar_figure that loss is taken into account in the dollar_figure of adjusted_gross_income reported on petitioners’ return the rental property loss is disallowed in the notice according to respondent’s explanation t he taxpayer fails the half personal services test thus rental real_estate losses are limited by sec_469 respondent also imposed a sec_6662 accuracy-related_penalty on various grounds for the year in issue some of the adjustments made in the notice have been agreed to between the parties or conceded by one or the other of them and other adjustments are computational those adjustments will not be discussed discussion as a general_rule the commissioner’s determination in the notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the determination is improper see rule a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any claimed deductions rule a see 503_us_79 i rental real_estate activity a taxpayer is generally allowed deductions for certain business and income- producing expenses see sec_162 sec_212 sec_469 generally disallows for the taxable_year any passive_activity_loss a passive_activity_loss is the excess of petitioners do not claim that the provisions of sec_7491 are applicable and we proceed as though they are not the aggregate losses from all passive activities for the taxable_year over the aggregate income from all passive activities for that year sec_469 a passive_activity is any trade_or_business or activity for the production_of_income in which the taxpayer does not materially participate sec_469 rental_activity is generally treated as per se passive regardless of whether the taxpayer materially participates sec_469 however the rental_activity of a taxpayer is not treated as per se passive if the taxpayer satisfies the requirements of sec_469 sec_469 if a taxpayer is described in that section sometimes that taxpayer is referred to as a real_estate_professional then sec_469 does not apply and the taxpayer’s rental real_estate activity if conducted as a trade_or_business or for the production_of_income is not treated as a passive_activity if the taxpayer materially participates in the activity sec_469 fowler v commissioner tcmemo_2002_223 sec_1_469-9 income_tax regs petitioners’ rental real_estate activity constitutes a there is an additional exception for rental real_estate activity losses of a natural_person s see sec_469 the deduction is phased out as adjusted_gross_income modified by sec_469 exceeds dollar_figure with a full phaseout occurring when modified_adjusted_gross_income equals dollar_figure sec_469 respondent determined in the notice_of_deficiency that the phaseout rules of sec_469 preclude petitioners from currently deducting any of their rental real_estate loss a point petitioners do not dispute real_property_trade_or_business within the meaning of sec_469 see sec_469 we proceed without finding that petitioner materially participated in the rental real_estate activity during see sec_469 although the application of sec_469 can be complicated the disagreement between the parties is relatively simple--the parties disagree as to the number of hours petitioner spent providing personal services during as an excel employee and the number of hours she spent performing personal services in connection with petitioners’ rental real_estate activity to be considered a real_estate_professional ie a taxpayer to whom sec_469 applies and entitled to the deduction here in dispute petitioners must establish that the hours petitioner spent in connection with their rental real_estate activity exceed the hours she spent performing personal services for excel see sec_469 there is nothing in the record that suggests that petitioner or petitioners elected to treat all of their interests in rental real_estate as one activity see sec_469 technically they have two separate rental_real_estate_activities because it makes no difference to the outcome of this case and for convenience we refer to petitioners’ rental real_estate activity as though it was a single activity given the explanation in the notice_of_deficiency for the disallowance of the loss deduction here in dispute we proceed as though respondent agrees that petitioner spent more than hours providing personal services in petitioners’ rental real_estate activity during see sec_469 relying upon the revised log petitioners argue that petitioner did respondent disagrees and for the following reasons so do we according to petitioners petitioner spent big_number hours working for excel in according to respondent petitioner’s compensation from excel suggests that petitioners have understated the amount of time petitioner spent providing personal services to that company during the only direct evidence on the point is petitioner’s testimony which finds some support in the offer letter assuming without finding that petitioner’s estimate is accurate we proceed as though she spent big_number hours performing services as an employee of excel during next we consider the time petitioner spent performing personal services in petitioners’ real_estate trade_or_business petitioner’s initial log prepared during the examination of petitioners’ return shows that petitioners collectively spent hours performing services for their rental real_estate activity even if we were to attribute every hour recorded on that log to petitioner she would not satisfy the test set forth in sec_469 the revised log shows that petitioners collectively spent big_number hours performing services for their rental real_estate activity the revised logs however lack proper substantiation by contemporaneous verification or other reasonable means the temporary regulations provide that hours of participation may be established by c ontemporaneous daily time reports logs or similar documents sec_1_469-5t temporary income_tax regs fed reg date but participation can also be established