department of the treasury internal_revenue_service teige eo examinations commerce street mc dal dallas tx date fe tax_exempt_and_government_entities_division number release date person to contact identification_number telephone number in reply refer to last date for filing a petition with ‘the tax_court uil certified mail - return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 c of the internal_revenue_code irc to you dated september is hereby revoked and you are no longer exempt under sec_501 a as an organization described in sec_501 c of the irc effective january our favorable determination_letter our adverse determination was made for the following reasons you have not established that you are organized and operated exclusively for an exempt_purpose or that you have been engaged primarily in activities that accomplish one or more exempt purposes as required by sec_1_501_c_3_-1 and that no part of your net_earnings inure to the benefit of private shareholders or individuals you failed to provide information and documents to repeated reasonable requests to allow the internal_revenue_service to examine your receipts expenditures or activities and as such you failed to meet the operational requirements for a continued exemption under sec_501 of the code and sec_1 c -i a the code sec_6001 required by as contributions to your organization are no longer deductible under sec_170 of the code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states ‘tax court the united_states court of federal claims or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the tules for initiating suits for declaratory_judgment you may write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc u s district_court for the district of columbia constitution ave n w washington dc the taxpayer_advocate_service tas is an iridependent organization within the irs that can help protect your taxpayer rights we can offer you help if your tax problem is causing a hardship or you’ve tried but haven’t been able to resolve your ptoblem with the irs if you qualify for our assistance which is always free we will do everything possible to help you visit taxpayeradvocate irs gov or call we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours maria hooke director exempt_organizations examinations enclosures publication i9 department of the treasury irs tax_exempt_and_government_entities_division internal_revenue_service was wes oy taxpayer_identification_number exempt_organizations examinations form tax_year s ended person to contact id number contact numbers toll free long distance fax manager's name id number manager’s contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don’t hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you may also file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally letter catalog number 34809f for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn’t 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 internal_revenue_service office_of_the_taxpayer_advocate phone number for additional information 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 whaurse btloeka maria hooke director exempt_organizations examinations enclosures report of examination form 886-a form_6018 publication publication state website attachment letter catalog number 34809f form_886 a name of taxpayer explanation of items department of the ‘i'reasury - internal_revenue_service schedule no or exhibit year period ended december date of notice july 20xx issues whether continues to qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code and should be revoked due to failure to reply and produce their organizing documents financials and information pertaining to activities facts ddr applied for tax-exempt status by filing the form 1023-ez streamlined application_for recognition of exemption under sec_501 of the internal_revenue_code on september 20xx and was granted tax-exempt status as a c on september 20xx with an effective date of september 20xx an organization exempt under c needs to be organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and to foster national and amatuer sports competition the organization was selected for audit to ensure that the activities and operations align with their approved exempt status the organization failed to respond to the internal_revenue_service attempts to obtain information to perform an audit of form_990 for the tax_year december 20xx the form 1023-ez streamlined application_for recognition of exemption under sec_501 of the internal_revenue_code list the phone number of for the president of per the state of web-site it lists the organization as limited_partnership not a corporation association or trust thus it cannot be considered an exempt_organization under irc’ sec_501 and sec_501 e correspondence for the audit was as follows o o letter rev with attachments was mailed to the organization on august 20xx with a response date of september 20xx letter 3844-a rev with attachments was mailed certified to the organization on march 20xx with a response date of april 20xx article number tracking this was returned on may 20xx pincite am as unclaimed max per the united_states postal service usps form 886-a crev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december hold time expired letter 3844-a rev with attachments was mailed certified to the president’s home address on march 20xx with a response date of april per the united_states postal service 20xx article number usps tracking this was undeliverable at addressed on april 20xx and returned to irs by mistake a second letter 3844-a rev with attachments was mailed certified to the organization on march 20xx with a response date of april 20xx article number postal service usps tracking this was signed for and delivered on april 20xx per the united_states letter with copies of the form 1023-ez letter copy of 990-n and attachments was mailed to the organization on april 20xx with a respond date of may 20xx no response was received from the organization pertaining to this letter e telephone contact for the audit was as follows oo september 20xx received a called from the phone number listed on the form 1023-ez for the president of called back the number and spoke with the president of the organization and she asked how to respond to our inquiry and also asked for an extension to respond gave until october 20xx to respond and received voicemail october 20xx left a voice message with the president of the organization organization really is an llp and if so left a message as to three options they could pursue about not receiving a reply and to check if the november 20xx called the phone number listed on the form 1023-ez for the president of with the options they plan on pursuing to continue their exempt status and left another voice message to call me back november 20xx after no reply left another more stern message for them to reply so we could continue with their examination otherwise we would have to start procedures for revocation of their exempt status november 20xx president of the organization called back she had been out of town and asked for more time to respond with information said would be having surgery and would be out for a few weeks and so an form 886-acrev 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 schedule no or exhibit year period ended december extension of days was granted for the organization to provide us with the information we were requesting january 20xx no reply from the organization called and left a message using the presidents phone number asked to