t c memo united_states tax_court sugarloaf fund llc jetstream business limited tax_matters_partner et al petitioners v commissioner of internal revenue respondent docket nos john e rogers for petitioners filed date craig connell thomas a deamus and clare w darcy for respondent 1cases of the following petitioners are consolidated herewith sugarloaf fund llc warwick trading llc butler fund llc severus fund llc john e rogers partners other than the tax_matters_partner jetstream business limited tax_matters_partner docket no and sugarloaf fund llc jetstream business limited tax_matters_partner docket nos and memorandum findings_of_fact and opinion goeke judge before us are five consolidated dockets each of which arises from a notice of final_partnership_administrative_adjustment fpaa issued to sugarloaf fund llc sugarloaf for each year from through however the years and have been resolved by respondent’s concession the years and involve issues of whether sugarloaf should be recognized for tax purposes who sugarloaf’s partners are and who is taxed on its income whether sugarloaf revenue should be subject_to self- employment_tax whether various fpaa adjustments reducing expenses should be sustained and whether the penalty under sec_6662 a should apply findings_of_fact john e rogers is both sugarloaf’s representative and the promoter of the transactions at issue mr rogers has long been a party to litigation in this court both as a promoter of tax_shelters involving distressed_debt and as a taxpayer 2these cases were assigned to judge robert a wherry jr who retired from judicial service on date with the parties’ agreement the cases were reassigned to judge joseph r goeke for the purpose of rendering an opinion 3unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the tax years at issue and all rule references are to the tax_court rule_of practice and procedure himself the present dockets arise from his role as a promoter mr rogers had complete control of sugarloaf and the transactions at issue in these cases he made all the operating decisions at his direction sugarloaf engaged in distressed asset transactions such as those described in 143_tc_322 and derringer trading llc v commissioner tcmemo_2018_59 in mr rogers used warwick trading llc warwick for the transactions and he used sugarloaf beginning in mr rogers had warwick and sugarloaf use trading and holding_companies treated as partnerships for federal tax purposes for transactions during and he had sugarloaf switch to transactions using trusts for through the parties have extensively stipulated facts including the entire record of trial in kenna trading the stipulated facts are incorporated herein by this reference for all relevant periods including when the petitions were filed the parties stipulated that sugarloaf’s place of business was in illinois mr rogers implemented and promoted the distressed_debt transactions that give rise to respondent’s adjustments through three business entities portfolio properties inc ppi sugarloaf and jetstream business ltd jetstream mr rogers organized ppi as its sole shareholder and caused it to elect s_corporation status in he formed sugarloaf and treated it as a partnership for federal_income_tax purposes he formed jetstream a british virgin islands limited_company with ppi as its sole shareholder to act as sugarloaf’s sole manager and its tax_matters_partner jetstream is a disregarded_entity for federal tax purposes mr rogers was jetstream’s sole director and manager mr rogers controlled ppi jetstream and sugarloaf during the years at issue the present cases involve mr rogers’ treatment of investors in the distressed_debt transactions he had previously structured nevertheless neither sugarloaf nor the various investors in the partnerships and trusts received any proceeds from the distressed_debt through mr rogers restructured the investments to roll_up the investors in the distressed_debt transactions into sugarloaf so he could treat the rollup as transforming the investors into new partners in sugarloaf sugarloaf is a party to these dockets primarily because of the rollup of the investors the rollup transactions started in and ended in the first rollup occurred in date and involved all of the trading and holding_companies used in the and transactions promoted through partnerships mr rogers structured the rollups so that the trading companies were treated as contributed to sugarloaf and in return the holding_companies became partners in sugarloaf in the subtrusts used in the transactions were contributed to sugarloaf and in return the trusts became partners in sugarloaf likewise in the subtrusts used in the and transactions were contributed to sugarloaf and in return the and trusts became partners in sugarloaf sugarloaf conducted business in the same manner both before and after the rollups mr rogers continued to sell the distressed_debt transactions to new investors income profit or loss from the sale of the distressed_debt transactions to new investors was not disbursed or allocated to the rolled-up investors the parties stipulated that neither the investors nor their representatives received prior notice of the rollups or consented to them in writing there are no contracts showing what assets were rolled up or what interests the investors acquired in sugarloaf mr rogers decided on his own what interest each investor acquired mr rogers did not reevaluate each investor’s interest in making this determination the investors were not asked to consent orally and were not notified of the rollups until after they had occurred mr rogers did not have authority under the terms of the trading companies’ operating agreements or the trust agreements to make the transfers involving the rollups as the manager of sugarloaf the manager of the trading companies or the trustee of the trusts with respect to the rollup of the investors from the and transactions the operating agreements are identical except for the investors’ names and the amounts of the investments article vi of the trading companies’ operating agreements for the warwick transactions and the sugarloaf transactions sets forth when and how a member may transfer his interest in the trading company there is no provision in the operating agreements for anyone other than a member to transfer a member’s interest article vi was not followed in transferring the ownership of the trading companies to sugarloaf as they were not aware of the transfers the investors did not provide to the trading companies the amounts of capital to transfer to sugarloaf moreover jetstream did not consent in writing to the transfers as required by the operating_agreement article iv sec_4 a of the operating agreements grants the manager the authority to manage and control the business property and affairs of the trading companies it does not provide authority to transfer ownership the operating agreements do not grant mr rogers any authority either implied or express to transfer the investors’ ownership of the trading companies without their consents with respect to the rollup of the trust investors from the and transactions the trust agreements are identical in relevant part except for the investors’ names and the amounts of the investments sec_2 a of the supplement to the trust agreements states that no interest in the subtrust may be transferred except as provided in sec_2 b and transfers not in compliance with sec_2 b shall be considered null and void sec_2 b provides that interests in the subtrusts and the subtrusts’ assets may be transferred only upon prior written notice by a beneficiary to the trustee mr rogers did not receive such written notices from the investors in the trust structures before the years at issue sugarloaf was owned by jetstream beginning with sugarloaf’s return listed the rolled-up investors as partners for to the rolled-up investors are listed as the holding_companies and trusts for the rolled-up investors are listed in their individual capacities however for each year from through the schedules k-1 form_1065 partner’s share of income deductions credits etc list the holding companies’ and trusts’ employer identification numbers and not the investors’ social_security numbers in addition to the rolled-up investors evidence of the owners of sugarloaf is inconsistent jetstream and warwick are listed on sugarloaf’s tax returns as partners for through in addition four entities connected with mr rogers’ promotion of the distressed_debt transactions globex teviot citgo and bernard equity were listed as sugarloaf partners for some but not all the years at issue globex was a brazilian retailer that contributed distressed_debt to sugarloaf in exchange for a partnership_interest the other three entities were connected with mr mazzuchelli who was involved in the operation of the tax_shelter with mr rogers teviot and bernard equity were owned by mr mazzuchelli and his father-in-law respectively mr rogers did not know who owned citgo but suspected that mr mazzuchelli owned it sugarloaf’s tax_return shows teviot citgo and bernard equity as partners the return shows the interests of the four entities as zero mr rogers eliminated the interests of teviot citgo and bernard equity because he believed that mr mazzuchelli had cheated him petitioners presented no agreements indicating how teviot and bernard equity became partners of sugarloaf there are no contribution agreements nor are there any documents memorializing their interests in the profits losses and capital of sugarloaf mr rogers offered no explanation for why globex’s interest was reduced to zero shelter promoter michael hartigan’s clients were listed as partners for and petitioners’ represented to the court that mr hartigan’s clients were not partners for and despite earlier returns listing them as such with respect to citgo documentary_evidence indicates that citco purported to acquire big_number shares and or units of sugarloaf on date however sugarloaf issued schedules k-1 to citgo only for and sugarloaf’s operating_agreement does not state that it issued shares or units to its members instead capital accounts are maintained nothing in the record establishes the amount if any citgo contributed to sugarloaf for its interest during sugarloaf received dollar_figure in income from the sale of interests in sugarloaf international and incurred dollar_figure in cost_of_goods_sold related to this income sugarloaf declared this income and thus allocated taxable_income to the partners however there is no evidence that cash or some other economic benefit was ever distributed to the partners from these transactions as part of the distressed_debt transactions the investors deposited into the investor trust accounts dollar_figure dollar_figure and dollar_figure for and respectively in the fpaa respondent determined on the basis of the deposits that sugarloaf had unreported income the fees earned by promoters mr hartigan mr greer and mr agresti and any other sellers of the shelter were paid separate and apart from the amounts deposited into the investor trust accounts sugarloaf did not collect these fees or disburse them to these individuals on its partnership tax returns for through sugarloaf claimed business_expense deductions that respondent disallowed in the fpaa and that remain in dispute see appendix infra p in the answer petitioners asserted that sugarloaf is entitled to increase its business_expense deduction for legal and professional fees for by dollar_figure for a total deduction of dollar_figure in the fpaas respondent asserts accuracy-related_penalties under sec_6662 for through prior written supervisory approval for imposing the penalties was obtained only for and the approval for was obtained four days after the fpaa was issued opinion kenna trading has a direct impact on the present cases the record in kenna trading has been stipulated for inclusion in the records of these cases petitioners seek an interpretation of the record in kenna trading different from the one reached by the court respondent maintains that the findings in kenna trading should form the foundation of our analysis of the present cases petitioners offer us no compelling basis to revisit the findings and legal analysis of kenna trading and we adopt respondent’s position in kenna trading t c pincite we describe the origin of sugarloaf as follows mr rogers during or before conceived a plan that he contended would successfully invest in and manage distressed retail consumer receivables overseas and remit the proceeds to the united_states he used a tiered_partnership structure in and most of and a tiered trust structure in and to sell interests to individual investors mr rogers contended the business would profit through aggressive collection efforts translation gain from currency speculation and a planned initial_public_offering the first step under this plan was for brazilian retailers to contribute receivables to a limited_liability entity controlled by mr rogers which for u s tax purposes would accede to the tax basis of the retailers in the consumer debt in he used a limited_liability_company called warwick trading llc to purchase receivables from lojas arapua s a arapua a brazilian retailer of household appliances and consumer electronics in he used a different limited_liability_company sugarloaf to which two other brazilian retailers globex utilidades s a globex and companhia brasileira de distribuição cbd also contributed distressed accounts_receivable for interests in that company in sugarloaf contributed a tranche of those assets to other limited_liability companies trading companies sugarloaf then contributed most or all of its interest in the trading companies to yet other limited_liability companies holding_companies in sugarloaf contributed assets to trusts main trusts which each created another trust subtrust the main trust assigned the beneficial interests of the receivables in the subtrust to an investor who contributed money to the main trust in both years sugarloaf and the trading companies entered loan management and servicing agreements with a british virgin islands company called multicred investments limited and or a brazilian company called multicred investimentos limitada mr rogers formed sugarloaf through entities he owned and controlled he was the sole owner of an s_corporation portfolio properties inc ppi which owned jetstream at that time a british virgin islands company on date mr rogers through jetstream formed sugarloaf a delaware limited_liability_company according to the operating_agreement jetstream was the initial manager on date mr rogers sent an engagement letter to mr mazzucchelli as managing member of sugarloaf by which sugarloaf agreed to retain seyfarth shaw as its legal counsel in august mr rogers represented to seyfarth shaw that the owners of sugarloaf were mr mazzucchelli and ms dowek he never disclosed jetstream’s ownership which was at that time i the rollups mr rogers alleges that after he made a decision to roll_up the distressed_debt from the partnerships and trusts he had used to promote his tax_shelter scheme into sugarloaf with the alleged purpose of allocating ownership in sugarloaf to the partners and trust beneficiaries and to sell the debt for the investors to recover portions of their investments petitioners bear the burden to sustain these allegations and to put it succinctly the record lacks any coherent thread of evidence to support mr rogers’ assertion that a legally enforceable change in ownership occurred see rule a in addition no economic consequence resulted from the alleged rollups as there was no recovery_of distressed_debt shared with alleged new owners of sugarloaf accordingly we find there was no rollup for federal tax purposes and the tax consequences to sugarloaf in the years before us should be based on the ownerships described in kenna trading in kenna trading t c pincite the court found that all payments made by trust investors in whether paid to trust accounts or directly to sugarloaf constituted income to sugarloaf less fees retained by the promoters the trust transactions for through were implemented in the same manner as they were for respondent asserts that the conclusion reached for in kenna trading is required in the present case we agree as the record before us offers no supportable alternative ii a viable business in kenna trading the court found that sugarloaf was not a partnership for the years and because jetstream globex and cbd pda did not intend to join together for purposes of carrying on a debt collection business id pincite we have previously stated that we will not recognize the alleged rollup of new owners nothing of substance occurred in the years to to transform sugarloaf into a partnership sugarloaf was a sham in fact for to petitioners contend that in cbd pda and globex contributed distressed_debt to sugarloaf in return for partnership interests we reject this argument as it was also rejected in kenna trading the court found that under the disguised sale rules and the step_transaction_doctrine cbd pda and globex sold distressed_debt to sugarloaf in id pincite nothing presented in these cases changes that holding sugarloaf did not acquire new debt in the years at issue and the result reached in kenna trading controls here as well petitioners contend that sugarloaf had a business plan that could earn investors money 4petitioners’ contention that investors could earn money on the sugarloaf transactions and that the distressed_debt had significant value is also contradicted continued however the court’s conclusions in kenna trading are not based upon sugarloaf’s lacking a business plan instead sugarloaf was not a partnership and the transactions sugarloaf engaged in lacked substance iii sugarloaf’s income petitioners contend that sugarloaf’s taxable_income should not be allocated to mr rogers however this court found that jetstream was the sole owner of sugarloaf during the years and petitioners have not established there were any new owners of sugarloaf during the years to the only owner remaining is jetstream therefore all of sugarloaf’s income should be allocated to jetstream and accordingly that income flows through to mr rogers petitioners assert that jetstream was a subchapter_c_corporation and became a partner in sugarloaf on date however sugarloaf’s tax returns for through show that jetstream was a flowthrough entity in the petitions and the amended petitions petitioners did not raise the issue that a subchapter_c_corporation known as jetstream became a partner in or that income should be allocated to that partner in addition the parties stipulated that jetstream has not filed forms u s_corporation income_tax return for any continued by respondent’s experts dr finnerty mr hanan and mr tostes petitioners offered no evidence to rebut these reports of the through years and petitioners have not proven that a subchapter_c_corporation known as jetstream became a partner in sugarloaf at any time in ie petitioners offered no contracts records or other documents showing that jetstream a subchapter_c_corporation was admitted as a partner in fact jetstream was originally organized in date as a limited_company under the laws of the british virgin islands in date jetstream elected to be treated as a disregarded_entity for tax purposes while petitioners assert that jetstream became a subchapter_c_corporation in date the schedules k-1 attached to sugarloaf’s returns and the designation of jetstream as tax_matters_partner on sugarloaf’s tax returns did not change in conclusion we hold that sugarloaf was not a partnership for tax purposes during the years to and all of its income should be allocated to jetstream the parties stipulated that as part of the distressed_debt transactions the investors deposited into the investor trust accounts dollar_figure dollar_figure and dollar_figure during and respectively respondent argues these amounts less amounts paid to mr rogers and includible by him are gross_receipts to sugarloaf which sugarloaf did not report of dollar_figure dollar_figure and dollar_figure for and respectively in kenna trading t c pincite n the court stated second and conclusively here we found that in these transactions the investors each purchased a tranche of receivables from sugarloaf making the money paid into the trust accounts income to sugarloaf under sec_1001 so regardless of whether the investors’ payments went into the trust accounts or directly to sugarloaf those amounts were still income to sugarloafdollar_figure 38we note that respondent has determined only that the six trust deposits actually deposited into sugarloaf's bank account constitute income under our findings all payments by the trust investors would constitute income to sugarloaf less fees retained by the promoters we will not question respondent’s magnanimity the distressed_debt transactions for and were implemented in the same manner as they were in using the same structure distressed debts acquired in deal documents and trust bank accounts at heritage bank thus in substance the brazilian retailers sold distressed assets to sugarloaf in and sugarloaf sold them to the investors in through these sales created taxable_income to sugarloaf which in substance had control_over the payments mr rogers agrees sugarloaf did not report this income the fees earned by mr hartigan mr greer and mr agresti and any other sellers of the shelter were paid separate and apart from the amounts deposited into the investor trust accounts respondent concedes that the amounts of sugarloaf’s unreported income for and are decreased by the amounts included in mr rogers’ income for those years we have previously held that for dollar_figure transferred from the trust accounts to mr rogers was included in his income as compensation_for his services as trustee see rogers v commissioner tcmemo_2018_53 at we also held that dollar_figure that sugarloaf paid to ppi during was included in ppi’s gross_income id at for dollar_figure was transferred to mr rogers from the trust accounts as compensations for services and he was required to report the dollar_figure as income these amounts should be subtracted from the sugarloaf income as they are mr rogers’ income directly the income in question is subject_to self- employment_tax under sec_1401 because the income was earned through mr rogers’ activities iv the deductions deductions are a matter of legislative grace and are allowed only as specifically provided by statute 503_us_79 292_us_435 generally a taxpayer must establish that deductions claimed under sec_162 are ordinary and necessary business_expenses and the taxpayer must maintain records to substantiate the deductions claimed sec_6001 meneguzzo v commissioner 5in rogers v commissioner tcmemo_2018_53 mr rogers disputed the taxability of these transfers to himself for the year however we found that dollar_figure was taxable to him id at 43_tc_824 sec_1_6001-1 e income_tax regs claimed deductions in support of discredited tax_shelter transactions are nondeductible 113_tc_254 aff’d 254_f3d_1313 11th cir in kenna trading this court held that expenditures made in an attempt to obtain abusive_tax_shelter benefits are not ordinary and necessary business_expenses or otherwise deductible under sec_162 kenna trading t c pincite quoting 139_tc_67 further the court stated the transactions in question were tax_shelters and sugarloaf’s claimed expenditures were made in an attempt to obtain abusive_tax_shelter benefits id respondent maintains that all the deductions in dispute should be disallowed as supporting illicit tax_shelter activities that lack economic_substance see winn-dixie stores inc v commissioner t c pincite while this argument applies to some of the amounts in dispute sugarloaf’s business was actually to derive income from the investors in the spurious tax_shelters although mr rogers maintains all the shelter investments were rolled up into sugarloaf we have rejected that position earlier accordingly we will analyze the disputed deductions on the basis of what we find to be sugarloaf’s actual business siphoning money from the shelter investors the traditional attacks on loosely documented deductions are also made by respondent and they are compelling here petitioners have generally failed to establish that the deducted expenses were actually incurred for the stated business_purpose were not previously deducted by another entity or were actually expended in the first instance we have here attempted to discern whether any of the deducted amounts were actually allowable on the basis of the jumbled record petitioners have offered we disallow the disputed deductions except to the extent stated below for through sugarloaf deducted business_expenses as set forth in the appendix see infra p for petitioners contend that sugarloaf is entitled to an additional deduction for legal fees of dollar_figure except as stated infra petitioners have failed to establish the amounts or business purposes of disputed business_expense deductions for sugarloaf is entitled to deduct legal expenses and accounting expenses of dollar_figure and dollar_figure respectively for sugarloaf is also entitled to deduct dollar_figure in management fees paid to ppi petitioners adequately substantiated the amounts and business_purpose of these expenses on the other hand abandoned amortization consulting fee and other disallowed deductions are not established as having been incurred by sugarloaf or having been amortized by sugarloaf in the first instance for the deducted legal fees have not been established as being incurred for sugarloaf’s business and the deducted travel_expenses do not meet the strict substantiation requirements of sec_274 for various deducted management fees totaling dollar_figure are documented only by checks to ppi sugarloaf’s business_purpose for these checks is not proven and they are not allowed as deductions we find the consulting fees deducted for to the extent they are documented were in furtherance of the tax_shelter scheme to justify the spurious efforts to collect the distressed assets only dollar_figure of the claimed amounts has been documented but these amounts are not deductible for the reason stated the amortization of startup costs deducted for is simply not substantiated v accuracy-related_penalties respondent asserted accuracy-related_penalties under sec_6662 against sugarloaf in the fpaas issued for and sec_6751 provides no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved in writing 6we note respondent’s reply brief has very carefully set forth the inconsistencies in the records offered for the sugarloaf deductions and those inconsistencies in themselves establish the lack of general credibility of the deductions sought by the immediate supervisor of the individual making such determination or such higher level official as the secretary may designate we have recently held that challenges to accuracy-related_penalties in partnership cases such as these may include the commissioner’s alleged noncompliance with the requirements of sec_6751 endeavor partners fund v commissioner tcmemo_2018_96 at see also graev v commissioner t c ___ ___ slip op pincite date supplementing and overruling in part 147_tc_460 when a penalty is asserted supervisory approval must be secured in writing before the initial determination sec_6751 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 when the penalty is asserted in an fpaa that approval must come before the notice is issued endeavor partners fund v commissioner at see also chai v commissioner f 3d pincite with respect to penalties asserted against partnerships the commissioner has no burden of production and the taxpayer must show that no penalty should apply sec_7491 dynamo holdings v commissioner t c ___ ___ slip op pincite date endeavor partners fund v commissioner at in these cases written supervisory approval was sought and received for the penalties asserted in the and fpaas before their issuance however the requisite supervisory approval for the penalties asserted in the fpaa was not obtained until four days after the fpaa was issued section ‘6751 b requires written approval of an initial penalty determination no later than the date’ the commissioner issues an fpaa endeavor partners fund v commissioner at quoting chai v commissioner f 3d pincite because the necessary approval for the fpaa penalty was not obtained until after the fpaa was issued respondent failed to adhere to the statutory requirements and the penalty is not sustained respondent has asserted that the sec_6751 requirements were satisfied by his amending his answer and reasserting the penalties after supervisory approval was received however as we recently stated in endeavor partners fund v commissioner at w e are unable to accept this argument written approval must be obtained before the initial determination of a penalty the initial determination of the penalty in this case was made before the penalty was asserted in the fpaa the requisite approval was not obtained before the fpaa was issued and thus failed to satisfy the statutory requirements respondent urges that by rejecting his ability to cure a defective penalty assessment in an fpaa through an answer with this court we are creating a conflict between sec_6751 and sec_6226 sec_6751 requires the initial determination of a penalty to be approved by a supervisor in writing conversely sec_6226 allows this court to determine the applicability of any penalty which relates to an adjustment to a partnership_item we fail to see respondent’s perceived conflict these sections stand wholly on their own respondent notes that the purpose of an answer is to place the court and the parties on notice of disputes in respondent’s view that makes the answer an appropriate place to raise a sec_6662 penalty we find no issue with respondent’s raising an accuracy-related_penalty in his answer particularly if such a penalty was previously included in an fpaa after supervisory approval respondent is even free to initially assert a sec_6662 penalty in his answer if the requisite approval was obtained first see graev v commissioner t c 7in congress passed the bipartisan budget act of pub_l_no sec_1101 sec_129 stat pincite which repealed the previous tefra partnership audit rules including sec_6226 act sec_1101 sec_129 stat pincite replaced sec_6226 with an entirely new provision that is not applicable in the present cases our holding today should be limited to interpreting sec_6226 as it existed before the amendment and has no applicability to the current rendition of sec_6226 because these cases concern the through tax years prior sec_6226 applies at ___ slip op pincite finding that sec_6751 was satisfied where the commissioner asserted for the first time in his amendment to answer an accuracy-related_penalty that had not been previously determined the word initial is key in these cases respondent’s initial determination of an accuracy-related_penalty was asserted in the fpaa issued to sugarloaf before written supervisory approval had been obtained respondent cannot cure a defective initial determination with an approved subsequent determination there can be only one initial determination of a penalty and that determination must be timely approved in writing by a supervisor failure to obtain timely approval for an initial determination renders it defective and is fatal to respondent’s ability to assert the penalty now because the requisite timely supervisory approval was obtained for the and penalties they are sustained the court has considered all of the parties’ arguments and to the extent not discussed above concludes that those arguments are irrelevant moot or without merit to reflect the foregoing decisions will be entered under rule expense accounting fees amortization abandonment amortization bank service charges licenses and fees collection expense commissions consulting fees filing fees legal and professional fees management and director office expense rent professional fees telephone travel_expenses appendix dollar_figure -0- -0- big_number big_number big_number -0- -0- -0- dollar_figure big_number big_number big_number big_number big_number -0- -0- big_number big_number dollar_figure big_number big_number -0- -0- -0- big_number big_number big_number big_number big_number big_number -0- -0- -0-


internal_revenue_service number release date index number ------------------------------------------ ------------------------- ----------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-154593-05 date january ------------------------------- ------------------------------ ------------------------------ --------------------------------- --------------------------- legend legend a ------------------------------------------------------------- b ------------------------------------------------------------- c ------------------------------------------------------------- d ------------------------------------------------------------ fc accounting firm accounting firm individual year year year year year year year country x dear ------------------------------- ------- ------- ------- ------- ------- ------- ------- ---------------------- ------------ -------------------------- ----------------------------------------------------------- taxpayers have represented the following facts the rulings contained in this letter are based upon information and this is in response to your letter dated date requesting an plr-154593-05 extension of time to file a qualified_electing_fund qef election with respect to a’s and b’s taxpayers’ investment in fc representations submitted by taxpayers 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 this request_for_ruling such material is subject_to verification upon examination facts for the purpose of investing in real_estate in country x taxpayers c and d formed fc under sec_351 of the internal_revenue_code code in year and adopted a taxable_year ending june for fc at the time of its formation taxpayers owned two shares of redeemable preferred_stock and c and d each owned one share of common_stock for a total of shares in year taxpayers c and d contributed additional capital to the corporation in exchange for the issuance of additional shares following the year contribution of capital taxpayers owned shares of redeemable preferred_stock and c and d each owned big_number shares of common_stock advisors to assist them in complying with u s tax laws and relied on those tax advisors to provide them with appropriate guidance to comply with the laws in year taxpayers engaged tax advisors from accounting firm who were qualified_tax professionals competent to render tax_advice with respect to the ownership of shares of a foreign_corporation in year fc was a passive_foreign_investment_company pfic within the meaning of sec_1297 of the code taxpayers continued to engage accounting firm until year however at no time did the tax advisors from accounting firm inform taxpayers c and d that fc was a pfic and of their need to make a qef election for fc or of the tax ramifications for failing to make such an election taxpayers contacted individual with accounting firm to discuss the tax implications of a proposed sale of one of the real_estate investments held by fc individual determined that fc was a pfic and advised that a qef election under sec_1295 should have been made with respect to taxpayers’ year consistent with that advice taxpayers are seeking relief under the special consent procedures of sec_1 f in year taxpayers engaged the services of accounting firm in year at all times during their ownership of fc taxpayers engaged competent tax taxpayers request the consent of the commissioner of the internal revenue sec_1295 provides that any pfic shall be treated as a qef with respect to plr-154593-05 as of the date of this request_for_ruling no representative of the internal_revenue_service has raised upon audit the pfic status of fc for any taxable_year of taxpayers ruling requested service to make a retroactive qef election under sec_1_1295-3 with respect to their year taxable_year law and analysis a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic commissioner to make a retroactive qef election for a taxable_year however the commissioner will grant relief under sec_1_1295-3 only if four conditions are satisfied the first requirement is that the shareholder reasonably relied on a qualified_tax professional who failed to identify the foreign_corporation as a pfic or failed to advise the shareholder of the consequences of making or failing to make a sec_1295 election sec_1_1295-3 provides that a shareholder will not be considered to have reasonably relied on a qualified_tax professional if the shareholder knew or reasonably should have known that the foreign_corporation was a pfic and knew of the availability of a sec_1295 election in addition a shareholder cannot claim reliance upon a qualified_tax professional if he knew or reasonably should have known that the tax professional relied upon was not competent to render tax_advice with respect to the ownership of shares of a foreign_corporation or did not have access to all relevant facts and circumstances with respect to stock ownership of a foreign_corporation and had access to all the relevant facts and circumstances they failed to advise taxpayers that fc was a pfic failed to make a qef election on taxpayers’ year federal_income_tax return and failed to advise taxpayers of the consequences of failing to make such an election thus taxpayers reasonably relied on a qualified_tax professional within the meaning of tax advisors from accounting firm were competent to render u s tax_advice under sec_1_1295-3 a taxpayer may request the consent of the this requirement is met in this case because taxpayers have entered into a the second requirement of sec_1_1295-3 is that granting consent will plr-154593-05 sec_1_1295-3 and further taxpayers did not know and should not reasonably be expected to have known that fc was a pfic not prejudice the interests of the u s government under sec_1 f i the interests of the u s government are prejudiced if granting relief would result in the shareholder having a lower tax_liability taking into account applicable_interest charges in the aggregate for all years affected by the retroactive election other than by a de_minimis amount than the shareholder would have had if the shareholder had made the sec_1295 election by the election due_date the time_value_of_money is taken into account for purposes of this computation if granting relief would prejudice the interests of the u s government the commissioner may in his sole discretion grant consent to make the election provided the shareholder enters into a closing_agreement with the commissioner that requires the shareholder to pay an amount sufficient to eliminate any prejudice to the u s government as a consequence of the shareholder’s inability to file amended returns for closed taxable years sec_1_1295-3 closing_agreement with the commissioner that requires them to pay an amount sufficient to eliminate any prejudice to the united_states government as a consequence of their inability to file amended returns for closed taxable years in addition taxpayers have agreed to file an amended_return for each of their subsequent taxable years affected by the retroactive qef election the third requirement of sec_1_1295-3 is that the request must be made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder sec_1_1295-3 in this case the pfic status of fc has not been raised upon audit requirements set forth in sec_1_1295-3 must be met these include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted by the shareholder and any qualified_tax professional upon whose advice the shareholder relied sec_1_1295-3 iii these affidavits must describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure and the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional here affidavits meeting the requirements set forth in sec_1_1295-3 and iii as to the failure of accounting firm 1’s tax advisors to inform taxpayers of their need to make a qef election have been submitted and taxpayers have otherwise satisfied the procedural requirements of sec_1_1295-3 the final requirement of sec_1_1295-3 is that the procedural consent is granted to taxpayers to make a retroactive election for year under this private_letter_ruling is directed only to taxpayers who requested it section based on the information submitted and representations made a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this plr-154593-05 sec_1_1295-3 provided that they comply with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election k of the code provides that it may not be used or cited as precedent letter is being sent to taxpayers’ first representative cc ethan a atticks senior technical reviewer cc intl b02 office of associate chief_counsel international sincerely


internal_revenue_service number release date index number ------------------------------------------------- -------------------------------------------------------- ----------------------------- ---------------------------- - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-125709-06 date date --------------------------------------------------- --------- x --------------------------------------------------- p members --------------------------------------------------- ------------------------------------------------------ country d1 dear -------------- ---------------------- ------------ ----------------------------- this letter responds to the letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a partnership under sec_301_7701-3 effective d1 facts according to the information submitted x was formed on d1 as a p under the laws of country x was formed by three members each having limited_liability as members of x under the laws of country the members of x intended that x be treated as a partnership for federal tax purposes effective d1 however due to inadvertence x failed to file a timely form_8832 entity classification election plr-125709-06 law and analysis 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 as provided in sec_301_7701-3 sec_301_7701-3 provides that unless it elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed 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 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 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-125709-06 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and to elect to be classified as a partnership for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts discussed above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative s sincerely heather c maloy associate chief_counsel passthroughs special industries copy of this letter copy for sec_6110 purposes enclosures cc


t c memo united_states tax_court nathan t olpin petitioner v commissioner of internal revenue respondent docket no filed date w kevin jackson for petitioner pamela j sewell for respondent memorandum opinion dean special_trial_judge this case is before us on petitioner's motion for summary_judgment and respondent's cross-- motion for summary_judgment filed pursuant to rule unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax based on a finding that petitioner had not filed a valid federal_income_tax return and that petitioner's proper filing_status was married_filing_separately petitioner resided in salt lake city utah at the time he filed his petition petitioner moves for summary_judgment in his favor arguing that as a matter of law he filed a valid joint federal_income_tax return with his former spouse and that he is entitled to joint filing_status respondent initially objected to petitioner's motion arguing that there was a genuine issue of fact regarding the intent of petitioner's former spouse to file a joint_return both parties agreed however during a subsequent conference call with the court that there are no genuine issues of material fact with respect to the issue of whether petitioner filed a valid federal_income_tax return respondent filed a cross-motion for summary_judgment focusing on the reguirements of a valid_return the sole issue presented for summary_judgment is whether petitioner filed a valid federal_income_tax return although there has been no stipulation of facts we set forth a summary of facts relevant to our discussion which from the pleadings affidavits and the parties’ memoranda in support of their motions do not appear to be in dispute we treat these facts as true only for purpose of ruling on the motions background petitioner and his former spouse susan olpin now known as susan stroup but hereafter referred to as mrs olpin were legally married throughout and were divorced on date petitioner and mrs olpin filed and obtained two extensions of time to file their return on date a form_1040 was sent to the internal_revenue_service irs which petitioner argues is a joint federal_income_tax return the purported return the purported return was not signed by either petitioner or mrs olpin but was signed by their tax preparer respondent initially processed the purported return as a joint federal_income_tax return for petitioner and mrs olpin for the tax_year and petitioner made payments totaling dollar_figure to satisfy the liability reflected on the purported return ' respondent's answer to petitioner's petition admitted petitioner's allegation that he and his ex-wife obtained an extension for filing for the tax_year on form_4868 and an additional extension by filing form_2688 although respondent denied this allegation in his response to petitioner's motion for summary_judgment respondent has not sought to amend his answer admitting this fact and respondent's memorandum in support of respondent's motion for summary_judgment acknowledges that time extensions were requested by petitioner and granted by the irs see rule sec_36 sec_41 the irs' tax account transcripts for the tax_year originally recorded the receipt of the purported return as the filing of a joint income_tax return by petitioner and mrs olpin the irs however on or about date reversed its original processing of the purported return to reflect that a valid_return was not filed by petitioner although mrs olpin stated in a sworn affidavit that in she intended to file a joint income_tax return with petitioner for tax_year mrs olpin signed and filed an individual federal_income_tax return with a filing_status of married_filing_separately for tax_year on or about date in her affidavit mrs olpin explained that during the course of a chapter bankruptcy proceeding that she initiated the irs filed a proof_of_claim asserting a tax_liability for the tax_year mrs olpin further explained that the proof_of_claim was based upon unreported income for nathan olpin and upon an unsigned joint tax_return for the year in issue mrs olpin's affidavit also stated that because she had no independent knowledge of petitioner's income and had not seen the unsigned tax_return she signed and filed a separate individual federal_income_tax return at the suggestion of the irs petitioner nevertheless contends that he and mrs olpin filed a valid joint federal_income_tax return for the tax_year he argues that the subsequent filing of a separate federal_income_tax return by mrs olpin was not valid because mrs olpin had already filed a joint_return with petitioner according to petitioner mrs olpin was unlawfully advised to file the tax_return during the bankruptcy proceeding on the basis of these contentions petitioner concludes that no adjustments may be properly made to his filing_status for the tax_year petitioner agrees that all issues turn on whether he filed a valid federal_income_tax return respondent argues that summary_judgment in favor of the ir sec_1s appropriate because there are no genuine issues of material fact with respect to whether petitioner filed a valid federal_income_tax return and that as a matter of law petitioner did not file a valid_return discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials see 90_tc_678 a motion for summary_judgment 1s appropriate if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b see 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of showing that there is no genuine issue of material fact and factual inferences are viewed in the light most favorable to the nonmoving party see 95_tc_594 the existence of any reasonable doubt as to a material fact will result in denial of the motion for summary_judgment see 63_tc_18 a fact is material if it 'tends to resolve any of the issues that have been properly raised by the parties ' 106_tc_343 quoting 10a wright et al federal practice and procedure civil sec pincite 2d ed where both parties move for summary_judgment each motion must be examined to determine whether it has been established that there is no genuine issue as to any material fact and that a decision may be entered as a matter of law see 82_tc_630 affd 804_f2d_553 9th cir we agree with the parties that there are no material facts at issue with regard to whether petitioner filed a valid federal_income_tax return having determined that this is a proper case for summary_judgment we focus on the legal requirements of what constitutes a federal_income_tax return sec_6011 provides that any person made liable for any_tax shall make a return according to the forms and regulations prescribed by the secretary a return required to be filed shall contain or be verified by a written declaration that it 1s made under the penalties of perjury sec_6065 sec_6061 provides the general_rule that any return statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the secretary the regulations promulgated under sec_6061 require that each individual shall sign the income_tax return required to be made by him except that the return may be signed for the taxpayer by an agent who is duly authorized in accordance with paragraph a or b of sec_1_6012-1 to make such return sec_1_6061-1 income_tax regs the signature of petitioner's tax preparer does not qualify nor does petitioner suggest that it qualifies as the signature of a duly authorized agent as described by the regulations the law is well settled that a form_1040 that is not duly signed and verified under penalties of perjury does not constitute a valid federal_income_tax return see 113_tc_125 72_tc_818 65_tc_68 affd without published opinion 559_f2d_1207 3d cir 52_tc_986 revd on other grounds 444_f2d_770 3d cir 31_tc_690 affd 295_f2d_336 5th cir 28_tc_338 petitioner acknowledges the traditional general_rule requiring signatures on tax returns but contends that the unsigned form sent to the irs for tax_year is a valid_return because both he and his former spouse intended to file a joint_return and they inadvertently failed to sign the purported return petitioner relies on two arguments recent federal_law has eliminated the manual signature requirement and the facts of this case fall within an exception to the general_rule requiring tax returns to be signed ’ petitioner also suggests that the irs is required to abide by its initial processing of the purported return as the joint_return of petitioner and mrs olpin the irs' processing of the purported return and its acceptance of petitioner's payments of the tax_liability reflected on the form however can not cure the absence of a signature see 281_us_245 finding that no irs officer had the power to override the requirement that a tax_return be signed for purposes of the statute_of_limitations 52_tc_986 revd on other issues 444_f2d_770 3d cir smart v commissioner tcmemo_1987_279 although there is a case suggesting that the actions of the irs may constitute acceptance of an unsigned return the present case is distinguishable in 614_f2d_1263 10th cir vacated and remanded 465_us_1001 the court_of_appeals for the tenth circuit determined that the irs in relying on unsigned amended tax returns to convict taxpayers of willfully filing fraudulent_returns and to determine additional taxes due had accepted the amended returns and could no longer argue that there was no limitation period for assessment of tax shown on the original continued petitioner asserts that in recent years the manual signature requirement has become more relaxed and that sec_6061 eliminates the requirement petitioner cites no authority to support his contention that the law is becoming more relaxed regarding the signing and verification of tax returns as evidenced by our recent ruling in elliott v commissioner supra failure to satisfy the signature requirement remains fatal to the validity of a return furthermore sec_6061 has not eliminated the requirement assuming arguendo that sec_6061 pertains to a notice_of_deficiency filed on date for the taxable_year it is clear on the face of the statute that it applies only to continued returns on remand the court_of_appeals did not address the issue of whether the irs' treatment of an unsigned tax form could constitute acceptance see 738_f2d_354 10th cir in contrast to the situation in dowell where the commissioner did not challenge the efficacy of the amended returns except with respect to the statute_of_limitations issue the commissioner in the instant case determined that the form filed by petitioner is not a return sec_6061 was enacted as part of the internal_revenue_service restructuring and reform act of publaw_105_206 sec a 112_stat_685 effective on date it is not clear for what taxable years the statute authorizes the secretary to waive signature requirements for electronic filings the legislative_history suggests that the authority may apply only to taxable years beginning after date see s rept the provision requires the secretary to establish procedures to the extent practicable to receive all forms electronically for taxable periods beginning after date -- - electronic filings sec_6061 titled electronic signatures provides that the secretary shall develop procedures for the acceptance of signatures in digital or other electronic form it authorizes the secretary to waive the requirement of a signature until such procedures are in place sec_6061 b a if there were any doubt however as to the application of the statute it is clear from its legislative_history that sec_6061 was promulgated to promote paperless electronic_filing by eliminating the need to file a paper form with a manual signature in addition to the electronic_filing see s rept furthermore even if sec_6061 did authorize the secretary to waive the signature requirement for any_tax return the language of the statute is discretionary and does not require such a waiver petitioner's second argument that the purported return is a valid federal_income_tax return because he and his former spouse intended it to be their joint_return at the time of filing also is without merit we have long held that if an income_tax return is intended by both spouses as a joint_return the absence of the signature of one spouse does not prevent their intention from being realized 56_tc_1 emphasis added see ebeling v commissioner tcmemo_1994_277 affd without published opinion 76_f3d_385 9th cir hammann v commissioner tcmemo_1987_260 we thus have carved out an exception to the general_rule that a tax_return must be signed by both spouses in order for the return to constitute a joint_return if one spouse has signed the return and if the nonsigning spouse intended the return to be a joint_return it does not follow that in the absence of both spouses' signatures on a joint_return a valid tax_return has been filed merely because the couple intended the form to be their joint_return taxpayers may not circumvent the signature requirement simply by attempting to elect to file a joint_return accordingly petitioner and mrs olpin's intent to file a joint tax_return has no bearing on whether they actually filed a valid_return as a matter of law we find that petitioner did not file a valid federal_income_tax return and must compute his tax on the basis of a married individual filing separately respondent thus is entitled to a grant of summary_judgment we have carefully considered all arguments made by petitioner and find them either irrelevant or without merit to the extent they are not specifically addressed herein to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number 6050p ------------------------------- ------------------------------------ ---------------------- --------------------------------- in re ------------------------------------ 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 pa plr-108149-16 date july legend entity ------------------------------------ state x ------------ asset ------------------ collection action -------------------------------------------------------- notices -------------------- plaintiff ----- -------------- court ---------------------------------------------------- date --------------------------- dear -------------------- this letter responds to the letter dated date submitted on behalf of entity requesting a ruling that entity is not required by sec_6050p and sec_1_6050p-1 to file forms 1099-c to report the write-off of certain balances under an order from the court and subsequent settlement agreement for the reasons set forth below we conclude that entity is not required to report the discharge_of_indebtedness because none of the identifiable events listed in sec_1_6050p-1 has occurred plr-108149-16 facts entity is a financial_institution operating in state x and engaged in among other things financing consumer asset purchases when consumers defaulted on these loans entity took collection action and pursuant to state x law sent notices to the consumers pursuant to state x law collection action would sometimes result in a deficiency balance plaintiff filed a class action lawsuit against entity alleging entity’s notices were deficient under state x law and seeking amongst other things an injunction prohibiting entity from collecting the outstanding deficiency balances from the class of debtors who received similar notices along with statutory damages pursuant to state x law on date court ruled that the notices were deficient under state x law and that entity was barred from collecting any deficiency balance pursuant to the notices that it sent to plaintiff and the class subsequently entity and the class entered into a settlement agreement which included inter alia a provision requiring entity to write-off deficiency balances owed by the class law analysis sec_6050p of the internal_revenue_code requires that an applicable_entity report any discharges in whole or in part of indebtedness of any person in excess of dollar_figure on a form 1099-c sec_1_6050p-1 of the treasury regulations provides that for information reporting purposes a discharge_of_indebtedness is deemed to have occurred upon the occurrence of an identifiable_event whether or not an actual discharge_of_indebtedness has occurred on or before the date on which the identifiable_event has occurred sec_1_6050p-1 provides a list of identifiable events of the listed identifiable events two are potentially relevant to the requested ruling agreement by the parties to discharge the debt for less than full consideration and a decision by the creditor to discontinue collection activity and discharge the debt in this case the court’s order barred entity from collecting the deficiency balances entity and the class did not arrive at an agreement to discharge the indebtedness nor did entity decide to discharge the indebtedness within the meaning of sec_1 6050p- b because none of the identifiable events listed in sec_1_6050p-1 occurred entity is not required to report these write-offs conclusion based solely on the information provided and representations made we conclude that entity is not required to file forms 1099-c with respect to the write-offs of the class plr-108149-16 members’ deficiency balances because none of the identifiable events listed in sec_1_6050p-1 has occurred except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely blaise dusenberry senior technician reviewer procedure administration enclosures copy of letter for sec_6110 purposes notice of intention to disclose notice cc


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax exempt and governmt entities division release number release date date uniform issue list date e h m h h c dollar_figures a m o m w m t t o w o u o r dear we have considered your request dated date requesting a ruling that the receipt of a brokerage commission by m which constitutes income to m under sec_61 of the internal_revenue_code code does not constitute unrelated_business_taxable_income under sec_511 facts m is an organization exempt from federal_income_tax under sec_501 of the m seeks to code m directs coordinates and supports the health care industries of the r integrate all of the health care ministries of r the entities involved include s is the president and chief_executive_officer of m s is also a licensed real_estate broker and the sole_proprietor of t s is employed pursuant to an employment agreement with m the agreement requires him to dedicate his full-time and exclusive services for the sole benefit of m this includes the use of his real_estate license for the purpose of saving m some or all of any commission charged by brokers in real_estate transactions m entered into a rental lease agreement with u for a building located in v m will use the building for office space for its general administrative use and for use as medical offices m uses the building in connection with its charitable activities s served as a co-broker in the negotiation of the leasehold interest on behalf of m a check in the amount of dollar_figure of the check over to m and employment agreement with m that his brokerage license was to be used solely for the benefit of m in any real_estate_transaction involving m s promptly endorsed the full amount s's action in endorsing the check over to m reflected his understanding was made payable to t s’s actions were confirmed in a letter from w board chair of m dated date noting that as required by his employment contract s was to dedicate his full-time and exclusive services for the sole benefit of m including the use of his real_estate license for transactions involving m since his employment with m s has not engaged in any other brokerage activities real_estate transactions of this nature are not typical for m this is the only transaction in the last five years in which m received a brokerage commission ruling requested m is requesting a ruling that the receipt of the brokerage commission by m which m has stipulated in its request is income to m is not unrelated_business_taxable_income ubti within the meaning of sec_511 of the code law sec_501 of the code provides that an organization described in sec_501 or d or sec_401 shall be exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for religious and charitable purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of certain tax exempt_organizations sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the deductions allowed by this chapter which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in subsection b sec_513 of the code defines the term unrelated_trade_or_business means in the case of any organization subject_to the tax imposed by sec_511 any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_513 of the code provides that for purposes of this section the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the income_tax regulations regulations provides that the term unrelated_business_taxable_income means the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the deductions and subject_to the modifications provided in sec_512 of the code unless one of the specific exceptions of sec_512 or sec_513 is applicable gross_income of an exempt_organization subject_to the tax imposed by sec_511 is includible in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations states in general that any activity of an organization subject_to sec_511 of the code which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 --and which in addition is not substantially related to the performance of exempt functions-- presents sufficient likelihood of unfair competition to be within the policy of the tax accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations states in part that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued for example specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides in general that gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question--the activities that is of producing or distributing the goods or performing the services involved--and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_1_513-1 of the regulations provides that in determining whether activities contribute importantly to the accomplishment of an exempt_purpose the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt_function which they purport to serve thus where income is realized by an exempt_organization from activities which are in part related to the performance of its exempt functions but which are conducted on a larger scale than is reasonably necessary for performance of such functions the gross_income attributable to that portion of the activities in excess of the needs of exempt functions constitutes gross_income from the conduct of unrelated_trade_or_business such income is not derived from the production or distribution of goods or the performance of services which contribute importantly to the accomplishment of any exempt_purpose of the organization in 63_fsupp2d_1257 the court applied the regularly carried on requirement in the context of a one-time lease of a donated boeing jumbo jet by the museum of flight foundation to the boeing corporation originally boeing contributed the jet to the museum in and the museum began work to restore the aircraft for permanent display shortly after boeing donated the aircraft boeing identified the need for a test bed airframe for new jet engines and sought to lease the boeing jumbo jet back from the museum the museum agreed to lease the aircraft back to boeing for a two-year term which was extended slightly the museum has never before or since leased aircraft for testing or any other purpose the court concluded that the lease was not an activity that was regularly carried on because it was a one-time completely fortuitous lease of unique equipment that was unavailable on the open market analysis under sec_511 and sec_512 of the code an organization described in sec_501 that provides services for a fee will have unrelated_trade_or_business taxable_income if the three conditions in sec_1_513-1 of the regulations are satisfied first the income must be from a trade_or_business second the trade_or_business is regularly carried on third the trade_or_business is not substantially related to the organizations performance of its exempt_function the term trade_or_business has the same meaning for the purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services see sec_1_513-1 trade_or_business sec_513 of the code provides that for purposes of this section the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services n addition sec_1_513-1 of the regulations states that for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services m is exempt from federal taxation under sec_501 of the code m directs m is not in the business of coordinates and supports the health care industries of the r providing real_estate brokerage services a trade_or_business is defined under sec_513 of the code as an activity which is carried for the production_of_income from the performance of services m stipulates that the receipt of the brokerage commission constitutes income to m m received the brokerage commission income because s was acting as a real_estate broker on behalf of m under the terms of s’s employment contract with m s was required to dedicate his full-time and exclusive services including the use of his real_estate license for the benefit of m therefore s was acting as m’s agent in negotiating this rental lease agreement s's activity as an agent resulted in m receiving the brokerage commission income the receipt of the commission constitutes the performance of services for a fee that results in a trade_or_business that generates income within the meaning of sec_513 of the code and sec_1_513-1 of the regulations having met the trade_or_business requirement we must analyze whether or not the business activity is regularly carried on regularly carried on the regulations provide that specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on under sec_1_513-1 of the regulations if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations m entered into a rental lease agreement with u for a building located in v s the president and chief_executive_officer of m served as a co-broker in the negotiation of the leasehold interest on behalf of m as noted above s was acting as an agent on behalf of m and m received a brokerage commission this was the only transaction of its type in which m received a brokerage commission in the past five years since his employment with m s has not engaged in any other brokerage activities on behalf of m entering into a real_estate_transaction of this nature is unusual for m and appears to be a one-time transaction this is the only transaction in the last five years in which m received a brokerage commission in a similar manner as the organization discussed in 63_fsupp2d_1257 the receipt of the brokerage commission by m was a one-time unique event the receipt of the brokerage commission in this case does not constitute a business that was regularly carried on substantially related to exempt_purpose the regulations provide that a trade_or_business is related to exempt purposes under sec_1_513-1 of the regulations only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one substantially related to m's tax-exempt purpose m's receipt of the brokerage commission income is not although m entered into the real_estate lease agreement for the purpose of acquiring a building for office space to be used for its general administrative use and for use as medical offices the receipt of the commission does not have a causal relationship to the achievement of m’ exempt_purpose in evaluating whether trade_or_business income is substantially related to an exempt_function we consider the relationship between the activity that generated the particular income and the accomplishment of the tax-exempt purpose sec_1_513-1 of the regulations the activity is substantially related for the purposes of sec_513 of the code only if the causal relationship is a substantial one sec_1_513-1 a substantial casual relationship exists where the performance of the services from which the income is derived contributes importantly to the accomplishment of the organization's exempt_purpose see sec_1 d therefore where the services do not contribute importantly to the accomplishment of the organization's exempt purposes the income earned is not derived from the conduct of related trade_or_business among the reasons for which m was incorporated and granted exemption form tax under sec_501 of the code are to direct coordinate and support the health care industry of the r while the ultimate usage of the leased building may contribute importantly and be causally related to the performance of m’s exempt purposes the receipt of a real_estate brokerage commission income does not contribute importantly to accomplishing m’s exempt_purpose therefore the receipt of the brokerage commission income is not substantially related to m’ tax exempt_purpose private benefit inurement an organization exempt from federal_income_tax under sec_501 of the code must be organized and operated exclusively for exempt purposes with no part of its net_earnings inuring to the benefit of any private_shareholder_or_individual as set out in sec_501 in this case there was a potential for private benefit inurement flowing to s as the co-broker on behalf of m in negotiating the leasehold interest as a result a check in the amount of dollar_figure pursuant to his employment contract with m s promptly endorsed the check over to m arguably if s had kept this check and deposited into his personal checking account there possibly could have been an issue with private benefit inurement however since s promptly endorsed the check over to m no part of m’ net_earnings inured to the benefit of any private_shareholder_or_individual was made payable to the t the name under which s works as a broker s m’s ceo served conclusion accordingly based on the information submitted m’s activities concerning the receipt of the brokerage commission income by m will not result in imposition of the unrelated_business_income_tax because the leasing activity is not regularly carried on by m within the meaning of sec_513 of the code therefore the brokerage commission income received as a result of the rental lease agreement transaction is not unrelated_business_taxable_income under sec_512 and will not be subject_to unrelated_business_income_tax under sec_511 this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice deletions you should follow the instructions in notice if you disagree with our proposed this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely ronald j shoemaker manager exempt_organizations technical group enclosure notice


department of the treasury yi internal_revenue_service p o box irs cincinnati oh release number release date uil code date date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 a other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service cincinnati oh legend x state y date b dollars dollar amount dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were formed in the state of x on y according to your articles of incorporation the purpose for which you were formed is the preservation of nature and animals you are a membership_organization anybody that wants to join the membership is welcome the only cost to become an active member is to pay an annual fee of b dollars there may be a small processing fee to cover administrative costs if there is a claim in your application_for exemption you stated that your purpose is to protect your members from significant loss if their deer herd experiences contribute on a pro-rated basis to the organization to limit the loss experienced by the member s you state that your goal is not to create a profit for any farmer but to limit members’ losses and prevent great hardship on any one member if there are deer losses the membership will only breeding farms are covered under your plan hunting preserves are not only deer that are legal and owned by an active member are considered when indemnity is sought as members experience deer losses the membership as a whole is solicited to provide funds to partially reimburse the member for their losses based on the value of their herd z there will be an operating committee which will appoint appraisers in various states the committee will send genetics and production records to five appraisers the final value of a whole herd or the trace outs will be the average of a minimum of five appraisers through your plan the herd owner would absorb the remaining loss of the final appraised value would be available to a member your regulations advise your members to sell the indemnity if possible if that amount is less than the appraised value then the herd owner is eligible to collect the rest from your plan up to of appraised value the committee reserves the right to see the inventory records and contact any necessary parties to confirm the positive herd or traceback animals or mandated eradications as deemed necessary infected herd to the governing agent and collect there will be no collections made from the membership until a positive herd or trace outs are dispersed of the date used to determine payouts will always be the date that a deer is found to be positive there will be no coverage for any member not signed in at least days prior to a positive test law internal_revenue_code sec_501 provides for the exemption from federal_income_tax of labor agricultural or horticultural_organizations sec_1_501_c_5_-1 of the income_tax regulations states that organizations described under code sec_501 are those which have no net_earnings inuring to the benefit of any member and have as their objects the betterment of the conditions of persons engaged in the pursuits of labor agriculture or horticulture the improvement of the grade of their products and the development of a higher degree of efficiency in their respective occupations in revrul_70_372 1970_2_cb_118 an organization composed of agricultural producers was formed to process production data for farmers for use in improving the milk production of their dairy herds each farmer sent the organization his milk production and test records for each cow in the herd the sole activity of the organization was to process the records and produce statistical analyses that enabled farmers to make comparisons with standards established by the state college of agriculture the analyses were sent to each farmer on a fee basis the costs of the organization’s operations were met solely from the fees charged the service held that the organization was not exempt under sec_501 of the code because the processing of production and test records for individual farmers does not better the conditions of those engaged in agricultural pursuits improve the grade of their products or develop a higher degree of efficiency in their operations revrul_74_195 1974_1_cb_135 held that a nonprofit organization formed to manage graze and sell its members' cattle did not of itself better the conditions of those engaged in agricultural pursuits improve the grade of their products or develop a higher degree of efficiency in their operations within the meaning of sec_501 of the code in actual operation the organization provided such supplies materials feed and equipment as may be useful or necessary for the handling and breeding of said livestock the principal purpose of the organization was to provide a direct business service for its members' economic benefit the organization was denied exemption under sec_501 of the code letter rev catalog number 47628k revrul_77_153 1977_1_cb_147 held that a nonprofit organization that owns and operates a livestock facility and leases it to local members of a nonexempt national association of farmers for use in implementing the association's collective bargaining program with processors does not qualify for exemption as an agricultural_organization the operation and leasing of a facility for collecting weighing sorting grading and shipping of livestock the organization's principal activity is the providing of a business service to those members who make use of the national association's collective bargaining program this service merely relieves the members of the organization of work they would either have to perform themselves or have performed for them such activity does not serve an exempt_purpose of an agricultural_organization under sec_1_501_c_5_-1 of the regulations application of law you do not meet the qualifications under sec_1_501_c_5_-1 of the income_tax regulations because your activities are not aimed at the overall betterment of conditions within the farming industry you operate to aid your members in mitigating their losses you work with other members to insure losses on member herds where members would otherwise have to insure themselves you are relieving them of this responsibility by providing this service you are similar to the organization in revrul_70_372 providing insurance services to members does not serve an exempt_purpose under sec_1_501_c_5_-1 of the income_tax regulations because your activities are not aimed at the overall betterment of conditions within the farming industry generally instead you specifically benefit your individual members you are similar to the organization in revrul_74_195 by providing an insurance service you are not bettering the conditions of those engaged in agricultural pursuits improving the grade of their products or developing a higher degree of efficiency in their operations your principal purpose is to provide a direct business service for your members you are similar to the organization in revrul_77_153 insuring member herds is a business service which operates for the benefit of members this service relieves your members of having to maintain their own insurance such activity does not serve an exempt_purpose under sec_1_501_c_5_-1 of the regulations conclusion based on the facts above we concluded you are not operating as an organization described in sec_501 of the code your operations are not aimed at the overall betterment of conditions improvement of the grade of products or the development of a higher degree of efficiency within the farming industry but provide a direct business service for the benefit of your members therefore we have determined that you do not qualify for exemption under sec_501 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with letter rev catalog number 47628k e e e e anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh letter rev catalog number 47628k you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k