by other reasonable means such as appointment books calendars or narrative summaries that identify the services performed and the approximate number of hours spent performing such services id for purposes of that regulation we are not required to accept postevent ballpark guesstimates nor are we bound to accept the unverified testimony of taxpayers in the absence of adequate documentation see eg lum v commissioner tcmemo_2012_103 estate of stangeland v commissioner tcmemo_2010_185 petitioner did not keep a contemporaneous log of the hours that she devoted to petitioners’ rental real_estate activity petitioner did refer to contemporaneous notes she used to create the logs but those notes were not provided to the court the logs were created in apparently in connection with the examination of petitioners’ return furthermore we are unable to identify with any degree of certainty which entries on the logs are attributable to petitioner and which entries are attributable to mr farris the distinction is important because only the hours attributable to petitioner count see sec_469 on consideration of the entire record we reject petitioners’ claim as to the hours petitioner spent providing personal services in their rental real_estate activity because we are not persuaded that petitioner spent more time on petitioners’ rental real_estate activity during than she did working for excel petitioners have not established that she is a taxpayer to whom sec_469 applies it follows that respondent’s disallowance of the loss deduction here in dispute is sustained ii accuracy-related_penalty sec_6662 and b and imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence disregard of rules or regulations or substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs respondent bears the burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 respondent has demonstrated that in this case the deficiency understatement_of_tax and underpayment of income_tax are all computed in the same manner see sec_6211 sec_6662 sec_6664 petitioners failed to keep accurate records with respect to petitioner’s participation in petitioners’ rental real_estate activity respondent has satisfied his burden of production see sec_7491 the accuracy-related_penalty does not apply with respect to any portion of an underpayment for which it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 for purposes of sec_6664 a taxpayer may be able to establish reasonable_cause and good_faith by showing reliance on professional advice sec_1_6664-4 income_tax regs to establish good_faith and reasonable_cause through reliance on professional advice the taxpayer must show that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir petitioners’ return was prepared by a paid income_tax_return_preparer the fact that petitioners had a return preparer prepare their return does not in and of itself prove that they acted with reasonable_cause and in good_faith see id pincite importantly petitioners offered no evidence establishing that they gave the return preparer all necessary and accurate information such as records to substantiate the time spent by petitioner in petitioners’ rental real_estate activity instead petitioner testified that she did not know what was given to the return preparer because mr farris pretty much handles all of that although both mr farris and petitioners’ return preparer were present during the trial neither was called as a witness see 6_tc_1158 aff’d 162_f2d_513 10th cir petitioners have not shown that they acted in good_faith and had reasonable_cause for the underpayment_of_tax required to be shown on their return accordingly they are liable for a sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------ ---------------------- ---------------- -------------------------- department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc corp b02 - plr-147850-03 date date - legend distributing shareholder shareholder shareholder shareholder shareholder shareholder state a state b date date ------------------------------------------------------------------------------------------- ------------------------ ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- --------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------ ----------- ---------------------- ---------------------- plr-147850-03 date business d business e f g h i j k l m n ----------------------- ------------------- -------------------------------------- ----- ------- ----------- --------- --------- ----------- ----- ----- ----- dear -------------- this is in reply to your letter requesting rulings about the transaction described in this letter the information submitted for consideration is substantially as set forth below distributing was incorporated in state a on date on date it elected to be taxed as a subchapter_s_corporation and on date it registered with the office of the secretary of state b to conduct business as a foreign_corporation in state b distributing is engaged in business d in state a and business e in state b distributing only has one class of stock outstanding shareholder and shareholder each own h of distributing shareholder and shareholder each own i of distributing and shareholder and shareholder each own j of distributing shareholder and shareholder are husband and wife the parents and are the parents of shareholder shareholder shareholder and shareholder the children shareholder and her husband are also the sole shareholders in a plr-147850-03 corporation engaged in business d that is located on land adjacent to the land where distributing engages in business d the children do not agree with the way the parents have been operating and managing distributing business e has not been profitable and shareholder has used money from business d to supplement the losses and cash_flow needs of business e the children also own a separate corporation engaged