contact us as soon as possible january 20xx still no reply from organization left another message to send copy of their articles of incorporation to us february 20xx called and left stern message to call us or by end of week we would start procedures for revocation of their exempt status march 20xx called president at her phone number without answer did not leave a voice message but instead prepared the letter 3844-a with idr may 20xx after receiving letter with attachments back as undeliverable attempted to call the organization and left one more message asking to respond prior to starting revocation process o o o o o law sec_501 an organization described in subsection c or d or sec_401 shall be exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 sec_501 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_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 h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_511 of the internal_revenue_code imposes a tax at corporate rates under sec_11 on the unrelated_business_taxable_income of certain tax-exempt organizations department of the treasury - internal_revenue_service form 886-a crev page -3- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december sec_6001 of the code provides that every person liable for any_tax imposed by this title or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title sec_6033 of the code provides 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 treasury regulations regulation c -1 in order to be exempt under sec_501 the organization must be both organized and operated exclusively for one or more of the purposes specified in the section religious charitable scientific testing for public safety literary or educational regulation sec_1_501_c_3_-1 of the regulations states 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 regulation c -1 c of the regulations provides that an organization will not be regarded as operated exclusively for one or more exempt purposes described in sec_501 of the code if more than an insubstantial part of its activities is not in furtherance of a c purpose accordingly the organization does not qualify for exemption under sec_501 of the code regulation sec_1_6001-1 of the code provides that such permanent books_and_records as are required by paragraph a of this section with respect to the tax imposed by sec_511 on unrelated_business_income of certain exempt_organizations every organization exempt from tax under sec_501 shall keep such permanent books of account or records including inventories as are sufficient to show specifically the items of gross_income receipts and disbursements such organizations shall also keep such books_and_records as are required to substantiate the information required by sec_6033 see sec_6033 and sec_1_6033-1 through form 886-a ev 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 schedule no or exhibit year period ended december regulation sec_1_6001-1 of the code provides that the books_or_records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law regulation sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 regulation sec_1_61-1 of the regulations provides that gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services income may be realized therefore in the form of services meals accommodations stock or other_property as well as in cash revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and 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 organizations position the organization's position is unknown at this time due to failure to respond with any of the requested information governments position based on the above facts the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in sec_501 if an organization fails to meet either the organizational_test or the operational_test it is not exempt in accordance with the above-cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and form 886-a crev department of the treasury - internal_revenue_service page -5- form_886 a name of taxpayer explanation of items department of the ‘i'reasury - internal_revenue_service schedule no or exhibit year period ended december the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax sec_1_6033-1 of the regulations specifically state that exempt_organizations shall submit additional information for the purpose on enabling the internal_revenue_service to inquire further into its exempt status using the rationale that was developed in revrul_59_95 the organization's failure to provide requested information should result in the termination of exempt status conclusion based on the foregoing reasons the organization does not qualify for exemption under sec_501 and its tax exempt status should be revoked it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code accordingly the organization's exempt status is revoked effective january 20xx form_1120 returns should be filed for the tax periods after january 20xx department of the treasury - internal_revenue_service form 886-acrev page -6-


internal_revenue_service department of the we sec_3s significant index no washington dc third party contacts participants i corrtnct drarnan- telephone number tn reference to t ep ra t a1 date jun in re this letter constitutes notice that with respect to the above-named defined benefit pension_plan we have granted a conditional waiver of the minimum_funding_standard for the plan_year ending date we have also modified our prior ruling letter dated date this conditional waiver for the plan_year ended date has been granted in accordance with sec_412 of the internal_revenue_code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the waived amount is the contribution which would otherwise be required to reduce the balance in the funding_standard_account to zero after the payment of amounts required under sec_412 for a previous waiver as of the end of the plan_year for which this conditional waiver has been granted the information furnished indicates that the employer had a net_loss for its fiscal_year ended date and that it had net profits for its fiscal years ended date and however the employer had a net_loss for the nine- month period ended date also net_worth and working_capital were negative for this period moreover the employer's cash_flow was not sufficient both to meet routine operating_expenses such as payroll and to contribute the minimum_funding requirement the employer states that its business is cyclical and that the end of this temporary downturn is imminent to facilitate its recovery the employer has effected a price increase for its products and reduced staff medical_benefit costs it has also reduced inventory and reduced ay the employer expects cash_flow and its general financial position to improve as these measures take effect but the prospects for recovery are still uncertain also as of date the value of the plan’s assets was equal to just of the plan's current_liability therefore the waiver is subject_to the following conditions the contributions required to satisfy the minimum_funding_standard taking into account this waiver for the plan years ended date and are to be timely made as defined in code sec_412 without a waiver being granted for either of these plan years the quarterly contributions described in code sec_412 are to be made on or before the due dates beginning with the payment due_date and not later than days from the date of this letter the employer is to provide a security_interest to the plan for the amount of the waiver that is satisfactory to the pension_benefit_guaranty_corporation if any of these conditions is not satisfied the waiver is retroactively null and void you agreed to these conditions in a letter sent by your authorized representative dated date your attention is called to code sec_412 and erisa sec_304 which describe the consequences which would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized this letter also modifies our ruling letter dated date granting a conditional waiver for the plan_year under the terms of that letter the waiver was subject_to three conditions the employer did not satisfy condition and condition of the date ruling letter accordingly our letter of date is modified such that condition and condition read as follows the contributions required to satisfy the minimum_funding_standard taking into account this waiver for the plan years ended date and are to be timely made as defined in code sec_412 without a waiver being granted for either of these plan years the quarterly contributions described in code sec_412 are to be made on or before the due dates beginning with the payment due_date excluding the payments due_date and date when filing form_5500 for the plan_year ended date the date of this letter should be entered on schedule b actuarial information a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney form on file with this case a copy of this letter should also be sent to the enrolled_actuary for the plan we have sent a copy of this letter to the employee_plans classification manager in sincerely carol d gold employee_plans tax_exempt_and_government_entities_division vector


tcmemo_2011_231 united_states tax_court concert staging services inc petitioner v commissioner of internal revenue respondent docket no 3050-09l filed date neil deininger and amy g hall for petitioner william f castor for respondent memorandum opinion laro judge petitioner petitioned the court under sec_6330 to review the determination of respondent’s office of appeals appeals sustaining a proposed levy upon petitioner’s property to collect dollar_figure of employment_taxes for the taxable periods ended date date and date and unemployment taxes for the issues for decision are whether petitioner is entitled to relief from additions to tax under sec_6651 and penalties under sec_6656 because of reasonable_cause we hold it is not whether appeals abused its discretion in denying petitioner’s request to reallocate prior payments and deposits from the non- trust-fund portion to the trust fund portion of petitioner’s employment_tax liabilities we hold it did not whether appeals abused its discretion in denying petitioner’s request for a face-to-face collection_due_process cdp hearing in little rock arkansas little rock we hold it did not whether appeals abused its discretion in not granting petitioner a two- part hearing to separately discuss the issue of respondent’s allocation of petitioner’s payments to the non-trust-fund portion of tax_liabilities and the issue of petitioner’s proposed collection alternatives we hold it did not 1unless otherwise indicated section references are to the applicable version of the internal_revenue_code code and rule references are to the tax_court rules_of_practice and procedure some dollar amounts are rounded 2we deem petitioner to have conceded issues raised in the petition but not addressed on brief see 127_tc_118 n affd 544_f3d_471 2d cir 123_tc_64 background the parties submitted this case to the court for decision without trial see rule the stipulation of facts and the attached exhibits are incorporated herein by this reference the stipulated facts are found accordingly when the petition was filed petitioner was an arkansas corporation with its principal_place_of_business in little rock petitioner operated as a stage production company from the early 1980s until date michael pinner mr pinner was petitioner’s sole shareholder and corporate officer at all relevant times petitioner filed form sec_941 employer’s quarterly federal tax_return for the taxable periods ended date date and date collectively employment_tax returns petitioner also filed form_940 employer’s annual federal unemployment futa_tax return for unemployment tax_return petitioner failed to pay all of the taxes reported on its employment_tax returns and unemployment tax_return collectively unpaid tax_liabilities according to form_4340 certificate of assessments payments and other specified matters petitioner entered into an installment_agreement with respondent in connection with petitioner’s unpaid tax_liabilities on date on date respondent issued to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing notifying petitioner that respondent proposed to levy upon petitioner’s property to collect the following tax_liabilities additional tax period unpaid amount penalty1 interest form_941 dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number 1we understand respondent’s reference to additional penalty to relate to the addition_to_tax under sec_6651 and penalties under sec_6656 on date petitioner filed with appeals a form request for a collection_due_process or equivalent_hearing the request proposed an installment_agreement or offer-in-compromise as collection alternatives to respondent’s proposed levy petitioner also requested in an attachment to form that the additions to tax and penalties be abated because of reasonable_cause petitioner also contended that respondent overstated the sec_6656 penalty for the quarter ended date petitioner further asserted that respondent erred in failing to apply payments and deposits made by petitioner or mr pinner to the trust fund portion of taxes due on petitioner’s employment_tax returns trust_fund_taxes 3the trust_fund_taxes refer to taxes petitioner was required to withhold from the wages of its employees and to hold in trust continued by letter dated date petitioner requested a face- to-face cdp hearing in little rock on date petitioner faxed to respondent form 433-b collection information statement for businesses signed by mr pinner on the form 433-b mr pinner reported that petitioner was out of business but owned real_property mr pinner reported that the property’s value was dollar_figure and that it was subject_to a dollar_figure encumbrance petitioner did not attach supporting documentation regarding the encumbrance though the form 433-b instructed petitioner to do so the form 433-b also reported that a fire had destroyed a building and its contents but that petitioner still owned misc ellaneous equipment scattered around the country of uncertain value by letter dated date a settlement officer with appeals settlement officer notified petitioner that a cdp hearing had been scheduled by telephone for date the letter stated that the settlement officer could consider collection alternatives only if petitioner submitted a completed form 433-b with supporting documentation documentation supporting petitioner’s claims as stated in form and continued for the united_states see sec_7501 132_tc_301 copies of mr pinner’s and individual federal_income_tax returns on date petitioner resubmitted a copy of the previously filed form 433-b to appeals without supporting documentation petitioner also submitted a memorandum in support of its position memorandum the memorandum stated that petitioner was out of business and that petitioner’s main concern was whether payments and deposits had been properly applied to the trust fund portion of petitioner’s employment_tax liabilities which was borne by mr pinner as petitioner’s sole responsible_officer the memorandum also claimed that certain payments respondent allocated to the non-trust-fund portion of employment_taxes due for the quarter ended date date quarter should be reallocated to the trust fund portion of petitioner’s unpaid tax_liabilities finally the memorandum stated that the internal_revenue_service irs did not prepare a 4mr pinner did not file his individual federal_income_tax return until date as of date mr pinner had not filed his individual federal_income_tax return the record is not clear whether mr pinner submitted his income_tax returns to appeals 5the commissioner may collect unpaid trust_fund_taxes from an officer_or_employee within a company who is under a duty to collect and pay over trust_fund_taxes see sec_6671 and b this is commonly known as the trust fund recovery penalty tfrp the individuals who are liable for the tfrp are referred to as responsible persons mason v commissioner supra pincite the tfrp assessed against a responsible_person is separate from the employer’s responsibility for the unpaid taxes sec_6672 mason v commissioner supra pincite binding form 433-d installment_agreement formalizing petitioner’s installment_agreement with terms permitting respondent to apply payments in the government’s best interest attached to the memorandum were copies of checks from petitioner’s bank account totaling dollar_figure and checks totaling dollar_figure from mr pinner’s personal bank account all of the checks bore the notation trust fund only on date the settlement officer conducted a cdp hearing with petitioner’s counsel by telephone the settlement officer stated that a face-to-face hearing could be held in oklahoma city oklahoma oklahoma city but petitioner’s counsel refused that invitation next the settlement officer discussed respondent’s application of petitioner’s federal tax deposits and payments to the trust fund and non-trust-fund portions of petitioner’s unpaid tax_liabilities the settlement officer stated that mr pinner’s tfrp was not properly at issue because mr pinner had received a prior opportunity to appeal a cdp_notice with respect to the tfrp in a letter dated date petitioner’s counsel contended that contrary to respondent’s assertion neither petitioner’s counsel nor petitioner signed or received form 433-d sec_301_6159-1 proced admin regs permits the commissioner to require any installment_agreement entered into by the taxpayer and the irs to include terms protecting the interests of the government the terms of form 433-d state that the irs will apply all payments on this agreement in the best interest of the united_states that permitted respondent to apply payments in the government’s best interest the letter stated that petitioner requested an installment_agreement on or about date and soon thereafter petitioner and petitioner’s counsel received a letter approval of request to pay taxes in installments respondent sent petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination sustaining respondent’s proposed levy on date the notice_of_determination stated that all payments made toward the unpaid tax_liabilities had been applied towards petitioner’s outstanding liability and that petitioner’s challenge to the application of payments between the trust fund and non-trust-fund portion was immaterial to the amount of tax owed the notice_of_determination further stated that appeals did not have jurisdiction to review whether payments were misapplied to the date quarter because that quarter was paid in full and not subject_to the proposed levy the notice_of_determination conceded that respondent had overstated the sec_6656 penalty for the quarter ended date by dollar_figure the notice_of_determination rejected petitioner’s proposed collection alternatives on account of petitioner’s failure to produce supporting documentation and stated that petitioner is not entitled to abatement of additions to tax and penalties because of the absence of reasonable_cause petitioner petitioned the court in response to the notice_of_determination discussion under sec_6331 the commissioner is authorized to levy upon the property or property rights of a taxpayer who fails to make payment for taxes due within days after notice_and_demand for payment at least days before a levy is made the commissioner must notify the taxpayer in writing of the opportunity to appeal the proposed levy at a cdp hearing held by appeals see sec_6330 b at the hearing the taxpayer may raise any relevant issue as to the propriety of the proposed levy including spousal defenses challenges to the collection action and offers of collection alternatives sec_6330 see also 114_tc_604 the taxpayer may also challenge the existence or amount of the underlying tax_liability if the taxpayer did not receive a notice_of_deficiency or did not otherwise have an opportunity to dispute the liability sec_6330 a taxpayer may petition the court under sec_6330 to review appeals’ determination where the validity of the tax_liability is properly at issue we review appeals’ determination de novo sego v commissioner supra pincite 114_tc_176 where the validity of the tax_liability is not properly at issue we review appeals’ determination for abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite an abuse_of_discretion occurs when appeals’ determination is arbitrary capricious or without sound basis in fact or law see 125_tc_301 affd 469_f3d_27 1st cir 125_tc_14 we first address petitioner’s claim_for_abatement of additions to tax under sec_6651 and penalties under sec_6656 i liability under sec_6651 and sec_6656 where a taxpayer fails to timely pay tax shown on a return sec_6651 imposes an addition_to_tax equal to percent of the required tax payment per month not to exceed percent in the aggregate sec_6656 similarly imposes a penalty on a taxpayer who fails to make any requisite federal tax deposits by the date prescribed see also sec_6656 additions to tax under sec_6651 and penalties under sec_6656 may be abated where a taxpayer proves that the failure to pay was due to reasonable_cause and not willful neglect see sec_6651 sec_6656 see also sec_301 c proced admin regs petitioner does not dispute that it failed to pay the unpaid tax_liabilities but claims that these additions to tax and penalties should be abated for reasonable_cause we disagree a taxpayer may challenge the commissioner’s determination of the underlying tax_liability at a cdp hearing only if the taxpayer did not receive a notice_of_deficiency or have any prior opportunity to dispute the tax_liability sec_6330 the underlying tax_liability is any amount owed by a taxpayer including the deficiency additions to tax and statutory interest see 115_tc_329 mcnair eye ctr inc v commissioner tcmemo_2010_ the record does not establish and respondent does not contend that petitioner received a notice_of_deficiency or that petitioner had a prior opportunity to dispute the additions to tax or penalties accordingly we review de novo petitioner’s entitlement to an abatement of the penalties and additions as determined by respondent see 118_tc_22 respondent bears the burden of producing evidence that the imposition of additions to tax and penalties is appropriate see sec_7491 see also 116_tc_438 the parties agree that petitioner failed to timely make tax_payments and federal tax deposits and on that basis we conclude that respondent has carried his burden petitioner thus bears the burden of proving that respondent’s determination is inappropriate because the failure to pay was due to reasonable_cause 469_us_241 see also higbee v commissioner supra pincite reasonable_cause exists if petitioner can establish that it through mr pinner exercised ordinary business care and prudence and was nevertheless either unable to pay the tax or would suffer an undue_hardship if it paid on the due_date sec_301_6651-1 proced amin regs courts have characterized this as a heavy burden see eg united_states v boyle supra pincite 90_f3d_1190 6th cir 860_f2d_1235 5th cir affg tcmemo_1987_391 the determination of whether a taxpayer exercised ordinary business care and prudence is based on all the facts and circumstances of the taxpayer’s financial situation including the amount and nature of the taxpayer’s expenditures in light of the income sec_301_6651-1 proced admin regs a heightened standard for reasonable_cause applies when trust_fund_taxes are at issue see sec_301_6651-1 proced admin regs noting by way of 7we note that regulations under sec_6656 describe reasonable_cause only as to first-time depositors see sec_301_6656-1 proced admin regs however we have often looked to sec_6651 and regulations thereunder for guidance in determining reasonable_cause under sec_6656 as we have found the two sections to be analogous see eg 121_tc_89 affd 425_f3d_1203 9th cir custom stairs trim ltd v commissioner tcmemo_2011_155 example that what would ordinarily be considered reasonable_cause might not be considered as such when trust_fund_taxes are at issue see also mcnair eye ctr inc v commissioner supra petitioner argues that it has reasonable_cause for failure to pay its taxes because it lacked sufficient funds to both satisfy its tax_liabilities and remain in operation in a statement he forwarded to appeals requesting abatement of penalties mr pinner claimed that petitioner’s business began to suffer after the date attacks at the world trade center where it was staging a series of events mr pinner stated that as a result of the attacks petitioner lost staging structures and equipment and incurred significantly higher insurance rates that hurt its business mr pinner also alleged that petitioner subsequently reduced personnel and business_expenses and mr pinner sold his houseboat and took out a second mortgage on his colorado ranch in order to provide additional funding for petitioner we are not persuaded that these events even if true establish that petitioner exercised ordinary business care and prudence or that it was unable to pay or would suffer undue_hardship if required to pay on the due_date petitioner has not produced evidence to support the claim that mr pinner sold his houseboat and took out a second mortgage in order to raise additional funds for petitioner nor has 8mr pinner also claimed that petitioner lost all of its continued petitioner offered evidence to support its financial status at the time the taxes were due as this case was submitted for decision without trial pursuant to rule we have no occasion to observe mr pinner making these self-serving statements especially given the lack of corroborating evidence in support of mr pinner’s statements we are simply unwilling to credit the claim that petitioner exercised ordinary business care and prudence see watts v commissioner tcmemo_2009_103 we therefore sustain respondent’s determination that petitioner is liable for additions to tax under sec_6651 and penalties under sec_6656 ii allocations of payments between trust fund and non-trust- fund tax_liabilities petitioner next challenges respondent’s application of its payments and deposits to the non-trust-fund portion rather than the trust fund portion of its employment_tax liabilities petitioner contends that a challenge to respondent’s application of its payments to the non-trust-fund portion of its employment_tax liabilities non-trust-fund taxes is a challenge to the existence or amount of the underlying tax_liability under continued equipment because of a burglary and a fire plunging it further into financial difficulties these events however occurred after the closing of the business in and could not have been the cause of petitioner’s inability to satisfy its tax_liabilities in and therefore we cannot conclude that these events constitute reasonable_cause for petitioner’s failure to pay its taxes on time see sec_301_6651-1 proced admin regs sec_6330 and is subject_to de novo review we disagree in kovacevich v commissioner tcmemo_2009_160 we held that questions about whether a particular check was properly credited to a particular taxpayer’s account for a particular tax_year are not challenges to his underlying tax_liability see also orian v commissioner tcmemo_2010_234 our holding in kovacevich is consistent with our interpretation of the phrase underlying tax_liability in prior cases where we determined that the underlying tax_liability challenged by a taxpayer under sec_6330 refers to any amount owed by a taxpayer pursuant to tax laws see eg katz v commissioner t c pincite mcnair eye ctr inc v commissioner tcmemo_2010_81 we reasoned in kovacevich that a challenge to the proper crediting of checks to a particular tax_year is not a challenge to the underlying tax_liability because such an inquiry does not raise questions of the amount of tax imposed by the code for a particular tax_year but instead presents the question of whether that liability remains unpaid petitioner’s challenge to respondent’s allocation of petitioner’s payments and deposits similarly raises the question of the amount of tax_liability remaining unpaid we are mindful that the allocation of payments between trust fund and non-trust-fund taxes affects mr pinner’s tfrp liabilities but the reallocation of payments between trust fund and non-trust-fund taxes does not change the amount of tax petitioner owes we therefore review appeals’ decision not to reallocate petitioner’s payments for abuse_of_discretion see orian v commissioner supra kovacevich v commissioner supra see also 961_f2d_867 9th cir a allocation of undesignated federal tax deposits petitioner argues that the settlement officer abused his discretion in declining to reallocate four undesignated federal tax deposits ratably to the trust fund and non-trust-fund taxes due for the quarter ended date we disagree petitioner claims that internal_revenue_manual irm pt date requires that the irs ratably apply undesignated federal tax deposits between trust fund and non- trust-fund tax_liabilities when the payments correspond with the amount of federal tax deposits due from a taxpayer petitioner relies on a note to irm pt which states if the taxpayer established that the deposit was in the amount required by sec_31_6302-1 the ftd federal_tax_deposit was considered a designated payment and applied to the non-trust- fund and the trust fund portions of tax for the specific period covered by the ftd even before date the taxpayer must provide payroll records that show the composition of the ftd the records must reflect exactly how much of the ftd was employer fica employee fica and income_tax withheld the main text of irm pt states that if notification of a tfrp assessment was issued before date any undesignated payments received through date will first be applied to the non-trust-fund portion of tax then to collection costs penalty and interest and lastly to the trust fund portion of tax the note thus states an exception to the general method for payment application referenced in the body of irm pt as the tfrp assessment against mr pinner relates to taxable quarters in and notification of the tfrp assessment could not have been issued before date moreover petitioner asserts on brief that the four federal tax deposits were made between october and date as respondent received the undesignated payments after date and issued the notification of a tfrp assessment after date irm pt and its accompanying note is not applicable to petitioner’s case as a general practice the irs allows a taxpayer to designate the application of voluntary tax_payments see 47_tc_65 revproc_2002_26 2002_1_cb_746 see also jehan-das inc v united_states in re 925_f2d_237 8th cir in the absence of a designation by the taxpayer regarding the application of payments the irs generally applies payments in a manner that best serves its interest see davis v united_states supra pincite 565_f2d_1042 8th cir the irs has long followed the policy of applying undesignated payments to non-trust-fund taxes before trust_fund_taxes see irm pt date and many courts have endorsed that policy see 436_us_238 ndollar_figure jehan-das inc v united_states in re jehan-das inc supra pincite 900_f2d_1144 7th cir and cases cited thereat we thus find that the settlement officer did not abuse his discretion in determining that respondent may apply petitioner’s undesignated federal tax deposits to non-trust-fund taxes for the quarter ended date b designated payments petitioner next claims that appeals’ refusal to reallocate payments designated by petitioner and mr pinner as trust fund tax_payments but treated by respondent as non-trust-fund taxes was an abuse_of_discretion in particular petitioner refers the court to payments related to those at issue in this case and a quarter not at issue in this case namely the date quarter petitioner’s designated payments petitioner contends that the settlement officer abused his discretion in affirming respondent’s refusal to honor the trust fund only designation marked on payments petitioner made respondent counters that the settlement officer did not abuse his discretion because petitioner had entered into an installment_agreement which gave respondent broad authority to apply payments in the best interest of the government petitioner replies that it never signed or received form 433-d and that the payment designation as trust fund only must be respected sec_301_6159-1 proced admin regs provides that where a taxpayer has entered into an installment_agreement the irs may take actions to protect the interests of the government with regard to the unpaid tax_liability unless the installment_agreement states otherwise see irm pt date in a letter to appeals dated date petitioner’s counsel stated that petitioner requested an installment_agreement on or about date that letter further stated that petitioner and its counsel received a letter approval of request to pay taxes in installments notifying them that respondent had approved an installment_agreement moreover the record contains petitioner’s account transcripts which reflect that petitioner had entered into an installment_agreement forms submitted by the parties indicate that petitioner entered into an installment_agreement with respondent on date in connection with its unpaid tax_liabilities the existence of this installment_agreement is further evidenced by the assignment of status to petitioner’s accounts as shown in petitioner’s employment_tax account transcripts respondent’s internal policy indicates that status is assigned only with the receipt of a completed form 433-d formalizing an installment_agreement see irm pt an integrated collection system entry dated date similarly states that petitioner was in stat and that petitioner was in compliance with its installment payments while petitioner asserts that it never signed or received any form 433-d formalizing an installment_agreement it does not state that an installment_agreement was not entered into on the basis of respondent’s regularly kept business records we infer that an installment_agreement was entered into see 530_f2d_781 8th cir the presumption of regularity supports the official acts of public officers and in the absence of clear evidence to the contrary courts presume they have properly discharged their official duties nor has petitioner come forward with evidence showing that the installment_agreement contained any terms prohibiting respondent from applying payments to non-trust-fund taxes before 9the irm states that form 433-d could be used to execute an installment_agreement without obtaining the signature of the taxpayer on the form see irm pt - date while we express concern over respondent’s inability to produce a copy of the installment_agreement which petitioner purportedly entered into petitioner bears the burden of proving that it did not sign or receive a copy of the form 433-d as this case was submitted under rule we could not observe mr pinner at trial we are thus unable to accept the allegations that no form 433-d was signed or received by petitioner or petitioner’s counsel especially when the irs’ account transcripts reflect that such an installment_agreement was entered into trust_fund_taxes we therefore find that respondent may protect the interests of the government by applying payments to non- trust-fund taxes for the taxable quarters at issue and for the date quarter pursuant to sec_301_6159-1 proced admin regs petitioner further contends that the irs’ policy of giving non-trust-fund taxes priority over trust_fund_taxes repudiate s the trust_fund_theory according to petitioner payments of tax must first be applied to satisfy the trust fund portion of a taxpayer’s liability contrary to petitioner’s assertion that the trust_fund_theory is embodied in sec_7501 we find that sec_7501 neither explicitly nor implicitly prescribes a hierarchy for application of payments to trust fund and non- trust-fund taxes we have stated previously that we will not question the irs’ determination of what payment application method is in the best interest of the united_states see bierhaalder v commissioner tcmemo_1995_307 respondent’s practice of prioritizing the payment of non-trust-fund taxes is reasonable because consistent with the purpose of sec_6672 it enables the commissioner ‘to reach those responsible for the corporation’s failure to pay the taxes which are owing ’ see 952_f2d_236 8th cir quoting 431_f2d_742 5th cir accordingly we find that the settlement officer did not abuse his discretion in denying petitioner’s request to reallocate designated payments from non-trust-fund to trust_fund_taxes mr pinner’s designated payment petitioner also contends that a dollar_figure payment made by check from mr pinner’s personal bank account should have been applied to the tfrp assessed against mr pinner and not to petitioner’s non-trust-fund taxes we are unable to agree for two reasons first mr pinner indicated on the check that the payment was for trust funds only as mr pinner is not personally liable for non-trust-fund taxes that designation would be unnecessary unless mr pinner was making payments on behalf of petitioner second as this case was submitted under rule we have no evidence that mr pinner intended to apply that payment towards his tfrp liability we thus find that petitioner has failed to carry its burden of proving that the payment mr pinner made was not a payment made on behalf of petitioner under an installment_agreement accordingly we find that the settlement officer did not abuse his discretion in affirming respondent’s application of mr pinner’s dollar_figure payment to petitioner’s non-trust-fund taxes iii denial of face-to-face hearing in little rock petitioner also contends that the settlement officer abused his discretion in refusing to conduct a face-to-face hearing with petitioner in little rock because this is not a challenge to the underlying tax_liability we review this issue for abuse_of_discretion see sego v commissioner t c pincite goza v commissioner t c pincite the regulations interpreting sec_6330 provide that a cdp hearing may but is not required to consist of a face-to- face meeting sec_301_6330-1 q a-d6 proced admin regs emphasis added see also 115_tc_329 a taxpayer will ordinarily be offered a face- to-face hearing if the taxpayer presents in the cdp request relevant and nonfrivolous issues relating to the proposed levy sec_301_6330-1 q a-d7 proced admin regs see also golditch v commissioner tcmemo_2010_260 in the case of a taxpayer business the location of that hearing is the appeals_office closest to the taxpayer’s principal_place_of_business sec_301_6330-1 q a-d7 proced admin regs finally the regulations provide that if a face-to-face hearing is not held a hearing conducted by telephone by correspondence or by review of documents will suffice for purposes of sec_6330 see id as documented in the notice_of_determination the settlement officer offered petitioner a face-to-face hearing in oklahoma city because petitioner’s counsel refused that arrangement the settlement officer held the cdp hearing by telephone as the settlement officer has complied with the procedure promulgated in the regulations we find that he did not abuse his discretion in refusing petitioner’s request for a face-to-face hearing in little rock petitioner also contends that appeals must grant it a face- to-face hearing in little rock pursuant to the internal_revenue_service restructuring and reform act of rra publaw_105_ sec b 112_stat_768 that section provides that the commissioner shall ensure that an appeals officer is regularly available within each state petitioner acknowledges on brief that appeals had scheduled settlement officers to conduct face-to-face cdp hearings with taxpayers in little rock before and after petitioner’s cdp hearing but apparently not on a date agreeable to petitioner appeals also offered petitioner a face-to-face hearing in oklahoma city even though a cdp hearing is not required to consist of a face-to-face meeting sec_301_6330-1 q a-d6 proced admin regs on the basis of the record as a whole we are satisfied that appeals has made its officers regularly available as required by rra section b accordingly we conclude that appeals did not abuse its discretion in failing to hold a face-to-face hearing with petitioner in little rock iv whether petitioner is entitled to a two-part determination petitioner argues that appeals abused its discretion in not bifurcating the cdp hearing to separately consider petitioner’s underlying tax_liability and its proposed collection alternatives according to petitioner appeals prematurely considered petitioner’s proposed collection alternatives before a determination was made as to the amount of its underlying tax_liability we understand petitioner to argue that it should be allowed to delay its discussion of proposed collection alternatives until appeals has reached its determination on petitioner’s request to reallocate payments and deposits to its trust_fund_taxes petitioner relies on 317_fsupp2d_1276 d n m which held that appeals abused its discretion when it issued a notice_of_determination rejecting a proposed collection alternative before it determined the correct amount of taxes owed by the taxpayers petitioner’s reliance on borges is misplaced the taxpayers in borges challenged the amount of their total_tax liability at their cdp hearing and the settlement officer issued her notice_of_determination before determining the amount of the taxpayers’ tax_liability in the instant case however the settlement officer issued a notice_of_determination which determined the tax_liabilities owed by petitioner including an abatement of dollar_figure in federal_tax_deposit penalty for the quarter ended date thus unlike the rejection in borges the settlement officer’s rejection of petitioner’s proposed collection alternatives was not premature the regulations under sec_6330 allow for more than one cdp hearing with respect to a tax period in two limited circumstances first appeals may conduct more than one cdp hearing if different types of tax are involved in the proposed levy eg employment_tax liability and income_tax_liability sec_301_6330-1 q a-d1 proced admin regs second where the same type of tax is involved appeals may conduct more than one cdp hearing if the amount of unpaid tax has changed because of an additional_assessment of tax or an additional_assessment of penalties for that period id petitioner’s case does not fall into either of these circumstances we thus hold that appeals was not required to bifurcate the cdp hearing to separately review the trust fund tax allocation and petitioner’s proposed collection alternatives the settlement officer verified that the requirements of applicable law or administrative procedure with respect to the proposed levy had been met he considered all relevant issues presented by petitioner and determined that the proposed levy action was no more intrusive than necessary although petitioner proposed an installment_agreement or an offer-in-compromise as a collection alternative to respondent’s proposed levy mr pinner failed to provide the supporting financial information requested by appeals the settlement officer determined that collection alternatives could not be considered because petitioner failed to provide supporting documentation especially with regard to the equity in petitioner’s remaining assets we conclude that it was not an abuse_of_discretion to reject petitioner’s proposed collection alternatives given the lack of information surrounding the remaining equity in petitioner’s assets see mcclanahan v commissioner tcmemo_2008_161 finding that a settlement officer did not abuse her discretion in rejecting a taxpayer’s collection alternatives where that taxpayer refused to disgorge the realizable equity in life_insurance policies we conclude that the settlement officer satisfied his obligation to petitioner under sec_6330 v conclusion we have considered all arguments made by the parties and to the extent not discussed above we conclude that those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c date cc dom fs corp wta-d-106512-99 number release date uilc memorandum for regional_counsel internal_revenue_service national_office field_service_advice from subject deborah a butler assistant chief_counsel field service cc dom fs basis allocation substance over form this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer target target sub mirror x mirror y taxpayer s expert year year year date date date a b c d e f g h i issue s whether taxpayer properly recognized a loss on the sale of the stock of its subsidiary mirror x conclusion s taxpayer did not realize a loss on the sale its mirror x stock and therefore is not entitled to recognize the loss the basis that taxpayer used in determining a loss on the sale of the mirror x stock resulted from non-arm s-length transaction between related parties and does not reflect economic reality facts the facts are not fully developed but as outlined in previous correspondence with this office the facts are as follows during the period year through year target the common parent of a consolidated_group made loans to its subsidiary target sub in an amount totaling approximately dollar_figurea in year in anticipation of an acquisition of target taxpayer formed b mirror subsidiaries which then formed an acquisition subsidiary mirror x contributed dollar_figurec to the acquisition subsidiary and received in exchange d of the acquisition subsidiary stock on date the taxpayer group purchased all the outstanding_stock of target the exact form of the acquisition is unclear but following the transaction the b mirror subsidiaries owned directly all the stock of target in the same proportion as they had owned the stock of the acquisition subsidiary on date target liquidated and distributed its assets among the mirror subsidiaries the stock of target sub was distributed to mirror x the receivables representing the dollar_figurea debt owed by target sub to target were distributed to mirror y along with other assets of target taxpayer claims that immediately after the distribution taxpayer had a dollar_figurec basis in its mirror x stock and that mirror x had a net asset value apparently disregarding target sub s dollar_figurea intercompany debt of approximately dollar_figuree on date ie approximately months after date in anticipation of a sale of its mirror x stock taxpayer began a series a transactions that taxpayer describes as follows taxpayer contributed approximately dollar_figurea to mirror x and mirror x contributed that amount to target sub target sub then repaid its dollar_figurea million indebtedness to mirror y mirror y then loaned dollar_figurea million to taxpayer as a result of the capital_contribution taxpayer s claimed basis in its mirror x stock was increased by dollar_figurea taxpayer then in year sold its mirror x stock for approximately dollar_figuref resulting in a claimed capital_loss of approximately dollar_figureg at the time of the sale taxpayer claimed a basis in the mirror y stock of approximately dollar_figureh law and analysis the basis used by taxpayer in determining the loss on the sale of mirror x resulted from an allocation_of_basis among the mirror subsidiaries that did not reflect economic realities an example will illustrate the importance of an accurate basis allocation in a mirror- transaction acquisition suppose a holding corporation aholding has no assets other than the stock of two subsidiaries sec_1 whose stock has a value of dollar_figure and sec_2 whose stock has a value of dollar_figure prior to a planned acquisition of holding an unrelated corporation acquiring sets up two subsidiaries m1 and m2 acquiring funds m1 with dollar_figure and m2 with dollar_figure m1 and m2 contribute those funds to a newly formed acquisition subsidiary in exchange for and of the acquisition subsidiary stock respectively holding and the acquisition subsidiary then merge with holding surviving the former shareholders of holding receive dollar_figure in exchange for their stock holding then liquidates distributing the stock of sec_1 to m1 and the stock of sec_2 to m2 acquiring then sells the stock of m1 to an unrelated third party for its fair_market_value of dollar_figure if the form of the series of transactions is respected acquiring would recognize a loss of dollar_figure on the sale of the m1 stock but the purported loss results from the fact that the initial funding of m1 and m2 and therefore acquiring s basis in the two corporations was not reflected in the value received by the two mirror subsidiaries in the liquidation of holding the form therefore should not be respected and the purported loss should not be allowed the transaction at issue here does not substantively differ from that outlined above the economic reality of the transaction at issue is obscured by the fact that target sub was insolvent and by the fact that target sub s insolvency stemmed at least in part from an intercompany debt reduced to its essentials the series of transaction at issue here is as follows taxpayer funded mirror x with dollar_figurec taxpayer sold mirror x for dollar_figuref that is for dollar_figurei more than dollar_figurec additionally mirror y loaned dollar_figurea the ultimate source of which was taxpayer to taxpayer the series of transactions in which taxpayer engaged prior to the disposition of mirror x should not be allowed to obscure the fact that the taxpayer group suffered no economic loss on the sale of mirror x and indeed may have realized an economic gain of approximately dollar_figurei ignoring any possible proper adjustments to taxpayer s basis in its mirror x between the time of the acquisition of target and the time of the disposition of mirror x the failure of the series of transactions to reflect economic reality stems in the first instance as in the example above from the mismatch between the capitalization of mirror x and the value of what mirror x received in the liquidation of target this mismatch will become even clearer if one imagines that mirror x instead of being a wholly-owned subsidiary of taxpayer had had minority third-party shareholders suppose that is that third parties had contributed money to mirror x in exchange for stock at the time of its formation or had purchased stock in mirror x from taxpayer prior to the formation of the acquisition subsidiary suppose that the other facts of the series of transactions through the liquidation of target are unchanged in the liquidation of target mirror x which had contributed dollar_figurec to the formation of the acquisition subsidiary received only the stock of target sub an insolvent company whose debts greatly exceeded its assets in such a case the minority shareholders would clearly have had a valid claim for damages in a shareholder derivative action because in the liquidation mirror x simply did not receive value for money similarly the date contribution of dollar_figurea by taxpayer to mirror x and then by mirror x to target sub allowing target sub to pay off its debt to mirror y in full does not make economic sense those transactions could make economic sense only if had the debt not been paid mirror y would have expected to be able to enforce full payment of the debt by target sub following the sale given target sub s financial condition at the time of the sale this is utterly improbable again it may be helpful to imagine a scenario involving unrelated parties suppose shareholder entirely owns corporation corporation has dollar_figure in gross assets and dollar_figure in debt to an unrelated third party creditor a rational person in shareholder s position would be unlikely to contribute dollar_figure to corporation cause corporation to pay off its debt to creditor and then sell the stock of corporation for its fair_market_value of dollar_figure even though shareholder might recoup some of the dollar_figure paid over to creditor in the form of a loss for tax purposes resulting from shareholder s increased basis in the corporation stock when a series of transactions is undertaken for no economic purpose but simply for purposes of tax_avoidance the series of transactions should be given no effect for tax purposes 293_us_465 in the instant case the series of transactions at issue was undertaken for no purpose other than to create a tax loss on the sale of mirror x when in fact the taxpayer group suffered no economic loss on that disposition and in fact apparently realized a gain the claimed loss should disallowed case development hazards and other considerations ---------------------------------------------------------------------------------------------------------------------------- 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---------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ please call if you have any other questions by ___________________ arturo estrada acting branch chief corporate branch cc cc ner cc ner podcin lc