department of the treasury internal_revenue_service washington d c tax exempt anc government entities division release number release date date date s04 os o sec_50 dear contact person identification_number contact number employer_identification_number form required to be filed tax years 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 adverse 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 since 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 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 the instructions in notice further action if you disagree with our proposed deletions you should follow if you agree with our deletions you do not need to take any 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 letter cg catalog number lf 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 robert s choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date legend name of applicant date state name of realty company name of insurance_company name of bank name of individual name of individual name of individual name of individual name of individual z i z l i o j m r o l d l i w l o o m i dear contact person identification_number contact number fax number employer_identification_number uil index 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 issue does your organization qualify for tax exemption under sec_501 of the code facts you are an unincorporated association formed on n in the state of o your organizing documents consist of two distinct documents certificate of partners doing business under assumed name agreement your certificate of partners doing business under assumed name document states that you are conducting business under the name of m the names of the partners listed on this document are a b cand d the certificate document was signed by a b c and d and was notarized by e the agreement document lists a b c and d as the initial members of the unincorporated association and it was also signed by a b c and d in the organizing document titled agreement you state that you are organized exclusively for educational_purposes within the meaning of sec_501 of the internal_revenue_code or the corresponding section of any future federal tax code however you state in your mission statement that you are a net work business comprised of dedicated professionals you also state in your description of activities that you are a team comprised of two realtors a mortgage banker an insurance agent and an attorney this team has been conducting home buyers’ workshops since primarily first-time home buyers with background information which will help them achieve home ownership in an educated and informed mariner no fee is charged for the workshops all expenses such as advertising supplies and materials are contributed equally by the team members the team members provide your blue brochure is used to inform the public of your free workshops you indicate on the brochure that you will bring together all the professionals a home buyer would need to realize their dream of home ownership in addition the brochure provides a list of the services that a b c d and e offer in their respective private businesses on the brochure you promoted the brokerage services provided by a and b as realtors you advertised the insurance services provided by c as an insurance agent you promoted the financing services c july used for some time you also stated that when it is used again it will be revised to comply with the service's requirements red by d as a banker and you also advertised the legal services of e as an attorney letter you stated that the blue brochure has been exhausted and has not been inthe your website previously stated the goal is to earn the right to your referrals and future business by offering and giving the best possible service to all of our clients website provided the names of realtors a and b and stated that other services they provide are assistance in qualifying for grants and closing costs as well as resolving credit issues that may keep potential clients from buying a home c advertised his wide array of personal lines of insurance and financial services d was promoted on the website for selling mortgage products through r mortgage e advertised his services in helping buyers to review purchase offers and various legal documents that will be required to be signed the website also contained links to companies with which a b c and d are associated with including p q and r due to the service's questions over your apparent purpose of serving the private benefit of your members through referral of clients to your member's private businesses you have since modified your website to remove links to affiliated entities including p q and r you have also removed the above statement about your goal of earning the right to client referrals and businesses as well as statements encouraging home buyers to contact the personal businesses of your members the however your website still contains separate tabs for each of your members highlighting their experience and services they provide in their individual businesses a and b are featured as realtors with experience serving as buyer representatives c is promoted as an insurance expert owning his own insurance agency d is featured as a banker mortgage officer and e is promoted as a real_estate attorney the april all team members you also indicated in the same letter that these individuals fit the definition of insiders but there is no intent that they will ever receive any inurement letter stated that b is considered the sole officer while a b c d and e are you stated that you do not have any type of formal budget in your letter dated july6 you have no income and as expenses arise a b c d and e pay for expenses printing postage advertising etc proportionately you also stated in this letter that you are an unincorporated association under the laws of o an arrangement of a b c d and e operating under the name of m you stated that all decisions are made by a b c d and e and that b serves as the informal spokesperson for a b c d and e also in the july organization correspondence you provided the following statistics in regard to your to - years time period total number of workshops you have conducted - total number of people registered to attend the workshops - total number of people who completed the workshops - total number of participants who utilized the services offered by your members’ businesses - law sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations states that in order to qualify under sec_501 of the code an organization must be both organized and operated exclusively for one or more exempt purposes if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 of the income_tax regulations provides that an organization operates exclusively for exempt purposes if exempt purposes specified in sec_501 of the code an organization must not engage in substantial activities that fail to further an exempt_purpose it engages primarily in activities that accomplish w t sec_1_501_c_3_-1 of the regulations provides that an organization is not organized and operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it organized and operated for the benefit of private interests is necessary for an organization to establish that it is not sec_1 c -1 d of the regulations defines the term charitable as used in sec_501 of the code as including the relief of the poor and distressed or of the underprivileged the term charitable also includes the advancement of education sec_1_501_c_3_-1 of the regulations provides in part that the term educational as used in sec_501 of the code relates to the instruction of the public on subjects useful to the individual and beneficial to the community inurement results when the private benefit results to an insider and it is prohibited the prohibition is absolute according to 92_tc_1053 w hen an organization permits its net_earnings to inure to the benefit of a private_shareholder_or_individual it transgresses the private_inurement prohibition and operates for a nonexempt purpose since no part of the net_earnings of an organization may inure to the benefit of a private_shareholder_or_individual the amount or extent of such inurement or benefit is not determinative any level of inurement found regardless of how small will cause an organization to fail the requirements of sec_501 of the code according to 76_tc_1 and 74_tc_846 in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in international postoraduate medical foundation v commissioner tcmemo_1989_36 the tax_court concluded that when a for-profit organization benefits substantially from the manner in which the activities of a related nonprofit organization were carried on the latter organization was not operated exclusively for exempt purposes within the meaning of sec_501 even if it furthers other exempt purposes the court in est of hawaii v commissioner t c found that an organization formed to educate people in hawaii in the theory and practice of est was a part of a franchise system which is operated for private benefit and therefore may not be recognized as exempt under sec_501 of the code the applicant seeking exempt status was not formally controlled by the same individuals controlling the for-profit organization owning the license to the est body of knowledge publications methods etc however the for-profit exerted considerable control_over the applicant's activities by setting the number and frequency of different kinds of seminars and training and providing the trainers and management personnel f who are responsible to it in addition to setting the price for the training the court found that the fact that the applicant’s rights were dependent upon its tax-exempt status showed the likelinood that the for-profit corporations were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether it benefited substantially from the operation of the applicant the court determined that there was a substantial private benefit because the applicant was simply the instrument to subsidize the for- profit corporations and not vice versa and had no life independent of those corporations in 765_f2d_1387 the court affirmed a tax_court decision church by mail sent out sermons in numerous mailings this required a great deal of printing services twentieth century advertising agency provided the printing and the mailing twentieth century was controlled by the same ministers it also employed family members the services were provided under two contracts the contracts were signed by the two ministers for both church by mail and twentieth century church by mail business comprised two-thirds of the business of twentieth century in deciding for the government the court made the following statement there is ample evidence in the record to support the tax court's finding that the church was operated for the substantial non-exempt purpose of providing a market for twentieth’s services the employees of twentieth spend two-thirds of their time working on the services provided to the church the majority of the church’s income is paid to twentieth to cover repayments on loan principal interest and commissions finally the potential for abuse created by the rninisters’ contro of the church requires open and candid disclosure of facts bearing upon the exemption application moreover the ministers’ dual control of both the church and twentieth enables them to profit from the affiliation of the two entities through increased compensation in kj's fund raisers inc v commissioner u s tax cas cch pbig_number the court determined that an organization formed to provide a substantial private benefit to a related for- profit entity was disqualified for exemption under sec_501 the applicant organization was formed to raise funds for distribution to charitable causes primarily through the sale of lottery tickets the founders of the organization are also the owners of a for-profit lounge the lottery tickets are sold by the employees and owners of the lounge at its location the court determined that the activities of the applicant organization served to induce customers with a proclivity for this type of gambling not to desert the lounge in favor of other similar establishments in addition the lounge benefited from the publicity surrounding the exempt_function of the applicant this showed that the applicant organization in addition to its exempt_purpose of raising money for charitable purposes was also operated for the substantial private benefit of the lounge and its owners in 82_tc_196 an organization operated bingo at a bar a for-profit enterprise for purposes of raising money for scholarships the board_of directors included the bar’s owners and accountant and two other persons the court reasoned that because the bar owners controlled the organization and appointed its directors the organization’s fundraising activities could be used to the advantage of the bar owners and thus provide them with a maximum private benefit the organization claimed that it was independent because there was a separate_accounting and that no payments were going to the bar the court maintained that the organization’s and the bar's activities were so interrelated as to be functionally inseparable a separate_accounting did not change that fact thus the organization did not operate exclusively for exempt purposes but rather benefited private interests - the bar owners exemption was properly denied in 46_tc_519 affd 397_f2d_814 sth cir the court considered whether more than incidental private benefit accrued to physicians from the activities of a hospital two doctors who previously had owned and founded the hospital facilities in question shared in the fees from the privately-operated laboratory and x-ray departments within the hospital even though they performed no associated services the tax_court ruled this demonstrated that the hospital was operated to a considerable extent for the private benefit of the two founding doctors rather than exclusively as a charitable_organization the court found it unnecessary to decide whether the arrangement constituted inurement of hospital net_earnings to the doctors because it was satisfied the resulting private benefit was enough to prevent exemption in salvation navy v commissioner t c memo the tax_court decided in favor with the commissioner who determined that the taxpayer was not operated exclusively for charitable purposes the tax_court agreed that the taxpayer failed to meet the operational_test because the taxpayer had not shown that it was not operated for the benefit of a private individual as the affairs of the taxpayer and the individual in question were irretrievably intertwined the benefits the individual sought to obtain via a tax exempt letter would have inured to the individual himself additionally the organization had no fund-raising program in place had no revenue or expenses and had not kept any financial books_and_records revrul_55_231 1955_1_cb_72 described an organization incorporated for the purpose of making known to the world the contents and meaning of certain books written by a designated author who was also one of the incorporators of the organization this ruling held that an organization whose primary purpose is to promote the circulation of books of one of its incorporators is not organized and operated exclusively for educational_purposes within the meaning of sec_501 of the internal_revenue_code of or for any of the other purposes provided therein revrul_76_206 1976_1_cb_154 held that a nonprofit organization formed to generate community interest in the retention of classical music programs by a local for-profit radio station by seeking program sponsors urging the public to patronize the sponsors soliciting subscriptions to the station’s program guide and distributing materials promoting the classical music programs was held not to qualify for exemption under sec_501 the ruling held that such activities tend to increase the station’s revenues and thus benefit the for-profit radio station in more than an incidental way in revrul_80_287 1980_2_cb_185 a lawyer referral service that aids persons who do not have an attomey by helping them to select one was not entitled to exemption under sec_501 of the code although the service provides some public benefit its principal purpose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying basis as a result of their experience application of law based on the information you provided in the administrative file we conclude that you are not operated for exempt purposes under sec_501 of the code a fundamental requirement for an organization that seeks exemption from federal income taxes is that it benefits the public rather than its creator shareholders or persons having a personal or private interest in the activities of the organization see sec_1_501_c_3_-1 and sec_1_501_a_-1 of the regulations your organizational structure and manner of operation result in inurement to your team members insiders whose private businesses are enriched through your business referrals your home-buying workshops are conducted by five team members these team members each offer services in their private businesses or profession to potential home buyers in your five team members are two realtors a real_estate attorney a banker and an insurance agent your team members not only conduct your workshops but they also are your founders and individuals with significant influence over the operations of your organization thus there is an inherent conflict of interest between the members who control your organization and your home buying workshops which serves to promote the private businesses of your members included as evidenced by your website and blue your operations serve a substantial non-exempt purpose of functioning as a referral service for the private businesses of your members insiders brochure your true aim is not public education but the promotion of the private businesses of your members insiders your members are willing to equally fund all the expenses of your operations on a cooperative basis due to the benefits derived by their personal businesses since your formation you have acknowledged that a total of seminar participants have utilized the services offered by your members’ businesses the economic benefits to your team members were not in the form of your earnings but they were in the form of client referrals to their private business ventures these benefits to the related for-profit members’ businesses are deemed substantial because they directly profit those in control of your organization since the private benefits are conferred to members whom you have acknowledged are insiders with the authority to influence the decisions of your organization the private benefits constitute inurement and bar you from exemption under sec_501 of the code when your organization permits itself to function as a medium to enrich the private businesses of your insiders you transgress the private_inurement prohibition and operate for a nonexempt purpose similar to the organization described in american campaign academy vv commissioner supra approximately services offered by your team members’ private businesses because the prohibition of inurement is absolute regardless of the number and extent of your business referrals the benefits to the team members personal businesses caused your organizations to fail the requirements of sec_501 of the code like the organizations described in church of the transfiguring spirit v corrimissioner supra and basic bible church v commissioner supra percent of your participants went on to utilize the the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes 326_us_279 like the better business bureau of washington d c inc you are furthering a substantial non-exempt purpose by providing private benefits to your founders this single nonexempt purpose destroys your claim for exemption under sec_501 of the code while there may be an educational component to your activities the benefits to the public are outweighed by the benefits to the related for-profit ventures to which you have directed business like the organization described in international postgraduate medical foundation v commissioner supra the related for-profit businesses of your insiders benefit substantially from the manner in which the activities of your organization are carried on therefore you are not operated exc usively for exempt purposes within the meaning of sec_501 even if you do further other exempt purposes you are similar to the organization described in est of hawaii v commissioner and church by mail inc v commissioner supra products and or services offered by their individual business ventures your organization is providing a market for these products and or services and operating in such a maniner that a b c d and e benefit substantially from the operation of your organization by allowing a b c d and e to actively promote the you are very much like the organizations described in kj's fund raisers inc v commissioner and p l l scholarship fund v commissioner supra in both of these cases the organizations through their operations were benefiting or promoting related for-profit entities situation your activities directly promote the businesses of a b c d and e and serve to help the members increase their client base this is demonstrated by the fact that approximately percent of the workshop participants went on to utilize the services offered by your members the control exerted by your team members over your organization enabled their private business ventures to benefit from the affiliation in your you are similar to the organization described in p l l scholarship fund v commissioner supra where the court found that the organization in question had a non-exempt purpose that was substantial in nature by promoting business at a lounge owned by two members of the board_of directors through the operation of bingo_games the promotion of the for-profit businesses of a b c d and e through your operations is that a substantial purpose of your organization is not public education a non-exempt activity and shows you are like the organization described in sonora community hospital v commissioner supra in which the court ruled that the organization was operated to a considerable extent for the private benefit of the two founding doctors rather than exclusively as a charitable_organization the fact that percent of the workshop participants went on to utilize the services offered by your members insiders demonstrates that your organization does functions as a marketing tool for services of the for-profit businesses of a b c d and this also shows that the workshop participants were made aware of the availability of the services of a b c d and e sometime during the workshops or through your promotional efforts hence it operated to a considerable extent for the private benefit of a b c d and e is evident that you are in salvation navy v commissioner supra the tax_court determined that the taxpayer was not operated exclusively for charitable purposes the court determined that the benefits the taxpayer sought to obtain via a tax exempt letter would have inured to the individual also it determined that the affairs of the taxpayer and the individual were irretrievably intertwined this is similar to your organization in that the workshops provided by you are irretrievably intertwined with the services provided by a b c d and e that is the workshops you conduct serve as an avenue through which the services of a b c d and e can be marketed also you are similar to the organization described in salvation navy v commissioner supra in that you have no formal budget or revenues your expenses are funded equally by your members you are very much like the organization described in revrul_55_231 which promoted the private works of its incorporator by allowing your members a b c d and e to promote the products and services offered by their individual businesses you are providing an impermissible private benefit to your members insiders and is not operated for exclusively for exempt purposes under sec_501 of the code similar to the organization described in revrul_76_206 your activities benefit the related for-profit businesses of your team members and thus profit your members insiders in more than an incidental way like the lawyer referral service_organization described in revrul_80_287 you do not qualify for exemption under sec_501 of the code although your home buying workshops may provide some educational benefit its principal purpose is to introduce workshop participants to the use of real_estate professions in the hopes that they would enter into client relationships with your team members due to their experience in the real_estate industry even with the changes were made to your website it nonetheless still highlights the experience of your members insiders in the real_estate industry o w applicant’s position you provided that there is no intent for your team members to in your letter dated april receive inurement through your organization you also indicated that you do not solicit potential clients at the workshops conducted you stated that because the individuals that conduct the workshops are professionals in their respective fields it is inevitable that sometimes the workshop attendees will contact the individuals and retain them for their respective services you indicated that this is an incidental result of your primary objective and not a requirement of attendance at the workshops you also claimed that promotion of business is not a substantial purpose of your organization service’s response to applicant’s position we assert that the manner in which you advertised and promoted the private businesses of your team members in your blue brochure and website demonstrates that your true purpose is not public education but rather the promotion of the private businesses of your members insiders your members are willing to fund the expenses of your organization proportionally because they each have a private interest in your operations your organization structure lends itself to abuse as shown by the fact that’ utilize the services of your members’ private businesses we contend that inurement has already occurred hence because the benefits are granted to members who control your organization rather than being incidental these private benefits are substantial the prohibition of private_inurement is absolute you have transgressed the private_inurement prohibition and therefore is operated for a substantial non-exempt purpose percent of your workshop participants have gone on to conclusion you conduct your home buying workshops in the hopes that the workshop participants would enter into client relationships with your members insiders the true purpose of your operations is to channel business to the private businesses ventures of your members insiders your entire enterprise is carried on in such a manner that your insiders a b c d and e and their persona businesses benefit substantially from your operations resulting in inurement 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 of the code 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 that 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 appeais 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 these items include n o r n a the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing ts desired the statement of facts item must be declared true under penalties of perjury this may be done by adding to the appeal the following signed declaration 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 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 to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and for more information about declaration of representative if you have not already done so representation see 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 lf you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter to you that letter will provide information about filing tax returns and other matters if please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service att att you may also 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 if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert s choi director exempt_organizations rulings agreements


internal_revenue_service number release date index number ---------------------------------- -------------- ------------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication n a person to contact -------------------- id no ------------- telephone number ------------------- refer reply to cc psi b02 plr-104214-11 date date x ----------------------------------------- ------------------ state ------------- date ---------------------- dear ----- ----- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state it was intended for x to be an s_corporation effective date however no form_2553 election by a small_business_corporation for x was timely received by the service sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for plr-104214-11 any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election be an s_corporation by filing a completed form_2533 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning date a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal_income_tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers - ------------------- ------- ------------------------------ ------------- ---------------------------- ----------------------------- - department of the treasury washington dc person to contact -------------------------- telephone number --------------------- refer reply to cc corp - plr-146033-03 date december legend date date date d e f g business m technology n consideration o dear ------------- -------------------- ------------------------- ----------------------- ----- ------------- ------------- ------------- ---------------------------------------- ------------------------------------ -------------------------------------------------------------------------- ------ ---------------------------------------------------------------------- ---------- ----------------------------------- the rulings contained in this letter are based upon information and this letter responds to your date request that we supplement our plr-146033-03 letter_ruling dated date plr-102683-02 the prior letter_ruling the information submitted for consideration is summarized below capitalized terms not defined in this ruling have the meanings assigned to them in the prior letter_ruling 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 distribution by distributing of controlled stock to its shareholders and related transactions the distribution was completed on date the prior letter_ruling addresses certain federal_income_tax consequences of a supplemental facts on date controlled undertook a private_placement of a portion of its stock the controlled private_placement since the distribution certain unanticipated adverse events have occurred that have caused controlled to revise its business plan as a result controlled has entered into and is exploring additional transactions to address the unanticipated events and revisions to its business plan including among other transactions i raising additional capital and ii restructuring its indebtedness to distributing proposed partially completed transactions as a result of the unexpected change in business conditions controlled has contemplated several transactions to address its business needs including the following collectively the additional transactions i on date controlled sold d shares of preferred_stock convertible into e shares of common_stock and issued warrants to acquire an additional f shares of controlled common_stock ii controlled anticipates undertaking another private_placement to raise up to dollar_figureg additional needed equity_capital iii controlled intends to restructure its outstanding indebtedness to distributing possibly including the repayment of controlled’s obligation to distributing with newly issued controlled shares or the forgiveness of some or all of the indebtedness plr-146033-03 iv controlled may acquire distributing’s business m business segment v controlled may acquire distributing’s rights to the technology n vi controlled may issue additional warrants to certain of its customers in exchange for consideration o supplemental representations in connection with their request for a supplemental ruling the taxpayers have made the following representations a except as otherwise described in the supplemental ruling letter request all facts and representations set forth in the prior letter_ruling remain true and correct b in the case of the additional transactions there was an identifiable unexpected change in market or business conditions occurring after the distribution resulting in the additional transactions that was otherwise unexpected at the time of the distribution c the distribution was motivated in whole or substantial part by a business_purpose within the meaning of sec_1_355-2 other than a business_purpose to facilitate the controlled private_placement or additional transactions d the distribution would have occurred at approximately the same time and in similar form regardless of the controlled private_placement or additional transactions supplemental rulings based solely on the information submitted in the original and supplemental ruling requests and the representations set forth above we rule as follows the consummation of the additional transactions will not adversely affect the prior letter_ruling and the prior letter_ruling will retain full force and effect caveat no opinion is expressed about the tax treatment of the transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling procedural statements each taxpayer involved in the transaction should attach a copy of this ruling letter this supplemental ruling letter is directed only to the taxpayer s requesting it plr-146033-03 sec_6110 provides that it may not be used or cited as precedent to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is completed being sent to your authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely ______________________________ richard k passales senior counsel branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index no re washington dc person to contact telephone number refer reply to cc psi b04 - plr - date date legend decedent trust trustee date date date date date law firm dear this is in response to your letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make an election under sec_2057 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent died on date decedent's gross_estate consisted primarily of decedent’s farming operation trustee as trustee of trust engaged law firm to provide legal and tax_advice in regard to the post-death administration of decedent’s estate law firm prepared and timely filed decedent's federal estate_tax_return form_706 on date in preparation of form_706 law firm determined that the estate did not satisfy the threshold requirements in sec_2057 and did not advise trustee of the election accordingly an election under sec_2057 was not made plr - on date law firm prepared and filed supplemental information on form_706 first supplemental form_706 reflecting corrected values of some of the estate’s assets in preparation of the first supplemental form_706 law firm discussed the election under sec_2057 with trustee but once again law firm determined that the estate did not satisfy the threshold requirements in sec_2057 trustee relied on law firm’s expertise and signed the first supplemental form_706 accordingly an election under sec_2057 was not made on the first supplemental form_706 on date law firm filed a second supplemental form_706 second supplemental form_706 in preparation of the second supplemental form_706 law firm and attorney determined that the estate qualified for the election under sec_2057 an election under sec_2057 was made on the second supplemental form_706 decedent's_estate tax_return is currently under examination by the internal_revenue_service service decedent's_estate requests an extension of time under sec_301_9100-1 and sec_301_9100-3 to make an election under sec_2057 to deduct the adjusted_value of decedent's qualified family-owned business interests sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2057 provides that for purposes of the tax imposed by sec_2001 in the case of an estate of a decedent to which this section applies the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the adjusted_value of the qualified family-owned business interests of the decedent sec_2057 provides that the deduction allowed by sec_2057 shall not exceed dollar_figure sec_2057 provides generally that sec_2057 shall apply to an estate if a the decedent was at the date of the decedent's death a citizen or resident_of_the_united_states b the executor elects the application of this section and files the agreement referred to in sec_2057 c the sum of the adjusted_value of the qualified family-owned business interests described in sec_2057 plus the amount of the gifts of such interests determined under sec_2057 exceed sec_50 percent of the adjusted_gross_estate and d during the 8-year period ending on the date of the decedent's death there have been periods aggregating years or more during which such interests were owned by the decedent or a member of the decedent's family and there was material_participation within the meaning of sec_2032a by the decedent or a member of the decedent's family in the operation of the business to which such interests relate sec_2057 provides that the qualified family-owned business interests described in this paragraph are the interests which are included in determining the value of the gross_estate and are acquired by any qualified_heir from or passed to any qualified_heir from the decedent within the meaning of sec_2032a plr - sec_2057 provides generally that for purposes of sec_2057 the term qualified_family-owned_business_interest means an interest as a proprietor in a trade_or_business carried on as a proprietorship or an interest in an entity carrying_on_a_trade_or_business if at least percent of such entity is owned directly or indirectly by the decedent and members of the decedent's family at least percent of such entity is so owned by members of families and at least percent of such entity is so owned by the decedent and members of the decedent's family or at least percent of such entity is so owned by members of families and at least percent of such entity is so owned by the decedent and members of the decedent's family sec_2057 provides that for purposes of making the election and filing the agreement under sec_2057 rules similar to the rules under sec_2032a and regarding the election of special_use_valuation of farm and other qualified_real_property shall apply sec_2032a provides that the election under sec_2032a shall be made on the return of tax imposed by sec_2001 in a manner consistent with the regulations prescribed by the secretary the election once made is irrevocable sec_2032a provides that the secretary may prescribe procedures under which the executor will have a reasonable_time not exceeding days to provide necessary information or signatures after receiving notification of a failure to provide the required information or signatures sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore an extension of time to make the election under sec_2057 is granted until date the date on which the second supplemental form_706 was filed however the burden is on the estate to establish to the service's satisfaction that all of the requirements of sec_2057 are met plr - the ruling contained in this letter is 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express or imply no opinion on whether the estate qualifies for the deduction under sec_2057 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer 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 sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc initiator reviewer reviewer reviewer reviewer reviewer reviewer code surname date form 1937-a rev correspondence approval and clearance department of the treasury internal_revenue_service u s gpo


internal_revenue_service number release date index number ------------------------- ---------------------------- ----------------------------------- legend trust department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b07 plr-139975-06 date date --------------------------------------------------------------------------------------------------- ----------------------- -------- ------------------------------------------------ state grantor --------------------- date ---------------- court date ------------------ child -------------------------- date ----------------------- child --------------------------------- date ------------------ date ----------------------- date --------------------------- statute ------------------------------------------------------------------------------------- dear ----- correspondence requesting income gift and generation-skipping_transfer gst tax rulings with respect to the proposed conversion of trust to a total_return_trust under state law on date at the request of the trustees court divided the irrevocable_trust into four separate trusts on date trust is one of the four trusts created by the date court order and is held for the benefit of child and his descendants at the request of the this letter responds to your letter dated date and subsequent the facts and representations are as follows grantor created an irrevocable_trust under the terms of the original trust agreement and the date court order after under the terms of the original trust agreement and the date court order trust plr-139975-06 trustees court modified the trustee succession provisions with respect to trust on date date date and date are before date no additions actual or constructive have been made to trust since date trust is governed by state law child 1’s death child may direct the payment of up to one-third of the net_income in his last will and testament to his surviving_spouse the balance of the net_income or all of the net_income if none becomes payable to a surviving_spouse shall be paid to child 1’s issue from time to time surviving per stirpes child may by will change the proportion in which his issue shall share in the net_income by exercise of a limited_power_of_appointment if child dies without issue before the termination of trust the trust assets shall be added to the shares of the remaining children in the same proportion that such shares bear to each other shall continue until twenty years after the death of the last surviving of eight named individuals child was the last surviving named individual child died on date upon termination of trust the trust estate shall be paid to the person s then in receipt of the income if a spouse is currently receiving income a share of trust necessary to produce such income shall continue to be held in trust during the spouse’s life but the person s who would have received the income shall immediately have a vested interest in the principal withheld the trustees may choose to purchase an annuity for the spouse and make immediate distribution of the entire trust estate child exercised his right to change the percentage of net_income paid to his issue but did not direct payment of any net_income to a surviving_spouse trust income is currently distributed in accordance with the percentages set out in child 1’s will state statute permits a court to convert a_trust to a total_return_trust or unitrust if the court determines that the conversion will enable the trustee to better carry out the purposes of the trust and that the conversion is in the best interests of the beneficiaries statute provides that following conversion of a_trust to a total_return_trust income in the governing instrument means an annual amount equal to a percentage of the net fair_market_value of the total trust assets averaged over a three-year period finally statute provides that a court has the power to determine the percentage of the total value of the trust assets to be distributed from a total_return_trust trust to a total_return_trust under statute and that court approve a distribution percentage from trust after the conversion the complaint further requests the court the trustees have filed a complaint in court requesting that the court convert child died on date under article three of his will executed on date sec_2511 provides that the tax imposed by sec_2501 applies whether the sec_2501 of the internal_revenue_code imposes a tax on the transfer of plr-139975-06 declare that on termination the trust assets will be distributed to the persons then in receipt of a portion of the unitrust_amount in the same proportions as the unitrust_amount is then being paid after the conversion the unitrust_amount will be divided among the beneficiaries as directed in child 1’s will the trustees have requested rulings that the proposed conversion of trust to a total_return_trust will not cause trust to lose its status as exempt from the gst tax will not cause any beneficiary to have made a gift_for gift_tax purposes and will not cause trust or any beneficiary to realize capital_gain from an exchange of a_trust interest for income_tax purposes ruling sec_1 and property by gift by an individual transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible the date of the gift shall be considered the amount_of_the_gift distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date regulations provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or sec_2512 provides that if a gift is made in property the value thereof at sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 of the generation-skipping_transfer_tax sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 provides that a modification of the governing plr-139975-06 hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations that is otherwise exempt from the gst tax because it was irrevocable prior to sec_26_2601-1 example considers a situation where a_trust sec_26_2601-1 provides that for purposes of this section a the trustees represent that trust was irrevocable on date and the facts in this case are similar to those set forth in example of sec_26 plr-139975-06 date provides that trust income is payable to a for life and upon a’s death the remainder is to pass to a’s issue per stirpes state x the situs of the trust then amends its income and principal statute to define income as a unitrust_amount of of the fair_market_value of the trust assets valued annually the example concludes that the administration of the trust in accordance with the state statute defining income to be a unitrust_amount will not be considered to shift a beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under the facts of the example no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes that there were no additions to trust after date b i e which provides that the conversion of an income_interest to a unitrust_interest pursuant to state statute will not be considered to shift a beneficial_interest in a_trust for gst purposes example further concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes provided the proposed conversion meets the requirements of state statute and an order from state court approving the conversion is obtained we conclude that the conversion of the income_interest in trust to a unitrust_interest will not be considered to shift any beneficial_interest in trust and therefore will not cause trust to lose its status as exempt from the gst tax we further conclude that the proposed modification will not result in any beneficiary being treated as having made a taxable gift_for federal gift_tax purposes ruling whatever source derived including gains derived from dealings in property and income from an interest in an estate_or_trust shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1_1001-1 of the income_tax regulations the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially in_kind or in extent is treated as income or loss sustained under sec_1001 of the code gain from the sale_or_other_disposition of property sec_61 and provides that gross_income means all income from sec_1001 provides that the amount_realized from the sale or other sec_1_1001-1 provides that a loss is not ordinarily sustained prior to the plr-139975-06 disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sale_or_other_disposition of the property for the reason that until such sale_or_other_disposition occurs there remains the possibility that the taxpayer may recover or recoup some of the adjusted_basis of the property until some identifiable_event fixes the actual sustaining of a loss and the amount thereof the loss is not taken into account an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite sec_1_643_b_-1 provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax- exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than and no more than of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 beneficiaries of the trust will have the same property interests and legal entitlements as a result of the proposed conversion under state statute a conversion to a total_return_trust may be made upon the court's determination that the conversion will enable the trustee to better carry out the purposes of the trust in addition and under the facts in the present case the preliminary question is whether the trustees and except as expressly provided herein no opinion is expressed or implied plr-139975-06 presented there is to be no material_change in property interests or legal entitlements for trust the trustees or the beneficiaries if the conversion to a total_return_trust does not result in a material_change in property interest or legal entitlements there is no occasion for realizing taxable gain_or_loss under sec_1001 therefore under the facts presented the conversion will not trigger realization of gain_or_loss for the taxpayers for federal_income_tax purposes concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 provides that it may not be used or cited as precedent being sent to the taxpayer’s representatives pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer s requesting it sec_6110 the rulings contained in this letter are based upon information and sincerely melissa c liquerman melissa c liquerman senior technician reveiwer branch passthroughs special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-145126-02 date date legend company owners foreign_country date date dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_301_9100-3 of the procedure and administration regulations to file an election for company to be treated as a partnership for federal tax purposes facts according to the information submitted company was formed in foreign_country on date company is owned by owners who are all considered to have limited_liability under the laws of foreign_country and company is considered to be an entity plr-145126-02 under the laws of foreign_country at all times after the formation of company owners intended company to be treated as a partnership for federal tax purposes in date it was discovered that a form_8832 entity classification election inadvertently had not been filed law and application sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is classified as an association if all its members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing a form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-145126-02 conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly company is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center with an effective date of date a copy of this letter should be attached to the election and is enclosed for this purpose except for the specific ruling above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent under a power_of_attorney on file with this office we are sending the original of this letter to you and a copy to company sincerely s heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court robert and mildred peaco petitioners v commissioner of internal revenue respondent docket no filed date michael b yulsman for petitioners carol-lynn e moran and kenneth j rubin for respondent memorandum findings_of_fact and opinion foley judge by notice dated date respondent determined a deficiency of dollar_figure relating to petitioners’ federal_income_tax all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioners are entitled pursuant to sec_104 to exclude from income proceeds received in settlement of an age discrimination lawsuit findings_of_fact petitioners resided in coatesville pennsylvania at the time the petition was filed in date mrs peaco filed a lawsuit against her former employer chester county intermediate unit cciu alleging violations of the age discrimination in employment act adea and the pennsylvania human relations act phra she claimed damages which included fringe_benefits pension benefits front pay back pay and pain and suffering in her complaint she did not allege facts relating to any personal injury in a letter to cciu’s executive director dated date cciu’s attorney estimated that cciu’s liability to mrs peaco could exceed dollar_figure of back pay and could be nearly dollar_figure of front pay the attorney suggested that the back pay amount would be doubled in accord with the adea if a jury found willful discrimination he noted that the pain and suffering and punitive_damages were a wildcard on date cciu entered into an agreement with its insurer utica mutual_insurance_company utica allocating dollar_figure of the anticipated settlement proceeds to back pay and front pay and dollar_figure to pain and suffering in the summer of mrs peaco settled the lawsuit for dollar_figure and executed a confidential settlement agreement and general release settlement agreement that states all funds paid to mildred peaco in this settlement are for pain and suffering claimed in this matter arising from physical injury to her and not for front pay back pay or lost wages or benefits at mrs peaco’s insistence cciu agreed to this allocation petitioners did not report the settlement proceeds on their return opinion petitioners contend that the express terms of the settlement agreement reflect the intent of the parties and as a result all of the proceeds are excludable pursuant to sec_104 respondent contends that the entire proceeds should have been included in petitioners’ gross_income sec_104 provides that gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness thus an amount may be excluded from gross_income only when it was received both through prosecution or settlement of an action based upon tort or tort type rights and on account of personal injuries or sickness see 515_us_323 petitioners contend that the express terms of the settlement agreement satisfy the personal_injury_or_sickness requirement the terms of the settlement agreement however do not reflect the realities of the settlement see 102_tc_116 stating under similar circumstances that the court’s holding need not be consistent with the terms of a settlement agreement when those terms do not reflect the realities of the settlement affd in part revd in part and remanded on other grounds 70_f3d_34 5th cir a significant portion of the proceeds was paid to satisfy the loss of compensation claim the amount_paid was consistent with cciu’s attorney’s analysis of liability to mrs peaco the agreement between cciu and utica offered by respondent evidences cciu’s intention to allocate a portion of the proceeds to personal injury petitioners however disavow reliance on that agreement and contend that it had no binding effect on the settlement and should be wholly disregarded in sum petitioners have failed to establish that mrs peaco received all or any part of the proceeds on account of personal_injury_or_sickness accordingly the proceeds are not excludable pursuant to sec_104 to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court dale h sundby and edith littlefield sundby petitioners v commissioner of internal revenue respondent docket no 6977-01s filed date dale h sundby pro_se michael s hensley for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure and dollar_figure for the taxable years and the issue for decision is whether petitioners are entitled to certain deductions they claimed on schedule c profit or loss from business in petitioners resided in san diego california on the date the petition was filed in this case on date petitioner husband petitioner incorporated an entity in the state of california with the name access anytime anywhere inc on date this corporation’s name was changed to navis communications navis on date petitioner signed a document as director of navis that inter alia named petitioner as the chairman president chief_executive_officer ceo secretary and chief financial officer of navis by letter dated date navis was notified by the internal_revenue_service that its election to be treated as an s_corporation had been accepted effective beginning date subject_to verification if we examine your return navis’s status was suspended on date and then again on date on date petitioner incorporated another entity in the state of california with the name search2000 the corporation’s name was changed to power agent inc on date and its status was suspended on date a federal_income_tax return was filed for power agent in date with respect to its taxable_year beginning date and ending date this return reflected zero income and zero expenses navis conducted business throughout a conference table computer supplies and software business cards legal services fax repair services and access to an information service were all purchased by navis during that year in addition navis maintained a federal express shipping account and a sprint telephone service account throughout petitioner sent and received various correspondence in his capacity as ceo of navis the correspondence appearing in the record can be summarized as follows on date petitioner sent a letter as ceo of navis to integrated systems solutions corp of bethesda maryland concerning products under development by navis on date eds commercial services eds sent petitioner a letter concerning the development of a product known as workusa this letter stated in part my proposal is that eds and navis begin a four-month design effort during this stage eds will establish a core organization staffed with the expertise necessary to further define the business processes and requirements and design the data base application systems and technology platform we understand the purpose of obtaining these estimates is to assess eds’ ability to deliver a full solution we also understand that the figures may be used by navis in obtaining financial backing from outside investors eds asks that the source of these estimates be held in confidence between eds and navis until such time as navis and eds reach an agreement to proceed attached to the letter was a document titled an estimate to navis communications which spelled out in detail the proposal being offered by eds to navis in date petitioner prepared proposals for goldman sachs and sprint concerning products in development both of these proposals indicated that they were from navis and both named petitioner as the ceo thereof on date price waterhouse l l p sent a letter to petitioner as ceo of navis this letter stated that navis communications has asked price waterhouse to conduct a market evaluation study of its new product searchnet to be launched in date and the letter concluded by stating that we are confident that we can successfully help navis determine the market penetration and initial marketing program required for a successful launch of searchnet throughout navis also entered into a variety of confidentiality and nondisclosure agreements with a number of individuals and business entities there is no evidence in the record indicating that a tax_return was filed for navis with respect to or any other taxable_year petitioner gained a business advantage from the incorporation of navis insofar as the corporation gave petitioner a more legitimate base versus dale sundby the sole_proprietor in his business dealings petitioners filed a schedule c with their joint federal_income_tax return for taxable_year the schedule c which named petitioner as the proprietor of a business engaged in information services listed the following gross_receipts and deductions gross_receipts -0- car and truck expenses dollar_figure depreciation and sec_179 expense big_number employee benefit programs big_number legal and professional services big_number office expense big_number supplies big_number travel big_number meals and entertainment big_number utilities big_number home_office expense big_number net_loss big_number taking into account the schedule c loss petitioners reported adjusted_gross_income of negative dollar_figure and zero tax_liability for petitioners also filed a form_1045 application_for tentative refund on which they requested a tentative refund for on account of a net_operating_loss nol_carryback from to that year of dollar_figure respondent issued petitioners a refund of dollar_figure in accordance with this request in the notice_of_deficiency respondent determined that petitioners are not entitled to deduct the dollar_figure claimed as trade_or_business_expenses in the notice_of_deficiency states it is determined that the amount of dollar_figure as a loss from an information services business for the taxable_year ended date is not allowed because you did not establish that such an activity constitutes a bona_fide business entered into for profit further it has not been established that the claimed expenses were incurred or if incurred paid_by you during the taxable_year for ordinary and necessary business purposes or that any claimed amount qualifies as an allowable deduction under the provisions of the internal_revenue_code further it has been determined that the claimed schedule c expenses are start-up_expenditures and not deductible in the taxable_year ended date under sec_162 of the internal_revenue_code further it has been determined that the claimed schedule c expenses were not your expenses but those of the corporations search and navis communications accordingly with the disallowance of all of your schedule c expenses and home_office expenses taxable_income is increased dollar_figure because the schedule c expenses were disallowed respondent also determined that petitioners are not entitled to the nol_carryback from to the entire amount of the deficiency of dollar_figure results from the disallowance of the nol_carryback and related computational adjustments with respect to respondent also determined that income of dollar_figure received by petitioner wife from personalized workout of la jolla inc is subject_to self-employment_income tax this adjustment gives rise to the entire amount of the deficiency of dollar_figure despite stating a general objection to the deficiency in 1in lieu of the home_office expense deduction of dollar_figure respondent allowed petitioners additional itemized_deductions for taxes and mortgage interest totaling the same amount their petition petitioners did not address this underlying adjustment in the petition at trial or in their brief we therefore consider the issue to have been abandoned by petitioners the sole dispute in this case is whether petitioners are entitled to the schedule c deductions claimed in if petitioners are entitled to the deductions they are also entitled to the nol_carryback to petitioners’ primary arguments at trial and in their brief can be summarized as follows petitioner was engaged in a trade_or_business outside of the corporations that he owned and the schedule c expenses are his individual expenses rather than those of a corporation or in the alternative because navis was an s_corporation all of its expenses should have passed through to petitioner allowing petitioners to deduct those expenses on their individual return petitioners also argue that they are entitled to schedule c deductions in amounts greater than those claimed on their return a taxpayer generally may not deduct personal_living_and_family_expenses sec_262 expenses that are ordinary and necessary in carrying_on_a_trade_or_business of the taxpayer on the other hand generally are allowed as deductions to the taxpayer in the year in which they are paid_or_incurred sec_162 a taxpayer is engaged in a trade_or_business if the taxpayer is involved in the activity with continuity and regularity and with the primary purpose of making a profit 480_us_23 however the trade_or_business of a taxpayer is separate and distinct from the trade_or_business of a corporation owned by that taxpayer 319_us_436 the supreme court has stated the doctrine_of corporate entity fills a useful purpose in business life whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator’s personal or undisclosed convenience so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation the corporation remains a separate taxable entity id pincite fn refs omitted because the corporation is a separate taxable entity the expenses paid_or_incurred in carrying on the trade_or_business of the corporation are deductible by the corporation rather than by its shareholders sec_162 moline props inc v commissioner supra 308_us_488 47_tc_596 affd per curiam 400_f2d_584 9th cir this is so even where the shareholders personally pay the ordinary and necessary expenses of the corporation’s trade_or_business deputy v du pont supra 35_tc_956 in certain circumstances the corporate form may be disregarded where it is a sham or unreal moline props inc v commissioner supra pincite however if a taxpayer chooses to conduct business through a corporation and gains an advantage from its use the taxpayer is not permitted subsequently to deny the existence of the corporation for tax purposes id weigman v commissioner supra in general any small_business_corporation may elect to be an s_corporation under sec_1362 one of the effects of electing s_corporation status is that income earned by the corporation is not taxed at the corporate level sec_1363 however taxable_income is still computed at the corporate level sec_1363 accordingly s_corporations are required to file yearly tax returns and to provide copies of the information on those returns to its shareholders sec_6037 and b the individual shareholders in turn are required to either report on their own returns all s_corporation items consistently with the corporate return or to file a statement identifying inconsistencies or noting that a corporate return was not filed sec_6037 thus the corporate entity cannot be ignored even if the corporation has elected s_corporation status 45_tc_151 affd 361_f2d_939 7th cir see also weibusch v commissioner 59_tc_777 affd 487_f2d_515 8th cir taxpayers are required to maintain records sufficient to establish the amounts of income deductions and other items which underlie their federal_income_tax liabilities sec_6001 sec_1_6001-1 e income_tax regs at trial petitioner admitted that the amounts on the schedule c are estimates and that he cannot provide the supporting documents that were used to arrive at the amounts of the expenses shown thereon in support of their argument that they are entitled to deductions in amounts greater than those claimed on the schedule c petitioners offered and the court received into evidence hundreds of pages of receipts and invoices allegedly showing various business expenditures that were grouped into several categories corresponding to lines on the schedule c the summaries of the receipts and invoices provided with respect to each category are merely lists of receipts rather than any type of business record maintained contemporaneously with the conduct of the business activities--petitioner testified that petitioners assembled these records only after the examination of their return had begun petitioners did not maintain separate bank accounts or credit cards for use in their business activities and the checks and credit cards that were used to pay the expenses bear the name of petitioner or petitioner wife we conclude that petitioners have not maintained adequate books_and_records and that they have not properly substantiated the items claimed on their return despite petitioners’ arguments to the contrary see sec_6001 sec_1_6001-1 e income_tax regs some of the receipts and invoices petitioners provided have no plausible connection to any trade_or_business and are clearly nondeductible personal expenses under sec_262 for example petitioners seek to deduct the cost of installing a wireless fencing system for their dog there are also numerous other expenses which are likely personal with respect to which petitioners have provided inadequate explanations concerning their business_purpose these expenses include gasoline and car washes for petitioners’ family cars as well as various travel_expenses petitioners introduced into evidence groups of receipts and summaries for the travel_expenses and these summaries contained notations concerning the alleged business_purpose of the travel the notations for a date trip to vail colorado indicate that the purpose was a search2000 board_of directors meeting however search2000 was not incorporated sec_7491 does not apply in this case because the underlying examination began before date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 when petitioners were notified by letter dated date that their application_for tentative refund was under examination we note that had sec_7491 applied it would not have shifted the burden_of_proof to respondent because petitioners have not maintained adequate books_and_records and have not substantiated the amounts shown on their return sec_7491 the burden_of_proof remains on petitioners to show respondent’s determinations in the notice_of_deficiency to be in error see rule a until months after this alleged meeting and the notations indicate that the meeting involved only petitioner archie mcgill as director and petitioner wife as vice president the notations for another trip this one to hawaii in date also indicate various business meetings related to search2000 took place however these alleged business meetings occurred solely between petitioner and petitioner wife over hotel dinners certain receipts and invoices petitioners provided do reflect likely trade_or_business_expenses however the expenses that were billed to navis clearly were incurred by navis rather than petitioners we further conclude that the other business- related expenses that reflect petitioner or petitioner wife as the purchaser or payor also were expenses of navis rather than a sole_proprietorship of petitioner petitioner held himself out as the ceo of navis in his business dealings and the evidence of business activities in the record reflects that the activities were those of navis rather than of petitioner as a sole_proprietor other than petitioner’s testimony there is no evidence in the record supporting his contention that he was conducting his business activities as a sole proprietor--whether such a business was as a venture capitalist as petitioners argue or another activity--and that navis was a mere shell that conducted no business we do not accept petitioner’s testimony because it is self-serving uncorroborated and contradicted by the documentary_evidence in the record see 99_tc_202 in their brief petitioners argue that navis was just one of many ventures operated by petitioner and that navis remained dormant and was only used for interacting with potential partners with the purpose of being available as a corporate entity for any one of petitioner’s ventures should the need arise however the documentary_evidence demonstrates that the correspondence that was sent and received under navis’s name refers to various products or proposals offered by navis these products or proposals have the same names as what petitioners assert were separate business ventures we conclude that navis itself was offering these products or proposals as a part of its business activities petitioners further argue despite respondent’s contention that petitioner states however that navis was nothing more than a ‘shell corporation ’ and was not a separate_entity from dale sundby sole_proprietor petitioner never made that statement in fact petitioner stated the opposite that he was ceo of navis a separate_entity from the sole_proprietorship as ceo of navis it was not inappropriate for the petitioner to hold himself out as such using navis provided for legitimacy in signing agreements with other corporations petitioner had no obligation to disclose to any of these parties that navis had not yet received a transfer of any intellectual_property from the sole_proprietorship had no checking account etc because we have found that navis rather than petitioner was carrying on the trade_or_business petitioners’ distinction is one without a difference if petitioners argue that navis was a separate taxable entity the expenses they incurred were those of the corporation and therefore nondeductible by them see 308_us_488 if petitioners argue that navis was not a separate taxable entity the entity cannot now be disregarded for tax purposes and its expenses remain nondeductible by petitioners see 319_us_436 an issue involving navis as a corporate entity was previously addressed by this court in sundby v commissioner tcmemo_2003_204 in that case a deficiency with respect to petitioners’ taxable_year was before the court petitioners had claimed a bad_debt deduction of dollar_figure on a schedule c in we concluded that assuming arguendo that a bona_fide debt had existed navis would have been entitled to a bad_debt deduction rather than petitioners we stated the promissory note was made between search2000 and navis in because navis was incorporated under the laws of the state of california and there are other indicia of its separate status we shall treat it as a separate_entity since the promissory note was made payable to navis it is navis that would be entitled to the bad_debt deduction if any were to be allowed and petitioners have not shown that the note was transferred to them personally moreover petitioners have not shown that any s_corporation_election was in effect for navis for the year in issue in reaching this conclusion we found that navis was a corporation when the promissory note was signed in and we held that the corporate form could not be disregarded with respect to that transaction at the time that the debt allegedly became worthless in the court’s findings in sundby are consistent with our finding in this case that the business activity conducted by petitioner in was conducted in his role as ceo of navis rather than in a sole_proprietorship and our holding is not affected by petitioners’ failure to introduce evidence of an s_corporation_election in the prior case in summary the court has received into evidence hundreds of pages of receipts and invoices offered by petitioner who argues that each and every one represents a deductible expense however we conclude that many of the expenses are nondeductible personal expenses see sec_262 and that to the extent that the receipts are for trade_or_business_expenses the expenses relate to the trade_or_business of navis rather than petitioner see moline props inc v commissioner supra petitioners are not now free to disregard the corporate entity for tax purposes after gaining a business advantage from its use and the fact that petitioners personally paid certain expenses does not alter their characterization as corporate expenses see id deputy v du pont supra 47_tc_596 35_tc_956 petitioners have provided no other grounds for deducting any of the remaining expenses if any evidenced by the receipts 3one invoice received in evidence as alleged substantiation for petitioner’s schedule c expenses labeled by petitioners as office conference room upholstery fabric for chairs listed the continued finally we address a point petitioners raised at trial petitioners assert that the explanation in the notice_of_deficiency regarding the disallowance of the schedule c expenses was too vague to allow for an adequate response we agree that the explanation as a whole suffers from a certain lack of clarity or specificity however the notice_of_deficiency in effect sets forth several alternative theories under which respondent determined that petitioners are not entitled to any of the schedule c deductions the commissioner generally is permitted to set forth alternative grounds for adjustments in a notice_of_deficiency as well as to take alternative positions at trial 66_tc_101 on account of our holding however we need not address every such argument respondent raised in this case reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent continued purchaser as edith littlefield sundby sbmi interiors another invoice labeled office decorative fabric for couch listed the purchaser only as sbmi interiors while numerous other invoices for similar items list only petitioner wife as the purchaser no mention is made of sbmi interiors elsewhere in the record and petitioners have not argued that petitioner wife was engaged in a trade_or_business of any type other than with respect to the dollar_figure in income that she received from personalized workout of la jolla inc