in business d the husband of shareholder strongly believes that business e does not have good prospects for future profitability and he further believes that business d should not subsidize business e he also believes that the land in state b on which business e is conducted could be put to more profitable use shareholder disagrees although the disagreements have not yet led to legal disputes shareholder and shareholder are concerned that in the long run the disagreements will lead to greater family problems and to legal actions in addition the parents have certain estate_planning goals that they wish to accomplish with respect to business d to accomplish these objectives the following transaction is proposed i shareholder and shareholder plan to each gift to shareholder and to shareholder sufficient stock to equalize the percentage of ownership of distributing among their children at i these gifts will reduce the ownership of shareholder and shareholder in distributing to k ii distributing will organize under the laws of state a two wholly owned subsidiaries controlled and controlled by transferring l acres of real_property in state a and some property used in business d to controlled and m acres of real_property in state a to controlled in exchange for l shares of the stock of controlled and n shares of the stock of controlled distributing will contribute cash only if necessary to equalize the fair_market_value of the assets of controlled and controlled iii shareholder will transfer all of her stock of distributing for all l shares of the stock of controlled it is possible that shareholder will then merge controlled into the already existing corporation that she and her husband own iv shareholder shareholder and shareholder will each exchange all of their stock in distributing in for l shares of stock of controlled which in total is all n shares of the controlled stock v following the transaction shareholder and shareholder will own of the stock of distributing shareholder would own of the stock of controlled and shareholder shareholder and shareholder will each own of controlled plr-147850-03 representations in connection with the proposed transaction distributing has made the following a b c d e f g the fair_market_value of controlled stock and any other consideration received by shareholder will be approximately equal to the fair_market_value of distributing stock surrendered by the shareholder in the exchange the fair_market_value of controlled stock and any other consideration received by shareholder sec_4 and will be approximately equal to the fair_market_value of distributing stock surrendered by each of shareholder sec_4 and in the exchange no part of the consideration distributed by distributing is being received by any of shareholder or as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of distributing is representative of present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing controlled and controlled will each continue the active_conduct of its business independently and with separate employees the distribution of the stock of controlled and controlled is carried out to promote family and management harmony and avoid significant disagreements between the shareholders of distributing concerning the management and operation of business d and business e the current minority shareholders of distributing will be able to manage their respective corporations as they see fit the distribution of the stock or stock and securities of controlled and controlled is motivated in whole or substantial part by one or more of these corporate business purposes there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing controlled or controlled after the transaction except for the possible merger of controlled into the corporation that shareholder and her husband own as described in iii above h there is no plan or intention by either distributing controlled or controlled directly or through any subsidiary_corporation to purchase plr-147850-03 any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing controlled or controlled to merge either corporation with any other corporation except for the possible merger of controlled as described in iii above or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business the assets transferred to controlled and controlled by distributing will not be subject_to any liabilities and neither controlled nor controlled will assume any liabilities of distributing in connection with the proposed transaction no property is being transferred between distributing and controlled and controlled that would be subject_to investment_credit recapture distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction i j k l m no intercorporate debt will exist between distributing and controlled or controlled at the time of or subsequent to the distribution of the stock of controlled and controlled n o p payments made in connection with continuing transactions if any between distributing controlled and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm s-length no two parties to the transaction are investment companies as defined in code sec_368 and iv for purposes of code sec_355 immediately after the distribution no person determined after applying code sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in code sec_355 and during the five year period determined after applying code sec_355 ending on the date of the distribution q for purposes of code sec_355 immediately after the distribution no person determined after applying code sec_355 will hold stock possessing percent or more of the total combined voting power of all plr-147850-03 classes of controlled or controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled or controlled stock that was either i acquired by purchase as defined in code sec_355 and during the five year period determined after applying code sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in code sec_355 and during the five year period determined after applying code sec_355 ending on the date of the distribution r s t the distribution is not part of a plan or series of related transactions within the meaning of code sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing controlled or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing controlled or controlled the gross assets of the portion of the business directly conducted by distributing immediately after the distribution will have a fair_market_value that is greater than percent of the total fair_market_value of distributing s gross assets at that time the gross assets of the portion of the business to be conducted by controlled1 and controlled immediately after the distribution will have a fair_market_value that is greater than percent of the total fair_market_value of controlled and controlled s gross assets at that time based solely on the information submitted and on the representations set forth above we rule as follows the transfer by distributing to controlled of assets relating to business d solely in exchange for all of the outstanding_stock of controlled followed by the distribution of all of the controlled stock to shareholder in exchange for distributing stock as described above will be a reorganization within the meaning of sec_368 of the code distributing and controlled will each be a aparty to a reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss upon the transfer of assets to controlled in exchange for controlled stock as described in ii above sec_361 plr-147850-03 distributing will recognize no gain_or_loss upon the transfer of assets to controlled in exchange for controlled stock as described in ii above sec_361 controlled will recognize no gain_or_loss on the receipt of the assets of distributing in exchange for all of the shares of controlled sec_1032 controlled will recognize no gain_or_loss on the receipt of the assets of distributing in exchange for all of the shares of controlled sec_1032 the basis of each asset received by controlled and controlled respectively will be the same as the basis of such assets in the hands of distributing immediately prior to the proposed transaction sec_362 the holding_period of the assets received by controlled and controlled from distributing will include the period during which such assets were held by distributing sec_1223 distributing will recognize no gain_or_loss upon the distribution of all its controlled 1stock to shareholder and all of its controlled stock to shareholder and sec_361 shareholder will not recognize gain_or_loss and no amount will be included in the income of shareholder upon the receipt of controlled stock in exchange for distributing stock of equal value as described above sec_355 shareholder sec_4 and will not recognize gain_or_loss and no amount will be included in the income of shareholder or upon the receipt of controlled stock in exchange for all of their distributing stock of equal value as described above sec_355 the basis in the stock of controlled to be received by shareholder will be the same as the basis of the distributing stock surrendered by her in the exchange sec_358 the holding_period of the controlled stock received by shareholder will include the holding_period of the distributing stock surrendered in exchange therefore provided that the distributing stock was held as a capital_asset by shareholder on the date of the exchange sec_1223 the basis in the stock of controlled to be received by shareholder sec_4 plr-147850-03 and will be the same as the basis of the distributing stock surrendered by each of them in the exchange sec_358 the holding_period of the controlled stock received by shareholder sec_4 and will include the holding_period of the distributing stock surrendered in exchange therefore provided that the distributing stock was held as a capital_asset by each on the date of the exchange sec_1223 as provided in sec_312 of the code proper allocation of earnings_and_profits between distributing controlled and controlled will be made in accordance with sec_1_312-10 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent letter is being sent to your authorized representative representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination the rulings contained in this letter are based upon information and sincerely gerald b fleming gerald b fleming senior technician reviewer office of associate chief_counsel corporate


internal_revenue_service national_office technical_advice_memorandum number release date third party contact none index no control no tam-114664-99 cc dom p si b8 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved no conference held issue whether a self-unloading automobile truck body sold by the taxpayer is subject_to the retailers tax on truck bodies imposed by sec_4051 of the internal_revenue_code conclusion the self-unloading automobile truck body sold by the taxpayer is subject_to the retailers tax on truck bodies imposed by sec_4051 this technical_advice_memorandum revokes the technical_advice_memorandum issued to the taxpayer dated date tam this technical_advice_memorandum is effective from the date of its issuance see dollar_figure of revproc_99_2 1999_1_irb_73 facts the taxpayer is a farm equipment dealer that sells self-unloading automobile truck bodies at retail the bodies in question haul seed potatoes sugar beets grain and other farm products each body has a full-length variable speed powered conveyor belt that is designed to support and unload the cargo and a powered rear discharge door to assist in unloading cargo the support and unloading system of the body is elaborate and considerably more expensive than the stationary bed of a standard body the sales literature emphasizes the versatility of the body for uses such