internal_revenue_service number release date index number ---------------------------- ------------- -------------------------------------------------- ------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b03 plr-106167-11 date date ty ------- ty ------- legend taxpayer ------------------------------------------------------------- parent -------------------------------------------------------- subsidiary ---------------------------------------------------------- fund group -------------------------------- owning funds ---------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------- year ------- extended due_date --------------------------- discovery date ------------------------- dear -------------------- this is in response to your letter dated date in your letter you requested an extension of time to file the forms necessary to make a consent_dividend election under sec_565 of the internal_revenue_code for the tax_year ending december year the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations facts taxpayer a corporation is a regulated_investment_company owned by parent subsidiary and the owning funds in parent’s fund group parent administers the various funds in the fund group parent and subsidiary hold shares of each of the funds in the fund group in separate_accounts established for the purpose of funding variable_annuity contracts and variable life_insurance policies investors in parent and subsidiary may select one of the funds in the fund group including taxpayer as an plr-106167-11 investment option for a variable_annuity contract or life_insurance_policy taxpayer must make minimum distributions each tax_year to continue to be subject_to tax as a regulated_investment_company for future tax years parent prepared taxpayer’s form 1120-ric u s income_tax return for regulated_investment_companies for the tax_year ending december year and filed it before the extended due_date before filing taxpayer’s form 1120-ric the board_of directors approved taxpayer’s issuance of consent dividends to parent subsidiary and the owning funds to satisfy the taxpayer’s year distribution_requirements parent’s employees had no prior experience issuing consent dividends after consulting outside accountants and lawyers parent’s employees prepared an internal memorandum outlining the process of how funds in the fund group should issue consent dividends and the tax consequences of issuing them the memorandum stated that parent needed to file a form_973 corporation claim for deduction for consent dividends with each form 1120-ric of each fund in the fund group but the memorandum did not mention the additional regulatory requirement that parent file a form_972 consent of shareholder to include specific amount in gross_income with each fund’s return for each consent_dividend paid to a different shareholder of taxpayer time passed between when parent’s employees prepared the memorandum and when they began preparing the forms 1120-ric for each fund in the fund group when parent prepared form 1120-ric on behalf of taxpayer parent’s employees followed the memorandum’s instructions thus taxpayer’s return included an executed form_973 with the filing but not any executed form sec_972 the form sec_972 were not attached even though parent’s employees possessed two executed originals of form_972 one authorizing the inclusion of consent dividends in parent’s gross_income and the other authorizing the inclusion of consent dividends in subsidiary’s gross_income parent’s employees never obtained executed form sec_972 authorizing the inclusion of consent dividends in the gross_income of the various owning funds because they were inexperienced in issuing consent dividends they believed the law did not require them to obtain form sec_972 for the owning funds because the gross_income would flow through to parent and subsidiary for whom they had obtained executed form sec_972 taxpayer’s shareholders parent subsidiary and the various owning funds each included the appropriate amount of consent_dividend income in their respective gross incomes on parent’s consolidated_income_tax_return for year after the extended due_date but before the discovery date parent’s auditor discovered that no form sec_972 had been attached to taxpayer’s form 1120-ric to taxpayer’s knowledge the irs was not aware of the omission of the form_972 and has not contacted parent about the year consent_dividend election nor has it notified parent that taxpayer’s year form 1120-ric is under examination plr-106167-11 law and analysis sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its investment_company_taxable_income sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its net capital_gains determined with reference to capital_gain dividends only sec_561 provides that the deduction for dividends_paid includes consent dividends for the taxable_year as determined under sec_565 sec_565 of the code provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a consent_dividend for purposes of sec_561 relating to the deduction for dividends_paid consent_stock which is the type of stock with respect to which consent dividends are allowed sec_565 includes what is generally known as common_stock and participating preferred_stock the participation rights of which are unlimited sec_1_565-6 of the income_tax regulations sec_1_565-1 provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 provides that a consent may be filed no later than the due_date of the corporation's income_tax return for the taxable_year for which the dividends_paid deduction is claimed with such return and not later than the due_date the corporation must file form sec_972 for each consenting shareholder and a return on form_973 showing by classes the stock outstanding on the first and last days of the taxable_year the dividend rights of such stock distributions made during the taxable years to shareholders and give all other information required by the form under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1_565-1 includes the extended due_date of a return filed pursuant to an extension of time to file sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to plr-106167-11 grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations 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 sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking plr-106167-11 into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer in this case requested relief before the failure to make the regulatory election was discovered by the service and thus under sec_301_9100-3 the taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer's election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in the regulations under sec_1_565-1 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the plr-106167-11 election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time for making the election to issue consent dividends until days following the date of this ruling the election should be made by filing the forms necessary to make the sec_565 consent_dividend election for year and by including a copy of this ruling with an amended_return for year this ruling is limited to the timeliness of the consent_dividend election taxpayer wishes to make for year this ruling’s application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 robert casey acting branch chief branch income_tax accounting cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip 3-plr-100013-01 date date ty legend taxpayer taxpayer limited_partner general_partner date date date date date date date date date state dear this responds to a letter dated date requesting that the taxpayers be granted an extension of time to file an election under sec_1092 of the internal_revenue_code code of and sec_1_1092_b_-4t of the temporary income_tax regulations regulations facts taxpayer is an accrual basis limited_partnership organized under the laws of the state on date taxpayer is an accrual basis limited_liability_company organized under the plr-100013-01 laws of the state on date and is treated as a partnership for federal tax purposes limited_partnership is a limited_partnership organized under the laws of the state and is a member of taxpayer both taxpayer and taxpayer invest in futures contracts which are managed by trading advisors taxpayer allocates