number release date index no control no tam-123570-00 cc psi b4 date internal_revenue_service technical_advice_memorandum taxpayer’s name taxpayer’s id number taxpayer’s address date of death area conference held legend decedent spouse c d trust dollar_figures dollar_figuret date date date date date date issue to what extent does the residuary marital bequest under article iv of decedent’s will qualify for the estate_tax_marital_deduction under sec_2056 of the internal_revenue_code conclusion in determining the amount deductible under sec_2056 with respect to the residuary marital bequest under article iv of decedent’s will the value of the residuary bequest claimed as a deduction by the decedent’s estate must be reduced by dollar_figure to reflect the amount_paid by spouse to trust facts on date decedent executed trust naming spouse as trustee at that time trust was funded with one dollar in cash article ii a of trust provides that the trustee is to divide the trust property into two separate trusts equal in value one of the trusts is to be held for the primary benefit of decedent’s and spouse’s daughter c and the other trust is to be held for the primary benefit of decedent’s and spouse’s son d under article ii c the trustee is to distribute to the beneficiary of each trust and to such beneficiary’s descendants such amounts of income and principal as are necessary when added to the funds reasonably available to such beneficiary from other sources to provide for such beneficiary’s health support maintenance and education article ii f provides that each trust created under article ii for a beneficiary who is one of decedent’s children shall last for such beneficiary’s lifetime and shall terminate upon such beneficiary’s death when such beneficiary attains age and one-half dollar_figure is to be distributed to a separate trust for the sole benefit of that child the child shall be the sole trustee of the separate trust and it shall be maintained operated and distributed by the child as trustee as under the same terms and conditions as set forth in the trust originally established for the child when a child attains age then an additional dollar_figure of trust property from the trust originally established for the child is to be transferred to the separate trust to be held under the same terms upon the child attaining age the balance of the trust originally established for the child is to be added to the separate trust upon the termination of a_trust created under article ii all of the remaining unappointed property of such trust is to be distributed to such beneficiary’s separate trust or if the beneficiary’s death is the event that terminates the trust such property shall be distributed to such beneficiary’s then living descendants per stirpes article vii b of trust provides that the grantor or any other person may at any time grant transfer or convey either by inter_vivos transfer or by will to the trustee such additional property as he or she desires to become part of the trusts created under this trust agreement also on date decedent executed her last will and testament naming spouse as executor article iv of decedent’s will provides as follows i give all of the residue of my estate to my husband if he survives me provided however if the trust dated day of sic is not funded with property having a fair_market_value as of the date of funding of one million and no dollars dollar_figure then property from my estate shall be added to that trust to bring the fair_market_value of the funded amount to one million and no dollars dollar_figure this supplemental funding if any shall occur not less than one hundred twenty days after the date of my death and the judgment as to whether or not additional funds are required shall be made by my executor on the ninetieth 90th day following the date of my death decedent died on date as of date no additions had been made to trust thus the trust corpus was still dollar_figure as of date on date the decedent’s federal estate_tax_return form_706 was filed the estate_tax_return reported that pursuant to article iv dollar_figure from decedent’s estate was to be distributed to trust the estate claimed an estate_tax_marital_deduction for the value of the residuary_estate passing_to_spouse under article iv that reflected a reduction for the dollar_figure to be distributed to trust on date over one and one-half years after decedent’s death spouse transferred dollar_figure to trust between date and date spouse as decedent’s executor distributed dollar_figure in estate assets to trust law and analysis sec_2001 imposes a tax on the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides an exception to the general_rule of sec_2056 in the case of terminable interests passing to the spouse under sec_2056 if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail no deduction is allowed under sec_2056 with respect to such interest a if an interest in such property passes or has passed for less than an adequate_and_full_consideration in money or money’s worth from the decedent to any person other than such surviving_spouse or the estate of such spouse and b if by reason of such passing such person or his heirs or assigns may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving_spouse sec_2056 provides that for purposes of determining the value of any interest in property passing to the surviving_spouse for which a deduction is allowed- a there shall be taken into account the effect which the tax imposed by sec_2001 or any estate succession legacy or inheritance_tax has on the net value to the surviving_spouse of such interest and b where such interest or property is encumbered in any manner or where the surviving_spouse incurs any obligation imposed by the decedent with respect to such interest such encumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined example under sec_20_2056_b_-4 illustrates the application of sec_2056 in the example a decedent devised a residence valued at dollar_figure to his wife with a direction that she pay dollar_figure to his sister the example concludes that for purposes of the marital_deduction the value of the property interest passing to the wife is only dollar_figure the legislative_history underlying the enactment of the predecessor to sec_2056 provides this discussion regarding the amount deductible for marital_deduction purposes the interest passing to the surviving_spouse from the decedent is only such interest as the decedent can give if the decedent by his will leaves the residue of his estate to the surviving_spouse and she pays or if the estate income is used to pay claims against the estate so as to increase the residue such increase in the residue is acquired by purchase and not by bequest accordingly the value of any such additional part of the residue passing to the surviving_spouse can not be included in the amount of the marital_deduction s rep no 80th cong 2d sess part 1948_1_cb_285 under sec_2056 the marital_deduction is limited to the net value of the interest passing to the surviving_spouse thus the value of any interest passing to the surviving_spouse must be reduced by any encumbrances upon the interest or any obligation imposed by the decedent with respect to the passing of the interest to the surviving_spouse similarly in a case where obligations which are payable out of the interest passing to a surviving_spouse are discharged by the surviving_spouse voluntarily from his or her own funds the marital_deduction is limited to the net amount received from the decedent ie the value of the property devised to the surviving_spouse in excess of the spouse’s voluntary contributions this latter point was illustrated in 33_tc_361 aff’d 287_f2d_725 6th cir in estate of denman under state law the decedent’s surviving_spouse was entitled to a set-off and support allowance totaling dollar_figure however the probate_estate did not contain sufficient liquid_assets to pay these items accordingly the surviving_spouse contributed funds to the estate and these funds were used to pay the set-off and allowance the estate then claimed a marital_deduction for the allowance paid to the spouse the court concluded that a marital_deduction was not allowable with respect to the payment as follows s he advanced moneys from her own funds to the estate and for reasons undisclosed by the record she as executrix satisfied her claims the same day by paying herself the statutory allowances with checks drawn on the estate thus as we see it the claims were not paid from assets of the estate and we do not see how it can be said that they passed_from_the_decedent_to_his_surviving_spouse within the meaning of the language of the statute providing for the marital_deduction estate of denman v commissioner t c pincite similarly the application of the predecessor to sec_2056 was at issue in 375_us_118 in stapf the decedent’s will put his surviving_spouse to an election to either retain her one-half interest in the couple’s community_property or take the benefits under the will and allow her community_property to be disposed of under the terms of the will the spouse elected to take under the terms of the will consequently she received one-third of the combined community_property and one-third of the decedent’s separate_property her one-half interest in the community_property passed under the terms of the will to a_trust for