district_director as transporting crops to market the taxpayer received a technical_advice_memorandum dated date tam that held that these bodies were exempt under sec_4053 law and analysis sec_4051 imposes a tax on the first_retail_sale of automobile truck bodies sec_4053 provides that the tax imposed by sec_4051 shall not be imposed on any body primarily designed a b c d e to process seed feed or fertilizer for use on farms to haul feed seed or fertilizer to and on farms to spread feed seed or fertilizer on farms to load or unload feed seed or fertilizer on farms or for any combination of the foregoing revrul_69_579 1969_2_cb_200 holds that certain automotive truck bodies equipped with heavy-duty unloading equipment and used primarily for hauling feed seed or fertilizer to and on farms are exempt from the manufacturers tax under sec_4063 now sec_4053 the ruling states that the elaborate and expensive unloading equipment built into the bodies and the modifications required to accommodate the unloading systems make it impractical to purchase the bodies for use other than in hauling seed feed or fertilizer to and unloading it on farms the equipment included heavy duty mechanical or pneumatic unloading equipment that formed an integral part of the bodies the mechanical system employed conveyors or augurs that unloaded from the top of the bodies the pneumatic system employed blowers and a hose and usually unloaded from the bottom and rear of the body revrul_75_462 1975_2_cb_419 holds that a dump truck designed for and primarily used in hauling grain sugar and beets from the field to points on or off the farm and that may also be used to haul fertilizer over the highway to the farm is not exempt from tax under the provisions of sec_4063 the ruling states that highway bodies used for general hauling of feed seed or fertilizer over the highway are subject_to the manufacturers excise_tax unless they have specific features that indicate they are primarily designed to haul those items to and on farms the ruling further states that district_director although the bodies carry feed and fertilizer they do not have specific features that indicate they are primarily designed to haul feed and fertilizer to and on farms section dollar_figure of revproc_99_2 provides that a holding that modifies or revokes a prior technical_advice_memorandum will be applied retroactively with one exception if the new holding is less favorable to the taxpayer than the earlier one it is generally not applied to the period when the taxpayer relied on the prior holding in situations involving continuing transactions the exemption from tax provided by sec_4053 does not extend to truck bodies designed for general use even though the bodies may be capable of hauling feed seed or fertilizer to and on farms and or performing a combination of the other purposes described in sec_4053 to be exempt a body must be primarily designed for one or a combination of the purposes described in sec_4053 unlike the bodies described in revrul_69_579 which would not be purchased for use other than in hauling feed seed or fertilizer the bodies here are designed for general hauling of farm cargo such as potatoes beets and grain in this connection the bodies' multipurpose design is emphasized in the taxpayer's literature the mere presence of a conveyor belt and powered rear discharge door to facilitate unloading does not establish that a body was primarily designed for an exempt_purpose under sec_4053 these features are equally useful for unloading a crop at market as emphasized in the sales literature and for other purposes in this respect we note that these bodies do not have built into them substantial integrated features relating to an exempt_purpose under sec_4053 thus the bodies are functionally similar to the bodies described in revrul_75_462 in that they are not primarily designed to haul feed seed or fertilizer accordingly the bodies are not exempt from tax under sec_4053 caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it shall not be used or cited as precedent in accordance with sec_6110 names addresses and other identifying numbers have been deleted - e n d -


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc intl br3 postf-153117-01 uilc memorandum for associate area_counsel chicago from subject legend special counsel cc intl dividends subject_to_withholding tax under sec_1441 and sec_1442 corp fx activity j activity k activity l country a this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent postf-153117-01 issue whether dividend payments by corp to fx are exempt from tax under sec_892 and therefore not subject_to_withholding during the taxable years at issue pursuant to sec_1441 and sec_1442 conclusion based on the facts presented we do not agree that either corp or fx can be shown to be a controlled_commercial_entity within the meaning of sec_892 accordingly we do not support the position taken that the dividends_paid by corp to fx are not exempt from tax under sec_892 and therefore subject_to_withholding under sec_1441 and sec_1442 facts the principal business of corp a domestic_corporation is conducting activity j it also earns income from activity k at least some of which is associated with activity j or adjacent to areas in which activity j is conducted the stock of corp is owned by a domestic_corporation and by fx a separate juridical entity organized in country a in country a fx conducts activity l the exact scope and character of activities authorized and necessary as part of fx’s conduct of activity l is uncertain in addition the relationship of fx to the government of country a or any governmental agency or subdivision is unknown however it is known that during the years under examination fx was owned ultimately by the government of country a during examination of corp it was learned that corp paid dividends to fx but