its assets between two trading advisors taxpayer allocates its assets among five trading advisors general_partner is a corporation organized under the laws of the state and is the general_partner of both taxpayer and limited_partnership the general_partner is a commodity pool operator that currently has over u s partnerships under management including taxpayer and taxpayer through limited_partnership for the taxable_year in issue taxpayer and taxpayer were the only new entities that commenced operations and were required to file initial year mixed_straddle account elections taxpayer and taxpayer commenced operations and entered into their first mixed_straddle transactions on date and date respectively under sec_1_1092_b_-4t taxpayer and taxpayer were required to file forms to make a mixed_straddle account election for the taxable_year on date and date respectively due to the fact that the internal accounting department of taxpayer and taxpayer was not notified of the commencement of trading activity taxpayer and taxpayer did not timely file form_6781 and make a mixed_straddle account election under sec_1_1092_b_-4t for the taxable_year the vice president of external reporting responsible for filing the elections for the taxpayers did not learn about the commencement of trading until the required reporting deadline for book purposes arose on or about date which was after the time for filing elections had expired for both taxpayers but before the end of the taxpayers’ then current tax_year date the vice president of external reporting immediately consulted with its external accountant after considering steps to remedy the situation on date the external accountant contacted the internal_revenue_service to inquire about remedying the error the taxpayers are in the process of developing and implementing internal controls to avoid the recurrence of the above error the taxpayers represent they have complied with all other operational aspects regarding the maintenance of the mixed_straddle accounts applicable law sec_1_1092_b_-4t of the regulations generally permits a taxpayer to elect in accordance with paragraph f of sec_1_1092_b_-4t to establish one or more mixed_straddle accounts sec_1_1092_b_-4t defines a mixed_straddle account to mean an account for determining gains and losses from all positions held as capital assets in a designated class of activities by the taxpayer at the time the taxpayer elects to establish a mixed_straddle account plr-100013-01 sec_1_1092_b_-4t of the regulations generally provides that except as otherwise provided the election to establish one or more mixed_straddle accounts for a taxable_year must be made by the due_date without regard to any extension of the taxpayer’s income_tax return for the immediately preceding year or part thereof sec_1_1092_b_-4t further provides that if a taxpayer begins trading or investing in positions in a new class of activities during a taxable_year the taxpayer must make the elections with respect to the new class of activities by the later of the due_date without regard to any extension of the taxpayer’s return for the immediately preceding year or days after the first mixed_straddle in the new class of activities is entered into finally sec_1_1092_b_-4t provides that if an election is made after the times specified above the election will be permitted only if the commissioner concludes that the taxpayer had reasonable_cause for failing to timely make the election based upon the facts and representations submitted we conclude that the taxpayers have shown reasonable_cause for failing to make a timely election under sec_1_1092_b_-4t of the regulations therefore we grant the taxpayers’ request for an extension of time to make the election under sec_1_1092_b_-4t for their respective taxable years ending date this extension will expire days from the date of this letter the election must be made in the manner prescribed in sec_1_1092_b_-4t and filed with the director having audit jurisdiction over the taxpayers’ respective tax returns 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 specifically no opinion is expressed regarding whether any transaction taxpayer entered into before date or taxpayer entered into before date constitutes a hedging_transaction under any provision of the code or regulations furthermore no opinion is expressed concerning whether the positions designated by the taxpayers as the class of activities are permissible designations under sec_1_1092_b_-4t of the regulations this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely acting associate chief_counsel financial institutions and products by alice m bennett chief branch enclosure copy


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division nov - uniform issue list legend taxpayer a taxpayer b ira x ira y amount a amountt _ financial_institution m date date date date dear this is in response to your request dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age received a distribution on date from ira y totaling amount a taxpayer a received a distribution on date from ira x totaling amount t it is asserted that taxpayer a’s failure to accomplish a rollover of either distribution within the 60-day period prescribed by sec_408 was due to errors and misunderstandings on the part of employees of financial_institution m taxpayer a further represents that amounts a and t have not been used for any other purpose _ page taxpayer a asserts that on or about date taxpayer a contacted financial_institution m to accomplish a rollover of amount a into an ira and on or about date taxpayer again contacted financial_institution m to accomplish an ira rollover of amount t on each date taxpayer a indicated to financial_institution m representatives that he had closed his ira account and wished to roll over these amounts into another ira on each occasion taxpayer a signed and returned paperwork sent him by financial_institution m believing he had purchased an ira cd and had established a rollover account during this period taxpayer a was the primary care giver for his spouse who has been diagnosed with a debilitating mental condition as a result taxpayer a was unable to monitor his financial affairs as closely as he would have liked and did not realize that the papers he was signing did not establish an ira account in calendar_year while completing taxpayer a's calendar_year federal_income_tax return taxpayer a's certified_public_accountant informed taxpayer a that amounts a and t were invested in non-ira accounts at financial_institution m said amounts a and t remain invested in non-ira vehicles based on the facts and representations you request a ruling that the internal_revenue_service waive the day rollover requirement with respect to the distribution of amount a contained in sec_408 of the code the code sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the goth day after the day on which the individual receives the payment or distribution or page ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that a failure to accomplish a rollover of either ira distribution within the 60-day period prescribed by sec_408 was due to errors on the part of a financial_institution taxpayer a requested a rollover of page each of the distributed amounts and signed paperwork purchasing two certificates of deposit believing he was establishing two ira rollover accounts however contrary to taxpayer a's representations to them personnel of financial_institution m invested these amounts in non-ira accounts therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution to taxpayer a of amounts a and t from iras y and x respectively pursuant to this ruling letter taxpayer a is granted a period of days measured from the date of the issuance of this letter_ruling to make a rollover_contribution of an amount equal to the total of amounts a and t except as noted below to another ira or iras described in code sec_408 provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution of an amount not to exceed the total of amounts a and t except as noted below will be considered a rollover_contribution within the meaning of code sec_408 it is noted by the service that taxpayer a has attained his required_beginning_date as that term is defined in code sec_401 a c has attained age thus this letter_ruling does not authorize the rollover of any amount s required to be distributed with respect to the and calendar years no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office _ page if you wish to inquire about this ruling please contact i d at _ please address all correspondence to se t ep ra t3 sincerely yours frances v sloan employee_plans technical group manager enclosures deleted copy of letter_ruling notice of intention to disclose


t c summary opinion united_states tax_court douglas zierdt petitioner v commissioner of internal revenue respondent docket nos 14337-12s 25419-12s filed date douglas zierdt pro_se cory h ellenson for respondent summary opinion guy special_trial_judge these consolidated cases were heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petitions were filed pursuant to sec_7463 the decisions to be entered are these cases were consolidated for purposes of trial briefing and opinion continued not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioner’s federal_income_tax and accuracy-related_penalties under sec_6662 for the years and in the amounts as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number petitioner filed timely petitions for redetermination with the court pursuant to sec_6213 at the time the petitions were filed petitioner resided in california the issues for decision are whether petitioner is entitled to certain deductions claimed on schedules c profit or loss from business for expenses related to his stockbroker and gambling activities during and years in issue and liable for accuracy-related_penalties under sec_6662 continued unless otherwise indicated section references are to the internal_revenue_code code as amended and in effect for and and rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar background some of the facts have been stipulated and are so found the stipulations of facts the supplemental stipulation of facts and the accompanying exhibits are incorporated herein by this reference i stockbroker activity during the years in issue petitioner worked part time as a stockbroker for western international securities petitioner testified that he started his workdays by purchasing several newspapers including investor’s business daily the wall street journal barron’s the new york times the financial_times the los angeles business journal the los angeles times the washington post and the san francisco chronicle he further testified that he spent approximately dollar_figure on these publications during each of the years in issue he paid cash for the newspapers and he did not obtain receipts for his purchases ii gambling activity a wagering petitioner considers himself a professional gambler he regularly spends the afternoon and evening hours wagering on horse races at tracks in southern california including santa anita del mar hollywood park and los alamitos he also places bets on horse races and other sports events in california and elsewhere in the united_states remotely via telephone and web sites such as tvg and xpressbet petitioner asserts that he has read books and attended seminars to improve his gambling skills but he did not identify a specific book that he read and he failed to produce any records to show that he attended a particular seminar petitioner sometimes attempts to recruit new clients for his stockbroker activity while at the racetrack in this regard he distributes the zierdt letter --a summary of his thoughts on the stock market--to potential clients and he sometimes holds business meetings with existing clients petitioner spends approximately hours per week gambling he admittedly derives personal enjoyment from the activity b gambling_losses petitioner did not maintain complete records of the gross amounts that he wagered during the years in issue but he acknowledges that he had net gambling_losses before taking into account his other gambling-related expenses for each of the taxable years to c gambling expenses in addition to the amounts he lost on wagers petitioner incurred gambling- related expenses such as transportation costs to and from racetracks food and beverage expenses parking and entry fees and the cost of so-called tip sheets petitioner paid cash for most of the items he purchased while gambling and he did not obtain receipts d records petitioner maintained written logs of his gambling-related expenses for the years in issue the logs generally list the date the distance in miles that he drove to and from racetracks the items that he purchased while there and the cost of those items the items listed in the logs include tip sheets gasoline purchases parking fees racing forms programs and admission or entry tickets petitioner’s daily gambling expenses ranged from approximately dollar_figure to dollar_figure and dollar_figure to dollar_figure per day during and respectively petitioner’s log for indicates that he normally spent dollar_figure per day on food and entertainment at the racetrack iii cellular phone records petitioner paid dollar_figure and dollar_figure for cellular phone service for and respectively he maintained a record of his cellular phone calls for distinguishing calls related to his stockbroker activity often identifying clients by name from calls related to his gambling activity petitioner’s log for does not include food and entertainment_expenses petitioner’s records of his cellular phone use during indicate that approximately one-half of his calls that year related to his stockbroker activity and the remaining calls related to his gambling activity petitioner testified that he rarely used his cellular phone for personal calls during petitioner did not maintain detailed records related to his cellular phone use in he testified that during about of his cellular phone calls were attributable to his stockbroker activity of his calls related to his gambling activity and of his calls were personal iv tax returns for and petitioner timely filed form sec_1040 u s individual_income_tax_return for and for both years petitioner reported gaming income as other income on line of his form sec_1040 and gaming losses in amounts equal to his gaming income under other miscellaneous deductions on schedules a itemized_deductions the parties agree that petitioner had gambling winnings of dollar_figure and dollar_figure during and respectively petitioner attached schedules c to both returns identifying the business activity as stockbroker petitioner did not file separate schedules c for his although this amount is dollar_figure more than petitioner reported on his tax_return for the parties agree that he likewise had additional gambling_losses of dollar_figure that year gambling activity but rather mislabeled and commingled his gambling and stockbroker expenses a schedule c for petitioner reported gross_receipts of dollar_figure on schedule c in respect of his stockbroker activity for he also reported total expenses of dollar_figure including in relevant part dollar_figure for repairs and maintenance dollar_figure for office expenses and dollar_figure for legal and professional services petitioner explained at trial that most of the repairs and maintenance expense represented his gambling expenses at hollywood park the dollar_figure amount identified as office expenses represented the total of his cellular phone charges and gambling expenses at santa anita and del mar and the dollar_figure expense identified as legal and professional services represented his gambling expenses at los alamitos b schedule c for petitioner reported gross_receipts of dollar_figure on schedule c in respect of his stockbroker activity for he also reported total expenses of dollar_figure including dollar_figure for insurance other than health dollar_figure for commissions and fees dollar_figure for advertising dollar_figure for utilities dollar_figure for repairs and maintenance dollar_figure for meals and entertainment and dollar_figure for office expenses petitioner explained at trial that most of the expenses listed above represented the total of his cellular phone charges and gambling expenses at various racetracks during v notices of deficiency a respondent issued a notice_of_deficiency to petitioner for disallowing for lack of substantiation dollar_figure of the deduction he claimed on schedule c for repairs and maintenance_expenses and the full amounts of the deductions he claimed for office expenses and legal and professional services b respondent issued a notice_of_deficiency to petitioner for disallowing for lack of substantiation dollar_figure of the deduction he claimed on schedule c for office expenses and the full amounts of the deductions he claimed for insurance commissions and fees advertising utilities and repairs and maintenance as previously mentioned respondent also determined that petitioner is liable for accuracy-related_penalties under sec_6662 for the years in issue respondent concedes that petitioner is entitled to schedule c deductions for of dollar_figure and dollar_figure for meals and entertainment_expenses and travel_expenses respectively discussion the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 petitioner does not contend that the burden_of_proof shifts to respondent under sec_7491 in any event because we decide the issues in dispute on the preponderance_of_the_evidence the allocation of the burden_of_proof is immaterial see 131_tc_185 deductions are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 292_us_435 a taxpayer must substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 hradesky v commissioner t c pincite when a taxpayer establishes that he or she paid_or_incurred a deductible expense but fails to establish the amount of the deduction the court normally may estimate the amount allowable as a deduction 39_f2d_540 2d cir 85_tc_731 there must be sufficient evidence in the record however to permit the court to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir under sec_162 a deduction is allowed for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 personal living or family_expenses are generally nondeductible expenses sec_262 sec_274 prescribes more stringent substantiation requirements before a taxpayer may deduct certain categories of expenses including travel_expenses meals and entertainment expenditures and expenses related to the use of listed_property as defined in sec_280f see 50_tc_823 aff’d 412_f2d_201 2d cir as relevant here for the taxable_year the term listed_property includes inter alia cellular phones sec_280f however sec_280f was amended by the small_business jobs_act of pub_l_no sec_2043 sec_124 stat pincite which removed cellular phones from the definition of listed_property the amendment is effective for taxable years beginning after date id sec_2043 to satisfy the requirements of sec_274 a taxpayer generally must maintain adequate_records or produce sufficient evidence corroborating his or her own statement which in combination are sufficient to establish the amount date and time and business_purpose for each expenditure for travel meals and entertainment or business use of listed_property sec_1_274-5t c temporary income_tax regs fed reg date sec_1_274-5t temporary income_tax regs supra provides in relevant part that adequate_records generally consist of an account book a diary a log a statement of expense trip sheets or a similar record made at or near the time of the expenditure or use along with supporting documentary_evidence the court may not use the rule established in cohan v commissioner f 2d pincite- to estimate expenses covered by sec_274 sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs fed reg date i stockbroker activity a newspaper expenses although we do not doubt that petitioner purchased newspapers and other financial publications as part of his stockbroker activity he did not produce receipts or other records to substantiate his newspaper expenses in short petitioner’s testimony aside there is no objective evidence in the record to permit the court to determine or attempt to estimate the amount of an allowable deduction for these items see williams f 2d pincite accordingly we hold that petitioner is not entitled to deductions for newspaper expenses for the years in issue b cellular phone expense sec_1 during the taxable_year cellular phones were classified as listed_property under sec_280f and therefore were subject_to the strict substantiation requirements of sec_274 petitioner paid dollar_figure for cellular phone service during and he produced records identifying calls that he made to clients in connection with his stockbroker activity petitioner’s records corroborate his testimony that approximately one-half of his cellular phone use in was related to his stockbroker activity we conclude on this record that petitioner has satisfied the strict substantiation requirements prescribed in sec_274 and that he is entitled to a deduction of dollar_figure of dollar_figure for cellular phone expenses for cellular phones were no longer subject_to the strict substantiation requirements of sec_274 in the record shows that petitioner paid dollar_figure for cellular phone service during and he credibly testified that approximately of his cellular phone use in was related to his stockbroker activity we therefore conclude that petitioner is entitled to a deduction of dollar_figure of dollar_figure for cellular phone expenses for ii gambling activity sec_165 provides that losses from wagering transactions are allowed as deductions only to the extent of the gains from such transactions we have held that the phrase l osses from wagering transactions in sec_165 refers to amounts expended on wagers as distinguished from other expenses paid_or_incurred in carrying on the trade_or_business of gambling see 136_tc_81 moore v commissioner tcmemo_2011_173 in this regard expenses paid_or_incurred by a taxpayer in carrying on the trade_or_business of gambling other than direct wagering expenses are deductible under sec_162 without regard to sec_165 mayo v commissioner t c pincite the parties disagree whether petitioner was engaged in the trade_or_business of gambling although petitioner maintains that he is a professional gambler respondent determined that he engaged in gambling as a hobby not as a business and he is not entitled to deduct his gambling-related expenses under sec_162 in the alternative respondent determined that petitioner failed to properly substantiate the gambling expenses that he reported on schedules c under sec_183 if an activity is not engaged in for profit then no deduction attributable to that activity is allowed except to the extent provided by sec_183 in pertinent part sec_183 allows those deductions that would have been allowable had the activity been engaged in for profit only to the extent of gross_income derived from the activity reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 deductions are allowable under sec_162 or under sec_212 or if the taxpayer is engaged in the activity with the actual and honest objective of making a profit 78_tc_642 aff’d without published opinion 702_f2d_1205 d c cir 72_tc_411 aff’d without published opinion 647_f2d_170 9th cir the existence of the requisite profit objective is a question of fact that must be decided on the basis of the entire record 82_tc_793 aff’d 771_f2d_269 7th cir aff’d 480_us_23 sec_1_183-2 income_tax regs in resolving this factual question greater weight is given to objective facts than to a taxpayer’s statement of intent sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth the following nonexhaustive list of factors that may be considered in deciding whether a profit objective exists the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the taxpayer’s success in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and any elements indicating personal pleasure or recreation no single factor nor even the existence of a majority of factors supporting or rebutting the existence of a profit objective is controlling and all facts and circumstances with respect to the activity are to be taken into account id see groetzinger v commissioner t c pincite a manner in which petitioner carries on the gambling activity if a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books_and_records it may indicate a profit objective sec_1_183-2 income_tax regs a change_of operating methods or adoption of new techniques with the aim of improving profitability may also indicate a profit_motive id however if the taxpayer’s records are not used to improve the performance of a losing operation such records generally do not indicate a profit objective see merkin v commissioner tcmemo_2008_146 petitioner did not maintain complete and accurate records of his gambling_losses or gambling-related expenses he often erred in tallying his daily expenses the parties agree that this factor is not relevant to our analysis on some dates in the stated total of expenses exceeded actual daily expenses by more than dollar_figure we also note that in some instances petitioner’s records contain two different statements of expenses for a specific date and in other instances he simply failed to record the date there is no evidence that petitioner changed his operating methods adopted new techniques or analyzed his gambling_losses and gambling-related expenses in an effort to improve his performance or to enhance the likelihood of earning a profit from the activity we conclude that petitioner did not conduct the gambling activity in a businesslike manner b expertise of petitioner or his advisers preparation for the activity by extensive study of its accepted business practices or consultation with those who are expert therein may indicate a profit objective where the taxpayer carries on the activity in accordance with such practices sec_1_183-2 income_tax regs petitioner did not identify specific books that he had read and he failed to show that he attended a particular seminar to gain expertise in gambling although he regularly consulted tip sheets before placing bets we are not persuaded that petitioner achieved any level of expertise handicapping horse races see merkin v commissioner tcmemo_2008_146 finding that reading video poker magazines and scouting poker machines on the casino floor did not validate the taxpayer’s claim that he was a poker expert this factor weighs against petitioner c time and effort expended in carrying on the activity the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity may indicate an intention to derive a profit sec_1 b income_tax regs petitioner devotes approximately hours per week to gambling his gambling records from tvg and xpressbet show that he placed numerous wagers in and we conclude that petitioner devoted substantial time and effort to gambling--this factor weighs in his favor d petitioner’s success in carrying out other similar or dissimilar activities the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that the activity in question was engaged in for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs although petitioner has achieved success as a stockbroker that activity is not sufficiently similar to wagering on horse races to provide any insights as to his profit_motive with regard to gambling petitioner did not offer evidence that he has profitably engaged in other gambling activities this factor weighs against petitioner e petitioner’s history of income or loss a series of losses during the initial or startup stage of an activity may not necessarily be an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs however if a taxpayer continues to sustain losses beyond the period which customarily is necessary to bring the operation to profitable status such continued losses if not explainable may indicate that the activity is not engaged in for profit id the goal must be to realize a profit on the entire operation which presupposes not only future net_earnings but also sufficient net_earnings to recoup the losses which have meanwhile been sustained in the intervening years 45_tc_261 aff’d 379_f2d_252 2d cir see also foster v commissioner tcmemo_2012_207 as discussed above although we do not have a complete picture petitioner admits that he had net losses from his gambling activity during the period to petitioner’s history of uninterrupted losses is indicative of a lack of profit objective see golanty v commissioner t c pincite moore v commissioner tcmemo_2011_173 this factor weighs against petitioner f occasional profits the amount of profits in relation to the amount of losses_incurred and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s intent sec_1_183-2 income_tax regs while petitioner has placed winning bets he admits that his gambling activity has never been profitable when petitioner’s gambling-related expenses are added to the mix his losses from the activity far outstrip any gambling-related income this factor is indicative of his lack of a profit_motive see golanty v commissioner t c pincite moore v commissioner tcmemo_2011_173 g petitioner’s financial status the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit sec_1_183-2 income_tax regs substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit id petitioner earned dollar_figure and dollar_figure as a part-time stockbroker during and respectively if he is permitted to deduct his gambling-related expenses from his stockbroker income his taxable_income will be significantly reduced for example the deductions that petitioner claimed in respect of his gambling activity in would have reduced his taxable_income to less than dollar_figure while it does not appear that petitioner gambles with the principal goal of reducing his tax_liability the fact that he derives substantial income from the stockbroker activity allows an inference to be drawn that he is not engaged in the gambling activity for the production_of_income this factor weighs against petitioner h elements of personal pleasure or recreation the presence of personal motives in carrying on an activity may indicate that the activity is not engaged in for profit especially where there are elements of recreation or personal pleasure sec_1_183-2 income_tax regs as discussed above petitioner testified that he enjoys trips to the track and gambling on horse races thus this factor weighs against petitioner i conclusion considering all the facts and circumstances and weighing the factors analyzed above we hold that petitioner did not conduct his gambling activity in a businesslike manner and he did not engage in that activity with the requisite profit objective during the years in issue consequently we sustain respondent’s determinations that petitioner is not entitled to deductions under sec_162 for the gambling-related expenses he reported on schedules c for and iii accuracy-related_penalty sec_6662 and b and imposes an accuracy-related_penalty equal to of the amount of any underpayment_of_tax that is due to the taxpayer’s negligence or disregard of rules or regulations or that is attributable to any substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 an understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 an understatement is substantial in the case of an individual if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 with respect to an individual taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect id pincite see rule a welch v helvering u s pincite assuming as we do that rule_155_computations will show that petitioner substantially understated his income_tax liabilities for the years in issue respondent will have satisfied his burden of production sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioner prepared his tax returns himself he did not file separate schedules c with his returns and instead he claimed deductions for gambling expenses on schedules c that identified the business activity as stockbroker such inaccurate and misleading income_tax reporting does not reflect a reasonable attempt to comply with the code in sum we conclude that petitioner failed to show that there was reasonable_cause for and that he acted in good_faith with respect to the underpayments in these cases see sec_1_6664-4 income_tax regs consequently we hold that petitioner is liable for accuracy-related_penalties for and to reflect the foregoing decisions will be entered under rule


internal_revenue_service number release date index number ---------------- -------------------------------- ----------------------------- ------------------------ ---------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc corp b04 plr-140419-15 date date taxpayer --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- ------------------------------ operating partnership --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- -------------------------- business group group new stock --------------------------------------------------------------------------------------------- ------------- ---------------- ----------------- --------------------------------------------------------------------------------------------- ------------------------ date a ---------------------- dear ------------- this letter responds to your date letter requesting a ruling on certain federal_income_tax consequences of a proposed transaction the information submitted in that letter and in later correspondence is summarized below the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material plr-140419-15 asbwcz submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts taxpayer has made a valid election to be treated as a real_estate_investment_trust reit under sec_856 for federal_income_tax purposes and has outstanding shares of common_stock and several series of preferred_stock preferred_stock the common_stock and certain shares of preferred_stock are publicly traded taxpayer is the sole general_partner of operating partnership and conducts substantially_all of its activities through operating partnership operating partnership is primarily engaged in business which consists of group and group proposed transaction for what are represented to be valid business reasons taxpayer proposes the following series of steps collectively the proposed transaction i ii iii taxpayer will distribute shares of new stock taxpayer will make a valid election under sec_858 to treat certain dividends distributed after the close of its taxable_year spillover distributions as having been paid during the taxable_year the preceding year the spillover distributions will be made on shares of common_stock new stock or both taxpayer will repurchase shares of common_stock new stock or both the repurchases the repurchases will be made through open market purchases accelerated stock repurchase programs or through an issuer tender offer representations taxpayer has made the following representations in connection with the proposed transaction a b c taxpayer is indifferent to the identity of the shareholders that will participate in the repurchases and will not make any repurchases with a purpose to increase or decrease the ownership percentage of any particular shareholder or group of shareholders no spillover distribution will be made by way of a repurchase or redemption of any of taxpayer’s stock all spillover distributions will be made as distributions within the meaning of sec_301 on or before date a plr-140419-15 asbwcz d e f the amount of current_earnings_and_profits in the preceding year taking into account all other applicable rules including sec_1_858-1 but disregarding the impact of any sec_302 redemptions in such preceding year will exceed the amount of the spillover distribution considered paid under sec_858 in such preceding year taxpayer will not claim a deduction for dividends_paid with respect to the repurchases taxpayer anticipates that most of the shareholders of the common_stock and of the new stock that will dispose_of their stock as part of the repurchases will be eligible to treat the dispositions as exchanges under sec_302 based solely on the information submitted and on the representations set forth above we rule as follows ruling the sec_301 spillover distributions are ordinary distributions in the preceding year and will take priority over the sec_302 repurchases made in the preceding year in accessing taxpayer’s available current_earnings_and_profits see sec_316 sec_312 sec_858 and revrul_74_339 1974_2_cb_103 caveats no opinion is expressed or implied as to whether sec_305 applies to the proposed transaction or about the federal tax treatment of any other aspect of any transaction or item discussed or referenced in this letter or about the tax treatment of any condition existing at the time of or effects resulting from any transaction or item that is not specifically covered by the above ruling in addition no opinion is expressed or implied concerning whether taxpayer qualifies as a reit under part ii of subchapter_m of chapter of the code procedural statements the ruling in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent plr-140419-15 asbwcz a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely _________________________________ benjamin m willis senior technician reviewer branch office of associate chief_counsel corporate


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division release number release date uil date legend org organization name xx date address address org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court july 20xx certified mail -- return receipt dear a final adverse determination_letter as this is to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective november 19xx you have agreed to this adverse determination per signed form_6018 on september 20xx our adverse determination was made for the following reasons org is not operated for an exclusive exempt_purpose as is required by sec_501 and sec_1 c -1 d a substantial part of the of org furthers private interests monies returned to trustee rather than public interests which is prohibited by sec_1_501_c_3_-1 the foundation failed to make financial distributions or provide any activity as a supporting_organization to a specified organization activities the organization did not operate exclusively for exempt purposes because it was organized and operated for the benefit of private interests rather than public interests and its net_earnings and assets inured to the benefit of its creators trustees and directors which is prohibited by sec_501 c contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1041 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment however you you also have the right to contact the office_of_the_taxpayer_advocate should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations commerce street dallas tx schedule no or exhibit year period ended so orm a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised legend org organization name donor-1 donor-2 donor bm-1 -3 co-1 co-2 co-3 co-4 co-5 co-6 co-7 co-8 co-9 co-10 co-11 co-12 co-13 donor family donor family board members xx date 18t 2n 3r gh 5th gth 7th gth gtk companies primary issue should the sec_501 tax exempt status of the org be revoked because it is not operated exclusively for tax exempt purposes facts the org the organization was created with a declaration of trust on november 19xx by donor-1 and donor-2 donors donor-1 is listed as trustee on the document the trust was created for the purpose of establishing an organization which is described in sec_501 and sec_509 the trust instrument provides that the donor renounces any power to determine or control by alteration amendment revocation termination or otherwise the income or principal of the trust estate in addition the trust instrument also provides that the founder renounces any interest either vested or contingent including any reversionary_interest or possibility of reverter in the income or principal of the trust estate in july 19xx the org received notification that they were an exempt_organization under c of the internal_revenue_code and that they weren't a private_foundation because they met the requirements of sec_509 the declaration of trust requires that each year the trustee shall distribute of the adjusted_net_income to co-1 the named primary charity in addition to this distribution each year the trustee shall distribute a total of of the adjusted_net_income to one or more identified charitable organizations or to the primary charity as directed by the majority of the board_of directors the board schedule a of the trust document identifies the supported charities schedule a has one hundred and four organizations listed including co-1 sec_2 of the trust says that in the event the trustee determines in the trustee's sole and complete discretion that the trust fund is too small to economically administer then in such event the trustee shall distribute the trust fund in its entirety outright and free of trust to such organization or organizations as described in sec_170of the code as the trustee in trustee’s total and complete discretion shall determine sec_2 provides that at the time of dissolution the remaining assets shall be distributed to a non-profit fund foundation or corporation which is organized and operated exclusively for charitable educational religious and or scientific purposes and which has established its exempt status under sec_501 of the code the declaration of trust provides that the board shall be the governing body of the trust and that the members of the board shall be determined as follows e one board member shall be appointed by the primary charity one board member shall be from the class consisting of donor-1 and donor-2 and each of their descendants the donor family the other members of the board shall be appointed by majority vote of the remaining board members the initial remaining board members were bm-1 and bm-2 in their response to our questionnaire the organization has said that the primary charity appoint sec_3 members of the board bm-1 bm-3 and bm-2 bm-1 is the trustee of co-1 form 886-a rev department of the treasury - internal_revenue_service page -1- ioe 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised -_ schedule no or exhibit year period ended a promissory note dated december 19xx shows a loan of dollar_figure with a simple interest rate of was made to donor-1 by the organization the interest was to be paid annually the note was due on december 20xx there was no requirement to make principal payments on the note on december 20xx the first note was extended for another years by a new promissory note the interest is to be paid annually and the principal paid off on december 20xx the interest rate is on december 20xx donor -1and donor-2 donated dollar_figure to the organization there is a copy of a cancelled check that shows this money was given to the organization on january 20xx donor-1 borrowed dollar_figure from the organization the interest rate was interest to be paid annually and principal pay off on december 20xx at the end of 20xx the notes receivable shown on the balance_sheet of the form_990 was dollar_figure there were three promissory notes provided by the organization on the notes according to the response provided by the organization there is no collateral on the notes the form_990 for the year ending december 20xx indicated the organization received dollar_figure in interest payments the amount due on the note for that year was dollar_figure the form_990 for the year ending december 20xx indicated organization received dollar_figure in interest the chart below was received from the organization on november 20xx it shows what they have for the amount of interest due and paid on the notes for the years 20xx through 20xx instead of the large interest payment shown on the form_990 the organization said it received charitable donations from the donor from taxpayer's response year 20xx 20xx 20xx 20xx 20xx note interest due interest pd difference dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure pd from 20xx pd from 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure over over dollar_figure dollar_figure dollar_figure short short over in their response they also said both notes are interest only notes with all principal due at the end of the note maker of the note did not wish to pay any principal nor did the trust request any payment of principal there were no payments on the principal from 20xx to 20xx the application_for exemption form_1023 was received by the irs on february 19xx it was signed on january 19xx the balance_sheet of the form_1023 for the end of 19xx shows there was a cash asset of dollar_figure there was no entry for notes receivable on the balance_sheet form 886-a cev department of the treasury - internal_revenue_service page -2- orn 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised schedule no or exhibit year period ended the statement of revenue expenses on the form_1023 shows that from xx to xx the organization received dollar_figure there is no mention on the application that there was a loan outstanding at the beginning of 19xx according to the donor when the organization gave a donation to the primary charity co-1 they could request the money be used for specific items in their letters the organization says that there was no actual or implied obligation given by co-1 that the requests would be honored the following chart shows the amounts the organization paid to co-1 and the amounts co-1 paid on behalf of the donors amount_paid to co-1 amounts paid_by co-1 to co-2 for tuition to co-3 20xx dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure the forms list cash and notes receivable as the assets the income is from interest and some donations the donor has stated that he gave cash to the organization in 19xx and that he took a charitable deduction on his form_1040 he no longer has the return or any checks or bank statements showing this there is a cancelled check for the dollar_figure that was donated in 20xx the copy of the form_1040 of the donor shows that he took a charitable deduction of dollar_figure on his personal return for 20xx in october 20xx donor-1 paid dollar_figure to various charities he has provided cashier checks that show the remitter is donor-2 and donor-1 the chart below shows the charities that received money and the amount of money received check payee date 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx co-3 co-4 co-5 co-6 co-7 co-8 co-9 co-10 co-11 amount dollar_figure dollar_figure h s a a h a h a p dollar_figure dollar_figure dollar_figure the dollar_figure that was paid to charities in october 20xx includes amounts to repay the dollar_figure loan the dollar_figure taken out of the organization for the education expenses of the founder's children and interest on the loan and education amounts the organizations shown in the above chart are exempt under sec_501 of the internal_revenue_code per irs publication form 886-a crev department of the treasury - internal_revenue_service page -3- conn 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended org revised org has prepared the form sec_1041 for the years ending december 20xx and 20xx there was tax of dollar_figure due for the year 20xx and dollar_figure due for the year 20xx the chart below shows the payment of those taxes check date 20xx 20xx co-12 co-12 payee amount dollar_figure dollar_figure f1041 for 20xx12 f1041 for 20xx12 on 20xx the organization closed its bank account by sending the money to co-13 the amount of the check was dollar_figure co-13 inc is exempt under sec_501 of the internal_revenue_code law sec_501 of the internal_revenue_code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for religious charitable or educational_purposes so long as no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the income_tax regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section sec_1_501_c_3_-1 of the income_tax 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 in 412_f2d_1197 ct_cl the court stated that loans to an organization's founder or substantial_contributor can constitute inurement that is prohibited under sec_501 in that case the church made loans to its founder and his family and failed to produce documentation that demonstrated that the loans were advantageous to the church the church also failed to produce documentation to show that the loans were repaid significantly the court stated that the very form 886-a crev department of the treasury - internal_revenue_service page -4- jaya 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised schedule no or exhibit year period ended existence of private source of loan credit from an organization's earnings may itself amount to inurement of benefit in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator's family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to exemption from federal_income_tax under sec_501 greg r vinikoor v commissioner t c memo states the determination of whether a transfer was made with a real expectation of repayment and an intention to enforce the debt depends on all the facts and circumstances patrick v commissioner t c memo also set down criteria to determine if a note existed 31_tc_1217 88_tc_604 sec_601_201 of the regulations provides that an organization may be revoked retroactively if the organization omitted or misstated a material fact operated in a manner materially different from that originally represented or it engaged in a prohibitive transaction of the type described in sec_601 n vii the types of prohibited_transactions referred to are those that divert corpus or income from the organization's exempt_purpose government’s position the