tcmemo_1997_416 united_states tax_court nicholas a and marjorie e paleveda petitioners v commissioner of internal revenue respondent docket no filed date nicholas a paleveda for petitioners clinton m fried for respondent memorandum findings_of_fact and opinion wells judge respondent determined deficiencies in petitioners' federal_income_tax and additions to tax and accuracy-related_penalties for the taxable years and as follows year deficiency sec_6651 sec_6662 additions to tax penalties accuracy-related dollar_figure big_number dollar_figure big_number dollar_figure big_number in the amended answer respondent asserts revised deficiencies in petitioners' federal_income_tax and additions to tax and accuracy-related_penalties for the taxable years and as follows year deficiency sec_6651 sec_6662 additions to tax accuracy-related_penalties dollar_figure big_number dollar_figure big_number dollar_figure big_number unless otherwise indicated all section and code references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules of ractice and procedure after concessions the issues to be decided are as follows whether petitioners have substantiated their claimed deductions on schedule c for certain business_expenses whether petitioners are entitled to certain passive losses petitioners conceded certain adjustments relating to unreported interest_income an ira distribution and a penalty thereon a self-employment health insurance deduction and a self-employment_tax deduction additionally at trial petitioners conceded the sec_6651 additions to tax we therefore do not consider those additions respondent conceded that petitioners are entitled to additional itemized_deductions for real_estate_taxes in the amount of dollar_figure an interest_expense in the amount of dollar_figure and charitable_contributions in the amount of dollar_figure in their petition petitioners disputed respondent' sec_2 disallowance of a schedule a deduction for real_estate_taxes to the extent of dollar_figure for petitioners' taxable_year petitioners however make no argument on brief concerning that issue consequently we consider it to have been conceded 91_tc_524 whether petitioners have substantiated their claimed deductions on schedule a for certain itemized expenses whether petitioners have failed to report income in the amount of dollar_figure for taxable_year and whether petitioners overreported income in the amount of dollar_figure for taxable_year whether petitioners are entitled to a business_bad_debt deduction for taxable_year for the worthlessness of a loan and whether petitioners are liable for accuracy-related_penalties pursuant to sec_6662 for the taxable years in issue findings_of_fact some of the facts have been stipulated for trial pursuant to rule the parties' stipulations of fact are incorporated herein by reference and are found as facts in the instant case at the time they filed their petition in the instant case petitioners resided in atlanta georgia petitioners are husband and wife during the years in issue petitioner nicholas a paleveda petitioner was an employee of mutual benefit life_insurance co mbl petitioner received from mbl a form_w-2 for showing wage income in the amount of dollar_figure with social_security_tax petitioner marjorie e paleveda signed the federal income tax returns for the taxable years in issue as marjorie ewing withheld in the amount of dollar_figure mbl has no record of receiving from petitioner any communication disputing the accuracy of the form_w-2 or assigning petitioner's wage income petitioner is being sued by mbl for commission chargebacks relating to petitioner's and wage income on date ben d razon assignor and the law firm of hampton paleveda murphy cody levy assignee or firm executed an agreement for assignment of partnership_interest agreement in med-center a florida partnership in consideration of the firm's payment of dollar_figure petitioner executed the agreement on behalf of the firm additionally petitioner wrote a check dated date from an account in his name to mr razon in the amount of dollar_figure in the memo section of the check was the notation partnership_interest as to the firm's purchase of the partnership_interest in med-center no note was ever executed and no loan amortization schedule was ever issued the preamble to the agreement stated that the firm desires to take an assignment of a partial interest in the partnership share owned by ben d razon additionally the agreement provided in relevant part ben d razon for and in consideration of the payment of dollar_figure receipt of which is hereby acknowledged and the assuming by hampton paleveda murphy cody levy of its proportionate share of the partnership liabilities of the above referenced partnership does hereby irrevocably assign transfer and set over to the assignee a proportionate share of his right title and interest in the above referenced partnership each of the parties hereto agrees to execute any and all documents necessary or appropriate to transfer their interests hereby conveyed or to be conveyed to the partnership_interest in the property owned by the partnership or the lease agreement as it pertains to the property if necessary petitioners filed their federal_income_tax returns returns for taxable_year on or about date and for taxable_year on or about date petitioners claimed schedule c business_expenses in the amounts of dollar_figure for taxable_year and dollar_figure for taxable_year respondent disallowed business_expenses to the extent of dollar_figure for taxable_year and dollar_figure for taxable_year petitioners claimed schedule e losses in the amount of dollar_figure for taxable_year and dollar_figure for taxable_year respondent disallowed losses to the extent of dollar_figure for taxable_year and dollar_figure for taxable_year on their return for taxable_year petitioners claimed schedule a itemized_deductions in the amount of dollar_figure respondent disallowed deductions to the extent of dollar_figure respondent has conceded that before statutory limitations petitioners are entitled to additional deductions for real_estate_taxes in the amount of dollar_figure charitable_contributions in the amount of dollar_figure and interest_expense in the amount of dollar_figure in the amended answer respondent asserts that petitioners underreported their gross_income to the extent of dollar_figure for taxable_year and overreported their gross_income to the extent of dollar_figure for taxable_year additionally during the audit petitioners claimed a bad_debt deduction in the amount of dollar_figure that was not reflected on their federal_income_tax returns or the notice_of_deficiency respondent determined that on the basis of all of the adjustments in the notice_of_deficiency petitioners were liable for additions to tax and penalties pursuant to sec_6651 and sec_6662 in the amended answer to reflect the adjustments related to petitioners' underreporting and overreporting of income respondent increased the addition_to_tax and penalty for and decreased the addition_to_tax and penalty for opinion the first issue to be decided is whether petitioners have substantiated their claimed schedule c business_expenses that respondent disallowed to the extent of dollar_figure for taxable_year and dollar_figure for taxable_year petitioners argue that they are entitled to the deductions citing 39_f2d_540 2d cir under certain circumstances when taxpayers establish that they incurred a trade_or_business expense but do not substantiate the amount of the expense the court may estimate the amount of the deductible expense petitioners argue that their business_expenses are established by the more than big_number canceled checks presented by petitioner at the audit level and by the fact that the deductions in issue were allowed by respondent in the 30-day_letter deductions are a matter of legislative grace and petitioners bear the burden of proving that they are entitled to the deductions claimed except as to increased deficiencies rule a 503_us_79 292_us_435 taxpayers must keep sufficient records to establish the amount of their deductions see sec_6001 43_tc_824 sec_1_6001-1 income_tax regs moreover a taxpayer who claims a deduction bears the burden of substantiating the amount and purpose of the item claimed 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_1_6001-1 income_tax regs in the instant case petitioners provided no books records or checks substantiating the disallowed business_expenses as to the checks petitioner claims to have presented at the audit level we decide petitioners' tax_liability on the evidence produced at trial and not a previous record developed at the administrative level 62_tc_324 and case cited therein accordingly on the basis of the record in the instant case we conclude that petitioners have not carried their burden of substantiating the amount and purpose of the disallowed business_expenses as petitioners have failed to establish at trial that they incurred any schedule c trade_or_business deductions beyond those allowed by respondent cohan v commissioner supra is not applicable in the instant case accordingly we sustain respondent's disallowance of those deductions the next issue to be decided is whether petitioners are entitled to certain passive losses that respondent disallowed to the extent of dollar_figure for taxable_year and dollar_figure for taxable_year in the exhibits accompanying the notice_of_deficiency respondent listed petitioners' passive losses for the taxable years in issue under the heading part i - rental real_estate with active_participation and computed the extent to which petitioners were entitled to the dollar_figure offset pursuant to sec_469 during each of the taxable years in issue sec_469 provides in general --in the case of any natural_person subsection a shall not apply to that portion of the passive_activity_loss or the deduction_equivalent within the meaning of subsection j of the passive_activity_credit for any taxable_year which is attributable to all rental_real_estate_activities with respect to which such individual actively participated in such taxable_year and if any portion of such loss or credit arose in another taxable_year in such other taxable_year sec_469 provides dollar limitation --the aggregate amount to which paragraph applies for any taxable_year shall continued however petitioners' modified_adjusted_gross_income was greater than dollar_figure with the result that the dollar_figure offset was phased out petitioners argue that they meet the requirements of the sec_469 material_participation test in that the rental properties were petitioners' former homes rented out and petitioner materially participated in their active_management additionally petitioner contends that pursuant to sec_469 their passive losses should be exempted by the dollar_figure offset to the extent of the phaseout for rental_real_estate_activities respondent argues that the exception provided in sec_469 for certain taxpayers who materially participate in a real_property business does not apply to the years in issue we agree sec_469 provides the general_rule that the term passive_activity includes any rental_activity sec_469 provides that sec_469 is to be applied without regard to whether or not the taxpayer materially participates in the activity for taxable years beginning after continued not exceed dollar_figure sec_469 provides a in general --in the case of any taxpayer the dollar_figure amount under paragraph shall be reduced but not below zero by percent of the amount by which the adjusted_gross_income of the taxpayer for the taxable_year exceeds dollar_figure date sec_469 provides an exception to the general_rule in sec_469 for taxpayers meeting certain conditions the taxable years in issue in the instant case however are and accordingly the sec_469 exception does not apply in the instant case respondent argues that for purposes of the dollar_figure offset for rental real_estate petitioners have not established that they actively participated in their rental_real_estate_activities as required by sec_469 in the instant case however respondent phased out the dollar_figure offset because petitioners' modified_adjusted_gross_income exceeded dollar_figure for each of the taxable years in issue as petitioners provide no further arguments as to their passive losses we sustain respondent's determinations to the extent that the dollar_figure sec_469 provides for taxpayers meeting the requirements of sec_469 that a in general --if this paragraph applies to any taxpayer for a taxable_year -- i paragraph shall not apply to any rental real_estate activity of such taxpayer for such taxable_year and ii this section shall be applied as if each interest of the taxpayer in rental real_estate were a separate activity notwithstanding clause ii a taxpayer may elect to treat all interests in rental real_estate as one activity nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited_partnership as a limited_partner offset is phased out once the rule_155_computations that we order below are made rule a as stated in our findings_of_fact after concessions and the application of statutory limitations the amount of disallowed deductions in issue is dollar_figure respondent argues that petitioners have not substantiated their deduction for real_estate_taxes to the extent of dollar_figure and their deduction for charitable_contributions to the extent of dollar_figure dollar_figure mathematical error petitioners argue that their deductions are established by the canceled checks presented by petitioner at the audit level additionally petitioners argue that as respondent disallowed many of the checks at the audit level on the grounds that petitioners could have received a personal benefit it is impossible for petitioners to prove that they did not receive such a benefit in the instant case petitioners provided no books records or checks substantiating the disallowed deductions as to the checks petitioner claims to have presented at the audit level we decide petitioners' liability for income_tax deficiencies on the evidence produced at trial and not a previous record developed at the administrative level 62_tc_324 on the basis of the record in the instant case we conclude that petitioners have not carried their burden of substantiating the amount and purpose of the disallowed deductions accordingly we sustain respondent's disallowance of schedule a deductions to the extent of dollar_figure for petitioners' taxable_year we next decide whether petitioners have failed to report certain income for taxable_year and whether petitioners have overreported income for taxable_year respondent increased by dollar_figure petitioners' gross_income for their taxable_year to coincide with the amount reported on petitioner's form_w-2 from mbl and decreased petitioners' gross_income by dollar_figure for their taxable_year at trial peter j gelcius the agency finance supervisor of mbl life assurance co formerly mbl testified that on the basis of his review of mbl's business records mbl made payments to petitioner in the amount of dollar_figure for and in the amount of dollar_figure for additionally mr gelcius testified that the checks from mbl were made out to petitioner and that in petitioner's file at mbl there was no assignment of petitioner's income a copy of petitioner's form_w-2 from mbl was admitted in evidence solely for the purpose of establishing that petitioner received a form_w-2 from mbl which stated that during mbl paid wage income in the amount of dollar_figure to petitioner additionally respondent introduced solely for impeachment respondent raised this issue as a new_matter in the amended answer and accordingly bears the burden_of_proof rule a petitioners did not agree that they overreported income for their taxable_year purposes certain business records of mbl which stated that during mbl paid to petitioner wage income in the amount of dollar_figure petitioners contend that during petitioner received no wage income from mbl but did receive dollar_figure from stuart financial planning corp stuart petitioners argue that at the audit they established that mbl paid stuart which paid dollar_figure to petitioner additionally petitioners argue that they reported income that was deposited in petitioners' account at nationsbank for their taxable_year alternatively petitioners argue that petitioner merely collected income in the role of agent and therefore is not required to include that amount in gross_income respondent has shown that during taxable years and petitioner received from mbl wage income in the amounts of dollar_figure and dollar_figure respectively mr gelcius testified that mbl made payments to petitioner in the amount of dollar_figure for and in the amount of dollar_figure for mr gelcius' testimony as to the payments made to petitioner during is corroborated by the parties' stipulation that petitioner received from mbl wages in the amount of dollar_figure additionally at trial mr gelcius' testimony was neither discredited nor contradicted by petitioner petitioners argue that mbl paid stuart which then paid petitioner at trial however petitioner did not present evidence that disputed mr gelcius' testimony that mbl made payments to petitioner the only questions that petitioner asked mr gelcius concerning the issue were do you have any knowledge of me actually physically receiving the check and depositing it in my bank account to which he responded i was not asked to check on that but no i don't but i could have though and so as far as you know this check could have gone to angelo scharelli the agency manager for the mbl division in south florida who in turn deposits it in a master bank account to which mr gelcius responded i have no knowledge of where that check would have went out all i know is that it would have been sent to nicholas a paleveda mr gelcius' testimony was uncontroverted petitioners argue that they established at the audit that mbl paid stuart which then paid dollar_figure to petitioner we however decide petitioners' liability for income_tax deficiencies on the evidence produced at trial and not a previous record developed at the administrative level greenberg's express inc v commissioner supra and petitioners did not offer any documentary_evidence establishing that mbl paid stuart and that stuart paid petitioner additionally petitioners did not provide any account statements from nationsbank or other documentary_evidence to establish that petitioner received only dollar_figure in income during finally petitioners offered no documentary_evidence establishing that petitioner merely collected income in the role of agent on the basis of the record in the instant case we conclude that during petitioner received from mbl wage income in the amount of dollar_figure respondent has conceded that petitioners are entitled to a decrease in their gross_income for to the tent of dollar_figure accordingly we sustain respondent's determinations the next issue to be decided is whether petitioners are entitled to a bad_debt deduction pursuant to sec_166 for the worthlessness of an alleged loan petitioners argue that the dollar_figure payment to mr razon during was a loan that was made in connection with petitioner's trade_or_business and that became worthless during respondent contends that petitioners have not established that a debtor-creditor relationship existed between petitioner and mr razon alternatively respondent argues that if a debtor-creditor relationship existed petitioners have not established that the in their brief petitioners argued that for they are entitled to decrease their gross_income to the extent of dollar_figure which petitioners allege is an amount that was characterized by a florida state court as a loan by mbl to petitioner respondent noting the decrease in petitioners' income for to the extent of dollar_figure argues that the issue was not raised in the petition or at trial we agree generally we do not consider new issues raised for the first time on brief rollert residuary_trust v commissioner 80_tc_619 affd on other issues 752_f2d_1128 6th cir 64_tc_989 64_tc_61 accordingly in the instant case we will not address the issue of excluding the alleged loan in the amount of dollar_figure from gross_income debt became worthless during sec_166 provides in general for the deduction of debts that become wholly worthless during a taxable_year the bad_debt deduction is limited to a bona_fide debt that is a debt that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs for purposes of sec_166 a contribution_to_capital is not considered a debt in re uneco inc 532_f2d_1204 8th cir 91_tc_575 sec_1_166-1 income_tax regs characterization of an advance as either a loan or a capital_contribution is a question of fact which must be answered by reference to all of the evidence with the burden on the taxpayer to establish that the alleged loans were bona_fide debts rule a 74_tc_476 58_tc_1062 objective factors are to be considered and the taxpayer's subjective intent alone is not conclusive of the issue of characterizing an advance as debt or equity in re uneco inc supra pincite deductions are a matter of legislative grace and petitioners bear the burden of proving that they are entitled to the deductions claimed rule a indopco inc v commissioner u s pincite 292_us_435 taxpayers are required to maintain records that are sufficient to enable the commissioner to determine their correct_tax liability see sec_6001 meneguzzo v commissioner t c pincite sec_1_6001-1 income_tax regs moreover a taxpayer who claims a deduction bears the burden of substantiating the amount and purpose of the item claimed hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs on the basis of the record in the instant case we conclude that petitioner has not established that the dollar_figure payment to mr razon was bona_fide debt although petitioner testified that he made a loan to mr razon petitioner's subjective intent alone is not conclusive of the issue of characterizing an advance as debt or equity in re uneco inc supra petitioners provided no documentary_evidence corroborating the payment as a loan several considerations support our conclusion that petitioner's payment to mr razon was not a bona_fide debt petitioner testified that he and mr razon did not execute a note or establish a loan amortization schedule the agreement provides that ben d razon does hereby irrevocably assign transfer and set over to petitioner a proportionate share of his right title and interest in the above referenced partnership additionally pursuant to the agreement the parties agreed to execute any and all documents necessary or appropriate to transfer their interests hereby conveyed or to be conveyed to the partnership_interest in the property the check written by petitioner to mr razon includes in the memo section the notation partnership_interest accordingly the foregoing considerations dissuade us from concluding that petitioner's dollar_figure payment was a loan as opposed to something else eg the purchase of a partnership_interest in med-center consequently we conclude that petitioners have not established that the dollar_figure payment to mr razon constitutes a bona_fide debt that is deductible as a business_bad_debt petitioners have not advanced any other theory upon which a deduction could be premised accordingly we hold that petitioners are not entitled to a bad_debt deduction in the amount of dollar_figure lastly we turn to the accuracy-related_penalties determined by respondentdollar_figure in the notice_of_deficiency respondent determined that on the basis of all of the adjustments in the notice_of_deficiency petitioners were liable for penalties pursuant to sec_6662 for taxable years and in the amended answer to reflect the adjustments related to petitioners' underreporting and overreporting of income respondent increased the penalty for taxable_year and decreased the penalty for taxable_year accordingly the in their brief petitioners argue that the sec_6651 additions to tax should be reduced at trial however petitioners conceded the additions to tax see supra note accordingly we do not consider petitioners' argument in any case petitioners offered no evidence on the issue rule a increase in the penalty attributable to petitioners' underreporting of income for is a new_matter within the meaning of rule a for which respondent bears the burden_of_proof respondent however made no argument on brief regarding the increase consequently we consider the increase in the penalty attributable to petitioners' underreporting of income for to have been conceded by respondent 91_tc_524 sec_6662 imposes a 20-percent penalty on the portion of an underpayment_of_tax that is attributable to inter alia negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including failure to exercise due care failure to do what a reasonable person would do under the circumstances or failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard of the code or the temporary or final regulations issued pursuant to the code sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement of tax is defined as the amount which exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 the accuracy-related_penalty does not apply to any portion of an underpayment with respect to which it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer's efforts to assess the proper tax_liability id circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer id petitioners must establish error in respondent's determination that they are liable for the penalty provided pursuant to sec_6662 rule a 104_tc_352 as to the penalties determined by respondent in the notice_of_deficiency petitioners contend that they are not liable because at the audit they produced canceled checks in support of their deductions additionally petitioners argue that respondent required evidence beyond petitioners' checks that in some cases was impossible to produce finally petitioners contend that there was no negligence and that they acted in good_faith we conclude that petitioners have not established error in respondent's determination that they are liable for the sec_6662 penalty the sec_6662 penalty does not apply to any portion of an underpayment with respect to which it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith sec_6664 we conclude that the presentation of canceled checks by petitioners at the audit standing alone does not establish that there was reasonable_cause for the portion of the underpayment or that petitioners acted in good_faith with respect to that portion additionally petitioners' mere allegation that in the instant case they were not negligent and that they acted in good_faith does not meet the requirements of sec_6664 petitioners have provided no other evidence upon which a finding of reasonable_cause and good_faith could be premised accordingly we sustain respondent's determination of a sec_6662 penalty as to the deficiency which is calculated in the rule_155_computations that we order below we have considered all of petitioners' remaining arguments and find them to be without merit to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court robert manashi and nahrin manashi petitioners v commissioner of internal revenue respondent docket no filed date robert manashi and nahrin manashi pro sese joseph e nagy for respondent memorandum findings_of_fact and opinion gale judge respondent determined that petitioners failed to report their distributive shares of income from an s_corporation in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for taxable years and respectively these and certain other adjustments resulted in deficiencies in petitioners’ and federal_income_tax of dollar_figure dollar_figure dollar_figure and dollar_figure respectively respondent also determined penalties pursuant to sec_6662 a of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively after concessions the only issue that remains for decision is whether the notices of deficiency issued by respondent for taxable years and were timely findings_of_fact some of the facts have been stipulated and are so found petitioners resided in california when they filed their petition 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure dollar amounts have been rounded to the nearest dollar 2respondent has conceded that his determinations of unreported income for and were overstated by dollar_figure and dollar_figure respectively petitioners concede that subject_to the foregoing adjustments they had unreported income for the years at issue in the amounts respondent determined the parties have stipulated that the sec_6662 penalty shall apply to of any underpayment resulting from the unreported income for each year at issue that petitioners have conceded petitioners have not specifically addressed in their petition in their pretrial memorandum or at trial respondent’s disallowance of dollar_figure of a casualty_loss deduction they claimed for we therefore deem petitioners to have conceded this issue see rule b 3the parties agree and we concur that the notice_of_deficiency for was timely insofar as an assessment for that year is concerned during the years at issue petitioner robert manashi owned of the stock of an s_corporation flight vehicles consulting inc fvc petitioners filed timely joint form sec_1040 u s individual_income_tax_return and mr manashi filed on fvc’s behalf as its president forms 1120s u s income_tax return for an s_corporation for and petitioners maintained three bank accounts during and a business account at wells fargo bank a personal account at union bank of california and a personal account at bank of america mr manashi deposited gross_receipts from fvc’s operations into all three accounts petitioners gave their accountant who prepared the aforementioned returns the bank statements from all three accounts but the accountant reported on fvc’s returns only the gross_receipts reflected in the deposits to the business account omitting the gross_receipts reflected in the deposits to the two personal accounts fvc reported gross_receipts or sales on line 1c of the forms 1120s that it filed for and of dollar_figure dollar_figure and dollar_figure and ordinary business income loss of dollar_figure dollar_figure and dollar_figure respectively for those same years petitioners reported the foregoing income loss amounts on schedules e supplemental income and loss as coming from fvc identifying it as an 4petitioners also filed a form 1040x amended u s individual_income_tax_return for s_corporation and providing its employer_identification_number the parties now agree that the gross_receipts reported on fvc’s and returns were understated by dollar_figure dollar_figure and dollar_figure respectively and that identical amounts were omitted from the income petitioners reported as schedule e income from fvc on their and returns the parties have further stipulated that these amounts omitted from petitioners’ and returns exceed of the gross_income reported on those returns during respondent’s examination of petitioners’ returns for the years at issue he issued subpoenas for petitioners’ bank records petitioners moved to quash those subpoenas and now concede that as a result the applicable_period of limitations within which respondent was required to issue any notice_of_deficiency was extended by days see sec_7609 respondent issued notices of deficiency to petitioners for the years at issue and petitioners timely petitioned for redetermination of the deficiencies opinion in general a notice_of_deficiency must be mailed within three years of the date the return is filed sec_6213 sec_6501 sec_6503 but the commissioner has six years to mail the notice if the gross_income omitted from the return exceed sec_25 of the amount of gross_income reported on the return sec_6501 however under former sec_6501 ii the omitted income for 5former sec_6501 applicable for the years at issue except as noted below states as follows ii in determining the amount omitted from gross_income there shall not be taken into account any amount which is omitted from gross_income stated in the return if such amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the secretary of the nature and amount of such item former sec_6501 redesignated from former sec_6501 see hiring incentives to restore employment act pub_l_no sec_513 sec_124 stat pincite was redesignated sec_6501 and amended by the surface transportation and veterans health care choice improvement act of act pub_l_no sec stat pincite to insert the parenthetical text below into clause iii as so redesignated iii in determining the amount omitted from gross_income other than in the case of an overstatement of unrecovered cost or other basis there shall not be taken into account any amount which is omitted from gross_income stated in the return if such amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the secretary of the nature and amount of such item sec_6501 was made effective for returns filed after date as well as for returns filed on or before that date if on that date the period for assessment under sec_6501 determined without regard to amendments made by sec of the act remained open act sec b stat pincite consequently sec_6501 could be interpreted to apply to one or more of the years at issue however since the newly added parenthetical--concerning overstatements of basis--has no bearing on the issues in this case we find it unnecessary to decide whether current sec_6501 rather than former sec_6501 applies to one or more of the years at issue in either case the result would be the same for convenience we will refer to former sec continued purposes of this calculation does not include the amount of any omitted income insofar as the taxpayer discloses the omitted amount in the return or in a statement attached to the return in a manner adequate to apprise the secretary of the nature and amount of such item the parties agree that the notices of deficiency for and were not mailed within three years of the returns’ filing dates but were mailed within six years of the filings once the tolling of the limitations periods on account of petitioners’ attempt to quash respondent’s subpoenas is taken into account they also agree that the amounts omitted from gross_income on petitioners’ returns for the foregoing years exceeded of the gross_income reported on those returns the issue for decision is whether petitioners adequately disclosed the omitted income for each year within the meaning of sec_6501 petitioners bear the burden of showing that their disclosures were adequate see 64_tc_460 whether disclosure is adequate for purposes of sec_6501 is a factual question 90_tc_702 the disclosure generally must appear on the face of the return or a statement attached to the return and be apparent to the elusive ‘reasonable man’ univ country continued e b ii as the applicable_provision for all years at issue club inc v commissioner t c pincite see also hines v commissioner tcmemo_1989_17 aff’d 893_f2d_1330 3d cir in certain circumstances when a taxpayer’s individual return references another return the other return must be examined in determining the adequacy of the disclosure for example when the individual return includes a reference to an s_corporation in which the taxpayers hold interests the corporate information_return on form 1120-s must be considered along with taxpayers’ individual returns in resolving the issue of adequate_disclosure 398_f2d_132 8th cir see also 144_tc_161 in determining whether adequate_disclosure has been made under sec_6501 we examine whether the return offered a clue regarding the existence nature and amount of the omitted income quick tr v commissioner 54_tc_1336 aff’d 444_f2d_90 8th cir for a disclosure to be adequate it must be sufficiently detailed to alert the commissioner and his agents as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one 88_tc_1020 see also heckman v commissioner tcmemo_2014_131 at aff’d 788_f3d_845 8th cir petitioners make two arguments in support of their position that there was adequate_disclosure of fvc’s gross_receipts income omitted from their and returns so that the omitted income would not be taken into account in determining whether their income omissions exceeded of the gross_income reported first relying on benderoff petitioners contend that we must consider fvc’s forms 1120s for and in determining whether the disclosure was adequate we agree with petitioners that it is appropriate to consider fvc’s returns as petitioners fully identified fvc as an s_corporation in which mr manashi held an interest on their individual returns however our agreement with petitioners stops there petitioners contend that adequate_disclosure occurred by virtue of the fact that fvc reported some amount of gross_receipts on its returns for each year in petitioners’ view respondent through internal data would have had knowledge of the amounts deposited into petitioners’ bank accounts and could have discovered that gross_receipts were erroneously reported for each year petitioners are mistaken simply put reporting some amount of gross_receipts offers no clue that other gross_receipts have been omitted nothing on fvc’s form_1120s for each year reasonably alerted respondent that gross_receipts had been underreported the clue must be on the face of the return respondent is not required to undertake further examination absent a clue that would inform a reasonable person second petitioners argue that forms were filed with respondent by the banks at which they maintained their personal and business accounts and those forms should have alerted respondent to the omitted income amounts on account of the significant discrepancies between fvc’s reported gross_receipts and the amounts deposited into those accounts for each year alternatively petitioners contend that fvc’s clients filed forms with respect to the payments those clients made to fvc and that those forms should have similarly alerted respondent to the omitted income there are no forms issued by petitioners’ banks or fvc’s clients in the record and certainly none attached to the returns filed by either petitioners or fvc thus any information from forms if they were in fact filed would not have been disclosed in the return or in a statement attached to the return as required by sec_6501 thus petitioners’ second argument is also unavailing we therefore hold that the six-year period of limitations provided in sec_6501 applies with respect to respondent’s assessments of deficiencies for petitioners’ and taxable years and that as a result the notices of deficiency for those years were timely to reflect the parties’ concessions decision will be entered under rule


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 fip b01 plr-148371-02 date date legend exchange cla sec_1 cla sec_2 a b c d e f g h dear -------------- ------------------------ --------------- --------------- ----- ------ ----- ---- ----- ---- ---- ----- this is in reply to a letter dated date and subsequent correspondence submitted by your authorized representative in accordance with revproc_2002_11 2002_1_cb_526 requesting a ruling that a cla sec_1 or cla sec_2 exchange market maker that functions as described below and satisfies the sec_1256 dealer qualification quotation requirements described below is a dealer_in_securities futures contracts sfcs within the meaning of ' g b of the internal_revenue_code revproc_2002_11 sets forth the procedures that an exchange must follow to obtain a ruling regarding whether certain persons trading on that exchange qualify as adealers in sfcs or options on such contracts for purposes of ' g b in addition revproc_2002_11 provides that after the issuance of a letter_ruling to an exchange it is expected that the irs will publish the same conclusion in a revenue_ruling that may then be relied upon by qualifying exchange members plr-148371-02 facts exchange has been designated by the commodity futures trading commission cftc as a contract market that is permitted to list sfcs as such exchange is a aqualified board or exchange within the meaning of ' g exchange has a market maker program under which exchange members may qualify as exchange market makers eligible for the market maker exclusion provided in exchange’s customer margin rules exchange market makers are obligated to provide liquidity for their specifically assigned sfc products that trade on exchange for this purpose an sfc product consists of contracts that may have varying maturities but that all relate to a particular underlying_security or a particular narrow-based index of securities a cla sec_1 or cla sec_2 exchange market maker must meet all of the following requirements be a member of exchange be registered as a floor trader or floor broker with the cftc or as a dealer with the securities_and_exchange_commission sec maintain records sufficient to prove compliance with exchange market maker requirements and the related regulations and rules of the cftc or sec as applicable including without limitation trading account statements and other financial records sufficient to detail activity and hold itself out as willing to buy and sell sfcs for its own account on a regular or continuous basis for an exchange market maker to fulfill the regular or continuous requirement in it must satisfy the following criteria as applicable for each of its assigned sfc products cla sec_1 market maker - the member provides continuous two-sided quotations throughout the trading day for all delivery months of all assigned sfc products where such assigned sfc products represent in the aggregate at least a meaningful proportion of the total trading volume on exchange except during unusual market conditions as determined by exchange such as a fast market in either an sfc product or a security underlying an sfc product at which time the member must use its best efforts to quote continuously and competitively and when the member provides quotations it quotes for a minimum of a sfc with a maximum bid ask spread of no more than the greater of dollar_figureb or c of the bid ask spread in the primary market for the security underlying each sfc product or cla sec_2 market maker - the member responds to at least d of the requests for plr-148371-02 quotation rfqs for all delivery months of all assigned sfc products where such assigned sfc products represent in the aggregate at least a meaningful proportion of the total trading volume on exchange except during unusual market conditions as determined by exchange such as a fast market in either an sfc product or a security underlying an sfc product at which times the member must use its best efforts to quote competitively and when the member responds to rfqs it quotes within e seconds for a minimum of a sfc with a maximum bid ask spread of no more than the greater of dollar_figureb or c of the bid ask spread in the primary market for the security underlying each sfc product for purposes of the preceding requirements for cla sec_1 and cla sec_2 market makers a meaningful proportion of the total trading volume on exchange means a minimum of f of the trading volume of sfcs traded on exchange during the calendar_quarter any exchange market maker that fails to comply with the exchange rules cftc rules or sec rules as applicable is subject_to disciplinary action in accordance with exchange rules sec_1256 dealer qualification cla sec_1 and cla sec_2 market makers seeking to qualify as a sec_1256 dealer under exchange’s market maker program must agree to meet the minimum quotation size requirements described below for all of their assigned sfc products that are specified for purposes of the market maker exclusion provided in exchange’s margin rules cla sec_1 and cla sec_2 market makers must provide continuous two-sided quotations or respond to requests for quotations in accordance with the applicable obligations set forth above by quoting a g contracts for each product not covered by b or c b e contracts for each product specified by the member to the extent such quotations are provided for delivery months other than the next two delivery months then trading and c a contract for any single stock futures_contract where the average market price for the underlying stock was dollar_figureh or higher for the preceding calendar month or for any narrow-based stock index futures_contract as defined by sec_1a of the commodity exchange act law sec_1256 defines the term aoptions dealer to mean any person registered with an appropriate national securities exchange as a market maker or plr-148371-02 specialist in listed options sec_1256 provides that a person shall be treated as a dealer in sfcs or options on such contracts if the secretary determines that such person performs with respect to such contracts or options as the case may be functions similar to the functions performed by an options_dealer sec_1256 further provides that such determination shall be made to the extent appropriate to carry out the purposes of this section the legislative_history for ' g states the following with respect to the determination process the determination of who is a dealer_in_securities futures contracts is to be made in a manner that is appropriate to carry out the purposes of the provision which generally is to provide comparable tax treatment between dealers in securities futures contracts on the one hand and dealers in equity options on the other although traders in securities futures contracts and options on such contracts may not have the same market-making obligations as market makers or specialists in equity options many traders are expected to perform analogous functions to such market makers or specialists by providing market liquidity for securities futures contracts and options even in the absence of a legal_obligation to do so accordingly the absence of market-making obligations is not inconsistent with a determination that a class of traders are dealers in securities futures contracts and options if the relevant factors including providing market liquidity for such contracts and options indicate that the market functions of the traders is comparable to that of equity options dealers h_r conf_rep no pincite conclusion it is determined that cla sec_1 and cla sec_2 market makers that function as described above and satisfy the sec_1256 dealer qualification quotation requirements described above perform functions similar to the functions performed by options dealers as defined in ' g a and that these exchange market makers are therefore dealers in sfcs within the meaning of ' g b this ruling is directed only to the taxpayer who requested it members of exchange may not rely upon its conclusion sec_6110 provides that it may not be used or cited as precedent except as expressed herein no opinion is expressed or implied concerning the tax consequences of any activities of exchange its members or any other parties having any connection to exchange in particular no opinion is expressed or implied plr-148371-02 regarding whether any particular sfc in the hands of an sfc dealer constitutes a dealer sfc under sec_1256 it is expected that a revenue_ruling will be issued that is substantially consistent with this letter_ruling that revenue_ruling will specify the effective date of any determination made under sec_1256 in the event that the revenue_ruling varies from this letter_ruling this letter_ruling will be treated as modified and superseded by the revenue_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to exchange's authorized representative sincerely yours ___________________________ patrick e white senior counsel branch office of associate chief_counsel financial institutions products enclosures copy of this letter sec_6110 copy


internal_revenue_service 4920dal eo mandatory review commerce street dallas tx number release date department of the treasury employer identification no person to contact employee id number tel fax date date form required to be filed org address tax years december 20xx and subsequent last day to file a petition with the united_states tax_court june 20xx legend org organization name xx date address address uil certified mail dear 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 are no longer recognized as exempt from federal_income_tax under sec_501 effective january 19xx for the following reason s you allowed a non exempt_organization to utilize your employee identification_number in order to report some of its revenue and expenses on your form_990 additionally you allowed donors to deduct charitable donations to a non exempt_purpose you impeded the irs in calculating the tax due and owing from donors and from the non exempt entity acts perpetuated by you have been interpreted as being in contrary to well-established federal public policy and thus in violation of internal_revenue_code sec_501 these willful and deliberate contributions to your organization are not deductible under 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 sec_7428 if you decide to contest this determination under the declaratory_judgment provisions of 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_letter was mailed to you contact the clerk of the appropriate 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 also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact your nearest advocate’s office in this case by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in 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 we will notify the appropriate state officials of this action as required by sec_6104 you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations attachments publication internal_revenue_service date org address department of the treasury causeway street tege room boston ma taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe 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 letter rev catalog number 34809f 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 if 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 sincerely robert stinson internal revenue_agent enclosures publication publication report of examination letter rev catalog number 34809f form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation issue xx date xyz state address address individual individual country country should the exempt status of the org under sec_501 of the internal_revenue_code irc as an organization described in sec_501 be revoked for all years beginning on january 19xx due to violations of federal_law facts a state of xyz certificate of incorporation was issued to the org on february 19xx according to this incorporation document the org is a not-for-profit corporation as defined in subparagraph a of sec_102 of the not-for- profit corporation laws in the state of xyz current state of xyz records indicate the corporation is still active the listed address of the org is address these records indicate that there is no registered agent the incorporator of the org is listed as incorporator the directors or officers of the org are not listed according to incorporation records the main purpose of forming the org is ‘to collect donations for the starving people of country it also states that the org will undertake assistance programs for the country people to address long term development needs including agricultural assistance water well drilling and training incorporator filed form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code in november 19xx some of the activities of the organization listed in the application included s n w p participate in fundraising events in the upstate xyz area arrange speakers to discuss country at area events collect clothes and medicine to ship to country seek sponsors to install new water pumping projects to provide safe drinking water to country villages based on records from the internal_revenue_service the org was issued a tax-exemption determination_letter under internal_revenue_code sec_501 in april 19xx the following information was extracted from the waiver of indictment plea agreement for incorporator a copy was submitted to the exempt_organization examinations division of the internal_revenue_service from the united_states attorney the northern district of xyz office incorporator attested to the following facts which were the basis of his plea agreement and which were presented to the u s attorney form 886-acrev department of the treasury p ry - internal_revenue_service page -1- schedule no or exhibit year period ended december 20xx form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country in november 19xx incorporator filed form_1023 on behalf of the org in order to establish tax- exempt status for the org the internal_revenue_service granted the org tax-exempt status in accordance to the internal_revenue_code sec_501 in april 19xx sometime in 19xx individual approached incorporator and explained that he was soliciting money for individuals in country using an organization called corporation individual further told incorporator that he was aware that incorporator controlled a 501_c_3_organization and that he wished incorporator to assist him individual told incorporator that he had not yet obtained tax-exempt status for corporation as a 501_c_3_organization but wanted to use the org as a surrogate incorporator agreed that he would allow individual to use the tax status of the org which would have the effect of disguising corporation from government scrutiny incorporator agreed amongst other things to list donations to and expenses of corporation as if they were the donations to and expenses of the org in doing so incorporator knew that he was reporting income and expenses that were not related to the charitable purposes for which the org was granted c status as they had been outlined in his 19xx form_1023 filed on the org’s behalf starting in 19xx corporation began using the employee identification_number of the org on its bank accounts and in 19xx corporation began using the employee identification_number of the org on its donation receipts some of these receipts also include letters which advise donors that their deductions are tax deductible and include the employee identification_number of the org this allowed donors to believe that their donations were being given to an authorized charity while ensuring that corporation’s mission in country was not disclosed to the united_states government from at least 19xx until 20xx incorporator filed annual forms returns of organization exempt from income_tax on behalf of the org with the internal_revenue_service bank records for the org indicate that the organization had annual deposits of approximately dollar_figure to dollar_figure from at least 19xx incorporator has included into the org’s revenue and expenses for the prior tax_year money that was reported to him by individual as corporation’s revenue and expenses in august 19xx incorporator reported to the irs that for the year 19xx the org had dollar_figure in revenue and dollar_figure in expenses in may 20xx incorporator reported to the irs that for the year 19xx the org had dollar_figure in revenues and dollar_figure in expenses in july 20xx incorporator reported form 886-a cev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country to the irs that for the year 20xx the org had in revenues and dollar_figure in expenses for food donation for the needy families incorporator knew the form_990 for the tax_year 20xx was false as bank records indicate the org had revenues and expenses of less than dollar_figure during this same period corporation had bank_deposits revenues of dollar_figure and sent dollar_figure to country from its banks in xyz corporation told its donors that these donations were to be used to buy food for needy people in country by agreeing to allow corporation to provide donors with the employee identification_number of a qualified sec_501 organization and by allowing corporation to report some but not all of its revenue and expenses on the org’s form_990 incorporator assisted individual in impeding the irs in calculating the tax due and owing from donors and from corporation and further assisted individual in keeping corporation ‘s violation of the country sanctions from being detected by the united_states government law all organizations seeking exemption under internal_revenue_code sec_501 must conform to certain fundamental legal principles applicable to all charitable organizations one of these basic charitable principles is that charitable organizations may not engage in behavior that is illegal or violates public policy the illegality doctrine derives from english charitable_trust law the legal foundation on which internal_revenue_code sec_501 was established under charitable_trust law trusts violating law or public policy cannot qualify for charitable status the law of charity provides no basis for weighing or evaluating the objective merits of specific activities carried on in furtherance of a charitable purpose if those activities are reasonably related to the accomplishment of the charitable purpose and are not illegal or contrary to public policy see restatement second of trusts sec_374 comment internal_revenue_code sec_501 allows organizations described in sub sec_501 to be exempt from taxation internal_revenue_code sec_501 exempts from federal_income_tax 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 only if 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 form 886-a cev department of the treasury - internal_revenue_service page -3- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection i and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office internal_revenue_code sec_6033 requires that except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_501_c_3_-1 of the income_tax regulations provides that an organization cannot be exempt under sec_501 operational_test that is the organization must be both organized and operated exclusively for charitable purposes of the code unless it meets both an organizational and in determining whether an organization meets the operational_test the issue is whether the particular activity undertaken by the organization is appropriately in furtherance of the organization's exempt_purpose not whether that particular activity in and of itself would be considered charitable moreover the fact that the activity reflects a particular viewpoint or opinion on a controversial issue does not preclude the organization from qualifying for exemption under sec_501 of the code see sec_1 c - d of the regulations sec_1_501_c_3_-1 requires 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 of the 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_501_c_3_-1 provides that 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 activities is not in furtherance of an exempt_purpose form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country schedule no or exhibit year period ended december 20xx sec_1_501_c_3_-1 provides that the operational_test is not satisfied where any part of the organization's earnings inure to the benefit of private shareholders or individuals and where the organization serves a private rather than a public interest sec_1_501_c_3_-1 provides that an organization may be exempt as an organization described in sec_501 if it is organized and operated exclusively for one or more of the following purposes a religious b charitable c scientific d testing for public safety e literary f educational or g prevention of cruelty to children or animals sec_1_501_c_3_-1gi provides that an organization is not organized or operated exclusively for one or more of the purposes specified in sec_501 unless it services a public rather than a private interest sec_1_501_c_3_-1 includes in the definition of charitable or charity the following a b c d e f relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organization designed to accomplish any of the above purposes or i ii to eliminate prejudice and discrimination iii to defend human and civil rights secured_by law or iv tocombat community deterioration and juvenile delinquency to lessen neighborhood tensions sec_1_501_c_3_-1 provides that educational as defined in sec_501 of the code includes the instruction or training of individuals for the purpose of improving or developing their capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community form 886-acev department of the treasury - internal_revenue_service page -5- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country therefore in making the determination of whether an organization's activities are consistent with exemption under sec_501 of the code the service will rely on a three-part test as stated in revrul_80_278 i r b accordingly the organization's activities will be considered permissible under sec_501 if the purpose of the organization is charitable the activities are not illegal contrary to a clearly defined and established public policy or in conflict with express statutory restrictions emphasis added and the activities are in furtherance of the organization's exempt_purpose and are reasonably related to the accomplishment of that purpose revrul_71_447 c b in interpreting sec_501 of the code concluded that an organization is not operated exclusively for charitable purposes if its activities are carried on in a manner that can be reasonably classified as contrary to well-established federal public policy revrul_59_95 c b concerns an exempt_organization that was requested to produce a financial statement and a statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in arlie foundation inc v united_states of america d d c f_supp the district_court upheld the revocation of arlie foundation’s tax-exempt status the district_court upheld the revocation because arlie foundation operated for non-exempt purposes and for private_inurement in dr murdock head the founder and executive director of afi was convicted in the eastern district of virginia of conspiracy to commit tax_fraud and to bribe public officials the fourth circuit reversed the conviction based on an improper jury instruction 641_f2d_174 4th cir dr head was retried and again convicted in the conviction was affirmed in 697_f2d_1200 4th cir cert_denied 462_us_1132 103_sct_3113 77_led_1367 following the criminal case the internal_revenue_service initiated an investigation of arlie foundation’s tax-exempt status for the years through at the conclusion of the investigation the internal_revenue_service determined that the arlie foundation did not operate exclusively for exempt purposes because it operated for the private benefit of dr head in the internal form 886-a rev department of the treasury - internal_revenue_service page -6- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country revenue service issued a notice_of_determination which revoked effective date arlie foundation’s tax-exempt status as a sec_501 c organization in 588_fsupp_693 the court had to determine if the exempt_organization operated exclusively for tax-exempt purposes in accordance to sec_501 that no part of its net_earnings inured to the benefit of any private individual and and if the revocation should be imposed retroactively with regard to the first requirement of sec_501 ie that an organization must be operated exclusively for an exempt_purpose the applicable regulations state as follows 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 activities is not in furtherance of an exempt_purpose based on similar court cases the court wrote that if the nonexempt activities of the plaintiff are more than incidental or insubstantial it is not entitled to continuing qualification as an exempt_organization the presence of a single noneducational purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly educational_purposes if there is present in an organization's operations a single noncharitable purpose substantial in nature though it may have other truly and important charitable purposes it is not entitled to be exempt the court examined the documents presented by freedom church and determined that the plaintiff did not operate exclusively for religious charitable or educational_purposes plaintiff has failed to provide any financial records to buttress its claims that it is organized primarily for exempt purposes under sec_501 moreover the united_states has presented evidence which has not been refuted that a substantial activity engaged in by plaintiff was the promotion of tax-avoidance schemes sec_501 clearly states that an organization must be operating exclusively for religious charitable educational or other exempt purposes tax_avoidance schemes do not qualify as other exempt purposes because more than an insubstantial part of its activities is not in furtherance of an exempt_purpose plaintiff has not met the operational_test therefore the court finds that plaintiff has failed to meet the first requirement of sec_501 that it be operated exclusively for one or more exempt purposes form 886-a ev department of the treasury - internal_revenue_service page -7- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org 20xx schedule no or exhibit year period ended december legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country the court also concluded that even if the plaintiff did meet its burden of proving that it is operated exclusively for an exempt_purpose plaintiff fails to meet the second requirement of sec_501 ie that its assets do not inure to the private benefit of private shareholders or individuals a 'private shareholder or individual' refer s to persons having a personal and private interest in the activities of the organization and includes the creator of the organization and his family the requirement that there be no private_inurement overlaps the requirement that an organization must operate exclusively for exempt purposes clearly if part of an organization's earnings inure to the benefit of private individuals the organization cannot be operating exclusively for exempt purposes the court was shown documents which substantiated that a total of dollar_figure was disbursed by check from two freedom church accounts to various debtors all personal in nature in the absence of any evidence submitted by plaintiff to explain how the funds in these church accounts were used for legitimate church purposes the court must conclude that the funds in these accounts inured to the founder’s personal benefit under any standard of proof plaintiff has not established that its earnings did not inure to private individuals as required under sec_501 of the code because plaintiff has failed to meet the requirements of sec_501 the court finds that it is not entitled to continuing qualification as an exempt_organization finally the court had to determine whether the revocation should be imposed retroactively title_26 code_of_federal_regulations sec_601_201 provides in pertinent part except in rare or unusual circumstances the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax_liability was directly involved in such ruling if i there has been no misstatement or omission of material facts ii the facts subsequently developed are not materially different from the facts on which the ruling was based iii there has been no change in the applicable law iv the ruling was originally issued with respect to a prospective or proposed transaction and v the taxpayer directly involved in the ruling acted in good_faith in reliance upon the ruling and the retroactive revocation would be to his detriment the court determined that the plaintiff does not meet all of the requirements set forth in this regulation thus it cannot avoid retroactive application of this revocation the facts upon which the revocation is based are materially different from the representations made in plaintiff's original application_for exemption upon which an exemption was granted in it was only after the irs granted a tax exemption to plaintiff pursuant to sec_501 that the irs found out that freedom church was actively promoting tax-avoidance methods and that its earnings were inuring to private individuals including its leaders clearly these facts as subsequently developed differ materially from the facts on which the original ruling was based form 886-acrev department of the treasury - internal_revenue_service page -8- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended december 20xx legend org organization name incorporator incorporator corporation corporation xx date xyz state address address individual individual country country accordingly the court sustained the retroactive application of the revocation of plaintiff's tax- exempt status government’s position the officers of the org had properly incorporated the organization in accordance to the state of xyz regulations however beginning from 19xx incorporator willfully and specifically violated internal_revenue_code sec_501 by agreeing to allow corporation to provide donors with the employee identification_number of a qualified sec_501 organization and he allowed corporation to report some but not all of its revenue and expenses on the org’s form_990 incorporator assisted individual in impeding the irs in calculating the tax due and owing from donors and from corporation and further assisted individual in keeping corporation ‘s violation of the country sanctions from being detected by the united_states government since an officer of the org intentionally and willfully perpetuated actions which are in violation of internal_revenue_code sec_501 the internal_revenue_service is proposing that the exempt status of the organization be revoked these willful and deliberate acts perpetuated by an officer of the organization have been interpreted as being in contrary to well-established federal public policy and thus in violation of internal_revenue_code sec_501 and cited as such in revrul_71_447 c b in consideration of all the previously reported illegalities which occurred during the operation of the org from 19xx to july 20xx and which were willfully and purposely incurred by an officer of the organization the internal_revenue_service has determined that the organization does not meet the three-part activities test as referenced in revrul_80_278 i r b and thus ineligible to be tax exempt under internal_revenue_code sec_501 taxpayer’s position incorporator has been contacted and does not dispute the facts which have been presented he has stated that the organization has been defunct since 20xx and will not appeal any proposed revocation conclusion due to the determination that the org has conducted activities that are in violation of internal_revenue_code sec_501 the internal_revenue_service is proposing that the tax exempt status of this organization be revoked for all years beginning on january 19xx form 886-a rev department of the treasury - 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