did not withhold taxes on those dividend payments corp claimed that fx was a foreign government and therefore the dividend payments were exempt from federal_income_tax under sec_892 and not subject_to_withholding pursuant to temp sec_1_892-7t the examiners disagreed and proposed a deficiency for failing to withholding_tax on the dividend payments contending that corp was a controlled_commercial_entity within the meaning of sec_892 because fx held a percent interest in corp and corp was engaged in commercial activities by reason of its conduct of activity j and in the alternative by reason of corp 1's conduct of activity k law and discussion the determination of whether the dividends received by fx qualify for exemption from tax under sec_892 requires analyzing the status of both corp and fx the shareholder under sec_892 the sec_892 tax exemption does postf-153117-01 not apply to income received by or from a controlled_commercial_entity emphasis added accordingly if either corp or fx constitutes a controlled_commercial_entity the corp dividend distributions received by fx will not qualify for exemption from tax and will be subject_to_withholding under sec_1441 and sec_1442 based on the available information neither corp nor fx appear to meet the definition of a controlled_commercial_entity within the meaning of sec_892 although the government of country a directly or indirectly held a interest in corp it is questionable whether it was engaged in commercial activity first its principal business activity j is one of the governmental functions specifically enumerated within the governmental functions provision of temp sec_1_892-4t although the reference in the regulations could be subject_to interpretation on these facts it is unlikely a court would find in favor of the service if this case were litigated second while corp 1's conduct of activity k would generally be characterized as commercial there is some risk that a court might find that the close relationship of activity k to activity j casts doubt on that characterization in this case accordingly based on the facts presented we do not recommend the field pursue an argument that corp is engaged in commercial activity on the basis of either activity j or activity k while it appears that fx may likely constitute a controlled_entity of a foreign sovereign within the meaning of temp sec_1_892-2t and thus a foreign government for purposes of sec_892 more precise information would be needed before making such a determination to the extent that fx were determined to be a controlled_entity denial of the exemption would also require establishing that fx was engaged in commercial activity as defined in temp sec_1_892-4t the information currently available is insufficient to determine that fx constituted a controlled_entity and was engaged in commercial activities so as to not be entitled to exemption from tax with respect to the dividend payments it received under sec_892 absent significant factual development focused on fx’s foreign government status ie controlled_entity vs integral part and the activities it conducts we do not agree that fx can be said to be a controlled_commercial_entity within the meaning of sec_892 please call if you have any further questions ____________________________ kristine a roth special counsel office of associate chief_counsel international


ot tax_exempt_and_government_entities_division uics department of the treasury internal_revenue_service washington d f sep 20p4 i lfba 7s legend taxpayer a company m insurance_company n company o individual d individual e company p company q company r company s company t court cp connecticut s state t date date date date date date date date month sec_1 and amount amount amount dear concerning the status of a contribution taxpayer a terminated employment with com the facts upon which you base your requests are as follows any p a licensed securities broker-dealer yer a authorized companies p and q to this is in response to a ruling_request dated to your individual_retirement_account ira induced by representations made by employees of co and company q a registered investment_advisor taxp manage the investment of his qualified retirement fund any m which sponsored one or more eaning of sec_401 of the internal termination taxpayer a was entitled to er a is a resident of state t in retirement plans represented to be qualified within the revenue code in which taxpayer a participated at h receive distributions from said retirement plans taxpa q taxpayer a rolled over distributions upon the advice of representatives of companies p and received respectively from the qualified retirement pl4n s maintained by company m into an individual_retirement_annuity described in code sectio taxpayer a rolled over amount on date sec_1 and taxpayer a’s ira annuity had decreased significantly the distributor of insurance_company n products co b issued by insurance_company n insurance_company n is a state s_corporation authoriz company n sells financial products primarily to indivi independent financial advisors and other distribution c investment firms and financial institutions on or about date taxpayer a along with oth in court cp state t a court of competent jurisdiction als most of its sales are made through annels including but not limited to similarly situated taxpayers filed a lawsuit gainst insurance_company n company o any p company q company r company 'd to do business in state t insurance as of date the value of page s individual d and individual e individuals d and e s the lawsuit alleged that individuals d and e and c recommended the ira annuity purchased by taxpayer pwned and operated companies p q r and panies p through s sold and or the lawsuit contains a factual allegation to the effect tha captioned group annuity application_for participation these applications were either signed by individual d along with a reference to company p as the agent’s firth individual e as agent and to company p as firm on indicate that individual d and individual e also was act company n in procuring the sale of the annuity each plaintiff signed a document for submission to insurance_company n individual e who was listed as agent the reference to either individual d or e application itself was intended to hg simultaneously as an agent of insurance a sample group annuity application_for participation submitted with taxpayer a’s ruling_request indicates that at qualified ira_annuities may be purchased from insurance_company n attached to the copy of the lawsuit nd individuals d and e breached their the lawsuit alleged that companies p through s a chase and selling him an ira annuity as a fiduciary duty to taxpayer a by both advising him to p ement plans insurance_company n was vehicle to receive distributions made from qualified reti its agents company p and individuals d vicariously liable for said breaches of fiduciary duty by e defrauded taxpayer a by either and e companies p through s and individuals d om him when they sold him his ira intentionally misrepresenting or omitting material facts ‘epresentations when he purchased his ira annuity furthermore taxpayer a relied upon said mi ere acting within the scope of their duties annuity finally company p and individuals d and e fraudulent misrepresentations and as agents of insurance_company n when they made the bonstructive fraud against taxpayer a in omissions all of the named defendants committed and individuals d and e were acting within selling him his ira annuity furthermore company p ly n when they committed constructive the scope of their duties as agents of insurance compan he were negligent when they sold an ira fraud companies p through s and individuals d an line in value of taxpayer a’s ira annuity annuity to taxpayer a which negligence caused the dec acting within the scope of their duties as furthermore company p and individuals d and e were recommended and sold the ira annuity to agents of insurance_company n when they negligently taxpayer a and companies p through s and individuals d and e negligently misrepresented and negligently failed to disclose material facts to taxp which negligence caused the decline in value of taxpay company p and individuals d and e were acting withir insurance_company n when they made their negligent negligently failed to disclose material facts ayer a when they sold him his ira annuity er a’s ira annuity furthermore ithe scope of their duties as agents of fisrepresentations and when they in month sec_1 and taxpayer a entered into as n and company o pursuant to which insurance comp money in exchange for his agreeing to the dismissal of under the terms of the settlement taxpayer a received settlement provides that fement agreement with insurance_company ry n agreed to pay taxpayer a a sum of the above-referenced date amount in relevant part article of the lawsuit insurance_company n shall make separate transfers of the surrender amounts for each of the plaintiff's annuities to plaintiff's respective designees within seven business days after the processing of such paperwork from documentation contained in the file it appears that result of arm’s-length negotiations between various p pursuant to the settlement agreement the date company o companies p through s and individuals i and e was dismissed payment was made by check from the above-referenced settlement was the ies with adverse interests wsuit against insurance_company n the above referenced amo on or about date insurance_company n to taxpayer a said check was taxpayer a’s counsel on or about date ' ach said counsel to taxpayer a amount represents am leposited into a_trust account maintained by k in the amount of amount was issued by unt less attorney’s fees on or about date his name with company t of code sec_408 the date amount was paid to taxpayer a said date taxpayer a contributed am unt into an ira set up and maintained in it has been represented thaf said contributory ira met the requirements contributiow was made within days of date it has been represented that pursuant to article of the taxpayer a’s ira annuity which consisted of the ira as a result of the settlement referenced herein less the by insurance_company n by means of a direct trustee account maintained with company t settlement agreement the value of annuity value exclusive of amounts received pplicable surrender charge was transferred o trustee transfer to the taxpayer’s tra it has also been represented that the sum of the settleme and of the amounts transferred to taxpayer a’s compahty t ira referenced in the paragraph immediately above did not exceed amount nt proceeds paid to taxpayer a amount based upon the foregoing you request the following ruling that taxpayer a’s receipt of amount from in described settlement of a lawsuit and its subseq maintained in his name with company t consti meaning of sec_408 of the intern surance company n pursuant to the above ent contribution into an ira set up and lites a valid rollover transaction within the al revenue code a of the code provides that for purposes of with respect to the requested letter_ruling sec_408 eans a_trust created or organized in the this section the term individual_retirement_account nj or his beneficiaries but only if the written united_states for the exclusive benefit of an individual quirements among these requirements is governing instrument creating the trust meets certain re states that except in the case of a rollover the one found in paragraph of sec_408 which c a b or e contribution described in subsection d in sec_4 no contribution will be accepted unless it is in cash andl contributions will not be accepted for the axable year under sec_219 on taxable_year in excess of the amount in effect for such behalf of any individual for the tax treatment of distributions from sec_408 of the code provides the general_rule iras this section provides in pertinent part that except as otherwise provided in subsection d page pment plan or under an individual retirement any amount_paid or distributed out of an individual retir annuity shall be included in gross_income by the payee gr r distributee as the case may be in the manner provided under sec_72 sec_408 of the code establishes an exception ib the contribution rules of sec_408 trtain transactions characterized as rollover and the income inclusion rule_of sec_408 for c scribed in paragraph as a rollover_contributions under sec_408 an amount is de ns a and b contribution if it meets the requirements of subparagrap subparagraph a of sec_408 of the code state sec_408 does not apply to any amount_paid or dis account or individual_retirement_annuity to the individu is maintained if -- i the entire amount received includ into an individual_retirement_account or individual retire contract for the benefit of such individual not later than receives the payment or distribution s in pertinent part that paragraph of tributed out of an individual retirement al for whose benefit the account or annuity g money and any other_property is paid nent annuity other than an endowment the 60th day after the day on which he - subparagraph b of sec_408 in short provide amount described in subparagraph a i received by an if at any time during the 1-year period ending on the day any other amount described in that subparagraph from includible in his gross_income because of the application s that this paragraph does not apply to any individual from an ira account or annuity of such receipt such individual received ira account or annuity which was not of this paragraph with respect to the requested letter_ruling it has been r presented that taxpayer a and other similarly situated taxpayers initiated a lawsuit in a cour t of competent jurisdiction against various defendants named in the lawsuit including insurance c mpany n relating to a significant loss in value of ira annuity described in code sec_408 various causes of said loss of value relating to activities company o or other named parties allegedly acting as lawsuit was settled pursuant to said settlement taxpay deducted amount which he subsequently rolled into within days of receipt owned by taxpayer a the lawsuit alleged taken either by insurance_company n the agents of insurance_company n said rer a recovered after attorney’s fees were an ira described in code sec_408 the above reference settlement proceeds were designed annuity amounts lost due to alleged misconduct on the te of a number of defendants including e issuance of the check in amount by insurance_company n no distribution occurred until t insurance_company n to replace a portion of taxpayer a’s ira accordingly based on the specific facts and so taxpayer a’s receipt of amount from insurance co his original ira annuity pursuant to the above-referen said amount to the newly-established individual retir valid rollover thus with respect to your ruling reques compan contained herein we hold that yany n as the replacement of a portion of e lawsuit settlement and the payment of ment account at company t represents a we conclude as follows that taxpayer a’s receipt of amount from insurance’ described settlement of a lawsuit and its subsequent con company n pursuant to the above ibution into an ira set up and maintained mage in his name with company t constitutes a valid rollovef transaction within the meaning of sec_408 of the internal_revenue_code this ruling letter is based on the assumption that taxpa sec_408 as represented it also assumes that the a e the name of taxpayer a described above meets the req s represented additionally it assumes the correctness respect thereto er a’s ira annuity was described in code yntributory ira set up and maintained in uirements of code sec_408 as all facts and representations made with a copy of this letter has been sent to your authorized representatives in accordance with a power_of_attorney on file in this office if you have any questions concerning this letter_ruling please contact not a toll-free number or esquire id fax who may be reached at enclosures deleted copy of this letter notice of intention to disclose sinderely yours fran es v sloar manager employee_plans technical group


internal_revenue_service number release date index numbers -------------------- ------------------------------- ----------------------------------------- ----------------------- ------------------------------------------------------ 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 plr-117420-10 date date legend ---------------------- company ----------------------------------------------------------- country date ---------------------- -------------------------- dear ------------- this letter responds to a letter dated date submitted on behalf of company requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts company was formed under the laws of country on date company represents that it is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes company intended to be treated as a disregarded_entity effective date however due to inadvertence company failed to file form_8832 entity classification election electing to treat company as a disregarded_entity effective date law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an plr-117420-10 eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301 b i a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer plr-117420-10 acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently company is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representatives sincerely associate chief_counsel passthroughs special industries s by _______________________________________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc