a department of the treasury internal_revenue_service washington d c nov commissioner tax_exempt_and_government_entities_division uniform issue list legend taxpayer a company l coo sis in letters dated date as supplemented by correspondence dated date and date your authorized representative requested a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a is a 61-year old widow who was employed as a retail clerk by company l taxpayer a retired from company l in i upon retirement company l closed taxpayer a’s account in its sec_401 plan plan x by issuing her shares of company l stock on a single stock certificate with a market_value of amount d which taxpayer a received on a taxpayer a called company l seeking advice and was erroneously told that no tax would be due until-she sold her stock taxpayer a was not aware of the 60-day rollover rule and was never consulted or advised to roll over the company l stock worth amount d into another account having no prior experience with stock certificates taxpayer a did not understand that the actual company l stock certificate she held represented a tangible investment she understood it to be a receipt or representation of her account and she thought her account was still invested in plan x relying on the advice of the company l representative taxpayer a placed the stock certificate in a safe deposit box aoe a based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount d because the failure to waive such requirement would be a hardship and against equity or good conscience with respect to your request to waive to day rollover requirement sec_402 of the code provides that except as otherwise provided in sec_402 any amount distributed out of an employees’ trust described in sec_401 that is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed in the manner provided under sec_72 of the code relating to annuities sec_402 of the code provides rules governing rollovers of amounts from exempt trusts to eligible retirement plans including iras sec_401 ay a of the code provides that a_trust shall not constitute a qualified_trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution- i elects to have such distribution paid directly to an eligible_retirement_plan and ii specifies the eligible_retirement_plan to which such distribution is to be paid in such form and at such time as the plan_administrator may prescribe such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible_retirement_plan so specified sec_401 of the code provides that for purposes of code sec_401 a the term eligible_retirement_plan has the meaning given such term by sec_402 with an exception not pertinent to this ruling_request thus a direct transfer defined in code sec_401 may be made into an ira sec_1_401_a_31_-1 of the income_tax regulations question and answer-5 provides in relevant part that a direct_rollover described in code sec_401 is a distribution and rollover of the eligible_rollover_distribution and not a transfer of assets and liabilities thus for example the consent and requirements of code sec_401 sec_411 and sec_417 apply to transactions described in code sec_401 code sec_402 provides that except as provided in subparagraph b paragraph shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed sec_402 of the code provides that the secretary may waive the 60-day poe ay requirement under sec_402 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information provided by taxpayer a demonstrates a failure on the part of of taxpayer a to satisfy the code sec_402 rollover requirements due to a lack of knowledge about stock certificates and her reliance on misleading advice from a company l representative taxpayer a called company l seeking advice and was told that no tax_liability would be incurred until she liquidated her stock taxpayer a has made no attempt to cash or sell the stock certificate and the certificate has been held in a safe deposit box pending the result of her request to the internal_revenue_service is granted a period of days from the issuance of this ruling letter to thus taxpayer a contribute amount d or any portion thereof to an ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contributions the contributed amounts will be considered rollover_contributions within the meaning of sec_402 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact a at ieee please address all correspondence to se t ep ra t3 ee ioe a copy of this letter has been sent to your authorized representative in accordance with a power of attomey on file in this office sincerely yours rances onanv sloary employee_plans technical group manager enclosures deleted copy of letter_ruling notice of intention to disclose


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 b1 plr-127256-07 date date --------------------------------------------------------------------------- legend x -------------------------------------------------- country date dear ---------------- --------------------- ------------------ this letter responds to the letter dated date and related correspondence written on behalf of x requesting a ruling that it be granted an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations in which to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes under sec_301_7701-3 facts based on the information submitted and representations made therein the relevant facts are as follows x was validly formed under country law on date x represents that as of date x was eligible to make an election under sec_301_7701-3 to be taxed as a corporation for federal tax purposes however the form_8832 entity classification election inadvertently was not timely filed after x realized that it had not timely filed an election to be treated as an association_taxable_as_a_corporation it requested relief under sec_301_9100-3 plr-127256-07 x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis sec_301_7701-3 provides that unless it elects otherwise a foreign sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with a single owner can elect either to be classified either as an association and thus a corporation under sec_301_7701-2 or as an entity separate from its owner eligible_entity is disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability or is an association if all members have limited_liability eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 an election can be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 to elect to be classified other than as provided in sec_301_7701-3 an sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions for time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election plr-127256-07 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in 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 the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this sincerely letter will be sent to your authorized representative enclosures copy of this letter copy for sec_6110 purposes cc william p o’shea associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 3-plr-109353-99 date date distributing controlled controlled date date date date date date date busine sec_1 busine sec_2 busine sec_3 busine sec_4 plr-109353-99 busine sec_5 pool pool pool shareholder shareholder shareholder a b c this letter responds to a request dated date for rulings about the federal_income_tax consequences of a proposed transaction we have received additional information in letters dated date date date date and date the information submitted for consideration is summarized below distributing is an accrual basis taxpayer that maintains its books on the basis of a fiscal_year ending date distributing elected to be taxed as an s_corporation effective date a date before date distributing has two classes of common_stock issued and outstanding voting common_stock and nonvoting common_stock distributing has a shares of voting common and b shares of nonvoting common_stock issued and outstanding distributing is engaged in the busine sec_1 distributing’s products are divided into four separate product lines businesses i the busine sec_2 ii the busine sec_3 iii the busine sec_4 and iv the busine sec_5 collectively the businesses distributing has consistently accounted for its inventories under the lifo_method since its fiscal_year ended on date distributing uses the dollar-value double- extension lifo_method distributing pools its inventories into three pools pool pool and pool plr-109353-99 shareholder and shareholder started distributing and the busine sec_2 in date the busine sec_3 in date the busine sec_4 in date and the busine sec_5 in date financial information has been received which indicates that the businesses each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years information has been received indicating the existence of substantial differences in the managerial philosophies of the businesses that have arisen among the shareholders in operating the businesses under a single corporate umbrella statements from distributing’s representatives and investment banker indicate that in order to resolve shareholder conflicts that have impeded and likely will continue to impede the growth and profitability of distributing distributing should be split up information has also been received indicating the need to obtain capital to grow and expand the busine sec_5 in order to raise capital to effect its plans controlled described below proposes to undertake an initial_public_offering ipo of approximately c percent of controlled’s total outstanding_stock distributing has concluded based upon documentation provided by its investment banker that an ipo will be significantly more effective if the busine sec_5 is separated from distributing to accomplish these objectives the taxpayer has proposed the following transaction the proposed transaction the assets and liabilities of the busine sec_2 will be transferred to controlled in exchange for all of its stock distributing will then distribute the stock of controlled to shareholder and the estate of shareholder in exchange for all of their stock in distributing following the distribution controlled will elect the dollar-value lifo_method of valuing its inventory following the distribution controlled will elect to be an s_corporation the assets and liabilities of the busine sec_5 will be transferred to controlled in exchange for all of its stock distributing will distribute all of the shares of controlled that it receives in the exchange pro_rata to its remaining shareholders following the distribution controlled will elect the dollar-value lifo_method of valuing its inventory following the distribution controlled will elect to be an s_corporation for the period of time prior to the ipo plr-109353-99 prior to the public sale of stock and while it is an s_corporation controlled will declare a dividend equal to the amount of the accumulated adjustment account aaa that is allocated to it under sec_1_1368-2 the dividend will be paid to the shareholders by the issuance of interest-bearing notes following the distribution controlled intends to sell approximately c percent of its stock to the public in an underwritten offering with respect to the proposed transaction the taxpayer has made the following representations a b c d e f the fair_market_value of the controlled stock to be received by shareholder and the estate of shareholder will be approximately equal to the fair_market_value of the distributing stock surrendered in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the years of financial information submitted on behalf of distributing is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted following the distributions distributing controlled and controlled will each continue the active_conduct of its business independently and with its separate employees except that following the distribution distributing will provide computer and data processing services to controlled and controlled pursuant to forthcoming agreements for an initial term of years subject_to renewal and distributing may perform disbursement functions for controlled the distribution of the stock of controlled is carried out for the following corporate business_purpose to resolve managerial and shareholder problems that have arisen this will enable a significant shareholder group to concentrate on a particular business the distribution of the controlled stock is motivated in whole or substantial part by this corporate business_purpose the distribution of the stock of controlled is carried out for the following corporate business purposes to raise additional capital needed to fund the expansion and operation of the business the proposed distribution of controlled creates a company operating in a single segment busine sec_5 which should enable controlled to raise capital in the ipo on a more cost effective basis the distribution of the controlled stock is motivated in whole plr-109353-99 or substantial part by this corporate business_purpose g h i j k l m n there is no noncorporate business_purpose a purpose of the transaction is not to facilitate personal shareholder planning distributing is an s_corporation within the meaning of sec_1361 controlled and controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution there is no plan or intention to revoke or otherwise terminate the s_corporation_election of either distributing or controlled controlled 2's s_corporation status will be terminated pursuant to the ipo there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of distributing controlled or controlled after the transaction except that the estate of shareholder will distribute his stock in controlled in accordance with his will there is no plan or intention by either distributing controlled or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 there is no plan or intention to liquidate distributing controlled or controlled to merge distributing controlled or controlled with any other corporation or to sell or otherwise dispose_of the assets of distributing controlled or controlled after the transaction except in the ordinary course of business the total adjusted bases and the fair_market_value of the assets transferred to controlled and controlled respectively by distributing each equals or exceeds the sum of the liabilities assumed by controlled and controlled respectively plus any liabilities to which the transferred assets are subject the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred none of the property transferred from distributing to controlled and controlled respectively is property with respect to which any investment_credit under sec_46 has been or will be claimed or with respect to which any investment_credit is required to be recaptured o no intercorporate debt will exist between any of distributing controlled and controlled at the time of or subsequent to the distribution of the controlled plr-109353-99 and controlled stock p q r payments made in connection with all continuing transactions if any between any of distributing controlled and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length neither distributing controlled nor controlled are investment companies as defined in sec_368 and iv the distributions are not part of a plan or a series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the combined voting power of all classes of stock of distributing controlled or controlled or stock possessing or more of the total value of all classes of stock of distributing controlled or controlled based solely on the information submitted and on the representations set forth above we hold as follows the transfer of the assets of the busine sec_2 to controlled in exchange for controlled stock and the assumption of related liabilities followed by the distribution of the controlled stock will be a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the transfer of the assets of the busine sec_2 to controlled in exchange for controlled stock and the assumption by controlled of related liabilities sec_361 and sec_357 no gain_or_loss will be recognized by controlled on its receipt of the assets of the busine sec_2 in exchange for controlled stock sec_1032 the basis of the assets to be received by controlled will be equal to the basis of such assets in the hands of distributing immediately before the transfer sec_362 the holding_period for each asset received by controlled will include the period during which such asset was held by distributing sec_1223 no gain_or_loss will be recognized by and no amount will be included in the income of shareholder or the estate of shareholder upon the receipt of the stock of controlled in exchange for all of their stock of distributing sec_355 plr-109353-99 the basis of the stock of controlled to shareholder and the estate of shareholder will be the same as the basis of their distributing stock exchanged therefor sec_358 the holding_period of the controlled stock received by shareholder and the estate of shareholder will include the holding_period of their distributing stock surrendered on the exchange provided that the distributing stock was held as a capital_asset by them on the date of the exchange sec_1223 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock to shareholder and the estate of shareholder sec_361 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 under sec_1_1368-2 the aaa of distributing will be allocated between distributing and controlled in a manner similar to the manner in which distributing will allocate its earnings_and_profits between itself and controlled under sec_1_312-10 the transfer of the assets of the busine sec_5 to controlled in exchange for controlled stock and the assumption of related liabilities followed by the distribution of the controlled stock will be a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the transfer of the assets of the busine sec_5 to controlled in exchange for controlled stock and the assumption by controlled of related liabilities sec_361 and sec_357 no gain_or_loss will be recognized by controlled on its receipt of the assets of the busine sec_5 in exchange for controlled stock sec_1032 the basis of the assets to be received by controlled will be equal to the basis of such assets in the hands of distributing immediately before the transfer sec_362 the holding_period for each asset received by controlled will include the period during which such asset was held by distributing sec_1223 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders upon the receipt of the stock of controlled from distributing sec_355 plr-109353-99 the aggregate basis of distributing and controlled stock in the hands of a distributing shareholder after the distribution will equal the aggregate basis of the distributing stock held immediately before the distribution allocated between the distributing stock and controlled stock in proportion to the relative fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c the holding_period of the controlled stock received by a distributing shareholder will include the holding_period of the distributing stock on which the distribution will be made provided that the distributing stock is held as a capital_asset by them on the date of the distribution sec_1223 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock to the shareholders sec_361 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 under sec_1_1368-2 the aaa of distributing will be allocated between distributing and controlled in a manner similar to the manner in which distributing will allocate its earnings_and_profits between itself and controlled under sec_1_312-10 provided that distributing immediately distributes the stock of controlled and controlled distributing’s momentary ownership of their stock will not cause either controlled or controlled to have an ineligible shareholder under sec_1361 therefore controlled and controlled are each eligible to make a timely election without the consent of distributing to be an s_corporation for their first taxable_year provided that controlled and controlled each satisfy the other requirements under sec_1361 neither controlled nor controlled will be subject_to sec_1374 of the tax_reform_act_of_1986 assuming controlled is eligible to be an s_corporation under sec_1361 and properly makes an election under sec_1362 controlled will remain an s_corporation until controlled 2's s_corporation_election terminates under sec_1362 controlled and controlled each may elect to use the lifo inventory_method for their initial taxable_year by timely filing an appropriate form_970 with its respective federal_income_tax return and otherwise complying with the requirements of sec_472 and the regulations thereunder whether or not controlled and controlled 2's applications for the adoption and use of the lifo inventory_method should be approved will be determined by the commissioner in plr-109353-99 connection with the examination of controlled and controlled 2’s federal_income_tax returns see sec_1_472-3 the busine sec_2 inventory transferred by taxpayer to controlled shall be treated by controlled as its opening_inventory for lifo purposes the busine sec_5 inventory transferred by taxpayer to controlled shall be treated by controlled as its opening_inventory for lifo purposes controlled and controlled each must determine the cost of its opening_inventory by the average_cost_method as provided by sec_472 distributing must compute its basis in the inventories transferred using a pro_rata vertical division of the base-year and subsequent yearly incremental costs in accordance with the procedures established in sec_1_472-8 see revrul_85_176 1985_2_cb_159 controlled and controlled must determine the total current-year cost of items making up a pool by use of one of the methods described in sec_1_472-8 through d 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 in particular no opinion is expressed as to the propriety of distributing’s lifo inventory_method the valuation of distributing’s inventory by distributing or the timeliness and validity of any past present or future elections under sec_472 by distributing controlled or controlled in addition we express no opinion as to the validity of distributing’s s_corporation_election whether controlled and controlled are eligible to elect s_corporation status or whether the elections will be valid under sec_1362 moreover we express no opinion as to the estate or gift_tax consequences of any of the transactions this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon facts and representations submitted in your request for a ruling the facts and representations were accompanied by a penalty of perjury statement that the taxpayer executed this office plr-109353-99 has not verified any of the facts and representations verification of the facts representations and other data may be required as part of a future audit of distributing controlled and controlled 2’s federal_income_tax returns sincerely yours assistant chief_counsel corporate by ken cohen senior technical reviewer branch


t c summary opinion united_states tax_court asif hafeez petitioner v commissioner of internal revenue respondent docket no 17006-09s filed date asif hafeez pro_se steven w ianacone for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax as well as a dollar_figure addition_to_tax under sec_6651 and a dollar_figure accuracy-related_penalty under sec_6662 the issues for decision are whether petitioner is entitled to certain deductions claimed on schedule c profit or loss from business whether petitioner is liable for the addition_to_tax under sec_6651 and whether petitioner is liable for an accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in new jersey at the time the petition was filed petitioner is a professional driver who worked as an independent_contractor for two different car service companies in new york city in petitioner worked as an independent_contractor for crestwood car and limousine services ltd 1respondent arrived at this amount by subtracting dollar_figure as tax_shown_on_the_return from dollar_figure as total_tax as determined by respondent after disallowing selected schedule c expenses in fact the return shows a tax due of dollar_figure respondent has not sought an increase in the deficiency thus we will treat it as a concession crestwood from january through august of and triline contracting triline from september through december of potential clients would contact the respective companies and contract for car services in and around the new york city area the car service would contact petitioner by telephone and provide an assignment petitioner was not permitted to pick up passengers without an assignment clients paid the car service a fare which varied because of distance duration waiting time stops and tolls and parking expenses_incurred during the trip petitioner was paid each week by the respective car service company the amount he received depended upon gross fares generated when petitioner first began working as a professional driver he rented or leased a vehicle from the car service company on date petitioner purchased a used lincoln town car town car for dollar_figure the town car was white and crestwood would permit only black vehicles to be used to carry passengers for the car service petitioner was unable to place the town car in service until approximately date after he had it painted black petitioner incurred costs for gasoline parking tolls and parking tickets with respect to the town car petitioner was required to wear a suit whenever he drove the town car for the car service company the car service company also required petitioner to clean and wash the vehicle regularly petitioner cleaned and washed his vehicle frequently as he understood that a clean vehicle would encourage repeat business and ultimately increase his income petitioner was also required to have a cellular telephone available so that the company could reach him to assign him jobs occasionally a client might use his cell phone petitioner hired an accountant to assist in the preparation of the return the schedule c and the schedule se self employment_tax petitioner filed his form_1040 u s individual_income_tax_return on date petitioner reported gross_income of dollar_figure and deducted expenses on his schedule c as follows car and truck expenses insurance rent or lease of vehicles repairs and maintenance supplies taxes and licenses travel other expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number on date respondent issued a notice_of_deficiency to petitioner disallowing the following claimed deductions for car and truck expenses of dollar_figure rent or lease of vehicle expenses of dollar_figure and other expenses which included the cost of car washes uniforms and dry cleaning and cellular telephone services of dollar_figure respondent also determined a late-filing addition_to_tax and an accuracy-related_penalty pursuant to sec_6651 and sec_6662 respectively discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 deductions are a matter of legislative grace 308_us_488 292_us_435 a taxpayer bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 welch v helvering supra wilson v commissioner tcmemo_2001_139 a taxpayer is required to maintain records sufficient to substantiate deductions claimed on his or her income_tax return sec_6001 sec_1_6001-1 e income_tax regs the fact that a taxpayer reports a deduction on the taxpayer’s income_tax return is not sufficient to substantiate the claimed deduction 71_tc_633 62_tc_834 rather an income_tax return is merely a statement of the taxpayer’s claim it is not presumed to be correct wilkinson v commissioner supra pincite roberts v commissioner supra pincite see also 28_tc_1034 a taxpayer’s income_tax return is a self-serving declaration that may not be accepted as proof for the claimed deduction or exclusion 7_tc_245 a taxpayer’s income_tax return is not self-proving as to the truth of its contents affd 175_f2d_500 2d cir pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner has neither alleged that sec_7491 applies nor established his compliance with the substantiation and recordkeeping requirements see sec_7491 and b petitioner therefore bears the burden_of_proof see rule a i schedule c deductions the taxpayer bears the burden of proving that he is entitled to the deductions claimed and this includes the burden of substantiation rule a 65_tc_87 affd per curiam 540_f2d_821 5th cir a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions sec_6001 sec_162 provides a deduction for certain business-related expenses in order to qualify for the deduction under sec_162 an item must be ‘paid or incurred during the taxable_year ’ be for ‘carrying on any trade_or_business ’ be an ‘expense ’ be a ‘necessary’ expense and be an ‘ordinary’ expense 403_us_345 deputy v du pont supra pincite to qualify as ordinary the expense must relate to a transaction of common or frequent occurrence in the type of business involved whether an expense is ordinary is determined by time place and circumstance welch v helvering supra pincite if a taxpayer establishes that he or she paid_or_incurred a deductible business_expense but does not establish the amount of the expense we may approximate the amount of the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir however for the cohan_rule to apply there must be sufficient evidence in the record to provide a basis for the estimate 85_tc_731 certain expenses may not be estimated because of the strict substantiation requirements of sec_274 see sec_280f 50_tc_823 affd per curiam 412_f2d_201 2d cir the expenses to which sec_274 applies include among other things expenses for listed_property eg automobile expenses cellular telephones computer equipment or any property of a type generally used for purposes of entertainment recreation or amusement and travel_expenses including meals_and_lodging while away from home sec_274 sec_280f to substantiate a deduction attributable to listed_property a taxpayer must maintain adequate_records or present corroborative evidence to show the following the amount of the expense the time and place of use of the listed_property and the business_purpose of the use sec_1_274-5t temporary income_tax regs fed reg date petitioner provided some documentation for the expenses we discuss each type of claimed expense in turn a rent or lease expenses petitioner claimed dollar_figure in rent or lease expenses this expense appears to relate to the town car purchased in december of petitioner used the town car in his capacity as a driver and petitioner provided the loan agreement and copies of canceled checks to substantiate that he incurred and paid the amount while the return identified the payments as rent or lease expenses the amount claimed represents the repayment of a loan to finance the purchase of the vehicle not a lease or rent of the vehicle thus petitioner is not entitled to a deduction for rental or lease expenses however this does not end the matter the purchase of the vehicle is properly characterized as the purchase of a capital_asset subject_to depreciation under sec_167 a taxpayer may be entitled to a depreciation deduction for exhaustion wear_and_tear of property used in a trade_or_business sec_167 503_us_79 automobiles are 5-year_property under sec_168 and thus should be depreciated over years sec_167 petitioner has provided the bill of sale for purchase of the vehicle which shows petitioner’s cost_basis in the vehicle as dollar_figure the applicable convention is the half-year_convention and the applicable method is the percent declining balance method sec_168 d we leave the calculation of the depreciation amount to the parties 2while there may have been an opportunity to expense the cost of the town car under sec_179 petitioner did not make such an election on his federal_income_tax return for and is therefore not entitled to the benefits of that section see visin v commissioner tcmemo_2003_246 affd 122_fedappx_363 9th cir see also sec_179 sec_1_179-5 income_tax regs b car and truck expense sec_1 in general sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business under that provision an employee or a self-employed_individual may deduct the cost of operating an automobile to the extent that it is used in a trade_or_business however under sec_262 no portion of the cost of operating an automobile that is attributable to personal_use is deductible ordinary commuting expenses are not deductible 681_f2d_1157 9th cir affg tcmemo_1981_407 a passenger_vehicle is listed_property under sec_280f subject_to strict substantiation under sec_274 the rule in cohan does not apply to expenses relating to listed_property which generally includes any passenger_automobile sec_274 sec_280f sanford v commissioner supra pincite seidel v commissioner tcmemo_2005_67 however the term passenger_automobile does not include any vehicle used by the taxpayer directly in the trade_or_business of transporting persons for compensation or hire sec_280f sec_1_280f-6 income_tax regs therefore the town car that petitioner purchased is not listed_property and the expenses related thereto are subject_to the cohan_rule gasoline petitioner claimed dollar_figure in gasoline expenses and submitted bank statements for the entire year with entries reflecting gasoline purchases the entries reflect debit and credit card purchases as well as expenditures made by check petitioner did not provide individual receipts whereby the court could verify the cost of gasoline that was purchased separate from any nondeductible personal items petitioner was required to purchase fuel for his vehicle in order to carry on his trade_or_business as a driver and despite his lack of complete records we found petitioner’s testimony to be credible and will allow him a portion of the amount claimed correcting for the inexactitude which is of his own making see cohan v commissioner f 2d pincite we therefore allow percent of the claimed fuel expenses for a total gasoline expense of dollar_figure parking and tolls petitioner also claimed a deduction for amounts expended for parking and tolls petitioner did not provide a log and did not provide receipts he did provide bank statements which show numerous charges for tolls petitioner claimed a deduction of dollar_figure which represented the cost of tolls to bring his vehicle into new york city for work each day while this amount might otherwise be a nondeductible commuting expense the nature of petitioner’s profession requires further analysis petitioner incurred the additional expense to transport the town car into new york city in order to carry on his trade_or_business as a professional driver we are satisfied that the daily toll to bring the town car into new york city is ordinary and necessary and thus allowable as an expense see fryer v commissioner tcmemo_1974_77 see also 413_us_838 petitioner claims he is entitled to a total of dollar_figure for parking and tolls petitioner arrived at this number by adding the following three amounts the daily toll into new york city the tolls he incurred with triline and twice the amount of tolls incurred with crestwood petitioner is entitled only to expenses_incurred and paid and is not entitled to claim twice that amount to correct a perceived unfairness the court is satisfied that he has shown the actual amount incurred we conclude therefore that petitioner is entitled to dollar_figure3 for tolls and parking town car painting expenses_incurred to maintain property used in a trade_or_business in efficient operating condition ordinarily are deductible see sec_162 jacks v commissioner t c memo 3this represents dollar_figure for tolls to get into new york city for work every day dollar_figure in tolls from january through date when petitioner worked for crestwood and dollar_figure in tolls from september through december of when petitioner worked for triline gilles frozen custard inc v commissioner tcmemo_1970_73 likewise the cost of repairs which neither materially add to the value of the property nor appreciably prolong its life but keep it in an ordinarily efficient operating condition may be deducted as an expense sec_1_162-4 income_tax regs see also sec_1_263_a_-1 income_tax regs on the other hand a capital_expenditure permanently improves property and increases its value sec_263 the well-established standard that we must use to evaluate a particular expenditure is as follows a repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition it does not add to the value of the property nor does it appreciably prolong its life it merely keeps the property in an operating condition over its probable useful_life for the uses for which it was acquired expenditures_for that purpose are distinguishable from those for replacements alterations improvements or additions which prolong the life of the property increase its value or make it adaptable to a different use ill merchs trust co v commissioner 4_bta_103 see also indopco inc v commissioner u s pincite as indicated petitioner purchased a white town car for use in his profession however crestwood required that all vehicles be black while the expenditure might be both an ordinary and necessary business expenditure it would appear that the painting added to the value of the vehicle and made it adaptable to a different use we conclude therefore that the cost of painting the town car is a capital_expenditure in the case of a capital_expenditure the capitalization_rules of sec_263 take precedence over the deduction rules of sec_162 thereby preventing capital expenditures from being deducted currently under sec_162 sec_161 418_us_1 petitioner has not provided a receipt for the exact amount of the cost of painting the vehicle but has provided credible testimony as to the expense therefore we allow him one-half of the claimed expense or dollar_figure which must be capitalized and depreciated over the life of the vehicle parking tickets petitioner also claimed dollar_figure for parking tickets as a business_expense such expenses are fines_or_penalties that are nondeductible even if related to business see sec_162 c other expenses on petitioner’s federal_income_tax return he claimed dollar_figure in other expenses comprising car washes uniforms and dry cleaning and cell phone expenses petitioner claimed dollar_figure in expenses for car washes the court is satisfied that the claimed car washes were an ordinary 4petitioner claimed dollar_figure in car wash expenses on his federal_income_tax return at trial he claimed the actual expense was dollar_figure petitioner explained that on average he paid dollar_figure per car wash and that he washed his car at least once a day the larger amount represents one car wash per day for days and necessary expense for a professional driver who relied on the appearance of his vehicle for repeat business petitioner provided bank records which show approximately weekly entries for car wash charges ranging from dollar_figure to approximately dollar_figure without other documentary_evidence to substantiate more frequent car washes we approximate that petitioner incurred car wash expenses about once per week at an average cost of dollar_figure therefore petitioner is entitled to a car wash business_expense of dollar_figure sec_162 permits a deduction for work_clothes or uniforms required as a condition_of_employment when the clothing is not suitable for general or personal wear and is not worn for general or personal purposes 30_tc_757 petitioner provided bank records and handwritten notations for clothing purchased in the type of clothing petitioner purchased for use as a professional driver was suitable for everyday wear see 74_tc_1266 petitioner’s clothing expenses are nondeductible personal expenses under sec_262 as are the expenses_incurred for laundering and drycleaning his clothing see boltinghouse v commissioner tcmemo_2007_324 petitioner claimed dollar_figure in expenses for cellular telephone service petitioner claimed to have paid approximately dollar_figure per month for unlimited calling and text messaging as required by the car service company petitioner did not offer any receipts bills or other documentary support for these expenses therefore petitioner has failed to meet the strict substantiation requirements of sec_274 and sec_280f for cellular telephone expenses respondent’s disallowance of cellular telephone expenses is sustained ii failure_to_file addition_to_tax sec_6651 imposes an addition_to_tax of percent per month of the amount of tax required to be shown on the return not to exceed percent for failure to timely file a return the addition_to_tax under sec_6651 is imposed unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect the record does not establish that petitioner’s failure to timely file his federal_income_tax return was due to reasonable_cause and not willful neglect thus petitioner is liable for the sec_6651 addition_to_tax sec_7491 provides that the commissioner has the burden of production in any court_proceeding with respect to liability for an addition_to_tax respondent has established that the tax_return for was not timely filed 6since we have allowed some deductions disallowed by respondent the amount of tax required to be shown on petitioner’s return will be different from the amount shown on the notice_of_deficiency and the addition_to_tax which i sec_25 percent of that amount will also differ we leave the recalculation to the parties’ rule_155_computations iii accuracy-related_penalty sec_6662 and b and imposes an accuracy- related penalty of percent on the portion of an underpayment attributable to negligence disregard of rules or regulations or a substantial_understatement_of_income_tax negligence includes any failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 a taxpayer may avoid the application of an accuracy-related_penalty by proving that he acted with reasonable_cause and in good_faith see sec_6664 see also 116_tc_438 sec_1_6664-4 income_tax regs we analyze whether a taxpayer acted with reasonable_cause and in good_faith by examining the relevant facts and circumstances and most importantly the extent to which the taxpayer attempted to assess his proper tax_liability see 85_tc_934 stubblefield v commissioner tcmemo_1996_537 sec_1_6664-4 income_tax regs in order for the reasonable_cause exception to apply the taxpayer must prove that he exercised ordinary business care and prudence as to the disputed item see 115_tc_43 affd 299_f3d_221 3d cir reliance upon the advice of a tax professional may establish reasonable_cause and good_faith for the purpose of avoiding liability for the sec_6662 penalty see 469_us_241 reliance on a tax professional is not an absolute defense but merely a factor to be considered 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 as a general_rule a taxpayer cannot shift the responsibility of filing an accurate return to a return preparer 88_tc_654 however we have held that under certain circumstances the taxpayer may avoid the imposition of a penalty if there was good_faith reliance by the taxpayer on the advice of a competent adviser 86_tc_492 affd 864_f2d_1521 10th cir the taxpayer claiming good_faith reliance on a competent adviser must demonstrate that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology associates p a v commissioner supra pincite the record does not provide a sufficient basis for the court to permit petitioner to avoid the imposition of the penalty petitioner has not established that he acted with reasonable_cause in attempting to assess his proper tax_liability nor has he established good_faith reliance on his preparer petitioner did not present to the court required_documentation to substantiate some of the claimed expense deductions petitioner did not assert that he maintained such records as required_by_law or that he provided such required records to his tax preparer the record is further void of any advice that the tax adviser provided to petitioner also on the basis of our findings eg tolls claimed petitioner clearly claimed deductions for amounts greater than the amounts actually expended for such items thus we conclude that petitioner did not act with reasonable_cause nor has he established that there was good_faith reliance on his tax adviser petitioner does not qualify for the reasonable_cause exception of sec_6664 therefore petitioner is liable for the accuracy-related_penalty pursuant to sec_6662 and b in an amount to be recalculated after computation of the deficiency to reflect the foregoing decision will be entered under rule


acknowledged significant advice may be disseminated acknowledged sca date linda hoffman cp ex cs m timothy l jones acting chief cc dom fi p form_8703 annual certification of a residential_rental_project your letter dated date concerning form_8703 was referred to this office to answer question on page sec_6652 provides that a penalty is due in each case of a failure to provide a certificate at the time prescribed in sec_142 sec_142 d0 permits the secretary to prescribe the time and manner for making the certification form_8703 and the instructions thereto were promulgated in response we believe that the best reading of sec_143 is that a penalty is due whenever form_8703 is not filed form_8703 is filed late and form_8703 is incomplete if we can be of any further assistance please feel free to call me on this is routine advice


internal_revenue_service number release date index number -------------------------- ------------------------------------------- ---------------------------- ---------------------------- legend x ----------------------------- ----------------------- 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-148920-05 date date ----------- -------------------------- d state dear --------------- correspondence submitted on behalf of x requesting relief under ' b of the internal_revenue_code this responds to your letter dated date and related facts x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a plr-148920-05 corporation s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to ' a or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under ' a effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under ' 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 d within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 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 the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely david r haglund david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n employer_identification_number number release date se t eo ra t1 date u i l numbers legend a b c n x dear ------------------ this is in response to x's request dated date for a ruling regarding the proposed termination of a charitable_remainder_unitrust x is a charitable_remainder_unitrust the trust described in sec_664 of the internal_revenue_code the code and a split-interest trust as defined in sec_4947 a is settlor of the trust with c a bank serving as trustee as lifetime beneficiaries the income beneficiaries a and his wife b are interested parties the trust was funded with shares of stock at the time of the funding a took a charitable_contribution_deduction under sec_170 of the code for contribution of the remainder_interest originally the trust agreement provided that the trust would pay the lesser_of i of the net fair_market_value of the trust assets or ii the trust income for the taxable_year any amount_paid under ii would include income for the year that exceeded of the net fair_market_value of the trust assets if and to the extent that the payments in prior years under ii were less than of the fair_market_value of the assets the trust was reformed by order of the district_court several years ago the trust agreement now provides that c the trustee shall pay annually to a the unitrust_amount of of the net fair_market_value of the assets following a’s death the unitrust_amount is to be paid to b for so long as she survives a upon the death of the last to die of a and b the assets are to be distributed to the qualified charitable organizations named in the trust agreement the remainder beneficiaries the trust represents that the remainder beneficiaries are all public_charities as described in sec_501 and sec_509 pursuant to a release executed by a a special_power_of_appointment granted to him in the trust agreement by which he could change the remainder beneficiaries was released the remainder beneficiaries are in need of financial assistance to carry out their charitable purposes consequently the parties agree that it would be in everyone’s best interest to terminate the trust and distribute the assets to all beneficiaries the trust agreement contains no provision for early termination of the trust the trust is construed under the law of the state of n x has presented an opinion from an n lawyer that when all of the beneficiaries of a_trust created for successive beneficiaries consent and none of them is under any legal incapacity the beneficiaries can compel the termination of a_trust before its natural expiration if its continuance is necessary to carry out a material purpose for its creation in the opinion of the attorney it is well established that modification including termination can come about through agreement of the settlor and all of the beneficiaries x submitted signed agreements from the settlor and all beneficiaries stating that the trust should terminate and distribute the remaining trust assets to the beneficiaries in accordance with the actuarial value assigned to each beneficiary’s interest in the trust x represents that upon termination c will calculate the lump sum distributions using the discount rate in effect under sec_7520 of the code on the date of termination and using the methodology under sec_1_664-4 of the income_tax regulations for valuing interests in charitable_remainder trusts x submitted statements signed under penalty of perjury by a b and doctors that have examined a and b that there are no conditions of which they are aware that would result in a shorter than normal life expectancy for a or b as set forth in the life expectancy tables at regulations sec_1_72-9 ruling requested the taxpayer requests a ruling that the proposed early termination of the trust will not result in a termination_tax pursuant to sec_507 and that such termination will not constitute an act of self-dealing under sec_4941 such that the disqualified persons as defined in sec_4946 will not be subject_to the taxes imposed under sec_4941 and b law sec_507 of the income_tax code code provides generally that except as provided in sec_507 the status of any organization as a private_foundation shall be terminated only if--- such organization notifies the secretary at such time and in such manner as the secretary may by regulations prescribe of its intent to accomplish such termination or a with respect to such organization there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter and b the secretary notifies such organization that by reason of subparagraph a such organization is liable for the tax imposed by subsection c and either such organization pays the tax imposed by subsection c or any portion not abated under subsection g or the entire amount of such tax is abated under subsection g sec_507 of the code imposes a tax on each organization whose private_foundation_status is voluntarily or involuntarily terminated under sec_507 sec_664 of the code exempts from income_tax charitable_remainder unitrusts which it defines as those from which a fixed percentage of the net fair_market_value of its assets is paid to at least one person not an organization described in sec_170 for a term of years after which the remainder_interest is transferred to an organization described in sec_170 sec_4941 of the code imposes an excise_tax on disqualified persons for each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code provides that the term self-dealing includes any direct or indirect a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person and e transfer to or the use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 of the code provides that the term disqualified_person with respect to a private_foundation includes a substantial_contributor to a private_foundation including the creator of a_trust a family_member of a substantial_contributor and a foundation_manager sec_4947 of the code provides generally that split-interest_trusts are subject_to the provisions of sec_507 sec_4941 and sec_4945 in the same manner as if such trusts were private_foundations but under sec_4947 not with respect to any amounts payable under the terms of such trusts to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 sec_53 a of the foundation and similar excise_tax regulations excise_tax regulations provides that for the purposes of sec_4941 only the term disqualified_person shall not include any organization which is described in sec_501 other than an organization described in sec_509 sec_53_4941_d_-1 of the excise_tax regulations provides that it is immaterial whether a transaction results in a benefit or a detriment to the private_foundation in determining whether the transaction is an act of self-dealing sec_53_4941_d_-2 of the excise_tax regulations provides that the fact that a disqualified_person received an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing sec_53_4947-1 of the excise_tax regulations provides that under sec_4947 sec_4941 does not apply to any amounts payable under the terms of a split- interest trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 with respect to the income_interest of any such beneficiary sec_53_4947-1 of the excise_tax regulations provides that the provisions of sec_507 of the code shall not apply to a_trust described in sec_4947 or by reason of any payment to a beneficiary that is directed by the terms of the governing instrument of the trust and is not discretionary with the trustee or in the case of a discretionary payment by reason of or following the expiration of the last remaining charitable interest in the trust sec_53_4947-1 of the excise_tax regulations sets forth the following relevant example example j creates a charitable_remainder_annuity_trust described in sec_664 under which s j's son receives dollar_figure per year for life remainder to be distributed outright to p an organization described in sec_501 j is allowed a deduction under sec_170 for the value of the remainder_interest placed in trust for the benefit of p and the provisions of sec_4947 apply to the trust at the death of s the trust will terminate and all assets will be distributed to p however such final distribution to p will not be considered a termination of the trust's private_foundation_status within the meaning of sec_507 revrul_2003_13 2003_4_cb_305 indicates that under sec_1_507-1 of the regulations a transfer of all of the assets of a private_foundation entity does not result in the termination of the transferor's private_foundation_status under sec_509 of the code unless the distribution is under sec_507 or the foundation voluntarily elects to terminate under sec_507 or an involuntary termination under sec_507 applies x’s request for a ruling involves two issues whether the early termination will constitute an act of self-dealing under sec_4941 and whether the early termination will result in a termination_tax pursuant to sec_507 as a crut under sec_664 of the code the trust is a split-interest trust described in sec_4947 and therefore subject_to sec_4941 which imposes an excise_tax on acts of self-dealing a and b are disqualified persons with respect to the trust under sec_4946 because a is the creator of the trust and a substantial_contributor and b is a’s spouse the tax on self-dealing applies to transfers to a disqualified_person of the assets of a split- interest trust except for amounts payable under the terms of such trust to income beneficiaries sec_4947 of the code state law provides for early termination under the facts presented however it does not settle the question of the proper allocation between the income and remainder beneficiaries a critical question is whether early termination may be expected to result in a greater allocation of the trust's assets to the income beneficiaries to the detriment of the charitable beneficiaries than a non-early termination the trust's proposed allocation method is reasonable if the income beneficiaries have no knowledge of medical conditions or other circumstances likely to result in a shorter life expectancy than that predicted by the actuarial_tables otherwise an early termination would tend to deprive the charitable beneficiaries of their benefit and would be inconsistent with the charitable deduction allowed to the donor of the trust we note that the trust termination is treated as a sale_or_exchange between the income and remainder beneficiaries resulting in a taxable transaction for the income beneficiaries however there is no act of self-dealing resulting from the sale_or_exchange between the beneficiaries as the charitable_remainder beneficiaries are public_charities and not private_foundations we conclude that the proposed termination of the trust will not constitute a direct or indirect act of self-dealing within the meaning of sec_4941 of the code because of all of the following circumstances state law allows the early termination all beneficiaries favor the early termination the trustees will use the regulations' formula for determining the present values of the income and remainder interests in a charitable_remainder_trust the income beneficiaries' physicians have conducted examinations of the income beneficiaries and stated under penalty of perjury that they find no medical conditions expected to result in shorter-than-average longevity under sec_1_72-9 the income beneficiaries have signed similar statements and the income beneficiaries are not disqualified persons with respect to any private_foundation charitable_remainder beneficiaries sec_507 of the code provides for the imposition of a termination_tax on certain private_foundation terminations described in sec_507 sec_507 of the code applies to the trust which is treated for certain purposes as a private_foundation pursuant to sec_4947 sec_507 does not apply however to payments to an income_beneficiary of a_trust that are considered payable under the terms of such trust and directed by the terms of the governing instrument of the trust and not discretionary with the trustee the payments here are equivalent to those made on such terms similar to sec_53_4947-1 example of the regulations the trust’s final lump sum payment to its charitable_remainder beneficiary organization will not be considered a termination under sec_507 of the trust’s private_foundation_status under sec_509 without a termination under sec_507 no termination_tax under sec_507 applies to the trust therefore we rule that the proposed early termination of the trust will not result in a termination_tax pursuant to sec_507 such termination will not constitute an act of self-dealing under sec_4941 and therefore the disqualified persons as defined in sec_4946 with respect to the trust will not be subject_to the taxes imposed under sec_4941 and b this ruling is directed only to x sec_6110 of the code provides that it may not be because this letter could help resolve future tax questions you should keep a copy of this except as we have ruled above we express no opinion as to the tax consequences of the transaction under the cited provisions of the code or under any other provisions of the code used or cited as precedent ruling in your permanent records telephone number are shown in the heading of this letter jane baniewicz manager exempt_organizations technical group if you have any questions about this ruling please contact the person whose name and sincerely


department of the treasury internal_revenue_service tax_exempt_and_government_entities_division jil 5o1 date taxpayer ide tification number form tax_year s ended certified mail - return receipt requested ih dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues ifa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking if we do not hear from you within days from the date of this letter we exempt status will process your case on the basis of the recommendations shown in the report of in that event you will be required to file examination and this letter will become final federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at oo socata eel if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number 34801v thank you for your cooperation enclosures publication publication form_6018 report of examination envelope sincerely o _r c johngon director eo examination letter catalog number 34801v oom bba year period ended explanation of items name of taxpayer issues whether an organization that receives more than an insubstantial amount of their income from non-member sources qualifies for exemption under sec_501 of the internal_revenue_code whether the receipts from the bingo and pull-tabs inured to the benefit of the fraternity members whether a membership_organization that is ptimarily engaged in providing a club for the social and recreational activities of its members can qualify code for exemption under sec_501 c of the internal revenue s- -_ was granted facts the’ __ exemption as a subordinate ‘under a group ruting the parent organization is an organization that was granted exemption under c _ sreinafter referredtoas activities jas established for social purposes for the young men that are attending _ imembers are involved in social activities entertainment leadership activities scholarship activities ras primarily formed to provide a social environment t and environmental activities and gaming activities for the members of the fraternity even though some of the activities are directed toward leadership activities scholarships or environmental cleanup activities the majority of their activities are directed toward social _ gaming activities bingo and pull-tab sales are being conducted with members of the general_public it was determined that for the year ending date approximately percent of receipts were from nonmembers it was also determined for the year ending date approximately percentof --s- eros receipts were from non-members see schedule a the net gaming receipts from the gaming activities are used for social activities t-shirts and parent’s weekend and some of the funds are used for leadership activities during the years of the examination it was determined that generally the gaming revenues were not used for charitable or educational activities gross law sec_501 of the internal_revenue_code provides exemption to clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the income_tax regulations relates to the exemption of social clubs reads in part as follows a the exemption pro ided by sec_501 for organizations described in sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other non-profitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified becausé‘it raises revenue from members through the use of club facilities or in connection with club activities form 886-a department of the treasury - internal_revenue_service page of form 886-a explanation of items year period ended name of taxpayer a _ _ _ ization which engages in business such as making its social and recreational b an o facilities available to the general_public is not organized an operated for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 a solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the organization in engaging in business and is not being operated exclusively for pleasure recreation or social purposes revproc_71_17 published in cumulative bulletin 1971_1_cb_683 sets forth guidelines for determining the effect of gross_receipts derived from nonmember use of a social organization's facilities on the organization's exemption under sec_501 and states in part as follows where an organization makes its facilities available to the general_public to a substantial degree the organization is not operated exclusively for pleasure recreation or other non- profitable purposes see revrul_60_324 c b 1960-big_number and revrul_69_219 c b section dollar_figure of revproc_71_17 describes the minimum gross_receipts standard and states in part as follows a significant factor reflecting the existence of a nonexempt purpose is the amount of gross_receipts derived from use of a organization's facilities by the general_public as an audit_standard this factor alone will not be relied upon by the service if annual gross_receipts from the general_public for such use is dollar_figure or less or if more than dollar_figure where gross_receipts from the general_public for such use is five percent or less of total gross_receipts of the organization prior to the enactment of public law an organization was required to be organized and operated exclusively for pleasure recreation and other non-profitable purposes the committee reports show that the wording change was intended to make it clear that social clubs may receive up to percent of their gross_receipts including investment_income from sources outside their membership without losing their exempt status within thi sec_35 percent limitation no more than percent of gross_receipts may be derived from non-member use of the organization’s facilities and or services earnings inures to the benefit of any private shareholder in addition the statute prohibits exemption under sec_501 if any part of the organization's net traditionally inurement has been found to be present where an organization derives income from non- revrul_58_589 published in cumulative bulletin page states in part as follows member sources and uses it to reduce the cost of providing services to members net_earnings may inure to members in such forms as an increase in services offered by the organization without a corresponding increase in dues or other fees paid for organization support or as an increase in the o distributable to members upon the dissolution of the organization ization's assets which would be form 886-a department of the treasury - internal_revenue_service page of form 886-a explanation of items year period ended name of taxpayer ee revrul_79_145 published in cumulative bulletin on page states that amounts paid to a social_club by visiting members of another social_club are amounts paid_by nonmembers even though both clubs are of like nature and the amounts paid are for goods facilities or services provided by such social_club under a reciprocal arrangement with such other social_club sec_501 of the internal_revenue_code grants exemption to civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 of the income_tax regulations describes the promotion of social welfare and states in part as follows an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements ‘ revrul_61_158 published in cumulative bulletin on page held that an organization which conducts weekly drawings among members of the general_public as its principal activity and uses the profits there from primarily for the payment of its general_expenses is not entitled to exemption from federal_income_tax as an organization described in sec_501 c of the internal_revenue_code of the ruling states in part as follows the instant organization by conducting a lottery on a weekly basis with the general_public and using almost the entire proceeds there from to pay general_expenses of the organization in the circumstances described above is not operating exclusively for the promotion of social welfare but is considered to be engaged in a business for profit accordingly it is held that the organization is not entitled to exemption from federal_income_tax under sec_501 of the code revrul_68_46 published in cumulative bulletin on page held that a war veterans’ organization does not qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code of where it is primarily engaged in renting a commercial building and operating a public banquet and meeting hall having bar and dining facilities kansas state law bingo tax law and regulations p and p define nonprofit charitable_organization and means any organization organized and operated for conferring direct benefits on the community at large and of which no part of the net earning inures to the benefit of any private_shareholder_or_individual member of such organization and has been determined by the administrator to be organized and operated as a bona_fide charitable_organization and which has been exempt from payment of federal_income_tax as provided by sec_501 sec_501 c i1 c c and c of the federal internal_revenue_code_of_1986 as amended or determined to be organized and operated as a bona_fide nonprofit charitable_organization by the administrator form 886-a department of the treasury internal_revenue_service page of -e explanation of items year period ended name of taxpayer -- during the examination it also determined that the gross_receipts that were attributed to nonmembers were conclusion approximately for the period ending date and for the period ending date nonmember income is substantial and is not within the or limited established under public law the net receipts from the gaming activities inure to the benefit of the members the members of the fraternity house expenses are reduced due to the fact the gross_receipts from the gaming activities are being used for non-charitable and non-educational house expenses sec_501 states that no part of the net_earnings shall inures to the benefit of any private_shareholder_or_individual qualify as a social_welfare_organization under c or any other tax-exempt section of the internal revenue yas formed primarily to promote the social activities of the fraternity therefore ‘ould not _ code the information shown above substantiates the fact thas revoked asof- internal_revenue_code or any other tax- exempt code section vecauise’ _ ‘s not operating within the meaning of sec_501 of the c tax exempt status should be form department of the treasury - internal_revenue_service