department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an advérse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil legend b date d state e state p name of program dollar_figure r s dollar_figure dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues e e do you meet the operational_test under sec_501 of the code no for the reasons described below do you meet the requirements under sec_501 of the code no for the reasons described below you were incorporated on b in d your articles of incorporation state that your purpose facts is to engage in any lawful act or activity for which corporations may be organized under the general corporation law of d your articles also contain the necessary c language you will promote wealth creation and financial self-determination within and among low and moderate income households and communities by developing and distributing adult financial education and also provide member products and services to small businesses located within or serving low and moderate income households and communities and advocate on behalf of the collective interests of low and moderate income households and communities literacy tools and services you will you will develop services and programs aimed at three groups of stakeholders low and moderate income households employees of corporations and stakeholders of other types of institutions and small businesses of employees or less located within or primarily serving low and moderate income communities you solicit funds from the public in order to defray costs of program development and operations create supportive networks of households businesses and organizations concerned with wealth-creation among low and moderate income households and communities participate in conferences and community based activities that support wealth creation among low and moderate income households and communities and advocate on behalf of the collective interest of low and moderate income households and the small businesses that serve them will the niche provide for corporations and recipient households you some of your products such as technology based tools and education materials on credit card use debt load management household budgeting home ownership and mortgage as a means of augmenting the learning costs etc will be distributed free of charge experience for social networking environments where similar households may receive additional web based learning opportunities cost effective products and services and information aimed at further financial self-determination will charge the sponsoring institution or employer a one-time fee for small businesses you provide these services for a one-time fee this is a membership fee which entitles the small_business to become a life time member small_business members will receive services such as entity drafting governance related documents business valuation selection and creation competitive benchmarking exit strategies risk and strategy analysis etc you provide small_business consulting and advisory services on a member only basis your financial literacy and education products will be priced according to common pricing conventions for the purpose of measuring the cost of production such as labor materials and overhead some products and services such as those provided to your small_business membership or those sponsored by companies or organizations on behalf of their employees or stakeholders will be priced below market prices set by for-profit providers of similar products and services members will be eligible for discounts based on their size companies and organizations purchasing sponsored products and services be distributed free of charge but will institutions you succession business creation planning plan and will also be eligible for a price discount based on an organization by organization basis in developing marketing and distributing your products and services you referred to three service groups adult financial literacy corporations and institutions and small_business services adult financial literacy you will provide research and technology based adult financial literacy tools and services to low and moderate income households beginning with the state of e free of charge to the recipient household the tools will include material on credit card use debt load management household budgeting and savings home ownership and mortgage costs and related topics you will also develop multimedia products and web2 products that instruct on various topics retirement planning investor education and related topics to augment the learning experience you will provide niche social networking environments where additional web-based learning opportunities cost-effective products and services and share information aimed at further financial self determination you will develop original research on various topics related to financial services access among low and moderate income households the unbanked and under banked and related topics every sponsored product is developed to address the information and literacy needs of target specific audiences your principal initiative is the p network the p network is the centerpiece of your adult financial literacy program and is the technological embodiment of your information education advocacy and action philosophies your primary expense in the first few years of operation will be the development and implementation of the digital learning and literacy platform you will pay a for-profit third party for the creation of the platform you will retain all rights and powers associated with any intellectual_property you develop we asked for specific details programs you offer development etc regarding the educational you indicated that the adult financial literacy program is under syllabus material corporations and institutions you will provide research and technology based adult financial literacy tools and services to workforce employees and stakeholders within other types of organizations and institutions beginning with the state of e you will charge a one-time fee a fee schedule for this service was not provided the tools will include pension analysis and retirement planning investor education seminars and related products to augment the learning experience you will provide niche social networking environments where additional web- based learning opportunities cost-effective products and services and share information aimed at further financial self determination small_business services you are a membership_organization only small_business members are required to pay a membership fee annual memberships are lifetime membership can be purchased for s you will not charge service fees to you membership the annual or lifetime membership provides free access to your services non-members will be provided services with a fee based on the type of service requested up to a r you indicate that you provide your membership with superior market-grade professional service for a fraction of market price in a membership fee your members can avail a growing network of lawyers accountants marketing themselves free of charge to professionals financiers and fellow members members have three categories of services foundation growth and network foundation services include start-up services business plan creating a legal entity filing for licenses and registrations etc and post- establishment services trademark monitoring and notification services assistance with employment laws loan application assistance etc growth services assists members evaluate plan implement and manage growth and provide access to investors network services provide access to your professional list server network of professionals original research monthly newsletter and other services in response to our question whether you will charge fees you responded you will not charge a fee of your clients for your services you will however charge a membership fee in return for which your members will be entitled to a suite of consulting and advisory services be provided company specific services and the price charged to each company will be determined on a case by case basis you also stated that if a company or organization is unable to pay for the company specific financial program they requested the program will not be provided to their employees or constituents in addition companies and institutions will you will develop web-based and mobile based products tools and services and purchase tools and services developed for you by third party software designers you also intend on creating or purchasing marketing materials that contain proprietary trademarks and service marks such as t-shirts hats sweatshirts pens pencils notepads and ornamental objects approximately of your time will be spent providing your small_business members services such as drafting operating agreements shareholder agreements agreements between partners etc you also state that since the activities you will provide in the future are all based on the areas of adult financial literacy and small_business consulting it is impossible to imagine all of the activities you will engage in services provided to your small organization members are provided by volunteers with professional experience in the area or areas of need facing the member a potential small organization contacts you via phone or e-mail one of your volunteers fields their questions and takes additional information regarding the client the potential member is then provided with information regarding your membership dues and types you will provide the potential member with a summary of needs and an application_for membership upon return of the application and the dues the member is matched up with a volunteer with specific experience you do not have any employees and do not plan to hire any employees you do not provide personal financial counseling services the vast majority of your activities will be digitally based and via web-based mobile-based and notebook-based devices you will rely heavily on pro-bono and volunteer services of professionals and donated