the benefit of the couple’s children the government argued that in determining the amount of the marital_deduction the value of the property passing to the spouse had to be reduced by the value of the property she was required to transfer to another as a condition for receiving the property the court agreed stating in the present case the effect of the devise was not to distribute wealth to the surviving_spouse but instead to transmit through the widow a gift to the couple’s children what the statute provides is a marital_deduction - a deduction for gifts to the surviving_spouse - not a deduction for gifts to the children the appropriate reference therefore is not to the value_of_the_gift moving from the deceased spouse but the net value_of_the_gift received by the surviving_spouse united_states v stapf u s pincite the court further concluded that the allowable deduction is limited to the net economic_interest received by the surviving_spouse and that this rule applies regardless of whether the surviving_spouse is required to make a payment out of the property received or is required to make a payment from the surviving spouse’s own funds in order to receive the bequest united_states v stapf u s pincite in the present case decedent’s will provided that to the extent trust was not funded with property having a fair_market_value as of the date of funding of dollar_figure then property from decedent’s estate was to be added to trust to bring the value of trust to dollar_figure the residue of the estate remaining after funding trust passed to spouse thus the interest in the residue that passed to spouse was subject_to the obligation imposed by decedent’s will to fund trust with up to dollar_figure it appears that by the time the decedent’s estate_tax_return was filed it had been determined that only dollar_figure of estate funds were required to fund trust because the remaining dollar_figure was to be paid_by spouse as in denman supra spouse in effect partially discharged the dollar_figure pre-residuary obligation under article iv of the will by voluntarily transferring dollar_figure of his own funds to trust thereby increasing the amount of the residuary passing to him by dollar_figure as was the result in estate of denman the only property that is considered to have passed from decedent to spouse is the value of the residue in excess of the spouse’s voluntary contribution of dollar_figure as discussed in the legislative_history discussed above spouse purchased the dollar_figure increase in the residue by transferring the identical amount to trust the dollar_figure increase in the residue did not pass to spouse by devise see also 506_f2d_1144 10th cir and revrul_79_14 1979_1_cb_310 marital_deduction for spousal bequest must be reduced under sec_2056 to the extent the fiduciary has the discretion to pay estate_taxes from the bequest even if the taxes are paid from other sources similarly we believe the court’s decision in united_states v stapf also supports this result that is in the instant case the amount of the residuary bequest passing_to_spouse was dependent on the amount of estate assets required to fully fund the dollar_figure bequest to trust to the extent additions were made to trust after the date of death the portion of the dollar_figure not required to fund trust would pass to the spouse spouse after the date of decedent’s death contributed dollar_figure to trust as a result an additional dollar_figure passed through the residuary_estate to spouse however as was the case in staph the additional dollar_figure distributed to spouse as part of the residuary bequest for which a marital_deduction was claimed passed to spouse only because spouse contributed the same amount to trust the effect of the residuary bequest to the extent of dollar_figure was not to distribute wealth to spouse but rather to transmit a gift to trust through spouse thus under sec_2056 in determining the allowable marital_deduction with respect to the residuary bequest the residuary bequest must be reduced by the dollar_figure that spouse transferred to trust under staph the residue as reduced by dollar_figure represents the net value_of_the_gift received by the surviving_spouse in the alternative we believe the residuary bequest received by spouse to the extent of dollar_figure would constitute a nondeductible terminable_interest under sec_2056 in 54_tc_1170 the decedent bequeathed her residuary_estate to her spouse on condition that the spouse agree in writing within months of the decedent’s death to bequeath on his death an amount equal to the value of the residuary_estate to their daughter the court found that the residuary spousal bequest was conditioned on the spouse’s agreement to make a testamentary transfer to his daughter if the spouse failed to agree to the transfer the spousal bequest would terminate and the residue would pass for the benefit of the decedent’s daughter accordingly the conditional bequest constituted a nondeductible terminable_interest under sec_2056 see also allen v united_states f 2d 2d cir 72_tc_970 dollar_figure bequest to spouse conditioned on spouse’s relinquishment of a life_estate in the decedent’s house and purchase of a different residence held to be a nondeductible terminable_interest revrul_82_184 1982_2_cb_215 in the instant case as was the case in estate of ray and estate of edmonds there was a significant condition_precedent to the spouse’s acquisition of the entire enhanced residue ie the residue including up to dollar_figure that is in order to acquire the enhanced residue either the spouse or another person was required to contribute funds to trust of up to dollar_figure in the absence of the contribution the residuary bequest to spouse up to dollar_figure would terminate or fail and the property would pass to trust as was the case in estate of ray the requirement that spouse contribute funds to trust in order to receive the identical increase in the residuary bequest or that a third party contribute funds to trust for no consideration constitutes a significant condition_precedent to spouse’s acquisition of that portion of the residuary bequest accordingly in this case since dollar_figure of estate assets were used to fund trust and a marital_deduction was not claimed for these assets the marital_deduction claimed by the estate for the residuary bequest passing_to_spouse should be disallowed to the extent of dollar_figure as constituting a nondeductible terminable_interest under sec_2056 the estate argues that sec_2056 and the regulations thereunder are not applicable in this situation in this case spouse was under no obligation to transfer any property to trust as a condition to receiving the residuary bequest rather whether or not spouse or any other person transferred funds to trust spouse would receive the residuary bequest in all events subject only to fluctuations in value depending on whether a contribution was made to trust the estate also argues that no part of the residuary bequest is a nondeductible terminable_interest the estate cites rev_rul 1990_1_cb_174 in which the date of death value of the d’s gross_estate was dollar_figure d’s will provided for a dollar_figure pre-residuary pecuniary_bequest of to d’s child with the residue passing to d’s spouse the executor could satisfy the pecuniary_bequest in cash or in_kind at the fair_market_value of the applicable assets at the date of distribution at the time of distribution the value of the gross_estate had declined to dollar_figure after distributing the dollar_figure pecuniary_bequest and the payment of expenses of dollar_figure the value of the residue that passed to the spouse was dollar_figure instead of the dollar_figure value of the residue at the time of d’s death the ruling holds that the possibility that post death fluctuations in the value of estate assets may significantly diminish the residuary bequest to the spouse does not cause the residuary bequest to be a nondeductible terminable_interest the estate also relies on estate of smith v commissioner 565_f2d_455 7th cir acq c b where the court held that property_passing_to_spouse under a marital_deduction equalization_clause pursuant to which the amount passing to the spouse was dependent on the value of the assets owned by the spouse determined as of the alternate_valuation_date was fully deductible and not a terminable_interest in revrul_82_23 c b the service announced that it would follow estate of smith and other equalization cases the estate argues that the residuary bequest in the instant case is similar to a formula bequest pursuant to the formula although the bequest will increase in amount if spouse or a third party funds trust or will decrease if nothing is contributed to trust spouse’s interest in the bequest will not terminate rather based on estate of smith and revrul_90_3 the fact that the value of the residue bequest may fluctuate depending on whether any person makes a post-death contribution to trust does not effect the qualification of the residuary bequest for the marital_deduction or the amount allowable as a deduction rather the spouse’s vested right to the entire residuary marital bequest was fixed on decedent’s death we disagree with the estate’s arguments first there is no indication that the analysis in staph denman or sec_20_2056_b_-4 example would be any different if the bequests involved in those cases were residuary bequests indeed it would seem that regardless of whether the spousal bequest takes the form of a pecuniary_bequest of a specific sum of money a specific_bequest of tangible or real_property or a residuary bequest of whatever is left over after payment of certain items if the spouse is required to transfer property to another in order to acquire the bequest or voluntarily pays a claim that has the effect of enhancing the bequest the marital_deduction must be reduced to reflect the net value_of_the_gift received by the surviving_spouse united_states v stapf u s pincite indeed the paragraph quoted above from the legislative_history underlying the marital_deduction provisions references a spousal residuary bequest that is increased as a result of the spouse’s voluntary payment of estate claims the example concludes that the marital_deduction allowable for the residuary bequest must be reduced to reflect the spouse’s payment s rep no 80th cong 2d sess part 1948_1_cb_285 further we believe the situation presented here is distinguishable from the situations presented in estate of smith revrul_82_23 and revrul_90_3 in estate of smith and the revenue rulings the date of death value of the spousal bequest could fluctuate but only due to market conditions there was no possibility that any portion of the spousal bequest would be diverted to other beneficiaries dependent on the failure of an event to occur such as a volitional transfer by a party for example in the fact situation presented in revrul_82_23 in determining the amount necessary to equalize the estates the value of the surviving spouse’s assets was to be determined as of the date of death and any post-death dispositions by the surviving_spouse of her assets was to be ignored this is significantly different from the instant case where up to dollar_figure of the residuary marital bequest was subject_to being diverted to trust if spouse or another party did not act post-death to fund trust under the circumstances presented we believe the action required to be taken in this case either by the spouse or a third party in order that spouse receive the dollar_figure portion of the residue was a significant condition_precedent for purposes of the terminable_interest_rule under sec_2056 see estate of ray supra involving a spousal residuary bequest estate of edmonds supra accordingly in determining the amount deductible under sec_2056 with respect to the residuary marital bequest under article iv of decedent’s will the value of the residuary bequest claimed as a deduction by the estate must be reduced by dollar_figure to reflect the amount_paid by spouse to trust caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it may not be used or cited as precedent - end


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years all dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions the instructions in notice f you agree with our deletions you do not need to take any further action if you disagree with our proposed deletions you should follow in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 47632s if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely rob choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number tax_exempt_and_government_entities_division date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number legend a date of incorporation state of incorporation b c date of amended articles of incorporation uil codes dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 and your protest based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below this letter supersedes our letter dated date issue do you qualify for exemption under sec_501 of the code facts you were incorporated in the b on date a your articles of incorporation initially stated that you provide ambulances and wheel chair vans to organizations that provide transportation services to the elderly and handicapped your articles of incorporation were amended on date c to state that you are organized exclusively for charitable religious educational and scientific purposes although you were incorporated on date a you were not operational in the first two years of your formation you state that you will work with organizations to develop a comprehensive coordinated and accessible system of transportation responsive to the needs of the aging population within the community and institutional setting your purpose as stated on forms is to provide safe and low cost transportation to the general_public you state each program has a scope of practice and these vary widely actual pricing will be determined as we examine each program's requirements since these programs are all very mature the administrators have a history of data for comparison your staff will meet the necessary qualifications to transport elderly and disabled persons they will receive training in cardio pulmonary resuscitation they must have completed an emergency vehicle operators course and pass a federal commercial drivers license equivalency test you will conduct criminal background checks and motor_vehicle driving record checks on all employees drivers must also undergo physical drug and alcohol screening as well you will provide tuition assistance to your employees your financial support will come from the organizations that hire you to provide paratransit services to their clients per passenger per one-way transport plus dollar_figure your rates will be dollar_figure per loaded mile for every mile after six miles you will also charge a waiting fee of dollar_figure per hour or fraction thereof your expenditures include wages for drivers support staff fuel insurance and continuing education and tuition assistance expenses law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes sec_1_501_c_3_-1 of the income_tax regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section an organization fails to meet either the organizational_test or the operational_test it is not exempt if sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that the term ‘charitable’ is used in sec_501 of the code in its generally accepted legal sense such term includes relief of the distressed revrul_72_124 1972_1_cb_145 describes an organization that operated a home for the elderly met the special needs of the elderly for housing healthcare and financial security it qualified for exemption under c as a charitable_organization because it revrul_76_244 1976_1_cb_155 describes a charitable_organization that provided home delivered meals to elderly and disabled persons volunteers delivered the meals a nominal fee that was insufficient to cover the costs of the meals and delivery was charged in some cases no fees were charged depending on the recipients’ abilities to pay the organization qualified for exemption under sec_501 of the code revrul_77_246 1977_2_cb_190 describes an organization that was formed to provide low cost bus transportation for senior citizens and disabled persons in a community where public transportation was unavailable or inadequate although the organization charged a nominal fee it was dependent upon contributions and federal and local governmental grants in order to meet its operating_expenses c of the code the organization qualified for exemption under section 70_tc_352 describes an organization whose sole activity was to provide consulting services for a fee to nonprofit_organizations it provided qualified persons to perform research projects for its clients the fees charged by the organization were set at or close to cost but were not less than the organization’s full cost of providing its service the organization was denied exemption because it operated in a commercial nonexempt manner the provision of managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the court held that the organization was not operated exclusively for charitable educational or scientific purposes within the meaning of sec_501 of the code application of law you are not described in sec_501 because you are not organized and operated exclusively for charitable educational or religious purposes you do not comply with sec_1_501_c_3_-1 of the regulations because you are not organized or operated exclusively for one or more exempt purposes you are not described in sec_1_501_c_3_-1 of the regulations because more than an insubstantial part of your activities is devoted to non-exempt purposes the provision of paratransit or transportation services is not a charitable educational or religious activity within the meaning of sec_501 of the code you have not demonstrated that the services you provide are offered in a noncommercial manner you have not demonstrated that your fees for service arrangement are distinguishable from those of your commercial counterpart you are not described in sec_1_501_c_3_-1 of the regulations because you do not directly provide services to a charitable_class your clientele consists of healthcare organizations and institutions that hire you to provide paratransit for their clients you are not like the organization described in revrul_72_124 although you require special training of your drivers to meet the physical needs of your riders you do not meet other special needs such as financial security of the elderly and the disabled you are contracted for services by organizations institutions and publicly funded programs that provide services to elderly and disabled persons you are not providing your services directly to the elderly and disabled therefore you do not consider their ability to pay payments are expected from the health care organizations or institutions which hire you you charge the rate of dollar_figure passenger one way in addition you charge dollar_figure for every mile after the first six miles and a per waiting fee of dollar_figure to pay per hour you have no provisions for basing your fees on the rider’s ability you are not like the organization described in revrul_76_244 the service fees you bill your clientele in order to operate your fees cannot be described as nominal no provision has been made for those riders who are unable to pay you operate in a commercial manner like any transportation service you determine your costs and set your fees to meet your financial obligations you are dependent on you are not like the organization described in revrul_77_246 because the rates you plan to charge organizations and institutions are not below cost you do not take into consideration the riders’ abilility to pay furthermore you do not charge the riders you bill the organizations that hire you to provide transportation services you are dependent on the transportation fees you charge to cover your expenses the majority of your expenses are salaries and wages you are similar to the organization described in the b s w group supra your sole purpose is to provide transportation services for your clients that request non-emergency transportation for their clients you are dependent solely on the fees you charge to operate the provision of transportation services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fees you charge lack the donative element necessary to establish your activities as charitable your fees are also set above cost in order to allow for the tuition assistance program you offer youremployees commercial manner rather than exclusively for charitable purposes you do not qualify for exemption because you operate in a applicant’s position you state that you have considered many pricing situations and the ability of riders to pay you state that you would provide a sliding fee schedule if necessary in response to our request for additional information your officer states am not aware that we have supplied you with any such information the public_utilities commission puc requires that paratransit services submit maximum rates for approval the rates provided in our april letter are those rates you subsequent state that you will offer discounts from the puc rates for private pay situations and will be based on the specific needs of the individuals your rates charged to organizations will be determined based on each organization’s requirements and the level of services they are requiring you state it is typical to supply a ‘cost build up’ analysis for each request for proposal service response to applicant’s position although you state that you have considered many pricing situations and the ability of riders to pay you have not substantiated your claim you have not provided a sliding scale fee schedule to demonstrate that your fee is based on the ability to pay of the riders you have not demonstrated that you do not operate in a commercial manner there is no evidence that your transportation rates are below cost furthermore you have not demonstrated that your rates address the financial needs of your riders including the elderly and the disabled your riders are not your direct customers therefore you do not have an obligation to provide them a below-market rate your direct customers are the organizations that you hire you for the provision of transportation to their clients you state you will offer discounts for private pay situations based on the specific needs of the individuals however you have not submitted data to substantiate the determination of ability to pay of your riders you rely solely on fees for transportation services you provide to health care organizations and institutions which are your direct clients you do not directly charge the elderly and disabled persons for the services you provide therefore you do not consider the riders’ abilities to pay the fact that you intend to provide tuition assistance to your employees indicates that your fees are set above your operating costs conclusion based on the information provided you do not qualify for exemption under sec_501 of the code you are not organized and operated exclusively for charitable purposes within the meaning of sec_501 of the code because you operate in a commercial manner you have not demonstrated that you directly serve a charitable_class nor have you demonstrated that the rates you charge meet the financial needs of the charitable_class you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements enclosure publication


department of the treasury internal_revenue_service commerce mc dal dallas tx tax_exempt_and_government_entities_division release number release date date date legend org - organization name xx - date address - address org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers phone fax certified mail - return receipt requested dear in a determination_letter dated april 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final letter with regard to your exempt status we previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on august 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter thank you for your cooperation sincerely nanette m downing director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service te_ge eo examinations commerce st dallas tx date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice ifa if we do not hear from you within days from the date of this letter we if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of in that event you will be required to file examination and this letter will become final federal_income_tax returns for the tax period s shown above file these returns with within days from the date of this letter unless a request the for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns - you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number 34801v thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication form_6018 report of examination envelope letter catalog number 34801v form 886a department of the treasury - internal_revenue_service exhibit explanation of items name of taxpayer org year period ended 20xx legend org - organization name state - state co-1 co-2 - xx - date address - addre sec_2 companies city - city issue whether org meets the requirements of sec_501 of the code facts on december 19xx org hereinafter org applied for recognition as a tax-exempt_organization under sec_501 of the code on april 19xx based on the information that org provided in its application_for exemption and on the assumption that org would operate in the manner represented in its application org was recognized as a tax-exempt_organization as described in sec_501 of the code an examination was conducted of org for tax_year ended december 20xx a review of org’s activities revealed that the organization owned no property and conducted no activities for tax_year ended december 20xx org was formed as a title holding corporation org’s purpose when formed was to own certain real_property to be leased to a governmental agency of the state of state the lease payments were to be used to pay the principal and interest on tax exempt bonds used to finance the purchase of the real_property after retiring the bonds the governmental agency had a bargain_purchase option to acquire the real_property for dollar_figure org was formed as a tax-exempt_organization because a state government_entity cannot mortgage its real_property an office building was purchased and is located at the following address address city state until 20xx the building was leased to the state department of health and rehabilitative services during 20xx the building was heavily damaged during hurricane and any tenants moved out org defaulted on the municipal_bonds used to purchase the property and a final judgment of foreclosure was granted to the co-1 as trustee a judgment of dollar_figure was awarded to the bondholders and the property was ordered sold at public auction the property was subsequently sold to co-2 org has owned no other real_property since 20xx law sec_501 provides that corporations organized for the exclusive purpose of holding title to property collecting income therefrom and turning over the entire amount thereof less form 886-a rev department of the treasury - internal_revenue_service page -1- a department of the treasury - internal_revenue_service form 886a exhibit explanation of items name of taxpayet org year period ended 20xx expenses to an organization which itself is exempt under sec_501 are exempt from taxation sec_1_501_c_2_-1 states that an organization cannot be exempt under sec_501 of the code if it engages in any business other than holding title to property and collecting income therefrom sec_1_501_c_2_-1 of the regulations states the limitation this way a corporation described in sec_501 cannot be exempt under sec_501 if it engages in any business other than that of holding title to property and collecting income therefrom revrul_58_566 it was held that an organization organized to hold title to property for exempt_organizations which had purposes and powers outside the scope of those of a c organization was not exempt government’s position org is not exempt under sec_501 of the code org does not operate exclusively for exempt purposes org does not hold title to any property does not collect income from any property and does not turn over any proceeds to an organization which is itself exempt under sec_501 of the code therefore org has no exempt_purpose and its tax exempt status should be revoked as of january 20xx taxpayer’s position org agrees the facts as stated in this report and has submitted form 6018-a signed by its president conclusion based on the foregoing reasons org does not qualify for exemption under sec_501 and its tax exempt status should be revoked form 886-a rev department of the treasury - internal_revenue_service page -2-


t c memo united_states tax_court vincent e judy bot petitioners v commissioner of internal revenue respondent docket no filed date garry a pearson and jon j jensen for petitioners blaine c holiday for respondent memorandum findings_of_fact and opinion pajak special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure findings_of_fact respondent determined deficiencies in petitioners' and federal income taxes in the amounts of dollar_figure dollar_figure and dollar_figure respectively the sole issue for decision is whether rental payments received by petitioner judy bot mrs bot from petitioner vincent e bot mr bot are includable in mrs bot's net_earnings_from_self-employment under sec_1402 and thus subject_to self-employment taxes some of the facts have been stipulated and are so found petitioners resided in minnesota at the time the petition was filed mr and mrs bot have farmed for approximately years during the taxable years at issue mr bot operated a 460-acre crop and livestock farm as a sole_proprietorship in minneota minnesota mr bot owned acres of the farm mr bot rented the remaining acres of the farm under cash rental agreements at approximately dollar_figure per acre from mrs bot and bruce b bot during the taxable years at issue mr bot rented acres of farmland from mrs bot for dollar_figure per acre for a total of dollar_figure per year mrs bot owned the farmland in her own name she inherited one-eighth of the farmland from her parents and purchased the remaining seven-eighth from her siblings sometime about soon thereafter mr bot entered into an oral agreement to lease the farmland from mrs bot when petitioners entered into this oral agreement petitioners expected that mrs bot would perform the duties she had been performing in the farming operations since mr and mrs bot began farming mrs bot has provided general farming services to the endeavor this includes raising livestock farrowing nursing cleaning and moving pigs operating machinery in the farm yard and in field work and harvesting and bailing crops on the farm she drives a tractor mowing moving snow and dragging a disk she also drives the bailer tractor mrs bot hauls grain to the bins during the wheat harvest she drives to town to pick up parts and supplies mrs bot did not participate in planting weeding or spraying crops mrs bot worked on the farm approximately big_number hours per year in mrs bot entered into a purported employment agreement agreement with mr bot the agreement said mrs bot was to perform various farming services including raising livestock operating machinery and picking up supplies in essence the agreement memorialized almost the same duties that mrs bot had been performing since mr and mrs bot began farming together the agreement also said mrs bot could participate in her husband's medical insurance and medical_reimbursement_plans mrs bot would have continued to do the same farming jobs even if there were no agreement for all years in issue petitioners filed their form sec_1040 income_tax returns on a married_filing_jointly basis on their schedules e supplemental income and loss petitioners reported that mrs bot received net rental income in the amounts of dollar_figure dollar_figure and dollar_figure in and respectively on line wages salaries tips etc of their form sec_1040 petitioners reported that mrs bot received wages in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively the identical amounts reported as wages were deducted as labor hired on the respective schedules f profit or loss from farming for the years in issue mr bot failed to withhold federal income taxes state income taxes federal_insurance_contribution_act taxes and medicare_tax for all years in the notice respondent inter alia determined that the real_estate rental payments mrs bot received from mr bot during the taxable years at issue are includable in mrs bot's net_earnings_from_self-employment under sec_1402 and thus subject_to self-employment_tax respondent also allowed petitioners a deduction for one-half of the self-employment taxes imposed for the taxable years at issue on the forms sales of business property attached to their returns mr and mrs bot reported gains from the sales of sows in gains from sales of sows in losses from sales of gilts and boars in and losses form the sale of boars in one of the adjustments to their income which is not in issue was that mr and mrs bot each received minnesota corn processors income opinion sec_1401 provides that a tax shall be imposed on the self-employment_income of every individual generally rentals from real_estate are excluded from the computation of net_earnings_from_self-employment sec_1402 however sec_1402 also provides that rentals derived by the owner or tenant of land are not excluded from the computation of net_earnings_from_self-employment if a such income is derived under an arrangement between the owner or tenant and another individual which provides that such other individual shall produce agricultural commodities including livestock on such land and that there shall be material_participation by the owner or tenant in the production or the management_of_the_production of such agricultural commodities and b there is material_participation by the owner or tenant with respect to any such agricultural commodity in other words as the regulations provide in pertinent part if the rental income is derived under an arrangement between the owner of land owner and another person which provides that such other person shall produce agricultural commodities on such land and that there shall be material_participation by the owner in the production or the management_of_the_production of such agricultural commodities and there is such material_participation by the owner then the rental income received by the owner pursuant to the arrangement is considered earnings from self-employment sec_1_1402_a_-4 income_tax regs such income is characterized as includible farm rental income id in determining whether compensation is includable in self-employment_income under sections such provisions are to be broadly construed so as to favor coverage for social_security purposes 95_tc_639 the rental exclusion in sec_1402 is to be strictly construed to prevent this exclusion from interfering with the congressional purpose of effectuating maximum coverage under the social_security umbrella 60_tc_829 petitioners contend that the oral lease agreement does not require material_participation by mrs bot in the farming operations petitioners further contend that the rental income that mrs bot received from mr bot was rental from real_estate and therefore should be excluded in determining whether mrs bot had any net_earnings_from_self-employment as that term is used in sec_1402 a in light of all the facts and circumstances we must decide whether mrs bot received rental income from mr bot pursuant to an arrangement between the parties to produce agricultural commodities on the farm within the meaning of sec_1402 a a in mizell v commissioner tcmemo_1995_571 this court explained that the word arrangement is defined as an agreement webster's third new international dictionary while the concept of an agreement certainly includes a contractual agreement it is a broader concept that would also include other forms of agreements not necessarily arising from strict contractual relationships consistent with its dictionary definition in most of the instances where it is used in the internal_revenue_code the word arrangement refers to some general relationship or overall understanding between or among parties in connection with a specific activity or situation generally it is not limited only to contractual relationships or used in a way that suggests that its terms and conditions must be included in a single agreement contractual or otherwise congress obviously recognized a distinction between a contract and the broader concept of an arrangement as is evident from those sections of the internal_revenue_code that make reference to both the parties stipulated that mr bot used the farmland to produce agricultural commodities such as livestock and crops with respect to whether under the arrangement mrs bot was to materially participate in the farming operations we look not only to the obligations imposed upon mrs bot by the oral lease but to those obligations that existed within the overall scheme of the farming operations which were to take place on mrs bot's property mizell v commissioner tcmemo_1995_571 emphasis supplied these include mrs bot's obligations as a longstanding participant in the farming_business as well as the general understanding between mr bot and mrs bot with respect to the production of agricultural products id viewed in this light the arrangement between mr and mrs bot provided or contemplated that mrs bot materially participate in the production of agricultural commodities on the farmland mr bot claimed he made all the management decisions and despite years of history to the contrary asserted that he could operate his farm without help from his wife under these circumstances we are not required to accept the self-serving testimony of mr bot as gospel 87_tc_74 although petitioners contend that the purported oral lease agreement did not require mrs bot to materially participate in the farming operations the record supports a finding that mrs bot played a material role in the production of agricultural commodities under an arrangement with her husband for about years through the taxable years at issue mrs bot performed general farming services on the farm on a regular and intermittent basis as we detailed in the findings_of_fact petitioners admitted that in addition to farrowing and other activities concerning their swine mrs bot operated farm machinery harvested and bailed crops and picked up supplies on a semiweekly basis as noted mrs bot worked on the farm approximately big_number hours per year we deem it immaterial that mrs bot also purportedly was paid a salary for her services with a corresponding deduction taken on their tax returns in our view these regularly performed services are material to the production of an agricultural commodity and the intermittent services performed are material to the production operations to which they relate sec_1 a --4 b example income_tax regs the regulations provide in pertinent part that if the rental income is derived under an arrangement between the owner of land and another person which provides that such other person shall produce agricultural commodities on such land and that there shall be material_participation by the owner in the production or the management_of_the_production of such agricultural commodities and there is such material_participation by the owner then the rental income received by the owner pursuant to the arrangement is considered earnings from self-employment sec_1_1402_a_-4 income_tax regs accordingly we find that the rental income is includable farm rental income that is part of mrs bot's net_earnings from self- -- - employment under sec_1402 for each of the taxable years at issue we have considered all of the arguments presented by the parties and to the extent not discussed above they are without merit or not relevant to reflect the foregoing decision will be entered for respondent


internal_revenue_service number info release date index number ------------- -------------------------------------- -------------------------------- ---------------------------------- - department of the treasury washington dc person to contact -------------id no ------------- telephone number --------------------- refer reply to cc psi b01 - genin-154646-04 date dec taxpayer dear --------------- -------------- we are responding to a letter on behalf of taxpayer dated date requesting a late s election effective date although we are unable to respond to the request as submitted this letter provides useful information relating to the request according to the information provided taxpayer intended to be an s_corporation effective date and filed form_2553 timely the internal_revenue_service denied the election because the form_2553 filed was incomplete taxpayer did not complete the form and refile it within the time period specified by the service since taxpayer filed its return for tax_year late revproc_97_48 is unavailable further since taxpayer requested relief more than months after the original due_date of the election revproc_2003_43 is also unavailable to obtain relief therefore the taxpayer may request a private_letter_ruling announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2004_1 copy enclosed in addition revproc_2004_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible to use the reduced fee provision you must include the statement described in ' b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room by way of introduction the irs has a small_business website which provides information and various useful links visit this special site at www irs gov smallbiz additionally you can order a single free copy of the small_business resource guide cd-rom by calling the cd-rom provides critical tax information including forms instructions and publications as well as valuable information from a variety of government agencies non-profit organizations and educational institutions we hope that the above information proves helpful s dianna k miosi sincerely yours dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures announcement revproc_2004_1 cc


id office uilc cca_2012021016291364 -------------- number release date from ----------------- sent friday date pm to ------------- cc ------------------ subject request for opinion concerning consideration of sec_6701 penalty during cdp hearing ----- based on the facts you provided the taxpayers did not receive a prior opportunity under sec_6330 to dispute the liability for the sec_6701 penalties assessed against them sec_6330 does not apply to this case first the sec_6701 penalty is imposed on a per document basis and is divisible so long as the entire penalty assessment for a single year relates to the same scheme because the assessment against each taxpayer relates to erroneous stimulus payments the penalty assessments are divisible therefore exam should have considered both taxpayers' claims for refund because each taxpayer included a payment for a divisible portion of a single sec_6701 penalty with their refund claims under sec_6703 the taxpayers could not file a refund_suit in district_court until the earlier of the day after the refund claims were denied or after the expiration of months after the filing of the refund claims because exam did not consider the taxpayers' claims for refund and did not issue claim disallowance letters the taxpayers could not file a suit in district_court until the expiration of months after the filing of the refund claims at that time the cdp hearing had already commenced thus the opportunity to file a suit in district_court and dispute the sec_6701 penalty liabilities did not expire prior to the cdp hearing see mason v commissioner 132_tc_305 a simultaneous opportunity to dispute an underlying liability is not a prior opportunity under sec_6330 please let me know if you have any further questions ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- -------------------------


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b03 lewis saideman postf-105182-11 uilc date date to laurel robinson area_counsel communications technology and media large business international attn alan cooper from merrill feldstein senior counsel branch income_tax accounting subject ---------------------------------------------- this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer -------------------------------------------- a ---------- b ---------- c -- d ---- e ---- f ------- g ------- h ------- i ------- j -- postf-105182-11 issue whether amounts incurred by taxpayer for slot machine conversions must be capitalized under sec_263 of the internal_revenue_code conclusion under the facts presented in this case amounts incurred by taxpayer for slot machine conversions are not required to be capitalized under sec_263 facts taxpayer operates numerous casinos in multiple gaming jurisdictions taxpayer offers two types of electronic gaming machines slot machines for the entertainment of the patrons of its casinos reel machines and video machines reel machines display game symbols and pay lines on three four or five spinning reels multiple reels produce a greater number of symbols and potential winning combinations that result in payout to the patron video machines display game symbols and pay lines on one or more video screens and can be set to offer more combinations of winning symbols or pay lines than reel machines taxpayer purchases all slot machines from third parties the retail price of a new slot machine generally ranges from dollar_figurea to dollar_figureb depending on the manufacturer the type of machine purchased the quantity purchased and any incentives or discounts offered by the manufacturer taxpayer represents that the commercial life of a reel machines may exceed c years and the commercial life of a video machine may exceed d years taxpayer characterizes all of its slot machines as 7-year_property under macrs each slot machine contains one or more erasable programmable read-only memory controller chip eprom which stores a pseudorandom number generator and other software used to establish the unique characteristics as well as the graphics and sounds used to define the game examples of eproms include basic input output system bios chips jurisdiction chips reel controller units game personality chips and bill acceptors the manufacturer delivers each slot machine with a complete set of installed eproms which designates the theme and terms of play for the specific game the terms of play defined for a particular game include the number and denominations of wagers allowed per play the number of winning results per play the probability of achieving a winning result per play the amount of the payout per winning result and the choices available to the player these terms of play factor into the computation of the theoretical payout percentage of the game inversely known as the hold rate for example if a game is programmed to return of amounts wagered by players over an infinite number of plays it is said to have a theoretical payout percentage of or a hold rate of the theoretical payout percentage or hold rate of the slot machines can be changed by changing the pay table which can be accomplished without postf-105182-11 changing the theme or game to change the pay table taxpayer replaces one or more of the eproms that control the slot machine game characteristics the amount of revenue generated by a slot machine is a function of the theoretical payout percentage and the number of plays experienced over a specified period the level of play of a particular slot machine will depend on a number of factors including the machine’s location on the casino floor promotions and advertising of the machine the game’s theme and the condition of the overall economy some slot machines enjoy play from regular customers eg video poker such that they do not experience a decrease in revenue over time for other slot machines the level of revenue generated and the number of plays experienced relative to other machines in similar locations will decline over the operating life of the slot machine this decline is generally attributable to the declining popularity of the particular game in addition some games never achieve the range of revenue initially anticipated by taxpayer the process of changing the game offered by the slot machine to a different game or games or the process of changing the manner of playing the slot machine is called a slot conversion slot machines that undergo slot conversions are not in disrepair and perform according to the design specifications designated by the manufacturer a particular slot machine may undergo more than one slot conversion over its expected commercial life or may experience none at all the decision to perform a slot conversion is elective in contrast all slot machines will require some regular maintenance and repair which may include the replacement of bulbs buttons panels power supply and screens as necessary moreover some slot machines are not capable of being converted if a casino wishes to change the particular game these slot machines must be replaced when taxpayer observes that the daily revenue generated by a slot machine on the casino floor drops below the range of anticipated revenue the slot machine is designated as an underperforming machine and becomes a candidate for a slot conversion taxpayer regularly performs slot conversions on underperforming slot machines with the express objective of bringing the level of daily revenues generated by the slot machine back to within the range of wins expected considering the particular casino property and the location of the machine on the casino floor taxpayer may also perform slot conversions to change the configuration of the slot machine for example a slot machine may undergo a slot conversion to change from accepting and dispensing coins or tokens to accepting and dispensing tickets or vouchers this type of slot machine conversion is primarily done to decrease operating costs the slot machines offered by taxpayer are designed so that the particular game or theme utilized by the slot machine to attract play can be easily changed or updated after the slot machine has been placed_in_service on the casino floor taxpayer performs slot conversions on approximately e percent of its slot machines each year to perform a slot conversion taxpayer first purchases a slot conversion kit from the manufacturer the kit includes all parts necessary to complete the conversion postf-105182-11 including eproms reel tapes glass video screens and decals the eproms contain firmware programming instructions burned onto the eprom itself the new eprom will frequently possess increased functionality compared to the old eprom to support the new firmware for example the new eprom may have a larger memory capacity superior graphics capability enhanced audio effects or additional functions such as more player panel switches and options player tracking and statistical data accumulation and accounting a slot machine conversion is a multi-step process before performing the slot machine conversion the machine is taken offline which entails disconnecting it from the system the length of time that the slot machine is offline during the slot conversion procedure depends on the regulatory review and certification procedures in the specific gaming jurisdiction but typically lasts one to three days during this time the slot machine is either physically removed from the casino floor or otherwise blocked to prevent patrons from using it slot conversions of reel machines typically require turning off the machine opening the main door of the slot machine removing the light bulb bulb fixture screws and bulb fixture removing the top glass installing the new upper glass removing the belly glass installing the new lower glass laying out the reel strips in order installing the reel strips in the reel basket removing the coin hopper and coin tray removing the main system processor board removing the reel eprom controller chip installing the new reel eprom controller chip removing the game eprom controller chip installing the new game eprom controller chip installing returning the main system processor board installing returning the coin hopper and coin tray turning the machine on initializing the slot machine and closing the main door of the slot machine slot conversions of video machines require the same steps except steps and in addition video machine conversions may also include the replacement of the video display screens the process takes approximately hours for both types of machines taxpayer’s total cost of a typical slot conversion performed on a reel machine including the eproms ranges from dollar_figuref to dollar_figureg per machine taxpayer’s cost of a typical slot conversion performed on a video machine including the eprom ranges from dollar_figureh to dollar_figurei per machine taxpayer’s slot machine technician employees generally perform the slot conversions as part of their regular duties the time and expense incurred by taxpayer’s employees to perform the slot conversions is not tracked separately from their other duties however taxpayer accounts for its slot conversion kit acquisition costs for financial statement reporting purposes by capitalizing the acquisition costs and recovering these costs over j years according to information provided by a slot machine manufacturer the economic useful_life of a conversion kit is generally to months postf-105182-11 law and analysis sec_162 of the code and sec_1_162-1 of the income_tax regulations allow a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-4 allows a deduction for the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its useful_life but keep it in an ordinarily efficient operating condition sec_263 and sec_1_263_a_-1 provide that no deduction is allowed for any amount_paid out for permanent improvements or betterments made to increase the value of any property or for any amount expended in restoring property or for making good the exhaustion thereof for which an allowance has been made in the form of a deduction for depreciation amortization or depletion sec_1_263_a_-1 provides that capital expenditures include amounts paid_or_incurred to add to the value or substantially prolong the useful_life of property owned by the taxpayer such as plant or equipment or to adapt property to a new or different use the regulation further provides that amounts paid_or_incurred for incidental repairs and maintenance of property within the meaning of sec_162 and sec_1 are not capital expenditures under sec_1_263_a_-1 the united_states supreme court has specifically recognized that the decisive distinctions between capital and ordinary expenditures are those of degree and not of kind and a careful examination of the particular facts of each case is required 308_us_488 290_us_111 any properly performed maintenance no matter how routine could be considered to prolong the useful_life and increase the value of the property if it is compared with the situation existing immediately prior to that maintenance consequently the courts have articulated a number of ways to distinguish between deductible expenses and non-deductible capital improvements for example in illinois merchants trust co v commissioner 4_bta_103 acq 1926_2_cb_2 the court explained that repair and maintenance_expenses are incurred for the purpose of keeping the property in an ordinarily efficient operating condition over its probable useful_life for the uses for which the property was acquired capital expenditures in contrast are for replacements alterations improvements or additions that appreciably prolong the life of the property materially increase its value or make it adaptable to a different use to determine whether costs incurred for work performed on property increase the value of the property or prolong its useful_life both the courts and the service have frequently looked to the standard applied in 39_tc_333 nonacq on other grounds 1964_2_cb_8 in plainfield-union the court allowed the taxpayer to currently deduct the costs incurred to clean a portion of its water postf-105182-11 pipeline and to replace the tar lining in those pipes with a cement lining these expenditures were necessary in order to restore the pipe’s carrying capacity which had decreased due to tuberculation of the pipe’s tar lining as part of its analysis the court stated that any repair increases the value of a taxpayer's property as compared with the situation existing immediately before that repair accordingly the court reasoned that the appropriate test for determining whether such cost constitutes a capital_expenditure is if it materially enhances the value use life expectancy strength or capacity of the property as compared with the status of the property prior to the condition necessitating the expenditure the plainfield-union standard id pincite under this analysis the court compared the status of the taxpayer s pipeline before the tuberculation to its status after the cleaning and relining the court found that the taxpayer’s expenditure had not materially enhanced the pipeline but rather had restored the capacity of the pipeline the courts and the internal_revenue_service have consistently applied the plainfield- union standard to distinguish routine maintenance from capital improvements see eg 291_fsupp2d_699 w d tenn aff’d 412_f3d_617 6th cir holding taxpayer’s costs for aircraft engine shop visits were deductible maintenance_expenses because the work performed did not materially add to the value of the aircraft as compared to their condition immediately after the previous engine shop visit and did not appreciably prolong but rather preserved the aircraft’s economic useful_life ingram industries inc v commissioner tcmemo_2000_323 finding work performed on towboat engines did not increase the value or prolong the useful_life of the boat or the engines revrul_94_38 1994_1_cb_35 finding costs of soil remediation did not result in improvements to land because they restored soil and groundwater to condition that existed before contamination revrul_2001_4 2001_1_cb_295 finding that costs of heavy maintenance visits on aircraft airframes were not capital expenditures in part because they kept airframe in ordinarily efficient operating condition over its anticipated useful_life for the uses for which it was acquired under the facts provided we find that that taxpayer’s costs incurred for slot machine conversions whether performed on video or reel machines generally do not rise to the level of a capital_expenditure under sec_263 specifically taxpayer’s slot machine conversions do not result in permanent improvements or betterments that materially increase the value of the machines or restore the machines under the standards provided in sec_1_263_a_-1 first a slot machine conversion does not materially add value to a slot machine as compared to the value of the machine either when it is first placed on the casino floor or immediately after its last conversion taxpayer has stipulated that over the operating life of certain slot machines the level of revenue or wins per unit and the number of plays experienced will decline because the particular game or theme declines in popularity as a result taxpayer regularly performs conversions on its under- performing machines with the express objective of bringing the machine’s revenue stream back to the level expected for its location on the casino floor and for the postf-105182-11 particular casino property while the conversion refreshes the appearance of the machine and updates the manner and modes of play to reflect current trends and standards we do not believe this conversion materially enhances the machine’s value in taxpayer’s business as compared to the machine’s initial or pre-decline condition rather the conversion restores the machine to an ordinarily efficient operating condition further the costs of the conversions as compared to the replacement costs of the machines the activities involved in the conversion process and the routine nature of such conversions suggest that the conversions do not materially increase the value of the machines over their initial or pre-decline value accordingly taxpayer’s conversion costs do not materiality increase the value of the slot machines using the comparisons appropriate under sec_1_263_a_-1 second the slot machine conversions do not substantially prolong the useful_life of the machines under sec_1_263_a_-1 according to taxpayer the commercial life of its reel slot machines may exceed c years in addition the commercial life of taxpayer’s video machines may exceed d years according to a slot machine manufacturer the economic useful_life of a slot machine conversion kit is to months under the facts provided we find no indication that slot machine conversions prolong the useful lives of the machines substantially beyond the economic useful lives anticipated when taxpayer places the slot machines into service neither do we find that the type of work performed on the machines constitutes a substantial replacement of property that would significantly extend the expected economic useful_life third the slot machine conversions do not adapt the machines to a new or different use both before and after the conversions the slot machines continue to offer games that provide the possibility of a payout to customers depositing money into the machines the style and content of the games change hopefully making the converted machines more attractive for marketing purposes but their use in taxpayer’s business is consistent with the use anticipated for a slot machine when placed_in_service therefore the amounts paid for the slot conversions do not adapt taxpayer’s property to a new or different use under sec_1_263_a_-1 the foregoing analysis does not change where taxpayer performs a slot machine conversion to change the configuration of the machine from accepting and dispensing coins or tokens to accepting and dispensing tickets or vouchers in order to decrease operating costs both the courts and the service have maintained that amounts paid solely to reduce or eliminate future costs may be deductible see eg 101_tc_581 holding that amounts paid to majority shareholder to compensate her for refraining from action that would cause a royalty rate increase were currently deductible revrul_95_32 1995_1_cb_8 holding that under specified circumstances expenditures incurred by a public_utility for the implementation and operation of energy conservation and load management programs are currently deductible under sec_162 postf-105182-11 based on the information provided we conclude that the amounts incurred by taxpayer for video and reel slot machine conversions are not capital expenditures under sec_263 but are more in the nature of routine maintenance_expenses deductible under sec_162 please note that the department of treasury has published proposed_regulations that clarify the application of sec_162 and sec_263 to expenditures paid_or_incurred to repair improve or rehabilitate tangible_property see guidance regarding deduction and capitalization of expenditures related to tangible_property fr date 2008_1_cb_871 final or temporary regulations pertaining to this subject have not yet been adopted we express no opinion on how the expenditures at issue would be treated under new regulations case development hazards and other considerations this chief_counsel_advice addresses only the facts pertaining to taxpayer and only the types of conversions for which adequate information was provided this office does not opine on any situation outside the facts set out above this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call lewis saideman at if you have any further questions


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-106539-17 date date internal_revenue_service number release date index number ------------------------- --------------------------------------------- ---------------------------------- re ------------------------------- legend decedent spouse date date dear ------------- ------------------ ------------------ ---------------------- --------------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election plr-106539-17 decedent’s estate represents that the value of decedent’s gross_estate plus her lifetime adjusted_taxable_gifts is less than the basic exclusion amount in the year of the decedent’s death decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-106539-17 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2 a of the estate_tax regulations provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely filed form_706 under sec_20_2010-2 the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted sec_20_2010-2 further provides that an extension of time to elect portability may be available under the procedures applicable under sec_301_9100-1 and sec_301_9100-3 for estates not required to file an estate_tax_return under sec_6018 sec_20_2010-2 provides that the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a plr-106539-17 specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void see sec_20_2010-2 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-106539-17 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries lorraine e gardner by _____________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes