iniernal revenue service appeals_office release number release date date date address certified mail dear department of the treasury employer identification no a person to contact employee id number tel fax form required to be filed tax years forward this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc it is determined that you do not qualify as exempt from federal_income_tax under sec_501 effective date our adverse determination was made for the following reason s based on the examination of your records it has been determined that you do not meet the requirements of an organization described under sec_501 you are not operated exclusively for charitable educational or any other exempt purposes you did not engage primarily in activitics that accomplish one or more of the exempt purposes specified in section - c more than an insubstantial part of your activities were in furtherance of a non-exempt purpose you are operated for a substantial private purpose because you are operated for the benefit of private rather than public interests contributions to your organization are not deductible under code sec_170 you are required to file federal_income_tax returns on the form indicated above you should file these returns within days from the date of this letter unless a request for an extension of time is granted file the returns in accordance with their instructions and do not send them to this office processing of income_tax returns and assessment of any taxes due will not be delayed because you have filed a petition for declaratory_judgment under code sec_7428 if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed within days from the date this determination was mailed to you contact the clerk of the appropnate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c 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 is not able to reverse legally correct_tax determinations nor extend the time fixed by law that vou have to file a petition in the us tax_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 if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter see the enclosed notice helpful contacts addresses for vour notice_of_deficiency for taxpaver advocate tel ephone numbers and if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely karen a skinder appeals team manager enclosure notice helpful contacts for your notice_of_deficiency tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service te_ge eo examinations ormsby station court suite a-stop louisville ky date taxpayer_identification_number 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 revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code 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 lf you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sracerely renee b wells acting director exempt_organizations examinations enclosures publication publication report of examination form 886a deparment of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibi year period ended 20xx 20xx legend org - organization name treasurer companies _ poa poa qfe ra-1 ra-2 co-3 co-4 motto mottc treasurer cpa cfa rp co-1 co-z date dnf ath xx gy g issue whether org org continues to meet the requirements of internal_revenue_code irc sec_501 and therein continues to qualify for exemption from federal_income_tax facts org was granted tax-exempt status as an sec_501 in january 19xx during the years in question org's primary activity was the operation of a weekly motto at the motto pull-tabs were also sold at the mottos the workers were required in sign-in the sign-in sheets contained two columns labeled name and team group marks were also made on the sign-in sheets such as left early share share tc dance i ke hc ke girls soccer hc fbla and other marks that summarizes the groups that worked on may 20xx an interview was conducted with the treasurer treasurer treasurer stated the following e e e e the form_990 for 20xx that was filed contains some additional financial information that does not belong to org the books were kept by cpa and contain a small amount of fundraising activity for another organization prior to the audit org did not issue and forms w-2 w-2g or 1099-misc the primary activity of the organization is motto the athletic director makes the determination on what athletic team receives funds from org org does not have any formal discussions concerning the activities or financial transactions the discussions are usually in the hallway or by telephone no documentation or formal approvals for fund disbursements exists only one meeting is held each year with very brief minutes being kept parents and children of different organizations work the motto for org there is no direct compensation to a certain group based off of the amount of motto that was worked this organization does not have a reward system for the workers treasurer is paid dollar_figure per month for her duties as treasurer she prepares the quarterly reports forms maintains the checkbooks and other related duties cpa is the primary motto operator on may 20xx later in the day a telephone call was placed to treasurer from poa power_of_attorney office treasurer stated that there is no formal or informal policy that other organizations receive money for working motto it is assumed that if you help you get money treasurer did not know what the shares and other marks on the sign-in sheets indicated she stated that cpa should know form acrev department of the treasury - internal_revenue_service page -1- department of the treasury- internal_revenue_service form 886a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx on july 20xx an interview was conducted with cpa motto chairperson secretary and poa poa was also present the interview was conducted at poa office the following statements were made by cpa e e e e e e e e e she was the motto chairperson and secretary for org in 20xx 20xx she attended every motto she attended the mottos as a volunteer she would ask friends and people affiliated with org to work motto some of the workers were rotc soccer basketball and co-1 she guesses that she was in charge of the mottos she recently went through a divorce and can not really remember that much she does not know what the shares and other marks on the motto sign-in sheets indicated she stated that treasurer would know she stated that on the checks the memo january cpa and correction to jan feb cpa meant that cpa dropped the checks off to the front desk of co-1 training center her daughter belonged to co-1 during that time cpa's husband was loaded and cpa always paid the fees related to her daughter's expenses at co-1 cpa did not have to work fundraisers to get credits she guesses that co-1 had individual accounts she did run a pizza fundraiser at co-1 and did not know if a portion of the sales went into the account of the seller she suggested that speak with ra-1 to find out what happens to the money that co-1 receives from org it was up to the org board if other organizations received money in exchange for working motto it was out of her control during 20xx org conducted approximately sessions during 20xx org conducted approximately sessions gross_receipts were as follows motto idollar_figure dollar_figuredollar_figure year december 20xx december 20xx org used a motto work force from multiple different tax-exempt and a for-profit organization in exchange for working a mottos the organization that provided workers would receive a donation this donation was based off of the net profit of the motto pull-tabs dollar_figuredollar_figure dollar_figuredollar_figure total dollar_figuredollar_figure dollar_figuredollar_figure co-2 co-2 is a for-profit group that was the primary motto force in the years in question members of co-2 received a portion of the donation placed into the individual accounts these accounts were used to offset the cost of being in gymnastics in 20xx org wrote checks labeled as donations to other entities in exchange for working motto the total amount was dollar_figuredollar_figure in 20xx co-2 received checks totaling dollar_figuredollar_figure from working the mottos this is the sign-in sheets co-2 provided of the workforce of the total donations according to form avrev page -2- department of the treasury - internal_revenue_service department of the treasury - internal_revenue_service form 886a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx in 20xx org cheerleaders received checks totaling dollar_figuredollar_figure from working the mottos this is of the total donations according to the sign-in sheets org cheerleaders provided of the workforce in 20xx co-3 received checks totaling dollar_figuredollar_figure from working the mottos this is of the total donations according to the sign-in sheets co-3 provided of the workforce in 20xx co-4 received checks totaling dollar_figuredollar_figure from working the mottos this is of the total donations according to the sign-in sheets co-4 provided of the workforce on january 20xx the office of charitable gaming issued a notice of violation to org the violation stated during the a quarter of 20xx the organization donated to co-2 co-1 dollar_figuredollar_figure for working their game in addition co-2 is not known to possess a charitable tax exempt status org was fined dollar_figure for this violation on july 20xx an interview was held with the ra-2 ra-2 is the record keeper for co-2 ra-2 indicated that co-2 would receive a check from org along with a list of people that worked the mottos credits would be applied to the individual workers accounts the accounts are used to offset the personal expenses associated with being in gymnastics documentation concerning the exempt and non-exempt activities was requested for org org was unable to provide any documentation concerning the tax-exempt activities of the organization org does have one meeting per year and provided the minutes from the meeting the primary discussion was motto related at the mottos the average workforce was made up of people taken from the sign-in sheets these individuals would sell the pull-tabs sell motto paper sell motto computers and handle the session records org also paid a security guard a janitor and treasurer handled the books in state all workers involved with charitable gaming must be volunteers as of the writing of this report the form_990 for the year ended december 20xx has not been filed law sec_501 of the internal_revenue_code exempts from taxation organizations described in subsection c or d under this subtitle unless such exemption is denied under sec_502 or sec_503 sec_501of the code exempts from taxation corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but onlyif no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office is carrying on propaganda or otherwise attempting to influence sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational or scientific purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual form acrev page -3- department of the treasury - internal_revenue_service form 886a deparment of the oe intemal revenue service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx sec_1 c - a provides in part that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -1 of the income_tax regulations provides c operational test-- primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which 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 activitie sec_1s not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 provides that the burden_of_proof is on the organization to establish that it is not organized and operated for the benefit of private interests 71_tc_102 provides in part that the word exclusively does not mean solely or without exception an organization which engages in nonexempt activities can obtain and maintain exempt status so long as such activities are only incidental and insubstantial 81_tc_958 neither the internal_revenue_code the regulations nor the case law provide a general definition of insubstantial for purposes of c this is an issue of fact to be determined under the facts and circumstances of each particular case world family corp v commissioner supra pincite in make a joyful noise inc v commissioner 56_tcm_1003 the court held that operating regularly scheduled motto games on behalf of other exempt_organizations was a trade_or_business unrelated to the organization's exempt purposes in that case the court concluded that the petitioner failed to carry its burden of proving that its participation in motto games was an insubstantial part of its activities in p l l scholarshi82_tc_196 the tax_court held that petitioner was not operated exclusively for exempt purposes under the provisions of sec_501 lr c and sec_1 c - i c income_tax regs therefore it is not exempt from federal_income_tax petitioner was incorporated as a nonprofit corporation for the purpose of raising money to be used for providing college scholarships the money was raised from the operation of motto games on the premises of a commercial establishment the court stated that after careful consideration of the entire record this court finds that the petitioner has not carried its burden of showing that it was operated exclusively for an exempt_purpose under the required standards the court further stated that since the record in this case does not show that the petitioner was operated exclusively for exempt purposes but rather indicates that it benefited private interests exemption was properly denied form acrev department of the treasury - internal_revenue_service page -4- ea 886a department of the teasing internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx in 75_tc_127 the court held that part of petitioner's net_earnings inured to the benefit of private shareholders or individuals and that petitioner was not exempt as an organization described in sec_501 of the internal_revenue_code of the court stated that the burden falls upon petitioner to establish the reasonableness of the compensation the court indicated that by basing compensation upon a percentage of petitioner's gross_receipts apparently subject_to no upper limit a portion of petitioner's earnings was being passed on to an individual the court stated that the statute specifically denies tax exemption where a portion of net_earnings is paid to private shareholders or individuals we hold here that paying over a portion of gross earnings to those vested with the control of a charitable_organization constitutes private_inurement as well all in all taking a slice off the top should be no less prohibited than a slice out of net revrul_69_383 1969_2_cb_113 jan provides in part that under certain circumstances the use of a method of compensation based upon a percentage of the income of an exempt_organization can constitute inurement of net_earnings to private individuals for example the presence of a percentage compensation agreement will destroy the organization's exemption under sec_501 of the code where such arrangement transforms the principal activity of the organization into a joint_venture between it and a group of physicians 31_tc_141 or is merely a device for distributing profits to persons in control 276_f2d_476 470_f2d_849 held in part that tax exemption is a privilege a matter of grace rather than right in accordance with the statutory recordkeeping requirement an organization must keep records adequate to determine the full nature of its operations and show that its net_earnings do not inure in part to the benefit of private individuals 640_fsupp_96 d c cir missing funds and lack of adequate_records made it impossible for organization to meet its burden of showing that its operations were primarily for religious or charitable purposes and that nothing inured to the benefit of its members and provided independent grounds for rejecting its claim to tax-exempt status revocation is appropriate in a case where the organization fails to maintain any records or maintains inadequate records without adequate_records the organization cannot carry its burden that no part of the organization's net earings inure to the benefit of private individuals 588_fsupp_693 d c cir the organization failed to provide any information on its operation and finances failed to provide sufficiently detailed evidence as to the nature of its charitable disbursements and the information submitted was insufficient to demonstrate positively that a portion of its earnings didnot inure to private individuals 73_tc_196 aff'd 631_f2d_736 7th cir cert_denied u s no bookkeeping procedures were instituted despite advice from organization's accountant that inability to document what happened to the money would be troublesome if the organization was audited the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66s ct am campaign acad v commissioner 92_tc_1053 see also old dominion box co inc v united_states f2d cir cert_denied 413_us_910 operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes am campaign acad v commissioner supra pincite6 form a rev department of the treasury - intemal revenue service page -5- form 886a deparment of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20kx taxpayer's position on a conference call november 20xx org indicated that they may agree to the revocation on a letter dated december 20xx the poa indicated that org will be appealing the issues we are in receipt of your november 20xx letter on the above named entity after consultation with the officers and directors they have chosen not to accept your settlement proposal in this case they do not feel since they are shutting down and have turned in their gaming license that they should have to revoke their tax exempt status back to january 20xx government's position based off of the information that you have furnished of org's time and financial activity was devoted to charitable gaming activities at the charitable gaming sessions of the workforce was compensated during 20xx 20xx of the income came from the charitable gaming operations these charitable gaming operations are not related to an exempt activity and are a source of unrelated_business_income during 20xx 20xx of the time was devoted to charitable gaming operations these charitable gaming operations are not related to an exempt activity and are a source of unrelated_business_income gross_income from you exempt_function activities was dollar_figure of your gross_income came from your charitable gaming activities you are operated similar to the organizations described in make a joyful noise v commissioner people of god community y commissioner and p l l scholarship fund v commissioner those cases involved organizations engaged primarily in fund raising activities through motto games the courts held that neither organization qualified for exemption under sec_501 c of the interna revenue code because they were not operated exclusively for exempt purposes because a substantial part of your activities is not in furtherance of an exempt_purpose we have determined that you are not operated exclusively for an exempt_purpose pursuant to sec_501 of the internal_revenue_code and sec_1_501_c_3_-1 of the income_tax regulations org does not have any other activity besides the charitable gaming sessions the workforce at the gaming sessions is made up of people from other organizations these other organizations worked motto in exchange for compensation org was basically running a turn-key-operation for other organizations in the these other organizations worked motto in exchange for compensation this direct compensation based off of the net receipts per motto is a form of inurement area we have determined that a substantial amount of income from your motto operation inured to the private benefit of your motto workers in addition by engaging in substantial activities that serve private rather than public interests you are not operated exclusively for one or more exempt purposes pursuant to sec_1_501_c_3_-1 of the income_tax regulations see church in boston v commissioner and world family corp v commissioner form acrev department of the treasury - internal_revenue_service page -6- form 886a deparment of the treasury- internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx the fact the org is shutting down and have tumed in their gaming license is irrelevant during the periods under examination of the activities were related to a non-exempt purpose motto and pull-tabs and of the income was related to a non-exempt purpose motto and pull-tabs org's tax exempt status should be revoked effective january 20xx conclusion based on the analysis of your activities and the sources and amounts of your gross_income and expenses we have determined that you no longer meet the requirements for exemption under sec_501 of the internal_revenue_code you are operated similar to the organizations described in make a joyful noise v commissioner people of god community v commissioner and p l l scholarship fund v commissioner those cases involved organizations engaged primarily in fund raising activities through motto games the courts held that neither organization qualified for exemption under sec_501 of the internal_revenue_code because they were not operated exclusively for exempt purposes because a substantial part of your activities is not in furtherance of an exempt_purpose we have determined that you are not operated exclusively for an exempt_purpose pursuant to sec_501 c of the internal_revenue_code and sec_1_501_c_3_-1 of the income_tax regulations we have determined that a substantial amount of income from your motto operation inured to the private benefit of your motto workers by engaging in substantial activities that serve private rather than public interests you are not operated exclusively for one or more exempt purposes pursuant to sec_1_501_c_3_-1 of the income_tax regulations see church in boston vy commissioner and world family corp v commissioner based on the facts law and conclusions cited above we have determined that you no longer qualify for exemption under sec_501 of the intemal revenue code the tax exempt status of org will be revoked effective january 20xx org wil be responsible for filing form_1120 for all periods after january 20xx org 1s also responsible for filing the associated forms 11-c and any other tax retum that maybe required alternative position in the event that org remains tax-exempt is the motto income considered unrelated_business_income ubi in the event that org remains tax-exempt is the pull-tab income considered unrelated_business_income ubi facts same as above form acrev department of the treasury - internal_revenue_service page -7- department of the treasury - intemal revenue service form 886a explanation of items name of taxpayer org schedule no or exhibit year period ended 20kx 20xx law sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 which includes sec_501 sec_512 of the code provides that as a general_rule except as otherwise noted the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_512 regularly carried on by it less certain allowable deductions and modifications sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_513 of the code provides that the term unrelated_trade_or_business does not include any trade_or_business in which substantially_all the work in carrying on such trade_or_business is performed for the organization without compensation sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions p g sec_1_513-1 of the regulations provides that in general any activity of an exempt_organization which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 of the code is a trade_or_business for purposes of sections further the term trade_or_business generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that in determining whether gross_income from a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_5 a of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question-- the activities that is of producing or distributing the goods or performing the services involved-and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived form a rev department of the treasury - internal_revenue_service page -8- deparment of the treasury - internal_revenue_service schedule no or orm 886a explanation of items name of taxpayer org exhibit year period ended 20xx 20xx to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_1_513-5 a in general -under sec_513 and subject_to the limitations in paragraph c of this section in the case of an organization subject_to the tax imposed by sec_511 the term unrelated_trade_or_business does not include any trade_or_business that consists of conducting motto games as defined in paragraph d of this section sec_1_513-5 b exception -the provisions of this section shall not apply with respect to any motto game otherwise excluded from the term unrelated_trade_or_business by reason of sec_513 and sec_1_513-1 relating to trades_or_businesses in which substantially_all the work is performed without compensation sec_1_513-5 c limitations motto games must be legal -paragraph a of this section shall not apply with respect to any motto game conducted in violation of state or local jaw no commercial competition -paragraph a of this section shall not apply with respect to any motto game conducted ina jurisdiction in which motto games are ordinarily carried out on a commercial basis motto games are ordinarily carried out on a commercial basis within a jurisdiction if they are regularly carried on within the meaning of sec_1_513-1 by for-profit organizations in any part of that jurisdiction normally the entire state will constitute the appropriate jurisdiction for determining whether motto games are ordinarily carried out on a commercial basis however if state law permits local jurisdictions to determine whether motto games may be conducted by for-profit organizations or if state law limits or confines the conduct of motto games by for-profit organizations to specific local jurisdictions then the local jurisdiction will constitute the appropriate jurisdiction for determining whether motto games are ordinarily carried out on a commercial basis sec_1_513-5 d mowo game defined -a motto game is a game of chance played with cards that are generally printed with five rows of five squares each participants place markers over randomly called numbers on the cards in an attempt to form a preselected pattern such as a horizontal vertical or diagonal line or all four corners the first participant to form the preselected pattern wins the game as used in this section the term motto game means any game of motto of the type described above in which wagers are placed winners are determined and prizes or other_property is distributed in the presence of all persons placing wagers in that game the term motto game does not refer to any game of chance including but not limited to keno games dice games card games and lotteries other than the type of game described in this paragraph issue is the motto operation of org org considered unrelated_business_income ubi taxpaver's position the taxpayer's position is unknown government's position form a rev department of the treasury - internal_revenue_service page -9- department of the treasury- internal_revenue_service form 886a explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx the motto operation is considered a source of ubj the exclusion under sec_513 does not apply since the motto operation was conducted with compensated labor which is a violation of state law the motto operations are a business it was regularly carried on and it is not related to the exempt_purpose in addition the volunteer labor exclusion does not apply since substantially_all of the work force was compensated this is apparent with the checks written to other organizations in exchange for providing motto workers conclusion the motto operation is considered a source of ubi issue is the pull-tab operation of org considered unrelated_business_income ubi taxpayer's position the taxpayer's position is unknown government's position the pull-tab operation is a source of ubi the activity was a business it was regularly carried on and it is not related to the exempt_purpose in addition the volunteer labor exclusion does not apply since substantially_all of the work force was compensated this is apparent with the checks written to other organizations in exchange for providing motto workers conclusion the pull-tab operation is considered ubi form acrev department of the treasury - internal_revenue_service page -


internal_revenue_service number release date index number - ------------------------------------------------------------ ---------------- -------------------------------------------------- ----------------------- ---------------- -------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-148280-06 date date dear ----------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ------------------in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation presp-148280-06 an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix a because such borrower is a governmental body and dollar_figure has already been allocated to applications requesting a smaller share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-148280-06 borrower name ------------------------------- ------------------------------- ------------------ ---------------------------------- appendix a project type project location hydropower facility -------------------------------- -------------------------------- -------- amount requested dollar_figure------------------- -------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service department of the treasury significant index nos 01-0b 2srington dc contact person telephone number ti reference to dhiep ra t a1 may in re excess_plan pension_plan excess trust t t pension_trust dear this is in response to your request for a ruling with respect to the creation of the excess_plan and its effect on the pension_plan you have requested the following rulings that the establishment and operation of the excess_plan will not cause the pension_trust to lose its tax qualified and tax-exempt status that the method of funding of the excess trust will not cause the pension_trust to lose its tax-qualified and tax-exempt status that contributions to the excess plan's participants and beneficiaries including the gross amounts made on their behalf to the excess trust are taxable to such participants and beneficiaries at the time the contributions to the excess trust are made that assuming the requirements for deductibility are met employer contributions are fully deductible in the taxable_year in which or with which ends the taxable_year of the employees in which the amounts are includible in the employees’ gross_income 02s the pension_plan is a qualified multiemployer defined_benefit_plan that received its most recent determination_letter on date the excess_plan is intended to be a defined contribution excess_benefit_plan established pursuant to sec_3 of the employment retirement income security act of erisa that will provide supplemental retirement benefits to selected employees of employers employers who participate in the pension_plan the excess trust which has been established for the exclusive benefit of employees participating in the excess_plan and their beneficiaries is not a_trust described in sec_401 a of the internal_revenue_code the code nor is it exempt from tax under sec_501 of the code the only participants in the excess_plan are employees who are already receiving retirement benefits under the pension_plan all participants in the excess_plan are fully vested in the benefits payabie to them under the excess_plan two types of benefits are payable annually from the excess trust first a participant will receive a sec_415 reduction benefit excess benefit’ which is the amount by which the participant's retirement benefit otherwise payable to him under the pension_plan for the prior calendar_year was restricted to satisfy the requirements of sec_415 of the code second the participant will be paid an amount equal to his share of the fica_taxes due with respect to his excess_benefit separate_accounts are maintained for each participant all benefits payable for an excess_plan year will be paid in january of that year or as soon thereafter as is administratively feasible the employers’ contributions to the excess trust will be irrevocable except to the extent that they were made as a result of a mistake of law or fact no part of the excess trust's principal or income may revert to any of the employers or be used for any purpose other than providing the benefits specified in the excess_plan amounts held in the excess trust are not subject_to the employers’ creditors and it is explicitly provided that all right title and interest in and to the assets of the excess trust are at all times vested exclusively in the trustees of the excess trust the employers’ contributions to the pension_trust can only be used to pay or provide for the payment of benefits to pension_plan participant's in accordance with provisions of the pension_plan no part of the corpus or income of the pension_trust may be used for or diverted for purposes other than to pay or provide for the payment of benefits to employees retired employees or their beneficiaries thus the assets of the excess trust can not be used to pay the benefits under the pension_plan similarly the assets of the pension_trust can not be used to pay the benefits under the excess_plan contributions will be made to the excess trust pursuant to a collectively bargaining agreement in amounts equal to the amounts to be paid from the excess trust under the terms of the agreement employers’ pension fund contributions will be allocated first to the excess trust with the remainder of the pension fund contribution if any allocated to the pension_trust sec_3 of erisa defines an excess_benefit_plan as one maintained solely for the purpose of providing benefits for certain plan participants in excess of the limitations imposed by sec_415 of the code without regard to whether the plan is funded sec_83 of the code provides that if in_connection_with_the_performance_of_services property is transferred to any person other than the person for whom such services are performed the excess of the fair_market_value of the property over the amount_paid for the property is included in the service provider's gross_income for the first taxable_year in which the rights to the property are either transferable or not subject_to substantial_risk_of_forfeiture sec_401 of the code provides the requirements for qualification of a_trust created or organized in the united_states and forming part of a stock bonus pension or profit sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries sec_401 of the code provides that a_trust shall not constitute a qualified_trust if the pian of which such trust is a part provides for benefits or contributions which exceed the limitations of sec_415 of the code sec_402 of the code provides that contributions to an employees’ trust made by an employer during a taxable_year of the employer which ends with or within a taxable_year of the trust for which the trust is not exempt under sec_501 shall be included in the gross_income of the employee in accordance with sec_83 relating to property transferred in_connection_with_the_performance_of_services except that the value of the employee’s interest in the trust shall be substituted for the fair_market_value of the property for purposes of applying such section sec_402 of the code provides that if one of the reasons that a_trust is not exempt from tax under sec_501 of the code is the failure of the plan of which it is a part to meet the requirements of sec_401 or sec_410 then instead of including in gross_income the a mount computed under sec_402 a highly_compensated_employee includes in gross_income for his or her taxable_year with or within which the trust's’ taxable_year ends an amount equal to the employee’s vested_accrued_benefit less th ie employee’s investment_in_the_contract as of the close of the trust's taxable_year sec_402 of the code provides that for the purposes of that paragraph the term highly_compensated_employee has the meaning given such term by sec_414 of the code sec_404 of the code provides if contributions are paid_by an employer to or under a stock bonus pension profit-sharing o r annuity pian or if compensation is paid_or_accrued by an employer on account of any employee under a plan deferring the receipt of such compensation such contributions or compensation is not deductible under chapter of the code but if it would otherwise be deductible is deductible under sec_404 subject_to that limitations of this subject sec_404 of the code provides that co ntributions or compensation paid under a nonqualified_plan or arrangement deferring the receipt of compensation if otherwise deductible are deductible in the taxa attributable to the contribution are includible in participating in the plan but in the case of a plan in which more than one employee participates only if separate_accounts are maintained for each employee ble year in which an amount the gross_income of the employees sec_412 of the code provides minimum_funding requirements that must be satisfied in pension plans sec_415 of the code provides limitations on benefits_and_contributions that may be provided under a qualified_trust sec_501 of the code provides that an organization described in sec_401 a is exempt from taxation sec_1_83-3 of the income_tax regulations the regulations provides that the term property includes a beneficial_interest in assets including money transferred or set_aside from the claims of the transferor’s creditors for example in a_trust or escrow account lor sec_1_83-8 of the regulations provides that if a transfer of property is subject_to the rules of sec_402 of the code sec_83 applies to the transfer only as provided in sec_402 sec_1_402_b_-1 of the regulations provides that contributions made on the behalf of an employee by an employer to an employees’ trust that is not exempt under sec_501 during a taxable_year of the employer which ends within or with a taxable_year of the trust for which it is not so exempt shall be included as compensation in the gross_income of the employee for his taxable_year during which the contribution is made but only to the extent that the employee’s interest in such contribution is substantially_vested at the time the contribution is made sec_1_404_a_-12 of the regulations provides that a deduction is allowable for a contribution under sec_404 only in the taxable_year of the employer in which or with which ends the taxable_year of an employee in which an amount attributable to such contribution in includible in his gross_income as compensation and then only to the extent allowable under sec_404 sec_1 -1 b of the regulations provides that a plan is a single plan’ if and only if on an ongoing basis all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries sec_1_404_b_-1t q a-2 of the temporary regulations provides that a plan or method or arrangement defers the receipt of compensation to the extent it is one under which an employee receives compensation or benefits more than a brief period of time after the end of the employer's taxable_year in which the services creating the right to such compensation or benefits is performed because the assets of the excess trust are not available to pay benefits under the pension_plan and the assets of the pension_trust are not available to pay benefits under the excess_plan the pension_plan and the excess_plan do not constitute a single_plan furthermore the benefits and provisions of the excess_plan do not affect the pension_plan or the amounts of benefits payable from the pension_trust thus the existence of the excess_plan does not affect the tax-qualified status of the pension_trust because the existence of the excess_plan does not affect whether the pension_trust meets the requirements for qualification of sec_401 of the code the existence of the excess_plan does not affect whether the pension_trust meets the requirements for exemption from taxation of sec_501 of the code thus the existence of the excess_plan does not affect the tax-exempt status of the pension_trust if the establishment adoption and operation of the excess_plan is not accompanied by an increase in the pension fund contribution rate under the collective bargaining agreement the method of funding of the excess_plan may cause the pension_plan to fail to meet the funding requirements of sec_412 of the code however a_trust does not lose its tax-qualified status merely because the plan of which it is a part fails to meet the minimum_funding requirements of sec_412 thus the method of funding of the excess trust does not affect the tax-qualified or tax-exempt status of the pension_plan under the terms of the excess_plan and excess trust the employers will make irrevocable contributions to the trust for the exclusive purpose of providing benefits under the plan to participating employees and their beneficiaries the excess trust's assets are not subject_to the claims of the employer's creditors and the excess trust is not exempt from tax under sec_501 of the code accordingly the rules of sec_402 govern the taxation of the employer contributions to the excess trust to the employees under sec_402 of the code an employer's contributions to an employees’ trust that is not exempt from tax under sec_501 are included in the employee’s gross_income in accordance with sec_83 however the value of the employee's interest in the trust is substituted for the fair_market_value of the property when applying sec_83 such contributions are included as compensation in the employee's gross_income for the taxable_year of contribution to the extent that the employee's interest therein is substantially_vested however if one of the reasons that a_trust is not exempt from tax under sec_501 of the code is the failure of the plan of which it is a part to meet the requirements of sec_401 or sec_410 of the code then instead of including in gross_income the amount computed under sec_402 a highly_compensated_employee includes in gross_income for his or her taxable_year with or within which the trust’s taxable_year ends an amount equal to the employee’s vested_accrued_benefit less the employee's investment_in_the_contract as of the close of the trust's taxable_year 2b accordingly if the excess_plan fails to meet the requirements of sec_401 or sec_410 of the code sec_402 will apply to highly compensated employees participating in the excess_plan and sec_402 will apply to ail other participants therefore a highly_compensated_employee participating in the excess_plan will include in gross_income for each taxable_year with or within which a taxable_year of the excess trust ends an amount equal to the employee's vested_accrued_benefit less their investment_in_the_contract under the excess trust as of the close of the excess trust's taxable_year for this purpose a highly compensated employee's vested_accrued_benefit equals the lesser_of their excess trust account balance and the present_value of their vested_accrued_benefit under the excess_plan the employee's vested_accrued_benefit under the excess_plan includes both the employee's vested accrued excess_benefit and their right to receive payment of the employee portion of the fica tax due with respect to that benefit because the excess_plan is a plan deferring the receipt of compensation under b -1t q a-2 of the temporary regulations contributions to the excess_plan are deductible only under the rules of sec_404 of the code because the excess pian is a nonqualified pian the provisions of sec_404 of the code are applicable because the excess_plan provides for the maintenance of separate_accounts for each employee contributions to the excess trust made by employers for the benefit of employees are deductible for the contributing employer's taxable_year in which or with which ends the employee's taxable_year in which an amount attributable to the contributions is includible in such employee's gross_income 20s therefore we hold that the establishment adoption and operation of the excess_plan does not cause the pension_trust to lose its tax-qualification or tax-exemption the method of funding of the excess trust does not jeopardize the tax- exempt status of the pension_trust contributions to the excess plan's participants and beneficiaries including any gross up amounts made on their behalf to the excess trust are taxable to such participants and beneficiaries at the time the contributions to the excess trust are made if the excess_plan fails to meet the requirements of either sec_401 or sec_410 of the code highly compensated participants in the excess_plan include in their gross_income with or within which the excess trust's taxable_year ends an amount equal to the employee’s vested_accrued_benefit less their investment_in_the_contract under the excess trust as of the close of the excess trust’s taxable_year assuming the requirements for deductibility are met employer contributions are fully deductible by the contributing employers in the taxable_year in which or with which ends the employee's taxable_year in which an amount attributable to the contributions is includible in such employee's gross_income zlob this ruling is conditional on the adoption of language revising the collective bargaining agreements that govern employers’ pension fund contributions such that employers’ contributions will be made to the excess trust in amounts equal to the amounts to be paid from the excess trust and that employers’ pension fund contributions will be allocated first to the excess trust with the remainder of the pension fund contribution if any allocated to tbe pension_trust this ruling does not consider the more general issue of the pension trust’s qualified status specifically whether the pension_trust complies with ail the code requirements for qualification this letter addresses only the impact if any of the adoption and funding of the excess_plan and the excess trust on the purportedly otherwise qualified status of the pension_trust this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent sincerely ore jr manager employee_plans actuarial group tax_exempt_and_government_entities_division


number release date id office uilc cca-121256-10 -------------- from --------------------- sent thursday date pm to ------------------- cc --------------------- subject re question --------- wow tough question but i think we can say that corps a b c and d are a combined_group under a -- we get there after looking pincite a and a so i think i agree with you that corp d and corp a are related under


internal_revenue_service number release date index number -------------------- ---------------------------------- ----------------------------------- ----------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-165164-04 date date x state date --------- ------------------------------------ legend ------------------------------------------------------------------- dear ------------- this letter is in response to your request on behalf of x dated date seeking a written_determination granting relief under sec_1362 of the internal_revenue_code ---------------------- facts x was incorporated under the laws of state on date the sole shareholder of x intended that x elect to be treated as a s_corporation effective date however the election to be treated as an s_corporation effective date was not timely filed law and analysis sec_1362 of the code provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 of the code provides guidance on when the s election becomes effective if an s election is made within the first two and one-half months of a corporation s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if the corporation makes an election after the plr-165164-04 first two and one-half months of a corporation s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 of the code provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determined reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as being timely made for that taxable_year and effective as of the first day of that taxable_year x did not file a timely election to be treated as a s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election therefore x is entitled to relief under section b conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date an original form_2553 along with a copy of this letter must be forwarded to the relevant service_center within sixty days from the date of this letter except as expressly provided herein no opinion is expressed or implied this ruling is directed only to the taxpayer s requesting it sec_6110 of concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the code provides that it may not be used or cited as precedent s dianna k miosi enclosures dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries copy of this letter copy of this letter for sec_6110 purposes sincerely


internal_revenue_service number release date index number ------------------------------------------ ------------------------ ---------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-106959-09 date date legend legend x trust a ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- --------------------- ----------------------------------------------------------------------------------------------------- ------------------------- state ------ date date date date ------------------ ---------------------- ------------------ ----------------- dear ----------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representatives requesting inadvertent invalid s_corporation relief pursuant to sec_1362 of the internal_revenue_code code in addition x’s representatives also seek relief to allow trust to file a late election to be treated as a qualified_subchapter_s_trust qsst pursuant to sec_1361 of the code plr-106959-09 facts x was incorporated under the laws of state on date and elected to be treated as an s_corporation effective date as of date the shareholders of x included individuals and trusts including trust pursuant to a_trust reformation effective date trust became a qualified_subchapter_s_trust qsst within the meaning of sec_1361 and has been since and including date and was therefore eligible to be an s_corporation shareholder a was the sole beneficiary of trust and inadvertently failed to file a timely qsst election therefore x’s s election was invalid x became aware of trust’s failure_to_file the qsst election on date x represents that since date all of its shareholders have filed their income taxes as if x was an s_corporation x and its shareholders represent there was no intent to knowingly make an invalid election to be an s_corporation and that the events that resulted in the inadvertent invalid election were not motivated by tax_avoidance or retroactive tax planning x and all of its shareholders who were shareholders since date agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for the purposes of sec_1362 a_trust all of which is treated under subpart e of part i of subchapter_j of this chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a such trust will be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made and c for purposes of applying sec_465 and sec_469 to the beneficiary of the trust the disposition of the s_corporation stock by the trust shall be treated as a disposition by such beneficiary plr-106959-09 sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1361 provides the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states a substantially separate and independent share of a_trust within the meaning of sec_663 shall be treated as a separate trust for purposes of sec_1361 and sec_1361 sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1_1361-1 provides that if a_trust holds c_corporation stock and that c_corporation makes an s election effective for the first day of the taxable_year in which the s election is made the qsst election must be made within the 16-day-and- 2-month period beginning on the day that the s election is effective sec_1_1361-1 provides that the income_beneficiary who makes the qsst election and is treated for purposes of sec_678 as the owner of that portion of the trust that consists of s_corporation stock is treated as the shareholder for purposes of sec_1361 sec_1366 sec_1367 and sec_1368 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after plr-106959-09 discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the election was made or the termination occurred is a small_business_corporation or to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to f agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the representations made and the information submitted we conclude that x’s s election was ineffective on date because of the failure of a to make a qsst election we further conclude that the ineffectiveness of x’s s_corporation_election constituted an inadvertent invalid election within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided that x’s s election was otherwise valid and not otherwise terminated under sec_1362 this ruling is contingent upon a filing a qsst election for trust with an effective date of date with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the qsst election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x is otherwise eligible to be treated as an s_corporation or whether trust is eligible to be a qsst under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives plr-106959-09 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


t c summary opinion united_states tax_court ronald stewart armstrong petitioner v commissioner of internal revenue respondent docket no 28922-07s filed date ronald stewart armstrong pro_se christina e ciu for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issues for decision are whether petitioner may deduct dollar_figure in business_expenses reported on his schedule c profit or loss from business petitioner’s itemized_deduction for medical and dental expenses is limited to the amount in excess of percent of his adjusted_gross_income and petitioner is entitled to an ordinary deduction for worthless_stock under sec_1244 background i petitioner petitioner is a lifelong musician and an entrepreneur who has combined his passions for music and business in a variety of business ventures a consultant by trade petitioner filed his federal_income_tax return in date that return included a schedule c that listed petitioner’s business or profession as consultant and claimed the following expense deductions expenses multi-labs inc research international diverse investments inc peterson controls opsafe x-factor technologies wizard guitars bartolini inc total amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number on date respondent issued a notice_of_deficiency notice disallowing petitioner’s deduction for schedule c expenses because the disallowance increased petitioner’s adjusted_gross_income respondent also disallowed petitioner’s deduction of dollar_figure in medical and dental expenses in excess of percent of his adjusted_gross_income petitioner requested redetermination of the deficiency by filing a petition with this court on date petitioner resided in california when the petition was filed ii bartolini a petitioner’s affiliation with bartolini petitioner was employed by bartolini inc bartolini a nevada corporation formed in date to manufacture and sell electronic musical pickups petitioner was also a shareholder of bartolini b formation of bartolini bartolini was formed to acquire bartolini guitars a sole_proprietorship owned by bill bartolini mr bartolini bartolini was formed under a resolution of its board_of directors that provided in relevant part the board_of directors of bartolini have determined that the corporation shall be organized and managed so that it is a small_business_corporation as defined in sec_1244 as amended and so that the shares issued by the corporation are sec_1244 stock as defined in sec_1244 as amended be it therefore resolved effective date the proper officers of the corporation are authorized to sell and issue common shares in an aggregate amount of money and other_property as contribution_to_capital and as paid in surplus which together with the aggregate amount of common shares outstanding at the time of issuance does not exceed dollar_figure that the sale and issuance of shares shall be conducted in compliance with sec_1244 so that the corporation and its shareholders may obtain the benefits of sec_1244 petitioner received shares of bartolini common_stock upon its formation in exchange for dollar_figure on date petitioner contributed another dollar_figure to bartolini in exchange for additional shares of bartolini common_stock c petitioner’s employment with bartolini during petitioner entered into an employment agreement with bartolini to serve as its president and chief_executive_officer ceo from date until in exchange for his services petitioner was to receive the following remuneration i a guaranteed annual salary of dollar_figure ii a guaranteed annual bonus of dollar_figure iii big_number shares of bartolini stock and iv warrants each year for big_number shares of stock petitioner worked as president and ceo of bartolini from date until date when bartolini was dissolved iii date trial a overview on date the court held a trial in san francisco california petitioner was the only witness called by either party the only evidence which petitioner presented to support his reported schedule c expenses was receipts related to bartolini the receipts ranged in date from to with the exception of one receipt that was undated the receipts consisted of i a dollar_figure invoice from the carson city treasurer for base license fee ii a dollar_figure consulting fee paid to mr bartolini and iii dollar_figure in receipts for laughlein expenses the undated receipt was from mcbee systems inc banking materials in the amount of dollar_figure the other receipts are not relevant to our decision and will not be discussed b amended_return petitioner also introduced into evidence an amended form_1040 amended_return which he intended to file with respondent the court admitted this return into evidence as an admission of petitioner’s intent relating to this case and not as a filed tax_return on schedule c of the amended_return petitioner claimed dollar_figure in expenses consisting of dollar_figure in expenses related to an unnamed business consulting service and dollar_figure in expenses related to building design services petitioner also attached to his amended_return a schedule_k-1 partner’s share of income deductions credits etc from wizard guitars the schedule_k-1 lists petitioner as a 33-percent general_partner of the entity the schedule_k-1 reports as to that petitioner’s beginning capital_account was dollar_figure and that his ending capital_account was dollar_figure on account of a dollar_figure ordinary business loss from that year discussion i deductibility of schedule c expenses a overview respondent disallowed petitioner’s schedule c expense deductions because petitioner failed to i substantiate that the expenses were paid_or_incurred during the taxable_year or ii demonstrate that the expenses were ordinary and necessary to petitioner’s consulting business petitioner argues generally that the expenses are valid sec_162 ordinary and necessary 2the record does not establish that the amended_return was filed by petitioner or accepted by respondent 3we are unaware of the origins of the purported business loss or whether wizard guitars filed a return of partnership income for business_expenses and does not address the substantiation issue for the reasons set forth below we hold for respondent an income_tax deduction is a matter of legislative grace and is not an unqualified right see 503_us_79 308_us_488 292_us_435 a taxpayer such as petitioner bears the burden of establishing his right to any amount claimed as a deduction rule a 305_us_281 290_us_111 62_tc_834 every taxpayer is also required to maintain supporting records or statements for amounts claimed as deductions see sec_6001 b deduction for ordinary and necessary business_expense sec_1 overview a taxpayer may deduct ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_162 an expense is ordinary if it bears a reasonably proximate relationship to the operation of the taxpayer’s business 276_us_145 an expense is necessary if it is appropriate and sec_7491 is inapplicable to this case because petitioner did not produce credible_evidence with respect to a factual issue relevant to determining his tax_liability helpful to the functioning of the taxpayer’s business welch v helvering supra pincite expenses related to bartolini a overview petitioner seeks to deduct dollar_figure in various expenses_incurred on behalf of his involvement with bartolini b base license fee petitioner presents a dollar_figure invoice from the carson city treasurer for licensing fees of bartolini incurred on date a corporation and its shareholders are separate taxable entities and therefore a shareholder may generally not deduct expenses that would be corporate expenses even if paid_by that shareholder see 319_us_436 d’angelo v commissioner tcmemo_2003_ petitioner may not deduct the licensing fees of bartolini because they are the expenses of the corporation--not of petitioner see 5_tc_1152 c additional expenses petitioner also presents a dollar_figure receipt for a laughlein certificate and dollar_figure in receipts for consulting fees to mr bartolini there is no indication in the record that these expenses are ordinary or necessary to petitioner’s consulting business we deny petitioner a deduction for these items d and undated expenses petitioner also presents receipts for expenses_incurred in and as well as an undated receipt again the record does not support that these expenses were ordinary or necessary to petitioner’s consulting business even if petitioner did demonstrate that these expenses satisfied the requirements of sec_162 they would still not be deductible petitioner may deduct expenses only for the year paid see eg 37_tc_424 stating that a cash_method taxpayer’s otherwise deductible expense is not deductible for any taxable_year other than the year in which it is paid e summary of expenses related to bartolini in summary the record contains no evidence that allows us to permit petitioner a deduction for expenses_incurred in connection with his involvement in bartolini accordingly we sustain respondent’s disallowance of the dollar_figure deduction expenses related to wizard guitars petitioner similarly provides no substantiation for expenses_incurred in connection with his affiliation with wizard guitars in lieu of receipts petitioner presents a schedule_k-1 from wizard guitars which reports that a dollar_figure ordinary business loss passed through to him in the limited record before us does not establish that petitioner is entitled to deduct any of this dollar_figure deductibility of remaining expenses we similarly find no evidence in the record that supports the dollar_figure deduction for the claimed expenses related to multi- labs inc research international diverse investments inc peterson controls opsafe or x-factor technologies we find it telling that petitioner’s amended_return does not seek a deduction for any of these claimed expenses we can only surmise that petitioner omitted these expenses from the amended_return because he has no means of substantiating them we deny the dollar_figure in claimed deductions ii impact on itemized_deductions respondent argues that the increase to petitioner’s adjusted_gross_income resulting from the disallowance of his schedule c deduction causes a computational disallowance of petitioner’s claimed deduction for medical and dental expenses we agree a taxpayer may deduct medical_expenses incurred during the taxable_year provided that the expenses exceed percent of the taxpayer’s adjusted_gross_income sec_213 petitioner claims dollar_figure in medical and dental expenses for as reported on his return dollar_figure of that amount exceeded percent of his adjusted_gross_income the disallowance of petitioner’s dollar_figure business_expense deduction increases petitioner’s adjusted_gross_income by a like amount and thus the 5-percent floor imposed by sec_213 is increased by dollar_figure dollar_figure x dollar_figure petitioner therefore is not entitled to deduct any of the dollar_figure in claimed medical and dental expenses iii sec_1244 stock petitioner argues that sec_1244 permits him to recognize an ordinary_loss on the worthlessness of his bartolini stock we disagree sec_165 and a provides that a taxpayer realizes a capital_loss when stock that is a capital_asset becomes worthless a limited exception to this general_rule permits an individual to deduct as an ordinary_loss any loss on sec_1244 stock sec_1244 the term sec_1244 stock includes common_stock issued in exchange for cash when the issuer is a domestic small_business_corporation as defined in sec_1244 percent of whose income does not come from investment activity sec_1244 qualification for sec_1244 status requires strict compliance with the provisions of the statute and the regulations thereunder see 51_tc_937 affd 425_f2d_633 2d cir 46_tc_878 magee v commissioner tcmemo_1993_305 petitioner has failed to prove that he meets the requirements of sec_1244 in particular he has failed to show that bartolini meets the definition of a small_business_corporation or establish the nature of its receipts petitioner has also failed to demonstrate that his bartolini stock is worthless within the meaning of sec_165 see klepetko v commissioner tcmemo_1990_644 affd without published opinion 956_f2d_1159 2d cir petitioner is not permitted a deduction under sec_1244 because he failed to meet his burden_of_proof on these issues iv conclusion petitioner may not deduct the dollar_figure in expenses claimed on his schedule c petitioner may not deduct any of the claimed dollar_figure in medical and dental expenses petitioner may not deduct any of his basis in bartolini we have considered all arguments made by the parties and to the extent not discussed above conclude they are without merit to reflect the foregoing decision will be entered for respondent


department of the treasury p o box - room cincinnati ohio employer_identification_number person to contact - id contact telephone numbers phone fax vil dollar_figure internal_revenue_service director exempt_organizations release number release date date legend b name of state c name of public charity d name of program x total amount of set-aside y annual payment amount z total cost of project dear in reply to your written request for approval of a set-aside under sec_4942 this is of the internal_revenue_code you are a corporation formed under the laws of the state of b exempt from federal_income_tax under sec_501 of the code and classified as a private non-operating foundation under sec_509 facts you wish to set_aside dollar_figurex for the development and implementation by c of the second_phase of the d this program provides technical support capacity building and direct financing for the implementation of conservation agreements by c and partner organizations five annual payments of dollar_figurey will be made annually to c for the work completed in the prior calendar_year on the implementation of the d these payments will be disbursed beginning date through date following the submission of technical reports demonstrating progress toward the agreed on milestones between you and the d the estimated cost of the entire program is dollar_figurez it is anticipated to be met through a combination of private sector contributions and foundation and international_organization grants you have stated that periodic_payments are conditioned on submission of technical reports demonstrating progress toward annual agreed upon milestones no additions to the set-aside for this project are contemplated you have provided a representation that amounts set_aside for future payments will actually be paid within months of date law sec_4942 of the code defines qualifying_distribution as a any amount_paid to accomplish one or more purposes described in sec_170 other than any contribution to i an organization controlled by the foundation or one or more disqualified persons or ii a private_foundation which is not an operating_foundation except as otherwise provided b any amount_paid to acquire an asset used directly in carrying out one or more purposes described in sec_170 sec_4942 of the code provides that for all taxable years beginning on or after date an amount set_aside for a specific project which comes within one or more purposes described in sec_170 may be treated as a qualifying_distribution if it meets the requirements of subparagraph b sec_4942 of the code provides that an amount set_aside for a specific project may be treated as a qualifying_distribution if at the time of the set-aside the foundation establishes to the satisfaction of the secretary the amount set_aside will be paid for the specific project within five years and the specific project is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds the suitability test’ sec_53_4942_a_-3 defines as a qualifying_distribution any amount set_aside within the meaning of paragraph b of this section sec_53_4942_a_-3 of the regulations provides that the amounts of income set_aside for a specific project for one or more of the purposes in sec_170 or sec_170 of the code may be treated as qualifying distributions for the tax_year s in which such amounts are set_aside but not in the tax_year in which actually paid if the requirements of sec_4942 and paragraph b are satisfied the requirements of paragraph b are satisfied if the foundation establishes to the satisfaction of the commissioner the amount set_aside will be paid for the specific project within months after it is set_aside and i the set-aside otherwise meets the suitability test of sec_53_4942_a_-3 or ii the foundation satisfies the cash distribution test sec_53_4942_a_-3 of the regulations provides that the suitability test for a set- aside is met if the foundation establishes to the satisfaction of the commissioner that the specific project is one in which relatively long-term grants or expenditures must be made in order to assure the continuity of particular charitable projects or program-related investments or where grants are made as part of a matching-grant program analysis sec_53_4942_a_-3 provides that a private_foundation must obtain internal_revenue_service approval of its set-aside of income under the suitability test by applying before the end of the tax_year in which the amount is set_aside you have sought timely approval of your set-aside of income in accordance with sec_53_4942_a_-3 in revrul_77_7 1977_1_cb_354 the term specific project as defined in sec_53_4942_a_-3 of the excise_tax regulations was held to include a building project to be undertaken by a public charity unrelated to the foundation making the set-aside your project is one that can better be accomplished by the set-aside of income rather than by the immediate payment of funds the periodic_payments for this project are conditioned on submission of technical reports demonstrating progress toward annual agreed-upon milestones as required by sec_4942 of the code and sec_53_4942_a_-3 of the regulations your proposed set-aside will be used to accomplish purposes described in sec_170 of the code namely to provide technical support capacity building and direct financing for the implementation of conservation agreements you have represented that the amount set-aside for this specific project will be paid out within months from the set-aside as required by sec_4942 of the code and sec_53_4942_a_-3 of the regulations the funds set_aside will be disbursed to a public charity earmarked for a project which is a specific project within the meaning of sec_53_4942_a_-3 your project therefore satisfies the suitability test as set forth in sec_4942of the code and sec_53_4942_a_-3of the regulations ruling based on the foregoing the set-aside of dollar_figurex for the taxable_year ending date meets the requirements of sec_4942 and accordingly constitutes a qualifying_distribution under sec_4942 we direct your attention to sec_53_4942_a_-3 of the regulations entitled evidence of set-aside this section provides that any set-aside approved by the internal_revenue_service shall be evidenced by the entry of a dollar amount in the books_and_records of a private_foundation as a pledge or obligation to be paid at a future date or dates further the amount of the set-aside must be taken into account in determining the foundation's minimum_investment_return see sec_53 a - c of the regulations and any income attributable to a set-aside must be taken into account in computing adjusted_net_income see sec_53_4942_a_-2 of the regulations this ruling is based on the understanding there will be no material changes in the facts upon which it is based any changes that may have a bearing on your tax status should be reported to the internal_revenue_service this ruling does not address the applicability of any section of code or regulations to the facts submitted other than with respect to the sections described this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling letter is directed only to the organizations that requested them sec_6110 of the code provides that they may not be used or cited as precedent please keep a copy of this ruling letter in your permanent records a copy of this letter has been sent to your authorized representative if you have any questions about this ruling please contact the persons whose name and telephone number are shown above in the heading of this letter sincerely yours notice enclosure robert choi director exempt_organizations rulings and agreements