resources distributed currently you do not receive client referrals from any organization however you intend to establish referral arrangements with various non-profits and similarly situated service providers we asked for information regarding the for-profit entities for which you now have or plan to have a relationship you responded by indicating that you intend to utilize both for-profit and non-profit organizations and it is completely impossible to anticipate even a sampling of the for-profit organizations with whom you will do business within or serving small businesses located your website indicates that you promote wealth creation and financial self-determination within and among working families and communities by developing and distributing adult financial education and literacy tools and services providing member products and services to by advocating on behalf of the collective interests of working families and the communities in which they reside you have developed a web based learning content management a personalized website that integrates niche networking rss web feeds system p financial related news and_ information designed to address the specific needs of your client’s households aimed at increasing financial literacy and elevating financial decision making your website describes p as the centerpiece of your adult financial literacy program and is the digital embodiment of your financial self-determination model you are currently accepting requests from for- profit and not-for-profit companies interested a complete and long lived adult financial literacy program in providing your stakeholders with investor education tools and our communities and literacy tools when asked about the nature of your advocacy activities and whether you plan to conduct legislative or lobbying_activities you answered that these questions were not applicable to you you have nine directors two of whom are related and the majority of whom are employed or involved in the financial industry your funding comes from corporate and small_business membership fees consulting fees foundation grants and donations you submitted budgets for your first four years of operations approximately of your income is from membership dues your growth strategy as per your annual board meeting agenda from date shows that you plan to establish a physical office during year four and expand your services to include bankruptcy and credit_counseling_services however you did not provide any details regarding these activities law sec_501 of the code provides that an organization described in sec_501 shall be exempt from taxation sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_501 of the code provides that organizations which provide credit_counseling_services as a substantial purpose shall not be exempt from taxation under sec_501 unless they are described in sec_501 or sec_501 and they are organized and operated in accordance with the following requirements a the organization-- i provides credit_counseling_services tailored to the specific needs and circumstances of consumers ii makes no loans to debtors other than loans with no fees or interest and does not negotiate the making of loans on behalf of debtors iii provides services for the purpose of improving a consumer's credit record credit history or credit rating only to the extent that such services are incidental to providing credit_counseling_services and iv does not charge any separately_stated fee for services for the purpose of improving any consumer's credit record credit history or credit rating the organization does not refuse to provide credit_counseling_services to a consumer due to the inability of the consumer to pay the ineligibility of the consumer for debt management plan enrollment or the unwillingness of the consumer to enroll in a debt management plan the organization establishes and implements a fee policy which-- b c any that fees charged to a consumer for services i requires reasonable ii allows for the waiver of fees if the consumer is unable to pay and iii except to the extent allowed by state law prohibits charging any fee based in whole or in part on a percentage of the consumer's debt the consumer's payments to be made pursuant to a debt management plan or the projected or actual savings to the consumer resulting from enrolling in a debt management plan are d at all times the organization has a board_of directors or other governing body-- i which is controlled by persons who represent the broad interests of the public such as public officials acting in their capacities as such persons having special knowledge or expertise in credit or financial education and community leaders ii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors' fees or the repayment of consumer debt to creditors other than the credit_counseling_organization or its affiliates and iii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees the organization the organization or who will or who will sec_501 defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or activities described above a combination of the iii sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified the organizational_test or the operational_test it is not exempt_organization fails to meet either section such an in if c -1 c of the regulations provides that be section regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose an organization will sec_1_501_c_3_-1 of the regulations provides that an applicant organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes the relief of the poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions l ed the supreme court held that the presence of in 326_us_279 66_sct_112 a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes operating for the benefit of private parties constitutes a substantial nonexempt purpose 477_f2d_340 4th cir cert_denied 413_us_910 in consumer credit counseling service of alabama inc v united_states u s t c d d c the court held that an organization that provided free information on budgeting for exemption from income_tax because its activities were charitable and educational of consumer credit the sound use practices qualified buying and in 70_tc_352 the court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in 746_f2d_388 cri the court considered how a medical plan conducted by a church affected its exempt status in analyzing the facts of the case the court stated that the facts in each case must be explored to ascertain the predominant or primary purpose for which the organization was formed and also the manner of its operation in 765_f2d_1387 9th cir affg tcmemo_1984_349 tax_court concluded that the extent of the integration between the operations of a non-profit entity and related for-profit entities controlled by the non-profit directors precluded exemption furthermore the tax_court found it unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officers the 9th circuit_court of appeals in affirming the tax court’s decision stated that the critical inquiry is not whether particular contractual payments to related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church’ a in easter house v u s cl_ct affd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health related_services to unwed mothers and their children rather the court found that the health-related services were merely incident to an adoption service not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite the organization's operation of which itself and did of in in 950_f2d_365 the court_of_appeals upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church did not qualify for exemption under sec_501 of the code because the organization was operated for a substantial nonexempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was a in competition with other restaurants engaged in marketing and generally operated in manner similar to commercial businesses the commerciality doctrine in 283_fsupp2d_58 d d c the court relied on the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax exempt_purpose as the court stated applying the operational_test because of in among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations or and operated purposes charitable exclusively for educational in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not exempt under sec_501 because it was not organized and impermissibly served private interests the organization was formed by an individual with experience selling debt management plans the founder and his spouse were the only member’s of the organization’s board_of directors the organization did not have any meaningful educational program or materials for providing to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization's overall activities the court held that the organization's purposes were not educational because its activities are primarily structured to market determine eligibility for and enroll individuals in dmps __ its purposes are not to inform consumers about understanding the cause of and devising personal solutions to consumers’ financial problems or to consider the particular knowledge of individual callers about managing their personal finances the tax_court also held that the organization's purposes were not charitable because its potential customers are not members of a charitable_class that are benefited in a 'non-select manner because they will be turned away unless they meet the criteria of the participating creditors the tax_court further held the organization would operate for the private interests of its founder because the founder and spouse were the only directors the founder was the only officer and employee and his compensation was based in part on the organization's dmp sales activity levels the organization was a family-controlled business that he personally would run for financial gain using his past professional experience marketing dmps and managing a dmp call center the court further held that the organization's principal activity of providing dmp services which were only provided if approved by a caller's creditors furthered the benefit of private interests finally the tax_court held that the facts in credit_counseling_services of alabama v united_states u s t c d d c stand in stark contrast because the sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal application of tax law sec_501 of the code sets forth two main tests for an organization to be recognized as exempt an organization must be both organized and operated exclusively for purposes described in sec_501 sec_1_501_c_3_-1 of the regulations based on the information you provided in your application and supporting documentation we conclude that you fail the operational_test to satisfy the c operational_test an organization must establish that it is operated exclusively for one the regulations you failed to establish that you are operated exclusively for one or more exempt purposes or more exempt purposes c -1 c section of your activities are not educational you were formed to promote wealth creation and financial self-determination you will provide services to low and middle income clients corporations and your membership while some of your activities may have an educational component and you plan to provide some free services your operational focus is on generating fees from your membership and other activities similar to the organization in solution plus supra your efforts are focused on informing potential clients about the range of services available and signing them up for one of your programs the products tools and services you will provide appear to contain some educational content however most of the access to this information is limited based on ability to pay or membership status when we asked for specific details regarding your educational programs you indicated that the programs were under development this is not sufficient to establish that you exclusively provide instruction or training useful to the individual and beneficial to the community within the meaning of sec_1_501_c_3_-1 of the regulations like the organizations described in solution plus supra better business bureau supra and easter house supra your activities have an underlying commercial motive that distinguishes your activities from those carried out by an educational_organization your activities are not charitable you provide services to low and moderate income households and communities and corporations however most of your time and resources are devoted to servicing your membership you are not described under sec_1_501_c_3_-1 of the regulations as your services are primarily marketed and available to those who can afford your fees or dues rather then those who are poor and distressed your services do not further charitable purposes as you do not limit your services to low- income individuals you do not waive your fees for those clients who cannot afford to pay for your services accordingly you are unlike the organizations described in consumer credit counseling service_of alabama supra and rul supra which aided low-income individuals and families who have financial problems thereby relieving the poor and distressed rev unlike the organizations in consumer credit counseling service of alabama supra and revrul_69_441 supra you charge fees member and non-member fees for most of your services fee ordinarily does not further charitable purposes solution plus supra ‘ p rimarily providing services for a thus you failed to establish that your activities are charitable within the meaning of sec_501 of the code you have a substantial nonexempt commercial purpose the courts have consistently held that an organization's purposes may be inferred from its manner of operations bethel conservative mennonite church supra your manner of operations is commercial in nature your activities primarily consist of providing consulting and other services to dues paying members and fee based clients your activities do not further an exempt_purpose as recognized by statute or by case law but rather a substantial nonexempt commercial purpose you provide services similar to those provided by for-profit entities is significant that you are in direct competition with for-profit entities that provide similar services competition with commercial firms is strong evidence of the predominance of non-exempt commercial purposes b s w group supra like the organizations in easter house supra airlie supra and living faith supra you are in direct competition with commercial businesses because you conduct activities generally conducted for a profit it parties like the organization described in old dominion box co supra your operation for the benefit of private constitutes a substantial nonexempt purpose the activities you identify as charitable and educational are incidental to your primary purpose of providing services and tools in return for dues or a fee thus more than an insubstantial part a nonexempt purpose in contravention of sec_1_501_c_3_-1 of the regulations therefore you are not operated for an exempt_purpose your membership and fee paying clients in furtherance of of your activities are private benefit an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest see sec_1_501_c_3_-1 of the regulations your primary expense will be to pay a for-profit entity to create your financial is not necessary for us to determine whether such payments are unreasonable tools it church by to substantially benefit the for-profit entity your enterprise is carried in such a manner as supra mail on you will make referrals to for-profit entities and refused to provide details regarding this planned future activity indicating it is completely impossible to anticipate even a sampling of the for-profit institutions you will have relationships with the referrals are a single non- exempt_purpose which precludes exemption similar to better business bureau of washington d c supra the organization in therefore you have not demonstrated that your operations serve a public rather than a private interest as required by sec_1_501_c_3_-1 sec_501 of the code sec_501 defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or a combination of the activities described above therefore for the purposes of sec_501 you provide credit counseling as a substantial purpose and to be exempt from taxation you must in addition to complying with the requirements of sec_501 comply with the provisions of sec_501 iii you do not comply with certain provisions of sec_501 of the code an exempt credit_counseling_organization must establish and implement a fee policy which requires a consumer for services are reasonable and allows for the that any fees charged to waiver of fees if the consumer is unable to pay you failed to establish that your membership dues and other fees are reasonable also you do not have a fee waiver policy sec_501 therefore even if you otherwise met the requirements of sec_501 your failure to satisfy the requirements of sec_501 would prevent you from being exempt from taxation under sec_501 conclusion based on the facts and information provided you are not operated exclusively for exempt purposes you do not pass the operational_test you are not educational you are not charitable you have a substantial non-exempt purpose you have not demonstrated that your operations serve a public rather than a private interest and you have failed to meet the requirements of sec_501 therefore you are not described in sec_501 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 appeal rights you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal must be accompanied by the following declaration the statement of facts item under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted ail of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations group p o box cincinnati oh internal_revenue_service eo determinations main street group cincinnati oh if you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely holly o paz director exempt_organizations rulings agreements enclosure publication


internal_revenue_service number release date index number ----------------------- ------------------------ --------------------------------------- ------------------------------- ----------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number --------------------- refer reply to cc tege eb qp2 plr-138844-09 date date ty calendar_year ty calendar_year legend state s state plan ----------------------- ------------------------------------ dear ----------------------- this responds to your authorized representative's letter on behalf of state s requesting a ruling concerning the restated deferred_compensation plan the state plan which state s intends to be an updated eligible_deferred_compensation_plan for state s under sec_457 of the internal_revenue_code the code as amended under the economic_growth_and_tax_relief_reconciliation_act_of_2001 egtrra the state plan previously received a private_letter_ruling on date the state plan is being amended to reflect changes made to the plan with respect to certain provisions of sec_457 of the code in addition amendments were made to the trust requirements of sec_457 under the state plan the participant may elect to make deferrals into the state plan from any accumulated sick_pay or accumulated vacation pay that is payable in conjunction with the participant’s severance_from_employment the participant’s election must be entered into before the first day of the month in which such amounts would otherwise be paid or made available the amount must be paid_by the later of ½ plr-138844-09 months after the participants severance date or the end of the plan_year in which the participant’s severance occurred and the amount must have otherwise been paid or usable by the participant prior to the severance if the participant had continued in the employment of state s the trustee may at any time on behalf of a participant who is actively employed or during the first twelve months following the retirement or severance_from_employment of any other participant who was formerly employed by state s accept administer and distribute an amount that is either i a direct plan-to-plan transfer of funds held under another eligible_deferred_compensation_plan or trust described in sec_457 of the code for a participant that is not an eligible_rollover_distribution or ii an eligible_rollover_distribution within the meaning of the state plan from another eligible_deferred_compensation_plan described in sec_457 under the state plan severe financial hardships of the participant shall constitute unforeseeable emergencies a an illness or accident of the participant or the participants spouse or dependents as defined in sec_152 of the code without regard to sec_152 b and d b b loss of the participant’s property due to casualty or c other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant including but not limited to imminent foreclosure of or eviction from the participant’s primary residence and the need to pay burial or funeral_expenses of a participant’s deceased spouse or dependent sec_457 of the code provides rules for the deferral of compensation by an individual participating in an eligible_deferred_compensation_plan as defined in sec_457 sec_457 of the code provides that in the case of a participant in an eligible governmental deferred_compensation plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid to the participant or beneficiary sec_457 prescribes that an eligible_deferred_compensation_plan must meet the distribution_requirements of sec_457 sec_457 provides that for a sec_457 plan to be an eligible_plan the plan must have distribution_requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age ii when the participant has a severance_from_employment with the employer or iii when the participant is faced with an unforeseeable_emergency as determined under treasury regulations plr-138844-09 sec_457 requires a plan to meet the minimum distribution_requirements of sec_401 as described in sec_1 a -1 thru a -9 sec_457 defines an eligible_employer to be a state political_subdivision of a state and any agency_or_instrumentality of a state or political_subdivision of a state sec_457 provides that a plan maintained by an eligible governmental employer shall not be treated as an eligible_deferred_compensation_plan unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries sec_457 provides that a_trust described in sec_457 shall be treated as an organization exempt from tax under sec_501 amounts of compensation deferred in accordance with the terms of the state the state plan as amended and restated effective date constitutes based upon the information submitted and the representations made we conclude as follows an eligible_deferred_compensation_plan as defined in sec_457 of the code as amended and the regulations thereunder plan including any income attributable to the deferred_compensation will be includible under sec_457 in the recipient's gross_income only for the taxable_year or years in which the amounts are paid to a participant or beneficiary in accordance with the terms of the state plan sec_457 and will be treated as an organization_exempt_from_taxation under sec_501 the trust associated with the state plan satisfies all applicable_requirements of 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 if the state plan is significantly modified this ruling will not necessarily remain applicable 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 sent to your authorized representative plr-138844-09 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely cheryl e press senior technician reviewer qualified_plans branch employee_benefits tax exempt government entities enclosure copy for purposes of sec_6110 cc


t c memo united_states tax_court homero f meruelo petitioner v commissioner of internal revenue respondent docket no filed date howard w gordon leticia vega and alyssa r wan for petitioner w robert abramitis for respondent memorandum findings_of_fact and opinion lauber judge the internal_revenue_service irs or respondent deter- mined a deficiency of dollar_figure in petitioner’s federal_income_tax for 1all statutory references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules of prac- tice and procedure we round all monetary amounts to the nearest dollar the deficiency stems from the partial_disallowance of a flow-through deduction for a net_operating_loss nol incurred in by an s_corporation in which petitioner held an interest which he sought to carry back to the question for decision is whether petitioner had sufficient basis in the s_corporation to absorb the entirety of this loss finding that he did not we conclude that the irs properly disallowed a portion of his claimed deduction for findings_of_fact the parties filed a stipulation of facts and a supplemental stipulation of facts with attached exhibits both of which are incorporated by this reference petitioner resided in florida when he petitioned this court petitioner is a real_estate developer in south florida who holds interests in numerous s_corporations partnerships and llcs one of these entities was mer- co of the palm beaches inc merco petitioner incorporated and elected s status for merco in date during he held of its stock 2ordinarily a taxpayer can carry an nol back only to the two taxable years preceding the loss_year see sec_172 however prompted by the fi- nancial crisis and at the direction of congress the irs for taxable years and allowed eligible small businesses to elect a carryback period of three four or five years see revproc_2009_52 2009_49_irb_744 petitioner properly made this election for petitioner incorporated merco to purchase a condominium complex in a bankruptcy sale in early the bankruptcy court approved the sale and re- quired merco to pay a dollar_figure million non-refundable deposit to secure the property to raise funds for his share of the deposit petitioner obtained a personal loan from city national bank of florida cnb petitioner transferred dollar_figure of the loan proceeds to merco group at akoya akoya an s_corporation in which he and his mother each held a interest on date akoya transferred into merco’s escrow account dollar_figure million--petitioner’s loan proceeds of dollar_figure plus dollar_figure of akoya’s own funds--to cover half of the required_deposit akoya had previously transferred to merco sufficient funds to cover the dollar_figure million balance of the deposit during merco entered into hundreds of transactions with various partnerships s_corporations and llcs in which petitioner held an interest collec- tively merco affiliates merco affiliates regularly paid expenses such as payroll costs on each other’s or on merco’s behalf to simplify accounting and enhance liquidity the payor company recorded these payments on behalf of its affiliates as accounts_receivable and the payee company recorded such items as accounts_payable during merco affiliates made payments in excess of dollar_figure million to or on behalf of merco merco repaid its affiliates less than dollar_figure million of these advances on december of each year merco’s books_and_records showed sub- stantial net accounts_payable to its affiliates luis carreras a certified_public_accountant prepared the tax returns filed by petitioner merco and the merco affiliates when preparing merco’s tax_return for a given year mr carreras would net merco’s accounts_payable to its affiliates as shown on merco’s books as of the preceding december against merco’s ac- counts receivable from its affiliates if merco had net accounts_payable as of that date mr carreras reported that amount as a shareholder loan on merco’s tax re- turn and allocated a percentage of this supposed indebtedness to petitioner on the basis of petitioner’s ownership interests in the various affiliates that had extended credit to merco in an effort to show indebtedness from merco to petitioner mr carreras drafted a promissory note dated date whereby petitioner made avail- able to merco a dollar_figure million unsecured line of credit at a interest rate mr carreras testified that at the time he prepared petitioner’s and merco’s tax returns for he would make an annual charge to merco’s line of credit for an amount equal to petitioner’s calculated share of merco’s net accounts_payable to its affiliates for the preceding year but there is no documentary_evidence that such adjustments to principal were actually made or that merco accrued interest annually on its books with respect to this alleged indebtedness there is no evidence that merco made any payments of principal or interest on its line of credit to petitioner and there is no evidence that petitioner made any payments on the loans that merco affiliates extended to merco when they transferred money to it or paid its expenses in merco incurred a loss of dollar_figure when banks foreclosed on the condominium complex it had purchased in merco reported this loss on form_1120s u s income_tax return for an s_corporation merco allocated of the loss to petitioner on schedule_k-1 shareholder’s share of income deduc- tions credits etc petitioner filed timely form sec_1040 u s individual_income_tax_return for and on his return he reported taxable_income of dollar_figure and tax due of dollar_figure on his return he claimed on form_4797 sales of business property an ordinary_loss deduction of dollar_figure this deduction re- flected a dollar_figure flow-through loss from merco dollar_figure netted against gains of dollar_figure from two other s_corporations in which he held in- terests after accounting for other income and deductions petitioner reported on his return an nol of dollar_figure in date he filed form_1045 appli- cation for tentative refund claiming an nol_carryback of dollar_figure from to after application of this nol_carryback his original tax_liability for dollar_figure was reduced by dollar_figure to dollar_figure on date the irs issued petitioner a refund of dollar_figure the irs selected petitioner’s and returns for examination it de- termined that his basis in merco was only dollar_figure viz the proceeds of the cnb loan that petitioner contributed to merco through akoya the irs accord- ingly disallowed for lack of a sufficient basis dollar_figure of the dollar_figure flow-through loss claimed for after disallowing part of the nol for the irs determined that peti- tioner’s nol_carryback to was limited to dollar_figure and that his correct_tax due for was dollar_figure because petitioner had reported a tax_liability of only dollar_figure for after application of the nol_carryback the irs deter- 3petitioner concedes the following adjustments to his return ad- ditional taxable dividend income of dollar_figure and additional taxable interest in- come of dollar_figure petitioner also concedes that the statute_of_limitations does not bar the assessment and collection of a deficiency if any for respondent agrees that petitioner had sufficient basis in merco to produce a deductible loss that eliminates any taxable_income for mined a deficiency of dollar_figure for that year the irs sent petitioner a timely notice_of_deficiency setting forth these adjustments and he timely peti- tioned the court for redetermination respondent agrees that petitioner is entitled to basis of dollar_figure in mer- co corresponding to funds that petitioner personally borrowed from cnb and con- tributed to merco through akoya in date petitioner contends that he has substantial additional basis in merco by virtue of inter-company transfers between merco and its affiliates at trial the parties introduced testimony bank records other documentary_evidence and spreadsheets in an effort to quantify the pay- ments and petitioner’s allocable share of the payments that merco affiliates made to or on behalf of merco during we find that petitioner’s allocable share of these payments was dollar_figure calculated as follows description amount petitioner’s share petitioner’s amount funds separately transferred by akoya in date petitioner’s share of funds trans- ferred by merco affiliates wholly or partly owned by petitioner wage expense defrayed by a merco affiliate as common_paymaster total dollar_figure dollar_figure -- -- big_number big_number big_number big_number opinion the irs’ determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 the taxpayer bears the burden of proving his entitlement to deductions allowed by the code and of sub- stantiating the amounts of claimed deductions 503_us_79 sec_1_6001-1 income_tax regs in certain circum- stances the burden_of_proof on factual issues may shift to the commissioner see sec_7491 rule a petitioner does not contend that this provision ap- plies here and he thus bears the burden_of_proof i governing statutory and regulatory framework sec_1366 generally provides that the shareholders of an s corpora- tion are taxed currently on its items of income losses deductions and credits re- gardless of actual distributions however sec_1366 provides that the amount of losses and deductions taken into account by the shareholder may not exceed the sum of the adjusted_basis of the shareholder’s stock in the s cor- poration and the adjusted_basis of any indebtedness of the s_corporation to the shareholder any disallowed loss or deduction is treated as incurred by the cor- poration in the succeeding taxable_year with respect to the shareholder whose loss- es and deductions are limited sec_1366 once the shareholder in- creases his basis in the corporation any losses or deductions previously suspended become available to the extent of the basis increase the code does not specify how a shareholder may acquire basis in an s cor- poration’s indebtedness to him the legislative_history of the predecessor to sec_1366 states that losses are limited to the adjusted_basis of the shareholder’s investment in the corporation s rept no 1958_3_cb_922 we have construed investment for purposes of sec_1366 to mean an actual economic outlay by the shareholder 103_tc_711 a taxpayer makes an economic outlay sufficient to ac- quire basis in an s corporation’s indebtedness when he incurs a ‘cost’ on a loan or is left poorer in a material sense after the transaction 137_tc_46 aff’d 727_f3d_621 6th cir the taxpayer bears the burden of establishing his basis see id pincite petitioner contends that a regulation promulgated in applies to the transactions at issue in this case with the supposed result that he need not show an actual economic outlay in order to obtain increased basis in merco respondent concedes that these regulations apply to at least some of the transactions in ques- tion but he contends that petitioner’s interpretation of the regulation is flawed the secretary proposed sec_1_1366-2 income_tax regs in fed reg date and finalized the regulation in t d 2014_33_irb_342 the final_regulation provides the term basis of any indebtedness of the s_corporation to the share- holder means the shareholder’s adjusted_basis in any bona_fide indebtedness of the s_corporation that runs directly to the sharehold- er whether indebtedness is bona_fide indebtedness to a shareholder is determined under general federal tax principles and depends upon all of the facts and circumstances the secretary has provided that s_corporations and their shareholders may rely on sec_1_1366-2 with respect to indebtedness result ing from any transaction that occurred in a year for which the period of limitations on the as- sessment of tax has not expired before date sec_1_1366-5 in- come tax regs petitioner professes reliance on the new regulation and the peri- od of limitations on assessment has not expired as to the and tax years at issue see sec_6213 on the other hand many of the inter-company trans- actions on which petitioner relies to generate his basis occurred during and and the periods of limitations on assessment for those years appear to have expired long before date it is not clear how the new regulation would apply in these circumstances in our view it does not matter whether or to what extent the new regula- tion applies because the outcome would be the same in either event the test set forth in the new regulation--limiting basis to bona_fide indebtedness of the s cor- poration that runs directly to the shareholder --is the same test set forth in prior case law see eg hitchins t c pincite t he indebtedness of the s cor- poration must run directly to the shareholders 59_tc_172 clearly there must be a debt running directly to the share- holder in order to permit the deduction of a corporate net_operating_loss moreover the new regulation provides that the existence of bona_fide in- debtedness shall be determined under general federal tax principles the actu- al economic outlay doctrine is a general tax principle that this court has applied in cases too numerous to mention to determine whether a shareholder has made a bona_fide loan that gives rise to an actual investment in the corporation see eg hitchins t c pincite ruckriegel v commissioner tcmemo_2006_78 91_tcm_1035 oren v commissioner tcmemo_2002_172 84_tcm_50 aff’d 357_f3d_854 8th cir and principles developed in other tax contexts requiring that a corporation’s indebtedness to a shareholder be genuine and reflect economic reality apply with equal force for purposes of sec_1366 see eg 154_f3d_61 3d cir requiring objective indicia of an obligation to support the existence of indebtedness between related parties rev’g in part vacating in part tcmemo_1996_447 in short the controlling test under prior case law as under the new regula- tion dictates that basis in an s corporation’s debt requires proof of bona_fide in- debtedness of the s_corporation that runs directly to the shareholder sec_1_1366-2 income_tax regs requiring that the shareholder have made an actual economic outlay is a general tax principle that may be employed under the new regulation as it was applied under prior case law to determine whether this test has been met we therefore need not decide the precise extent to which the new regulation applies to the transactions at issue 4we have previously recognized that the actual economic outlay doctrine is congruent with the new regulation see eg phillips v commissioner tcmemo_2017_61 at n in support of a contrary conclusion petitioner cites the following statement in the preamble to the proposed_regulations these proposed_regulations require that loan transactions represent bona_fide indebtedness of the s_corporation to the shareholder in order to increase basis of indebtedness therefore an s_corporation shareholder need not otherwise satisfy the ‘actual economic outlay’ doctrine for purposes of sec_1366 fed reg date but in stating that a shareholder need not other- wise satisfy the actual economic outlay doctrine the preamble indicates that the doctrine is relevant in ascertaining whether loan transactions represent bona_fide indebtedness of the s_corporation to the shareholder in any event we never have understood the preamble to proposed_regulations to be precedential 73_tc_1121 n ii analysis petitioner advances two theories to support his claim to basis beyond the amount respondent has allowed his first argument is that the merco affiliates lent money to him and that he subsequently lent these funds to merco he refers to this as the back-to-back_loan theory his second argument is that he lent money to the merco affiliates and that they used these funds to pay merco’s expenses he refers to this as the incorporated_pocketbook theory we examine these argu- ments in turn a back-to-back_loan theory petitioner first contends that transactions among the merco affiliates should be recast as loans to the shareholders including himself from the creditor com- panies followed by loans from the shareholders including himself to merco the regulations recognize that back-to-back loans if representing bona_fide in- debtedness from the s_corporation to the shareholder can give rise to increased basis see sec_1_1366-2 example income_tax regs as noted previously the indebtedness of the s_corporation must run direct- ly to the shareholder in order to create shareholder basis hitchins t c pincite sec_1_1366-2 income_tax regs the corollary of this rule is that in- debtedness of an s_corporation running to an entity with passthrough character- istics which advanced the funds and is closely related to the taxpayer does not satisfy the statutory requirements hitchins t c pincite t ransfers between related parties are examined with special scrutiny and taxpayers bear a heavy burden of demonstrating that the substance of the transactions differs from their form ruckriegel t c m cch pincite for example in shebester v commissioner we rejected the taxpayer’s contention that loans from one controlled s_corporation sec_1 to another controlled s_corporation sec_2 were in substance a series of dividends to the shareholder from sec_1 followed by loans from the shareholder to sec_2 tcmemo_1987_246 53_tcm_824 ruling that the taxpayer may not easily disavow the form of this transaction similarly in burnstein v commissioner we upheld the transactional form originally selected by the taxpayer and gave no weight to an end-of-year reclassification of inter-company loans as shareholder loans tcmemo_1984_74 47_tcm_1100 see also meisner v commission- er tcmemo_1995_191 69_tcm_2505 these authorities dictate that petitioner’s back-to-back_loan argument must be rejected on the facts here first no loan transactions were contempor- aneously documented the dollar_figure transferred to merco in date was apparently booked as a capital_contribution by akoya the dollar_figure paid_by a merco affiliate as common_paymaster was booked as the payment of merco’s wage expenses and the dollar_figure of net inter-company transfers reflected hundreds of accounts_payable and accounts_receivable which went up and down depending on the various entities’ cash needs these inter-company accounts were recharacterized as loans to shareholders only after the end of each year when mr carreras prepared the tax returns and adjusted merco’s book entries to match the shareholder loans shown on those returns none of these transactions was contemporaneously booked as a loan from shareholders and petitioner has not borne the heavy burden of demonstrating that the substance of the transaction s differs from their form ruckriegel t c m cch pincite second even if we were to treat these transactions as loans merco’s indebt- edness ran to its affiliates not directly to petitioner see prashker t c pincite the dollar_figure that akoya contributed to merco moved from one controlled com- pany to another without affecting petitioner’s economic position in any way the same was true for the dollar_figure of merco wage expenses that an affiliate in its ca- pacity as common_paymaster paid on merco’s behalf and the same was true for the dollar_figure of net inter-company payments which merco uniformly booked as accounts_payable to its affiliates the affiliates advanced these funds to merco not to petitioner and to the extent merco repaid its affiliates’ advances--it made payments in excess of dollar_figure million during 2004-2008--it made the payments to its affiliates not to petitioner there is simply no evidence that merco and its affiliates when booking these transactions intended to create loans to or from petitioner mr carreras’ adjustments to a notional line of credit uniformly made after the close of each relevant tax_year do not suffice to create indebtedness to petitioner where none in fact existed see 54_tc_1287 dis- regarding promissory note that did not reflect an intent by both parties substant- ially contemporaneous to the time of such transfer to establish an enforceable obligation of repayment parson v commissioner tcmemo_1974_183 33_tcm_789 finding no indebtedness to common shareholder of multiple s_corporations which had loaned each other money until such time as the share- holder himself repaid the advances aff’d without published opinion 554_f2d_1070 9th cir as noted earlier a taxpayer in this setting may not easily disavow the form of th e transaction he has chosen shebester t c m cch pincite the 5there may have been non-tax reasons including restrictive covenants bind- ing the merco affiliates that would have prevented them from making loans in ex- cess of dollar_figure million to petitioner without securing them with any collateral peti- tioner submitted no evidence on this point transactions at issue took the form of transfers among various merco affiliates and we find that petitioner has not carried his burden of proving that the substance of the transactions differed from their form see meissner t c m cch pincite w e have consistently held that taxpayers are generally con- strained to be taxed in the same form in which they have chosen to operate un- like the dollar_figure that petitioner initially borrowed and contributed to merco he made no actual economic outlay toward any of the advances that merco’s affili- ates extended to it see hitchins t c pincite we accordingly find on the basis of all the facts and circumstances that none of the inter-company trans- actions mentioned above gave rise to bona_fide indebtedness from merco to peti- tioner under his back-to-back_loan theory b incorporated_pocketbook theory petitioner alternatively contends that he used the merco affiliates as an in- corporated pocketbook to pay merco’s expenses on his behalf where a taxpayer 6petitioner errs in relying on scott singer installations inc v commission- er tcmemo_2016_161 112_tcm_257 that was a worker classifica- tion case in which we had to decide whether certain transactions were properly characterized as the payment of wages or the repayment of loans id pincite here it is undisputed that transactions among the merco affiliates gave rise to ex- tensions of credit in the form of net accounts_payable by merco the central ques- tion is whether this indebtedness ran to the merco affiliates or petitioner and scott singer installations sheds no light on the proper resolution of that question uses a related_entity as an incorporated_pocketbook we have held that payments from that entity to the taxpayer’s s_corporation may constitute payments on the taxpayer’s behalf and thus give rise to increased basis see yates v commissioner tcmemo_2001_280 82_tcm_805 culnen v commissioner tcmemo_2000_139 79_tcm_1933 rev’d on other grounds 28_fedappx_116 3d cir for an incorporated_pocketbook to exist the taxpayer must establish that he had a habitual practice of having his wholly owned corporation pay money to third parties on his behalf broz t c pincite ruckriegel t c m cch pincite whether an entity functions as an incorporated_pocketbook presents a question of fact see broz t c pincite the facts of this case are a far cry from those in yates supra and culnen supra upon which petitioner relies first in each of those cases the taxpayer was the sole shareholder of the corporation that he used to disburse funds on his be- half here petitioner seeks to treat as his incorporated_pocketbook distinct merco affiliates many of these companies had co-owners besides petitioner and because the inter-company payments allegedly creating his basis involved netting hundreds of accounts_payable against hundreds of accounts_receivable petitioner is necessarily contending that his incorporated_pocketbook not only disbursed funds but regularly received them we have never found an incorporated_pocketbook on such facts second in yates and culnen each taxpayer established that he had the habitual practice of causing his wholly-owned company to pay his personal expenses t c m cch pincite t c m cch pincite petitioner has made no such showing putting aside the basis-related transactions at issue peti- tioner has not alleged or proven that the merco affiliates habitually or routinely paid his expenses so as to make them an incorporated_pocketbook broz t c pincite messina v commissioner tcmemo_2017_213 at frequent and habitual payments are key to a finding that a corporation served as an incorporated_pocketbook cf yates t c m cch pincite finding that the taxpayer had used his wholly owned corporation to pay his personal expenses over the course of several years third in yates and culnen each taxpayer actually disbursed his own funds through the entity we found to be his incorporated_pocketbook t c m cch pincite t c m cch pincite petitioner did not do this all of the funds in question were disbursed by merco affiliates to or on behalf of merco petitioner made no actual economic outlay hitchins t c pincite and he was at best a third-party beneficiary of these transfers finally in yates and culnen the transactions alleged to create basis were actually booked as loans the corporations contemporaneously recorded share- holder loans on their ledgers and payments of principal and interest were made on the loans yates t c m cch pincite culnen t c m cch pincite5 here by contrast the transactions were contemporaneously booked as capital contributions payroll expenses or inter-company accounts_payable and receivable merco’s net accounts_payable to affiliates were recharacterized as shareholder loans only after the close of each year when mr carerras prepared the tax returns and adjusted merco’s book entries to match no payments of prin- cipal or interest were ever made on these supposed shareholder loans see broz t c pincite rejecting incorporated_pocketbook theory where corporation made year-end adjustments reclassifying advances as shareholder loans wilson v commissioner tcmemo_1991_544 rejecting reclassification of transactions on the basis of year-end journal entries for these reasons we find that petitioner has not carried his burden of prov- ing that he used the merco affiliates as an incorporated_pocketbook to pay merco’s expenses under this theory as under his back-to-back_loan theory peti- tioner seeks to disavow the form of inter-company extensions of credit in an effort to generate basis for himself because petitioner has not established the existence of bona_fide indebtedness running from merco directly to him he is not entitled to the increased basis he claims hitchins t c pincite sec_1 a i income_tax regs we accordingly conclude that respondent properly reduced petitioner’s allowable nol_carryback to to reflect the foregoing decision will be entered for respondent 7petitioner errs in seeking to accomplish the same result by invoking the doctrine_of constructive receipt see sec_1_451-2 income_tax regs this doctrine addresses a timing issue viz whether an item_of_income is includible in a taxpayer’s gross_income regardless of actual receipt it has no conceivable rele- vance in determining whether a taxpayer has made an actual economic outlay suf- ficient to create increased basis in the stock or indebtedness of an s_corporation


