office_of_chief_counsel internal_revenue_service memorandum number release date cc eee eb qp1 dsbloom presp-114910-19 uilc date third party communication none date of communication not applicable to david a conrad area_counsel mountain states denver tax_exempt_and_government_entities_division counsel from victoria a judson associate chief_counsel employee_benefits exempt_organizations and employment_taxes subject deductibility under sec_404 of contribution paid to a qualified_retirement_plan under the objective outlay-of-assets test of 429_us_569 this memorandum provides general legal advice on the determination of whether a contribution by an employer to the employer’s qualified_retirement_plan has actually been paid to the plan’s trust such that the contribution is deductible under sec_404 of the internal_revenue_code code for the employer’s taxable_year in which the contribution is made assuming all other applicable_requirements are satisfied this determination is made under the standards set forth in 429_us_569 which applies an objective outlay-of-assets test this memorandum describes the elements of this test provides that the application of the test is made taking into account the relevant facts and circumstances of the contribution and includes illustrative examples this memorandum should not be used or cited as precedent the analysis in this memorandum is limited to the determination of whether a contribution is deductible under sec_404 this memorandum does not address the treatment or characterization of similar transactions under other provisions of the code or the employee_retirement_income_security_act_of_1974 pub_l_no stat as amended erisa moreover the analysis does not depend on the classification for example as stock or indebtedness of the asset contributed or whether the contribution is subject_to or exempt from the prohibited_transaction rules of sec_406 or sec_407 of erisa and sec_4975 of the code presp-114910-19 issue for purposes of sec_404 how is a determination made that an employer’s contribution has been paid within the meaning of sec_404 to the trust of a qualified_retirement_plan in a taxable_year of the employer maintaining the plan for which the employer claims a deduction conclusion for a contribution by an employer to the trust of a qualified_retirement_plan maintained by the employer to be deductible under sec_404 for the employer’s taxable_year in which the contribution is made the contribution must be a payment of cash or its equivalent or property to the trust whether a contribution is paid for purposes of sec_404 is determined under the objective outlay-of-assets test set forth in don e williams the employer must experience an outlay of or reduction in its assets when the contribution is made moreover the trust must receive the full advantage of the contribution and thus there must be no retention by the employer of significant control_over the contributed asset or imposition of a significant encumbrance on the trustee’s ability to dispose_of the asset whether these elements are satisfied depends on the facts and circumstances of the particular contribution law and analysis under sec_404 the determination of whether a contribution by an employer to the employer’s qualified_retirement_plan is deductible for the employer’s taxable_year in which the contribution is made depends in part on whether the contribution constitutes a payment of cash or its equivalent or property to the plan’s trust the resolution of this issue depends in turn on whether the contribution satisfies the objective outlay-of- assets_test set forth in don e williams as described below sec_404 sec_404 governs the deductibility of a contribution to the trust of a deferred_compensation plan maintained by an employer for its employees that satisfies the qualification requirements of sec_401 pursuant to sec_404 if an employer makes a payment no later than the due_date including extensions for filing the employer’s return for a taxable_year and if the payment is on account of that taxable_year then the employer is deemed to have made a payment on the last day of the preceding_taxable_year presp-114910-19 among other requirements in order for an employer to deduct a contribution under sec_404 the amount must be paid_by the employer to the qualified_trust the words paid and payment appear throughout sec_404 payment requirement congress has also repeatedly emphasized the importance of the payment requirement in h_r rep no the ways_and_means_committee stated the present law endeavors to encourage the setting up of retirement benefits by employers for their employees and in pursuance of this policy permits employers to take as a deduction amounts irrevocably set_aside in a pension_trust or other fund to provide annuities or retirement benefits for superannuated employees see h_r rep no pincite finally the regulations under sec_404 promulgated in also emphasize the importance that the contribution actually be paid see sec_1_404_a_-1 contribution is paid payment is actually made sec_1_404_a_-3 contributions are paid contributions must be paid in a taxable_year as the supreme court has noted these regulations under sec_404 should be accorded significant weight don e williams and the objective outlay-of-assets test as noted above the use of the terms paid or payment imposes the requirement of actual payment rather than simply the recognition accrual of a liability to make payment although neither the code nor the regulations thereunder set forth a standard for determining what constitutes payment under sec_404 the supreme court in don e williams applied an objective outlay-of-assets test to determine if an employer had made a payment to a qualified_trust for purposes of claiming a deduction under sec_404 don e williams u s pincite the employer in that case argued that the contribution of a fully secured promissory demand note to the trustee of a profit sharing plan and trust constituted an amount_paid within the meaning of sec_404 id pincite the court disagreed stating that the note for the maker even though fully for example the word paid appears twice in the lead-in language of sec_404 see also paragraphs a a in the taxable_year when paid if the contributions are paid a e any amount_paid in a taxable_year in excess of the amount deductible in such year and a for purposes of paragraphs and a taxpayer shall be deemed to have made a payment on the last day of the preceding_taxable_year if the payment is on account of such taxable_year and is made not later than the time prescribed by law for filing the return for such taxable_year including extensions thereof see h_r rep no pincite compensation is paid s rep no pincite compensation is paid h_r rep no pincite contributions actually paid h_r rep no pincite payments to a qualified_trust or plan and a151 payment is made s rep no pincite actual payments staff of j comm on taxation 83rd cong summary of the new provisions of the internal_revenue_code of pincite actually made a payment see don e williams v commissioner u s pincite the applicable treasury regulations since consistently have stressed payment by the accrual-basis taxpayer see reg sec_29 p -1 reg sec_39 p -1 d reg sec_1_404_a_-1 sec_1_404_a_-1 with the statute re-enacted in the code this administrative construction may be said to have received congressional approval see 343_us_118 presp-114910-19 secured is still only his promise to pay and i t does not in itself constitute an outlay of cash or other_property id pincite relying in part on earlier decisions the court analyzed the payment requirement of sec_404 the statutory terms paid and payment coupled with the sec_404 grace period and the legislative history’s reference to paid and actually paid demonstrate that regardless of the method_of_accounting all taxpayers must pay out cash or its equivalent by the end of the grace period in order to qualify for the sec_404 deduction this accords also with the apparent policy behind the statutory provision namely that an objective outlay-of-assets test would insure the integrity of the employees' plan and insure the full advantage of any contribution which entitles the employer to a tax_benefit id pincite footnote omitted justice stevens in his concurring opinion explicitly tied the payment requirement to the purpose behind sec_404 mr justice blackmun’s opinion for the court which i join construes the word paid to require the delivery of cash or its equivalent in my judgment that construction best serves the statutory purpose of protecting the integrity of pension plans because the employer and the pension_trust are often controlled by the same interests id pincite stevens j concurring the court distinguished a promissory note from a bank check the line between a promissory note and a check may be thin at times but it is distinct the promissory note even when payable on demand and fully secured is still as its name implies only a promise to pay and does not represent the paying out or reduction of assets a check on the other hand is a direction to the bank for immediate payment is a medium of exchange and has come to be treated for federal tax purposes as a conditional payment of cash 12_tc_524 revrul_54_465 cum bull the factual difference is illustrated and revealed by taxpayer’s own payment of each promissory note with a check within a year after issuance the promissory note at issue in don e williams was the employer’s own acknowledging its obligation to the trust the court cited 283_us_140 denying a deduction for a taxpayer’s exchange of a note because the transaction involved no outlay of cash or property having a cash_value and 309_us_409 giving a personal note did not give rise to a deduction because the personal note was not the equivalent of cash don e williams u s pincite presp-114910-19 don e williams u s pincite the court also found that for purposes of determining satisfaction of the payment requirement it is irrelevant whether the employer’s promissory note is secured because the provision of collateral is not payment and does not transform the promise into an actual payment within the meaning of sec_404 accordingly because the employer in don e williams parted with none of its assets upon the issuance of its promissory note the court held that it was not entitled to a deduction under a statute that requires the actual payment of a contribution subsequently the tax_court applied the objective outlay-of-assets test to determine whether an employer is entitled to a current deduction for a contribution of property to a qualified_trust that was agreed to but not completed before the end of the grace period in reed smith shaw mcclay v commissioner t c m the tax_court considered whether a taxpayer was entitled to deduct a contribution made for a taxable_year when the taxpayer and the retirement_plan trustee entered into an agreement to contribute shares of stock before the end of the grace period described in sec_404 but the taxpayer failed to transfer title and control of the shares to the qualified_trust until after the end of the grace period the court applied the objective outlay-of-assets test in upholding the irs’ determination that no deduction under sec_404 was allowed for the taxable_year with respect to the contribution and cited other cases in which in the court’s view the objective outlay-of-assets test was applied the court in reed smith emphasized that a n employer must irrevocably set_aside the contribution for the plan prior to don e williams the court and the internal_revenue_service irs articulated the rule that delivery of a taxpayer’s own promissory note to a retirement_plan trust does not constitute payment that entitles the taxpayer to an immediate deduction see eg 12_tc_860 an actual payment of the contribution to an employees' trust in the taxable_year is a prerequisite to the allowance of a deduction on account thereof and the issuance and delivery of a promissory note does not constitute such actual payment revrul_71_95 1971_1_cb_130 the delivery of a taxpayer’s own term promissory note to an employees’ trust does not constitute payment for purposes of sec_404 don e williams u s pincite citing 309_us_409 there the taxpayer argued that his giving a secured note to a bank in response to a guarantee gave rise to a deduction the court observed that the note was not the equivalent of cash to entitle the taxpayer to the deduction and concluded that the fact the note was secured made no difference in the result t he collateral was not payment it was given to secure respondent’s promise to pay and did not transform the promise into the payment required to constitute a deductible loss in the taxable_year id pincite the reasoning is apparent the note may never be paid and if it is not paid the taxpayer has parted with nothing more than his promise to pay 54_f2d_848 ca1 for example we have held that an employer’s accrual on its books of its liability for a plan contribution does not constitute payment of the contribution for purposes of sec_404 see 63_tc_11 similarly we have held that there was no payment under sec_404 when an employer merely designated on its books and on the books of the plan that a portion of a certificate of deposit belonged to the plan see rollar homes inc v commissioner tcmemo_1987_166 reed smith t c m pincite presp-114910-19 or remove the contribution from the employer’s direct control in order to qualify for a deduction under sec_404 id pincite the objective outlay-of-assets test includes a requirement that as a result of the contribution for which it claims a deduction under sec_404 an employer must experience an outlay of or reduction in its assets and the trust must receive the full advantage of the contribution a promise to pay even if secured and certificated is not payment for purposes of sec_404 if there is no outlay of cash or property by the employer see don e williams u s pincite the promissory note even when payable on demand and fully secured is still as its name implies only a promise to pay and does not represent the paying out or reduction of assets reed smith tcmemo_1998_64 pincite an employer must irrevocably set_aside the contribution for the plan gillis t c pincite the statutory scheme it seems clear enough requires that an accrual basis taxpayer part with something of value to the pension_plan trustee petitioner did not part with anything during the required time it only accrued an obligation on its books and that is not enough in addition don e williams and later decisions highlight the relevance of control_over the asset following its contribution as a factor in determining whether a contribution satisfies the objective outlay-of-assets test thus the degree of control or influence retained by an employer over the contribution is an important element of the objective outlay-of-assets test as is the degree of encumbrance on the asset restricting the trustee’s flexibility to use it to best fit the needs of the plan these elements of the objective outlay-of-assets test apply in order to determine whether the trust has received the full advantage of the contribution at the time the contribution is made an employer who retains significant control_over the contributed asset has not actually made a payment to the trust because no amount is irrevocably set_aside for the plan see reed smith tcmemo_1998_64 pincite h_r rep no pincite see also rollar homes inc v commissioner tcmemo_1987_166 consequently even though the beneficiaries of the plan may have acquired some equitable rights to a portion of the cd such acquisition did not irrevocably set_aside the contribution for the plan or remove the contribution from the direct control of petitioner similarly the degree of encumbrance on the contributed asset is evidence of the extent to which the trustee has the ability to use the asset in a way that best meets the plan’s needs taking into account the nature of the asset a trustee’s ability to liquidate a_trust asset is necessary for a qualified_trust to be able to pay benefits for example if contributed_property cannot be sold on account of restrictions placed by the employer then the trust may not have the liquidity necessary to pay participant benefits in a timely manner this danger is avoided if the contributed_property is not significantly encumbered as the supreme court has noted the apparent policy behind the statutory provision is to insure the integrity of the employees’ plan and insure the full advantage of any contribution which entitles the employer to a tax_benefit don e williams u s pincite presp-114910-19 accordingly for a contribution by an employer to the trust of a qualified_retirement_plan maintained by the employer to be deductible under sec_404 for the employer’s taxable_year in which the contribution is made the contribution must be a payment of cash or its equivalent or property to the trust for a contribution to the trust to be a payment under sec_404 the contribution must satisfy the objective outlay-of-assets test of don e williams as described above which requires an outlay of or reduction in the employer’s assets and that the trust is entitled to the full advantage of the contribution and thus there is no retention of significant control_over the contributed asset by the employer or imposition of a significant encumbrance taken together these elements support the application of the objective outlay-of-assets test in accordance with its purposes as articulated by the supreme court in don e williams thus ensuring the integrity of the qualified_trust and the full advantage to the trust of any contribution that entitles the employer to a tax_benefit don e williams u s pincite facts and circumstances to be taken into account in applying the objective outlay-of-assets test some employers that maintain qualified_retirement_plans for the benefit of their employees have claimed a deduction under sec_404 for the employer’s taxable_year for the contribution to a plan of a note obligating the employer to pay cash or property to the trust after the end of the grace period described in sec_404 for that taxable_year with no current outlay or reduction in the employer’s assets in other cases an employer has retained significant control_over an asset following its contribution in the taxable_year for which the deduction under sec_404 is claimed or the asset is so encumbered that the trustee cannot effectively utilize the asset to pay plan benefits whether a contribution has actually been paid to a qualified_trust under the two elements of the objective outlay-of-assets test of don e williams as described in this memorandum depends on the facts and circumstances of the contribution the following illustrate the first element whether there has been an outlay of or reduction in the employer’s assets employer’s promissory note an employer contributes its own promissory note to the plan obligating the employer to pay cash or its equivalent or property to the trust at a later date the contribution is not deductible as an actual payment under sec_404 regardless of whether the note is secured or transferable because the note’s contribution is not an outlay of or reduction in the employer’s assetsdollar_figure in contrast to the contribution of an employer’s promissory note to the trust the transfer of an unrelated third-party’s promissory note held by the employer to a plan’s trust may be the payment of a contribution for purposes of sec_404 assuming the employer does not retain significant control_over the note nor is the trustee’s use of the note significantly encumbered so that the employer may deduct the fair_market_value of the contribution of the unrelated-third-party note for a taxable_year if it is made within the applicable grace period subject_to the limitations of sec_404 presp-114910-19 employer debt an employer contributes its own publicly traded debt to the plan the contribution of the debt_instrument is essentially the same as the contribution of a promissory note because the debt_instrument reflects the employer’s promise to make payments to the instrument’s owner at a later date and thus is not an outlay of or reduction in the employer’s assets similarly the contribution by the employer of debt of a member of its controlled_group within the meaning of sec_414 c or m is not an outlay of or reduction in the employer’s assets book entry an employer's designation of its liability for a plan contribution as a debit on its books and an accrual on the books of the plan without a corresponding transfer of assets to the plan is not an actual payment of the contribution because the book entry by itself is not an outlay of or reduction in the employer’s assets treatment of contributed asset as an asset of the employer for accounting purposes an employer’s continued treatment for purposes of its financial statements of an asset contributed to the qualified_trust as an asset of the employer or its inability otherwise to treat the asset solely as an asset of the plan is a factor to be taken into account in determining whether there is an outlay of or reduction in the employer’s assets the following illustrate the second element of the objective outlay-of-assets test whether the trust has received the full advantage of the contribution and thus there is no retention of significant control_over the contributed asset by the employer or imposition of a significant encumbrance asset inaccessible a trustee’s inability to access a contributed asset including an asset that is cash or otherwise unencumbered indicates the trust has not received the full advantage of the contribution because the trustee’s use of the asset is significantly encumbered for as long as the asset continues to be inaccessible following its contribution the asset may be inaccessible for example if the cash or property is placed in escrow the asset is available first to other creditors of the employer or the property is not transferrable for a number of years or without the prior approval of the employer employer option to repurchase property call option a contribution of property such as shares of employer stock whether or not publicly traded that includes an employer option to repurchase the property at the employer’s discretion or for a set number of years following the contribution is a factor to be taken into account in determining whether the employer has retained significant control_over the asset even if the repurchase price is to be determined by an independent fiduciary or is set to be equal to or exceed the asset’s fair_market_value option to require employer to repurchase contributed_property put option a contribution of property such as shares of employer stock whether or not publicly traded subject_to a put option requiring the employer to repurchase the presp-114910-19 contributed_property is a factor to be taken into account in determining whether the trust has received the full advantage of the contribution for example if the asset is significantly encumbered because the trustee cannot exercise the put option without the employer’s consent or for a set number of years following the contribution this may be true even if the asset subject_to the put option is to be sold at a price equal to or exceeding its fair_market_value similarly a put option that includes a right for the employer to delay the settlement_date for a significant period of time is a factor to be taken into account in determining whether the trust has received the full advantage of the contribution on account of the employer’s retaining significant control_over the asset other restrictions on trustee’s ability to transfer the asset other restrictions on the trustee’s ability to transfer or optimize the use of the contributed asset are also factors to be taken into account in determining whether the trust has received the full advantage of the contribution because the employer has retained significant control_over the asset or the trustee’s use of the asset is significantly encumbered examples of other restrictions include a prohibition on the trustee’s transferring the contributed asset to a third party or the trustee’s pledging the asset as security for a loan please call diane s bloom at if you have any further questions cc kyle n brown division counsel tegedc robin greenhouse division counsel lb_i


vo department of the treasury internal_revenue_service washington d c date mar contact person identification_number telephone number tl ly employer_identification_number a r i r x p i o i o dear sir or madam this is in response to your request for rulings concerning the federal tax consequences of your participation in a joint_venture that will manage a neonatal intensive care unit nicu details of the proposed transaction are described below x is an organization described in sec_501 sec_509 and sec_170 of the internal_revenue_code x owns and operates a hospital that is the only academic medical center in a five-state area devoted solely to the medical surgical and developmental needs of children x ‘s hospital includes a nicu neonatal nurseries are rated at level sec_1 hor fil depending upon the intensity of care which they are equipped and licensed to provide with level iii providing the most intensive level of care x’s nicu is a level iii nicu x has developed clinical protocols and methods of training clinical personnel that enhance and support the delivery of the most sophisticated levels of neonatal care in its nicu is an organization described in sec_501 sec_509 and sec_170 of the code y owns a general acute care hospital that includes a level il nicu no level ill nicu services are available in the community where y is located therefore neonatal patients that require a more intensive level of care must be transported to other communities in order to receive level ill services y is located in the northern portion of x's service area y desires to have a neonatal nursery offering level ill intensive care services at its hospital a new level ill neonatal nursery at y would enhance the level of care available to infants and families in the communities served by y would avoid the potential jeopardy to health and other disadvantages inherent in transferring fragile infant patients needing such services to other facilities outside the community that y serves furthermore a level ill neonatal nursery in order to obtain the necessary specialized medical expertise needed to operate a level il nicu y proposes to enter into a joint_venture with x the joint_venture will manage the new neonatal nursery at y the objectives of the joint_venture are to provide residents of the benefited communities with access to high quality children's health care services by expanding the neonatal intensive care services at y to decrease the need for out-of-area transport of critically ill newborns and to facilitate transfers back to the community of babies requiring neonatal intensive care services at y to decrease the physical and emotional stress on patients and families and to increase patient and family satisfaction with respect to the care of newborns requiring intensive care to increase the availability of trained neonatal surgeons physicians and other health care professionals in the benefited communities toimprove the efficiency and effectiveness of neonatal surgical techniques and therapies through a greater number of patients treated to enhance clinical research opportunities with respect to neonatal care and to enhance educational opportunities for medical professionals with respect to neonatal care through a greater number of patients treated the neonatal intensive care unit nicu will be operated pursuant to a joint operating arrangement the arrangement will be implemented through two interdependent contractual agreements the formation of a limited_liability_company llc with x and y as members and a management agreement between the llc and y ly the llc is organized under state law pursuant to a certificate of formation and will operate pursuant to an llc operating_agreement x and y will each have a membership interest in the llc the llc will manage the new level ill nicu unit at y the nicu will be operated under y's general acute care license y will provide routine administrative services and maintenance for the nicu just as it does for its other departments admission to the nicu medical staff will be open to ali qualified physicians consistent with the nicu's size and nature of its activities with the exception of certain areas of neonatology and pediatrics the nicu will provide care on a nondiscriminatory basis to persons meeting the clinical admission criteria and in accordance with y's medicare and medicaid participation agreements and with its charity care policies the llc will be capitalized by x in the amount of a and y will contribute cash in the amount of b immediately after x's contribution is made c of such amount will be distributed to y thereafter such amount will be restored to the llc by y over a period of years with an interest component such amount as and when restored to the llc will be subject_to distribution by the llc to its members along with all other cash available for distribution in accordance with the usual distribution provisions of the operating_agreement the governance of the llc will be implemented at three levels through the members through delegation by the members of certain operating decisions to an operations council and through delegation by the members of certain operating decisions to the program manager certain actions of the llc will need unanimous approval of both members these actions include any amendments to the certificate of formation or operating_agreement and any transactions involving a merger additional capital call dissolution of the llc sale of assets or admission of a new member certain actions of the llc will be delegated to the operations council the operations council consists of six to eight members that will govern the llc each member has the right to appoint an equal number of members to the operations council and has the right to remove any member it appoints the operations council's delegated responsibilities include developing and approving the llc's annual capital and operating budgets approving the llc's incurring any expenditure or indebtedness that was not approved as part of the capital or operating budget monitoring and auditing the nicu's compliance with its directives selecting the providers that will provide perinatal and or neonatal services at the nicu determining the specific scope and timing of the development of pediatric sub-specialty services available at the nicu and overseeing quality assurance with respect to neonatal services provided at the nicu the presence of a majority of the members of the operations council constitutes a quorum and the unanimous consent of all members of the operations council present is required to take action x will be the program manager of the llc the program manager is responsible for the day-to-day operation and management of the llc and in turn the nicu pursuant to the management agreement the responsibilities of the program manager include recruiting and selecting the program administrative manager directing the operations of the nicu and managing the nicu's facilities and services advising and assisting y regarding credentialing of nicu physicians and allied health professionals overseeing nicu staffing selecting the medical director of the nicu maintaining program quality assurance with respect to neonatal services provided at the nicu decision making consistent with the program manager's clinical judgment regarding the scope and mechanism for delivery of clinically appropriate ancillary services necessary to support patient care in the nicu and final approval of the providers who will provide perinatal and or neonatal services at the nicu and of the specific scope and timing of the development of pediatric sub-specialty services to be provided at the nicu the llc will receive a management fee for managing the nicu the management fee is equal to the difference between revenues derived from the treatment of nicu patients and expenses associated with such treatment the management fee may be negative that is the difference may result in a payment by the llc to y in particular in the start_up phase of the nicu when revenues are less than expenses y will provide a facility setting for the nicu including equipment space support services non-physician employees supplies medical records maintenance billing and collection these services will be provided in the same manner and to the same extent as they are provided to y’s other departments the net profits of the llc will first be allocated to each of the members in an amount equal to the agreed value of services performed by them in the conduct of the business of the llc thereafter all remaining net profits or losses will be allocated to x and y as members of the llc in accordance with their respective percentage interests in the llc the term of the operating_agreement is fifty years unless earlier terminated according to its terms the term of the management agreement is also fifty years unless the agreement is earlier terminated the term of the management agreement during which services will be provided will commence as of the date that all of the following conditions have been met e e the members receive a favorable response from the internal_revenue_service to the requested rulings all governmental or contractual approvals for the operation of the nicu by the llc have been received the facilities at the y nursery are completed and in a state of general readiness to commence nicu operations other than in the case of a failure to make an initial capital_contribution a termination of the joint operating arrangement of the parties under the operating_agreement and management agreement will be effectuated by a termination and liquidation of x's interest in the llc resulting in y becoming the sole member of the llc with sole authority over and interest in the llc ten years after the operations commencement_date either member may elect to cause x to withdraw as a member and terminate and liquidate x's interest in the llc termination events include an uncured breach of a material provision of the management agreement an ' uncured breach of a material provision of the operating_agreement a member's loss of its tax- exempt status or occurrence of any event including without limitation any change in the law rules or regulations or any order recommendation or determination of a regulating or accrediting agency or court with proper jurisdiction which would render performance by a member illegal or jeopardize a member's license accreditation certification or tax-exempt status if the members are unable after good_faith negotiations to agree to modify the operating_agreement to rectify the illegality or remove the jeopardy _ the llc may be dissolved on approval of the members or if the members fail to reach agreement after good_faith negotiations to amend the operating_agreement in connection with a failure to receive a favorable response from the irs for the requested rulings in the event of a termination and liquidation of its interest in the llc x shall be entitled to receive an amount generally dependent upon the value of its interest subject_to adjustment for the period expired since the operations commencement_date and the reason for the termination you have requested the following rulings your involvement in the llc will not affect your status as an organization described in sec_501 and classified as a public charity in sec_509 b a iii payments received from the llc for goods property services or personnel provided in connection with the nicu and your distributive_share of the income or loss of the llc in connection with its management of the nicu will constitute income from a trade_or_business that is substantially related to your tax-exempt purposes within the meaning of sec_513 and not be subject_to tax on unrelated_business_income law sec_501 of the code provides in part for the exemption from federal_income_tax of organizations that are organized and operated exclusively for religious charitable scientific or educational_purposes provided no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the cade an organization will not be so regarded if more than an insubstantial part of its activities are not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in code sec_501 in its generally accepted legal sense the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 iv scott on trusts sec_368 sec_372 3rd ed and revrul_69_545 1969_2_cb_117 sec_1_501_c_3_-1 of the regulations states that an organization exempt under sec_501 of the code may operate a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt purposes exemption will be denied to an organization which is organized or operated for the primary purpose of carrying on an unrelated_trade_or_business sec_509 of the code provides that the term private_foundation means a domestic or foreign organization described in sec_501 other than an organization described in sec_170 other than in clauses vii and viii sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the deductions directly attributable to such business activity sec_512 of the code provides that if an exempt_organization is a partner ina partnership and it generates unrelated_business_income then the organization shall include in computing its unrelated_business_income its share of gross_income from the partnership and share of partnership deductions directly connected with such gross_income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by an organization of the purpose or function constituting the basis for its exemption sec_1_513-1 of the regulations defines unrelated_business_taxable_income to mean gross_income from any unrelated_trade_or_business regularly carried on sec_1 b states that the phrase trade_or_business includes activities carried on for the production_of_income and which possess the characteristics of a trade_or_business within the meaning of sec_162 of the code finally sec_1_513-1 explains that regularly carried on has reference to the frequency and continuity of the conduct of an activity and the manner in which the activity is pursued sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activity has a causal relationship to the achievement of any exempt_purpose and is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of a 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 _ sec_1_513-1 provides that gross_income derived from charges for the performance of exempt functions does not constitute gross_income from the conduct of an unrelated_trade_or_business revrul_69_545 1969_2_cb_117 sets forth standards under which a nonprofit_hospital may qualify for recognition of exemption under sec_501 of the code this revenue_ruling gave consideration to two separate hospitals only one of which was determined to qualify for exempt status under sec_501 by weighing all the relevant facts and circumstances the revenue_ruling analyzed whether both the control and use of the hospitals were for the benefit of the public or for the benefit of private interests the hospital that qualified for exemption was found to be organized and operated to further the charitable purpose of promoting health by satisfying a community benefit standard that included among other factors a board_of directors that broadly represented the interests of the community the hospital that did not qualify for recognition of exemption was found to be operating for the private benefit of those who controlled it rather than for the benefit of the public revrul_98_15 1998_1_cb_718 situation explicitly approves formation of a limited_liability_company by an exempt hospital organization although in that ruling the other member is an unrelated for-profit entity situation of the revenue_ruling concludes that the hospital organization's principal activity continues to be the provision of hospital care even when such activities are conducted through a limited_liability_company because inter alia the tax-exempt hospital retains control_over the limited_liability_company and the limited_liability_company serves charitable purposes according to rev_rul for federal tax purposes the activities of a partnership are often considered to be activities of the partners aggregate treatment is also consistent with the treatment of partnerships for the purposes of the unrelated_business_income_tax under sec_512 of the code the revenue_ruling notes that in light of the aggregation principle reflected in sec_512 the aggregate approach also applies for purposes of the operational_test set forth in sec_1_501_c_3_-1 of the regulations thus the activities of a limited_liability_company treated as a partnership for federal tax purposes are considered to be the activities of an exempt_organization that is an owner of the limited_liability_company when evaluating whether the exempt_organization is operated exclusively for exempt purposes within the meaning of sec_501 of the code accordingly an organization that is exempt under sec_501 may form and participate in a partnership including a limited_liability_company treated as a partnership for federal tax purposes and meet the operational_test if participation in the partnership furthers its charitable purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of any for-profit partners in 505_f2d_1068 6th cir a nonprofit_hospital with an independent board_of directors executed a contract with a medical partnership composed of seven physicians the contract gave the physicians a virtual monopoly over the care of the hospital's patients and the stream of income they represented while also guaranteeing the physicians thousands of dollars in payments for various supervisory activities the court held that the benefits derived from the contract constituted sufficient private benefit to preclude exemption in 293_fsupp_346 w d va the court held that an organization that promoted an interest in theatrical arts did not jeopardize its exempt status when it hired a booking organization to arrange for a series of theatrical performances promote the series and sell season tickets to the series because the contract was for a reasonable term and the organization retained ultimate authority over the activities being managed in 74_tc_1324 affid 675_f2d_244 9th cir the tax_court held that a charitable organization's participation as a general_partner in a limited_partnership did not jeopardize its exempt status the organization co-produced a play as one of its charitable activities organization encountered financial difficulties in raising its share of the costs its funding obligations the organization formed a limited_partnership in which it served as a general_partner and two individuals and a for-profit corporation were the limited partners significant factors in the tax court's finding included that the limited partners played a passive role as investors only that the organization remained in control of all aspects of the play that none of the limited partners were directors or officers of the organization and that the investors’ interests in the particular play were not intrusive or indicative of serving private interests prior to the opening of the play the in order to meet in housing pioneers v commissioner 65_tcm_2194 aff'd 49_f3d_1395 9th cir amended 58_f3d_401 9th cir the tax_court concluded that the organization did not qualify as an organization described in sec_501 of the code because its activities performed as co-general partner in limited_partnerships substantially furthered nonexempt purposes and private interests were served by its activities the organization entered into partnerships as a one percent co-general partner of existing limited_partnerships for the purpose of splitting the tax benefits with the for-profit partners under the management agreement the organization's authority as co-general partner was narrowly circumscribed it had no management responsibilities and could describe only a vague charitable function of surveying tenant needs for federal_income_tax purposes the activities of a partnership are generally considered to be the activities of its partners see eg 36_tc_1097 aca 1962_2_cb_4 this is also consistent with the treatment of partnerships for purposes of the unrelated_business_income_tax under sec_512 of the code as provided in revrul_98_15 supra the activities of a limited_liability_company treated as a partnership for federal_income_tax purposes are considered to be the activities of an exempt_organization that is an owner of a limited_liability_company when evaluating whether the nonprofit organization is operated exclusively for exempt purposes within the meaning of sec_501 a sec_501 organization may form and participate in a partnership including a limited_liability_company which has not elected to be treated as a corporation for federal tax purposes and meet the operational_test if participation in the partnership furthers a charitable purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of any for-profit partner in the present case in contrast to revrul_98_15 both members of the llc are entities exempt from tax pursuant to sec_501 so that the activities of the llc remain entirely in the control of these tax-exempt charities and the llc will only benefit exempt entities thus after the llc's formation its members will each continue to promote the health of the community and otherwise accomplish their respective exempt purposes through the operation of the llc consistent with situation in revrul_98_15 therefore their exempt status under sec_501 will not be adversely affected by their participation in the llc after the llc becomes operational each of its members will continue to operate a hospital and provide hospital care and so will continue to be described in sec_509 and sec_170 of the code the exempt purposes of both x and y will be furthered by establishing the llc to manage the level iii neonatal intensive care unit at y ' s participation will permit it to improve and expand the level of hospital care offered to its infant patients x’s participation will permit it to use the sophisticated skills of its neonatal specialists to reach more patients improve neonatal techniques and therapies provide additional clinical research opportunities and create an additional venue for clinical education programs accordingly because the joint_venture enables the parties to continue to promote health in a charitable manner and contributes importantly to the accomplishment of each organization's exempt purposes any income received by x or y as members of the llc will not constitute income from an unrelated_trade_or_business within the meaning of sec_513 all patients in the nicu are patients of y y provides equipment space support services the services of non-physician employees supplies medical records maintenance billing and collection in relation to the nicu patients in the same manner and to the same extent as for its other patients none of these services constitutes the provision of administrative services to the llc for example the billing and collection activity relates solely to billing nicu patients not to the provision of financial or accounting services to the llc similarly any payment to y for the services of its specialized medical and nursing personnel to effectuate the clinical operations of the nicu will not be income from the conduct of an unrelated_trade_or_business because such income will be derived from activities that constitute the provision of patient care rather than ordinary administrative services therefore we rule as follows your exempt status under sec_501 of the code and your non-private foundation status under sec_509 and sec_170 will not be adversely affected by your involvement in the llc your receipt of payments from the llc for goods property services or personnel provided in connection with the management of the nicu and your distributive shares of income or loss of the llc in connection with the operation of the nicu will not constitute income from an unrelated_trade_or_business under sec_513 and not be subject_to the tax on unrelated_business_income under sec_511 you also requested a ruling under sec_141 of the code this ruling_request will be the subject of a separate communication 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 as precedent the rulings in this letter only apply the specifically indicated sections of the code and regulations to the facts that you have represented in this letter we do not rule on the applicability of any other sections of the code and regulations to your case because this letter could help resolve any future questions about your income_tax responsibility please keep a copy of this ruling 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 sincerely gobet fotervece marvin friedlander manager exempt_organizations technical group


cca_2013062709545646 id ------------ office uilc number release date from ------------------- sent thursday date am to ----------------------------- cc ------------------------------------------------ subject fw adjustment of status exemptions no itin hi ---------- - you asked us what filing_status should be used for a taxpayer who filed a joint_return with his nonresident_alien spouse who did not have a proper taxpayer_identification_number in your case after the tax years in question but before the examination of the returns in question the nonresident_alien spouse got a social_security_number because she was a nonresident_alien during the tax years in question she and her husband can file a joint_return for those years only if they both make an election under sec_6013 see sec_6013 g the election can be made with a joint amended_return up until the expiration of the refund statute_of_limitations within three years of the time the return is filed or two years of the time the tax is paid sec_1_6013-6 because the refund statute is still open for the tax years in question ------------------- the taxpayers could file amended joint returns for -------------------- making a sec_6013 election for each year the tpw can use her ssn for the purpose of making the joint amended returns because an individual who has an ssn can use the ssn for all tax purposes even if for instance the individual had previously been issued an itin or becomes a nonresident_alien see sec_301_6109-1 if for some reason the taxpayers choose not to make a sec_6013 election for a tax_year in which they were married tph's filing_status should be married_filing_separately unless he can establish head_of_household status under sec_2 of the code see sec_2 providing that for purposes of head_of_household status a taxpayer married to a nonresident_alien is not considered to be married see also lee v commissioner tcmemo_1980_195 holding that the petitioner who was married to a nonresident_alien was not entitled to file as head_of_household and did not contend that he elected to file a joint_return under sec_6013 was required to file as a married individual filing separately if you have any other questions or if i can be of further assistance please don't hesitate to contact me thanks ------------------ -------------- ----------------------


department of the treasury internal_revenue_service washington d c date cc dom fs p si tl-n-4782-98 uilc 2032a number release date internal_revenue_service national_office field_service_advice memorandum for james w clark district_counsel cc wr pnw sea from deborah a butler assistant chief_counsel field service cc dom fs subject special_use_valuation election this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend d h p p q r s t u v w x y year dollar_figure dollar_figure dollar_figure dollar_figure year year year year issues whether the estate is entitled to special_use_valuation under sec_2032a with respect to the decedent’s timberland and timber in determining the special use value of timber under sec_2032a whether the recapture provision set forth in sec_2032a can be considered conclusion the estate is entitled to special_use_valuation with respect to the decedent’s timberland and timber in determining the special use value of timber the recapture provision cannot be considered facts in year h obtained a p acre timberland parcel which was covered primarily with q-year old douglas-fir h maintained the property as timberland by removing downed trees and broken limbs purchasing at least r douglas-fir seedlings and planting them on the property to reforest an area of approximately s acres periodically planting other seedlings performing thinning operations as needed making daily inspections to guard against diseased trees and timber theft cleaning up debris to guard against fire and create better growing conditions and paying all property taxes h periodically explored the feasibility of logging the property but concluded that harvesting was not sufficiently profitable on december year h died and d h’s wife became the sole owner of the parcel subsequent to h’s death d continued to maintain the property as timberland she regularly inspected the property for timber theft and disease and arranged a network of neighbors to guard against timber theft in year the county condemned a part of the parcel to provide a road right-of- way d harvested t logs containing about u board feet which sold for dollar_figurev from the portion of the parcel which was condemned with the exception of a small harvest resulting from a timber trespass by an adjoining landowner no other commercial harvesting occurred during year to year on march year d died at the time of d’s death the timber was mature and suitable for harvest on november year a form_706 united_states estate and generation-skipping_transfer_tax return was filed the form_706 included the p acre timberland parcel valued at dollar_figurew a sec_2032a protective_election for special_use_valuation was made on november year an amended form_706 was filed electing the special_use_valuation under sec_2032a for the p acre timberland parcel and the qualified woodlands election under sec_2032a for the timber using the valuation method set forth in sec_2032a the timber was valued at dollar_figurex resulting in an overpayment of estate_tax in the amount of dollar_figurey in determining the value of the timber the appraiser estimated yearly income from the annual timber growth on the property and estimated the harvest of the timber in a single year in both of the forecasting models the appraiser estimated no income for the first ten years following the decedent’s death law and analysis qualified_use of property the value of the gross_estate includes the value of all property to the extent of the decedent’s interest at the time of decedent’s death sec_2031 in general the value of property is included in the gross_estate at its fair_market_value based on its highest_and_best_use as of the date of the decedent’s death sec_2031 sec_20_2031-1 in order to alleviate liquidity problems faced by the surviving family of a person who dies owning real_property used as a farm or in a closely_held_business congress added sec_2032a tax reform act pub_l_no a 90_stat_1520 this statute provides that to the extent real_property is used in farming operations or other closely held businesses rather than including the real_property at its fair_market_value it is included at its current use value as a farm or in the closely_held_business sec_2032a 89_tc_127 for property to be eligible for special_use_valuation the estate must meet a number of conditions the decedent must have been a citizen or resident_of_the_united_states sec_2032a and the property must be located in the united_states sec_2032a fifty percent or more of the adjusted_value of the gross_estate must consist of the adjusted_value of real or personal_property which on the date of decedent’s death was being used for a qualified_use by the decedent or a member of his family and was acquired from or passed_from_the_decedent to a qualified_heir sec_2032a twenty-five percent or more of the adjusted_value of the gross_estate must consist of the adjusted_value of real_property which passes to a qualified_heir sec_2032a during a period aggregating five years or more during the eight year period ending on decedent’s date of death the property must have been owned by the decedent or member_of_the_decedent’s_family used for a qualified_use and the decedent or a member of decedent’s family must have materially participated in the operation sec_2032a if the property meets the above requirements and the executor intends to use the special_use_valuation the executor must elect special_use_valuation on the federal estate_tax_return in the manner set forth in the regulations the executor must also file an agreement consenting to the application of sec_2032a tax treatment of dispositions and failures to use for qualified_use sec_2032a d and d sec_20_2032a-8 based on the information provided the parties agree that all the above requirements have been satisfied with the exception of whether the parcel was on the date of decedent’s death being used for a qualified_use by the decedent or a member of her family qualified_use includes the devotion of the property to use as a farm for farming_purposes sec_2032a the term farm includes woodlands and the term farming_purposes includes planting cultivating caring for or cutting of trees or the preparation other than milling of trees for market sec_2032a c where a taxpayer controls and supervises the acreage by paying the local property taxes each year inspecting the timberland several times each year regularly contacting adjoining landowners to ascertain what needs to be done to protect the timber from trespassers fire insects and disease and deciding from time to time whether the investment should remain in the acreage the taxpayer is conducting an active farm business which consists primarily of planting cultivating growing and caring for timber 82_tc_523 rev’d on other grounds 774_f2d_1057 11th cir the fact that conducting the business does not consume a great deal of time does not alter the conclusion that the taxpayer is conducting an active farm business estate of sherrod t c pincite in contrast where a parcel is designated under state law as forest cropland and the state provided a forest management schedule which established a minimum plan for implementing sound forestry but neither decedent nor a member of his family planted cultivated cut or cared for trees or prepared trees for market the taxpayer is not conducting an active farm business estate of holmes v commissioner tcmemo_1991_477 aff’d 978_f2d_1261 7th cir under the given facts h maintained the property as timberland by removing downed trees and broken limbs purchasing seedlings and planting them on the property periodically planting other seedlings performing thinning operations as needed making daily inspections to guard against diseased trees and timber theft cleaning up debris to guard against fire and create better growing conditions and paying all property taxes h periodically explored the feasibility of logging the property but concluded that harvest was not sufficiently profitable upon h’s death d continued to maintain the property as timberland she regularly inspected the property for timber theft and disease and arranged a network of neighbors to guard against timber theft based on their activities h and d had the acreage under their exclusive control and made every management decision with respect to the property during the entire period furthermore there is no indication that the activities performed by d and h were not consistent with the principles of good land management as recommended to and practiced by the owners of other_property of similar nature size and location or recommended by state and federal forestry agencies see estate of sherrod t c pincite nor is there an indication that the state set forth requirements with respect to timber_operations with which d or h failed to comply based on this it is our opinion that the parcel was used for planting cultivating caring for or cutting of trees or the preparation of trees for market that the parcel was used for a qualified_use and accordingly that special_use_valuation may be utilized qualified woodlands election for qualified woodlands an executor may elect to have trees growing on woodlands not treated as a crop sec_2032a qualified_woodland is any real_property which- i is used in timber_operations and ii is an identifiable area of land such as an acre or other area for which records are normally maintained in conducting timber_operations sec_2032a timber_operations include i the planting cultivating caring for or cutting of trees or ii the preparation other than milling of trees for market sec_2032a based on our conclusion above that the p acre parcel was used for planting cultivating caring for or cutting of trees or the preparation of trees for market it is our opinion that the executor was entitled to elect to have the trees growing on the parcel not treated as a crop valuation of timber sec_2032a provides that to the extent real_property is used in farming operations rather than including the real_property at its fair_market_value it is included at its current use value as a farm sec_2032a 89_tc_127 the method of valuation under sec_2032a is an integral part of the statutory scheme estate of thompson v comm’r tcmemo_1998_325 estate of sequeira v comm’r tcmemo_1995_450 where there is no comparable land from which the average annual gross cash rental may be determined or where the executor makes an election the value of the farm may be determined under sec_2032a sec_2032a based on the information provided there is no comparable land from which the average annual gross cash rental may be determined and the executor elected to value the property under sec_2032a sec_2032a provides that the following factors applying in determining the value of any qualified_real_property a the capitalization of income which the property can be expected to yield for farming or closely_held_business purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area taking into account soil capacity terrain configuration and similar factors b the capitalization of the fair rental value of the land for farmland or closely_held_business purposes c assessed land values in a state which provides a differential or use value assessment law for farmland or closely_held_business d comparable sales of other farm or closely_held_business land in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales_price and e any other factor which fairly values the farm or closely_held_business value of the property sec_2032a an executor may not select one of the five factors set forth above as the exclusive basis for the farm valuation but must utilize all of the factors and accord appropriate weight to each factor revrul_89_30 1989_1_cb_274 because there are various recognized methods of harvesting trees when managing a timber operation ranging from selective cutting to clear cutting the history of the timber_operations with respect to the subject property must be considered in order to determine the weight to be placed on each of the various factors in determining the value of the timber the appraiser estimated yearly income from the annual timber growth on the property and estimated the harvest of the timber in a single year in both of the forecasting models however the appraiser estimated no income for the first ten years following the decedent’s death based on the recapture provision set forth in sec_2032a if within ten years after the decedent’s date of death and before the death of the qualified_heir the heir disposes of any interest in qualified_real_property or the qualified_heir ceases to use for the qualified_use the qualified_real_property which was acquired from the decedent then a recapture_tax is imposed sec_2032a with respect to qualified_woodland to which an election under sec_2032a is made if the qualified_heir disposes of or severs any standing timber on the qualified_woodland the disposition or severance is treated as a disposition of a portion of the interest of the qualified_heir in the property and the amount of recapture_tax is determined according to sec_2032a sec_2032a in valuing property an encumbrance on the property will be taken into account conversely where there is no encumbrance at the time of transfer there is no reduction in value 105_tc_358 rev’d on other grounds 103_f3d_332 4th cir in determining the value of a gift the fair_market_value of the gift is not reduced by the amount_of_the_gift tax_liability in this case there was no encumbrance on the timber at the time it was transferred from the decedent to the beneficiaries rather the liability for recapture of the tax under sec_2032a will not arise unless a beneficiary disposes of an interest in timber accordingly there is no basis for reducing the value of the timber based on the potential application of the recapture provision furthermore the purpose of special_use_valuation is to alleviate liquidity problems faced by the surviving family of a person who dies owning real_property used as a farm h rept pincite 1976_3_cb_735 s rept part pincite 1976_3_cb_643 it is intended to allow the family to continue operating the farm or other business rather than the family being forced to sell the land to pay estate_taxes h rept supra c b vol pincite s rept part supra c b vol pincite 101_tc_140 the provision was not intended to allow an estate to escape taxation by making the election and having the beneficiaries discontinuing farming operations for the length of the recapture_period to the contrary under the special_use_valuation provisions the farm was intended to be a continuing operation the value should reflect this fact accordingly the value of the timber cannot be discounted based on discontinued operations during the time the recapture_tax is potentially applicable to determine the correct value of the timber based on the factors set forth in sec_2032a it is our recommendation that you obtain an appraisal because the timber is ready for harvest it is likely that application of sec_2032a will result in a value that closely approximates the fair_market_value of the timber such a value would be consistent with the timber being utilized as part of a continuing timber operation case development hazards and other considerations your memorandum adopts the position that sec_2032a imposes an additional or higher recordkeeping requirement than that necessary to establish a timber operation qualified_woodland is any real_property which- i is used in timber_operations and ii is an identifiable area of land such as an acre or other area for which records are normally maintained in conducting timber_operations sec_2032a it is our opinion that the records referred to in sec_2032a are those related to the identification of land on which timber_operations are conducted such a position arguably would be inconsistent with the legislative_history of sec_2032a discussing partial dispositions the house conference_report states for purposes of these rules on partial dispositions an identifiable portion of land is defined as an acre or such other area of land by which the taxpayer normally maintains his business records h rept no 97th cong 1st sess pincite see also joint_committee on taxation staff general explanation of the economic recovery act of 97th cong pincite this language supports the position that the records referenced in the statute are those by which an identifiable portion of land is determined your memorandum adopts the position that a taxpayer making an election under sec_2032a must establish that he is in a trade_or_business through the use of accounting_records tax records and timber operation records under sec_2032a to establish that the p acres are used for a qualified_use the executor must be establish that the property is devoted to use as woodlands for purposes of planting cultivating caring for or cutting of trees or the preparation other than milling of trees for market sec_2032a c records are required only to the extent necessary to establish that the property is used for such a qualified_use please call if you have any further questions by patrick putzi special counsel natural_resources passthroughs special industries branch field service division


t c memo united_states tax_court john ballard petitioner v commissioner of internal revenue respondent docket no 4307-07l filed date p filed a petition and motion to restrain assessment on the same date as a basis for his motion to restrain assessment p asserts that r instructed p’s employer to change the withholding status on p’s form_w-4 employees withholding allowance certificate without providing p a remedy to challenge r’s actions p asserts that r’s instructions to p’s employer constitute a collection action and that r failed to comply with the provisions of sec_6330 sec_1 the court issued an order to show cause why this case should not be dismissed for lack of jurisdiction on the grounds that no notice_of_deficiency or notice_of_determination has been sent to petitioner which confers jurisdiction on this court r asserts that no notice_of_deficiency or notice_of_determination wa sec_1 all section references are to the internal_revenue_code as amended unless otherwise indicated and all rule references are to the tax_court rules_of_practice and procedure issued to p and therefore the court is without jurisdiction to consider p’s motion to restrain assessment held since no notice_of_deficiency or notice_of_determination was issued in this case the court lacks jurisdiction held further the court’s order to show cause why this case should not be dismissed for lack of jurisdiction shall be made absolute john ballard pro_se benjamin j peeler and mark cottrell for respondent memorandum opinion panuthos chief special_trial_judge this matter is before the court on petitioner’s motion to restrain assessment and the court’s order to show cause why this case should not be dismissed for lack of jurisdiction on the grounds that no notice_of_deficiency or notice_of_determination has been sent to petitioner which confers jurisdiction on this court background a petition was filed with this court on date petitioner asserts that respondent instructed his employer to change the withholding status on his form_w-4 employee’s withholding allowance certificate without providing petitioner with a remedy to challenge respondent’s actions petitioner contends that respondent’s proposed change to his withholding status is unlawful2 because such change is a collection action taken without issuing the required notice under sec_6330 petitioner attached to the petition internal_revenue_service irs letter cg employee copy dated date which states why are we writing to you we are writing to you because based on the information we have the amount of income_tax withheld from your paycheck will not adequately cover your income_tax_liability as required by internal_revenue_code irc sec_3402 employers are required under the internal_revenue_code to withhold taxes from employees’ earnings sec_3401 and sec_3402 furthermore under sec_31_3402_f_2_-1t g temporary employment_tax regs fed reg date the commissioner may review withholding certificates to determine if the certificates are truthful and valid the commissioner has authority under the regulation to review withholding certificates for compliance with the internal revenue laws and to declare invalid those certificates found not to be in compliance 653_f2d_398 9th cir interpreting prior version of regulations but the premise remains valid see sec_31_3402_f_2_-1t g temporary employment_tax regs supra if a person fails to submit a valid withholding form the regulations require that the employer shall withhold from the employee as from a single_person claiming no exemptions sec_31_3402_f_2_-1 employment_tax regs sec_31_3402_f_2_-1t g temporary employment_tax regs supra provides procedures whereby the irs may implement a reduction in the number of withholding exemptions permitted to an employee sec_31_3402_f_2_-1t g vi temporary employment_tax regs supra provides procedures for an employee to administratively change his or her withholding there is no evidence that petitioner followed these procedures in other situations the commissioner has issued irs letter 2800c which is substantially_similar to and is issued for the same reason as irs letter cg what instructions did we give your employer we instructed your employer to disregard your form_w-4 employee’s withholding allowance certificate and withhold tax from your paycheck as follows filing_status allowances single in addition we have instructed your employer not to honor a new form_w-4 from you unless the filing_status and allowances you claim do not result in less withholding than the filing_status and allowances shown above what does the change to your filing_status and allowances mean this change in your filing_status and allowances will mean an increase in the amount withheld from your paycheck what can you do if you disagree - if your circumstances have changed your filing_status and your number of allowances you may complete the enclosed form_w-4 including the worksheet on the back include a written_statement and any supporting documentation to justify your filing_status and your number of allowances and return it to us within days from the date of this letter - - if you’re claiming exemption from withholding complete the enclosed form_6450 questionnaire to determine exemption from withholding return it with your completed form_w-4 and include your telephone number and the hours we can reach you in either case if we do not hear from you within days from the date of this letter your employer has been instructed to withhold at the rate shown above can my employer change my filing_status or increase my allowances your employer cannot change your filing_status or increase your allowances until they receive written notice from us the internal_revenue_code irc sec_3402 requires employers to withhold tax if the statement and documentation that you send to us justifies the filing_status and allowances on your new form_w-4 we will instruct your employer to withhold on the basis of your new form_w-4 what if you have more questions if you have any questions you may call tax examiner id on weekdays between a m and p m pacific standard time pincite-794-0059 this is a toll-free telephone number we’ve enclosed notice form_w-4 privacy_act notification for your convenience on date petitioner filed a motion to restrain in which he seeks injunctive relief pursuant to sec_6213 a and a by having the court order respondent to withdraw the letter cg reinstate petitioner’s filing_status and allowance as shown on his last form_w-4 before respondent issued the letter cg or allow petitioner to file a new form_w-4 to correct respondent’s change in petitioner’s withholding status and order respondent to reimburse petitioner for any damages that were unlawfully collected pursuant to letter cg the court issued an order setting petitioner’s motion to restrain assessment for hearing at the motions session in washington d c the court noted that no notice was attached to the petition which would permit petitioner to invoke the court’s jurisdiction accordingly the court ordered the parties to show sec_6213 provides for a restriction on assessment in the event that a notice_of_deficiency is mailed to a taxpayer there is no evidence in this case that a notice_of_deficiency was mailed to petitioner cause in writing why this case should not be dismissed for lack of jurisdiction on the ground that respondent has not issued to petitioner a notice_of_deficiency or notice_of_determination that would permit petitioner to invoke the court’s jurisdiction in his response respondent stated that a search of respondent’s records revealed no evidence of a notice_of_deficiency or notice_of_determination being issued to petitioner and thus respondent contends the court lacks jurisdiction in this case a hearing on petitioner’s motion to restrain was held in washington d c after the hearing the court received and filed petitioner’s response to respondent’s response to order to show cause and petitioner’s objection to respondent’s objection to petitioner’s motion to restrain assessment discussion this court can proceed in a case only if it has jurisdiction and either party or the court sua sponte can question jurisdiction at any time 127_tc_109 81_tc_879 we must have jurisdiction in order to consider the substantive merits of petitioner’s motion see stewart v commissioner supra we must decide whether we have jurisdiction if it appears that we may not have jurisdiction id 35_tc_177 thus the threshold issue for decision is whether this court has jurisdiction in this case the tax_court is a court of limited jurisdiction and we may exercise that jurisdiction only to the extent authorized by congress 85_tc_527 petitioner contends that this court has jurisdiction in this case to review a collection action under sec_6330 sec_6330 entitles a taxpayer to notice of the taxpayer’s right to request a hearing before certain levy actions are taken by the commissioner in furtherance of collection from the taxpayer of unpaid federal taxes if a hearing is requested the appeals officer conducting the hearing must verify that the requirements of any applicable law or administrative procedure have been met sec_6330 the taxpayer requesting the hearing may raise any relevant issue relating to the unpaid tax or the proposed levy sec_6330 the taxpayer may raise challenges to the existence or amount of the underlying tax_liability however only if he did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 following the hearing the appeals officer must determine whether the collection action is to proceed taking into account the verification the appeals officer has made the issues raised by the taxpayer at the hearing and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 the court’s jurisdiction under sec_6330 depends upon the issuance of a valid notice_of_determination and the filing of a timely petition for review sec_6330 see 123_tc_1 affd 412_f3d_819 7th cir 117_tc_122 116_tc_263 114_tc_492 see also rule b thus in the absence of a notice_of_determination this court lacks jurisdiction petitioner attached to his petition irs letter cg petitioner contends that irs letter cg constitutes a valid notice_of_determination that confers jurisdiction on this court under sec_6330 we disagree because none of the events described in sec_6330 that lead to a determination which we have jurisdiction to review have occurred there has been no notice of a right to a hearing no timely request for hearing and no determination with respect to the hearing or request for hearing as required by sec_6330 a description of a notice_of_determination is found in sec_301_6330-1 q a-e8 i proced admin regs which provides q-e8 how will appeals issue its determination a-e8 i taxpayers will be sent a dated notice_of_determination by certified or registered mail the notice_of_determination will set forth appeals’ findings and decisions it will state whether the irs met the requirements of any applicable law or administrative procedure it will resolve any issues appropriately raised by the taxpayer relating to the unpaid tax it will include a decision on any appropriate spousal defenses raised by the taxpayer it will include a decision on any challenges made by the taxpayer to the appropriateness of the collection action it will respond to any offers by the taxpayer for collection alternatives and it will address whether the proposed collection action represents a balance between the need for the efficient collection_of_taxes and the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary the notice_of_determination will also set forth any agreements that appeals reached with the taxpayer any relief given the taxpayer and any actions the taxpayer or the irs are required to take lastly the notice_of_determination will advise the taxpayer of the taxpayer’s right to seek judicial review within days of the date of the notice_of_determination none of these findings and decisions are set forth in irs letter cg petitioner contends that application of the protections provided under sec_6330 to withholding of income_tax is clearly implied by congressional intent we disagree there is nothing in the legislative_history of the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_685 that would indicate that congress intended to include withholding of income_tax as the type of collection action for which a hearing must be offered to the taxpayer we conclude that the irs letter cg is not a notice_of_determination under sec_6330 thus this court lacks jurisdiction an appropriate order dismissing this case for lack of jurisdiction will be entered