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 lmdonis pref-151037-07 uilc date date to virginia e cochran deputy area_counsel great lakes gulf coast area dallas group tax exempt government entities from dan e boeskin assistant branch chief employment_tax branch exempt_organizations employment_tax government entities tax exempt government entities subject et b returns by revenue_officer worker pref-151037-07 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issues whether revenue officers have authority under sec_6020 to prepare employment_tax returns in employment_tax cases in which worker classification issues are present conclusion in employment_tax cases where worker classification issues are present revenue officers have authority under sec_6020 to prepare employment_tax returns but the requirements of sec_7436 must be met prior to assessment facts we have been asked to review a memorandum which addresses the issue of whether a revenue_officer has authority under sec_6020 to prepare employment_tax returns on behalf of taxpayers who fail to file such returns in a case in which worker classification pref-151037-07 issues are present and where the revenue_officer did not refer the case to the employment_tax program as required under the internal_revenue_manual irm the facts indicate that for the years at issue the taxpayer took the position that certain workers were independent contractors for federal tax purposes however for previous years the taxpayer had treated such workers as employees after reviewing the facts of the case the revenue_officer determined that the workers should have been treated as employees for federal tax purposes and prepared substitute for returns sfrs under sec_6020 the taxpayer objected to the preparation of the sfrs and requested an appeal the appeals officer concluded that the worker classification issue was undeveloped and that the revenue_officer did not have the authority to prepare form sec_941 under sec_6020 procedures because the irm requires the issue to be referred to the employment_tax program and recommended the government concede the case law and analysis where there is an actual controversy involving a determination by the secretary that one or more individuals performing services for the taxpayer are employees as part of an examination sec_7436 gives the tax_court jurisdiction to determine certain worker classification issues ie the proper amount of the additions to tax additional_amounts and penalties that relate to the employment_tax imposed by subtitle c with respect to determinations of worker classification and whether the taxpayer is entitled to relief under sec_530 of the revenue act of to meet the requirements of sec_7436 certain procedures must be followed prior to an assessment of employment_taxes notice_2002_5 2002_1_cb_320 describes the procedures that sec_7436 requires notice_2002_5 provides generally that a taxpayer will first receive a 30-day_letter which lists the proposed employment_tax adjustments to be made and describes the taxpayer’s right either to agree to the proposed adjustments or to protest the proposed adjustments to the appeals function of the service appeals within days of the date of the letter if the taxpayer does not respond to the 30-day_letter by agreeing to the proposed adjustments or by filing a protest to appeals the taxpayer will receive a notice_of_determination of worker classification ndwc the taxpayer may also receive the ndwc if the taxpayer files a protest with appeals and the worker classification issues are not settled in appeals notice_2002_5 further provides that under sec_7436 the mailing of the ndwc suspends the period of limitations for assessment of taxes attributable to the worker classification issues for the 90-day period during which the taxpayer can bring suit2 and precludes the service from assessing the taxes identified in the ndwc prior to the expiration of the 90-day period during which the taxpayer may file a timely tax_court the ndwc is a jurisdictional prerequisite for seeking tax_court review under sec_7436 if the taxpayer does file a timely petition in tax_court the period of limitations for assessment is suspended until days after the decision of the tax_court becomes final pref-151037-07 petition if the service erroneously makes an assessment of taxes attributable to the worker classification issues without first either issuing a ndwc or obtaining a waiver of restrictions on assessment from the taxpayer the taxpayer is entitled to an automatic abatement of the assessment however once any such procedural defects are corrected the service may reassess the employment_taxes to the same extent as if the abated assessment had not occurred a taxpayer may settle the worker classification issues either before issuance of the ndwc or after issuance of the ndwc but before expiration of the 90-day period for filing a tax_court petition to settle the worker classification issues the taxpayer must formally waive the restrictions on assessment contained in sec_7436 and sec_6213 if the taxpayer does not settle or file a tax_court petition before the ninety-first day after the ndwc is mailed the employment_taxes identified in the ndwc shall thereafter be assessed under sec_6501 the amount of any_tax imposed by the code shall be assessed within years after the return was filed subject_to certain specified exceptions under sec_6020 if any person fails to make a required return or makes willfully or otherwise a false_or_fraudulent_return the secretary is authorized to make a return from his or her own knowledge and from such information as can be obtained through testimony or otherwise sec_6020 provides that any return made and subscribed by the secretary shall be prima facie good and sufficient for all legal purposes in this case the taxpayer failed to file an employment_tax return and did not submit evidence to establish that no employment_tax return was due the revenue_officer determined that some of the taxpayer’s workers were employees and that an employment_tax return should have been filed the revenue_officer prepared returns pursuant to the authority in sec_6020 because the revenue_officer failed to meet the requirements of sec_7436 an assessment of employment_taxes based on the sec_6020 return prepared by the revenue_officer in this case is improper however the facts in this case do not indicate that the government is required to concede the case notice_2002_5 provides that once the procedural defects are corrected and the requirements of sec_7436 are met employment_taxes may thereafter be assessed in employment_tax cases where worker classification issues are present revenue officers have authority under sec_6020 to prepare employment_tax returns but the requirements of sec_7436 must be met prior to assessment note however that sec_6501 provides that notwithstanding sec_6020 the execution of a return by the secretary pursuant to such section shall not start the running of the period of limitations on assessment and collection delegation_order number specifically gives revenue officers the authority to prepare returns pursuant to sec_6020 in addition revproc_77_13 1977_1_cb_570 specifically discusses the preparation of sec_6020 returns by revenue officers pref-151037-07 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


department of the treasury internal_revenue_service washington d c date number release date cc ebeo br uilc internal_revenue_service national_office chief_counsel_advice memorandum for district_counsel michael j roach chief cc ebeo br from subject worker classification - bail bond agents this chief_counsel_advice responds to your memorandum dated date chief_counsel_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 corporation x state y issues whether corporation x is entitled to relief under sec_530 of the revenue act of whether the retention of a commission from a collected premium by an agent of corporation x a bail bond company constitutes payment to the agent by the company and if so whether the bail bonding company is required to file information returns forms and for payments aggregating dollar_figure or more per year conclusions corporation x is entitled to sec_530 relief amounts aggregating dollar_figure or more that a bail bond agent retains from collected premiums should be treated as commissions paid_by corporation x for purposes of information reporting under sec_6041 of the internal_revenue_code facts corporation x is engaged in the bail bond business it enters into written agency contracts with each of its bail bond agents the agency contract provides that the agent is an independent_contractor and as such is liable for the payment of any state of federal taxes on any and al commissions as specified by contract the bail bond agents collect a premium for each bail bond they negotiate retain their commission out of the premium and remit the balance to the issuing bond company along with other fees they are required by state y to collect and pay over corporation x has not treated any of the commissions retained in this manner by its agents as payments by the corporation the bond company excluded the agent’s commissions from its gross_receipts and has not filed information returns however corporation x does have records of the amounts each agent has received since state y requires bond record keeping bail bond agents must be licensed by state y before they can transact any bail bonding business with state y a sample state y license included in your request contains the following printed language and i further certify that he she has authority to act as a professional bail bondsman for so long as he she may be employed by the above firm a bail bond agent cannot work independently of the company identified on the license or for any other company without getting a new license the bond is supplied by the surety company and has the surety company’s name on it as the one to guarantee that the client will appear before the court a provision on corporation x’s bail bond agreement recites that the agent is x’s true and lawful attorney-in-fact with full power and authority hereby confirmed law and analysis sec_530 relief the determination of whether a worker is an employee or independent_contractor is made pursuant to common_law analysis an analysis of the facts submitted with your request indicates that this issue would require further development before the employment status of the bail bond agents could be determined pursuant to common_law analysis however sec_530 of the revenue act of an uncodified provision of the act provided temporary relief from employment_tax liability in certain cases this relief provision has been modified extended and eventually made permanent in subsequent statutes in particular sec_530 as amended by the small_business job protection act of clarified that the first step in any case involving whether a business is liable for employment_taxes on the compensation paid to particular workers is to determine whether the business meets the requirements for sec_530 relief if so the business will not be liable for employment_taxes on the compensation paid to the workers even if they are its employees under the common_law standard sec_530 provides a business with relief from federal employment_tax liability if two requirements are met first the business must satisfy the reasonable basis test of the statute by showing that it had a reasonable basis for not treating the workers as employees under the statute a business can satisfy the reasonable basis test by meeting any one of four conditions reasonable reliance on judicial precedent published rulings or on a technical_advice_memorandum letter_ruling or determination_letter issued to the business reasonable reliance on a prior irs audit of the business if the audit began after date it must have covered the employment_tax status of workers whose positions were substantially_similar to the workers at issue reasonable reliance on a longstanding industry practice covering a significant segment of the industry in which the business is engaged or any other reasonable basis for not treating workers as employees second the business must satisfy two consistency tests namely reporting consistency and substantive consistency reporting consistency requires that a business must have filed all required forms during the relevant period substantive consistency requires that the business must have treated all workers in similar positions as independent contractors we believe that x will probably be able to satisfy both requirements for sec_530 relief firstly it seems likely that x can make a strong showing that it satisfies the reasonable basis test to satisfy the reasonable basis test x will be able to rely on revenue_ruling 1968_2_cb_458 which held that bail bond agents engaged by a bonding company were not its employees where it appeared that the bail bond agents were experienced bondsmen that they could write bonds for other bonding companies and that they paid all their own office expenses and other expenses_incurred in writing the bonds because of provisions of state law bail bond agents in state y are not permitted to write bonds for any company other that the one named in their bonding license but this is a technical difference of state law and if you conclude that x’s bail bond agents are otherwise similar to the bail bond agents in the revenue_ruling then you should consider that the reasonable basis test has been satisfied secondly we believe that x will be able to satisfy the consistency tests we note that there is nothing in the facts stated in your request to suggest that x did not treat all its bail bond agents as independent contractors for all relevant years therefore it appears that the substantive consistency_requirement of sec_530 has been satisfied in this case the facts stated in your request show that x did not file forms for its bail bond agents for any of the relevant years thus at least on its face the reporting consistency test of sec_530 has not been satisfied however the facts also show that x did not actually receive the gross bond premiums and then make payments to its bail bond agents so that at least arguably the payment requirement of sec_6041 is not satisfied and x had no obligation under that statute to file any forms for these bail bond agents although we could argue that x constructively received the gross premiums when those premiums were paid to its bail bond agents and then constructively paid the agreed upon commissions to the agents when it permitted them to retain those commissions a similar argument has been rejected in 987_fsupp_469 u s d c n c and j j cab service inc v united_states a f t r 2d ria u s d c n c these cases held that the cab companies involved were not required to file information returns pursuant to sec_6041 since they did not make payments to their drivers these cases involved lease agreements between the cab companies and the cab drivers which provided that the driver would pay a fixed amount of rent to the cab company for use of the cab or pay a portion of the fuel costs and the parties would split each cab fare collected both of the cab driver cases relied upon 733_fsupp_473 u s d c n h in which a music company agreed with several companies to place its amusement machines in their places of business and to split proceeds collected from the machines in the present case x enters into a written agency contract with each bail bond agent under which the agent receives a license to perform his or her work exclusively for the bail bond company under their contracts the bail bond agents act as the agents of x when they collect bail bond premiums from the public at least arguably no such agency relationship existed in the cab driver and amusement machine cases despite the differences between the facts in these cases and those in the present case the fact remains that we have never won a court decision in a case in which our argument was based on denying sec_530 relief to a taxpayer because it failed to file forms covering amounts constructively paid to a worker according we do not recommend that you assert that relief should be denied on the basis of the constructive_payment argument in this case in summary sec_530 relief will probably be available to x under the facts given in your request bail bond agents and information reporting code sec_6041 requires in part that all persons engaged in a trade_or_business and making payment in the course of that trade_or_business to another person of salaries wages compensation remuneration emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year must provide an information_return setting forth the amount of such gains profits and income and the name and address of the recipient of those payments income_tax regulation sec_1_6041-1 generally provides that every person engaged in a trade_or_business shall make an information_return for each calendar_year with respect to payments made during that calendar_year in the course of that trade_or_business of fixed or determinable salaries wages commissions fees and other forms of compensation_for services rendered aggregating dollar_figure or more regulation sec_1_6041-1 provides that income is fixed when it is to be paid in amounts definitely predetermined income is determinable when there is a basis for calculation by which the amount to be paid may be ascertained in revrul_92_96 1992_2_cb_281 the service addressed a situation in which lottery ticket sales agents retained a commission from the sales proceeds of each lottery ticket sold and remitted the balance to state x which operated the lottery the revenue_ruling holds that state x is the actual payor of the retained commissions and as such is responsible for complying with the provisions of sec_6041 revrul_92_96 relied in its analysis on revrul_55_522 1955_ 2_cb_489 in which insurance premiums are collected by soliciting agents who retain the commissions provided for in their contracts and transmit the remainder to general agents for remittance to the insurance_company the revenue_ruling holds that the general agents are the actual payors of the commissions retained by the soliciting agents and are therefore subject_to the provisions of sec_6041 revrul_57_474 1957_2_cb_841 also involved the insurance industry but in contrast to revrul_55_522 the insurance_company sold its policies solely through soliciting agents the service similarly concluded that the commissions retained by the soliciting agents constituted payments and accordingly the insurance_company was required to comply with sec_6041 see also tam relying on prior revenue_ruling service determined that car warranty salespersons are considered to have paid up front commissions to car dealers for dealers’ sale of warranties even though commission amounts are retained by car dealers upon the sale of warranties your request mentions two recent district_court opinions howard’s yellow cabs inc v united_states supra and j j cab service inc v united_states supra however we believe that the relationship between the bail bond companies and their agents resembles the agency relationship between an insurance_company and its agents found in the revenue rulings more closely than the relationship between a cab company and its drivers accordingly we believe the bail bond companies should be considered the payors of the commissions that the bail bond agents retain from premiums they collect for information reporting purposes the commissions should be treated as paid_by the bail bond companies as payors the bail bond companies are responsible for the information reporting requirements in sec_6041 hazards_of_litigation if you have any further questions please contact of my staff can be reached at michael j roach chief cc ebeo br