sec_501 tax exempt status of org the organization should be revoked because the assets of the organization inure to the benefit of the founder donor-1 and it is not operated exclusively for tax exempt purposes the organization received some interest payments and contributions a portion of this income was paid to co-1 and a portion of that was used to pay school tuition for the donor’s children also in december 20xx the organization received a donation of dollar_figure that amount was then transferred to donor-1 in january 20xx the amounts received by donor-1 and used for his children’s school tuition are inurement under sec_1_501_c_3_-1 of the regulations an organization must be both organized and operated exclusively for one or more of the purposes specified in sec_501 of the internal_revenue_code whether an organization has satisfied the operational_test is a question of fact sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes the requirement that an organization operate exclusively for charitable purposes is further amplified in sec_1_501_c_3_-1 of the regulations this section 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose in the fundamental case of better business bureau of washington d c inc v united_states supra the court concluded that the form 886-a rev department of the treasury - internal_revenue_service page -5- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised schedule no or exhibit year period ended presence of a single nonexempt purpose if substantial in nature would preclude exemption regardless of the number or importance of statutorily exempt purposes the facts show that the organization is not operated exclusively for a tax exempt charitable purpose rather the donors have operated the organization for their own personal benefit the donors have also used the organization for tax_avoidance purposes the promissory notes the repayment practices on the loans and the requests made to the primary charity show the organization was established to obtain tax_benefit of a charitable deduction without relinquishing control of the assets that they claimed to have contributed to the organization in december 19xx the donors signed a promissory note for dollar_figure the application_for exemption form_1023 shows the organization didn’t receive any donations until 19xx the application also shows the organization had a cash balance of dollar_figure at the end of 19xx the timing of the transactions and the information on the form_1023 suggests the organization received a promissory note instead of cash for the initial donation this suggests that the donor wanted a charitable deduction without actually giving anything away in 20xx the donor made a payment of dollar_figure to the organization all of this was applied to interest even though only dollar_figure was due for the interest payment when asked why none of the interest was applied to the principal the response was both notes are interest only notes with all principal due at the end of the note maker of the note did not wish to pay any principal nor did the trust request any payment of principal the donor is operating in a manner that is beneficial to the donor and not to the organization to be beneficial to the organization the interest would have to be received on a regular basis so that the organization would have the resources to carry out its exempt_purpose the first promissory note was due on december 20xx at that time a new note was written with the same amount and terms on december 20xx the donors gave dollar_figure to the organization none of this was applied to the principal balance on the first note the dollar_figure was claimed as a charitable deduction on the personal return of the donor on january 20xx the donor borrowed the dollar_figure from the organization the donor hadn't given up control of the money since he wrote a check to the organization and received the money back within a week this is tax_avoidance because the donor was able to take a deduction on his personal return and still had use of the money there wasn't any collateral on the notes there was no requirement for payment of the principal the organization hasn't enforced the requirement that the interest be paid on an annual basis also the organization didn't demand payment when the first note was due but allowed the donor to give dollar_figure and then let them borrow it right away this shows the organization is letting the donor set up the terms for his own benefit and not for the benefit of the organization in greg r vinikoor v commissioner the court used nine factors to determine if a note existed there was a promissory note or other evidence_of_indebtedness interest was charged there was security or collateral there was a fixed maturity_date a demand for repayment was made an actual repayment was made the transferee had the ability to repay any records maintained by the transferor and or the transferee reflected the transaction as a loan and the manner in which the transaction was reported for federal tax purposes is consistent with the loan in patrick v commissioner the following criteria was used to determine if a note existed the existence or nonexistence of a debt_instrument provisions for security_interest payments and a fixed repayment date whether the parties’ records if any reflect the transaction as a loan the source of repayment and ability to repay the relationship of the parties whether any repayments have been made form 886-arev department of the treasury - internal_revenue_service page -6- layer 886a department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org revised whether a demand for repayment has been made and failure to pay on the due_date or to seek a postponement for a payment to constitute a loan when the payments are received the recipient must intend to repay the amounts and the transferor must intend to enforce payment 88_tc_604 affd without published opinion 855_f2d_855 cir 55_tc_85 in this case there are promissory notes between donor-1 and the organization but there is no indication that donor-1 intended to pay the note or that the organization expected to receive payment in december 20xx when the first note was due it was extended for another five years two weeks later donor-1 donated another dollar_figure to the organization none of this was applied to the amount owed on the first note the dollar_figure was loaned back to donor-1 in a week when the organization received a large interest payment in 20xx the excess wasn't applied to the principal the organization let donor-1 use that as his interest payment for the next two years the next payment on interest was made in 20xx the amount_paid didn't cover the past due interest and the current year's interest the organization has made no effort to enforce the notes and has not required_payment of interest each year this showed the organization didn’t expect the amounts to be repaid the loan was repaid as part of the resolution of the case in october 20xx the organization which is controlled by the donors is operated to enable the donors to engage in financial activities which are beneficial to them but detrimental to the organization accordingly it is operated for a substantial non-exempt purpose see revrul_67_5 when the organization gave money to the primary charity the donors could request that the money be spent on certain items part of the money given to the primary charity by the organization was used to pay tuition at the co-2 for the children of the donors and to pay part of their tithing to the co-3 since he was able to request that monies be used by the primary charity the donor is using this for his benefit and not to benefit the actual charity a substantial part of the organization's activities appear to serve private interests it appears that the organization is operated as part of a tax_avoidance scheme tax_avoidance schemes do not further an exempt_purpose 588_fsupp_693 d d c according to regulation sec_1_501_c_3_-1 d ii an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest as stated in the court case 31_tc_1217 loans to disqualified persons promote private rather than charitable purposes donor-1 is a disqualified_person because he is the trustee of the organization the very presence of a private source of loan credit may amount to inurement 412_f2d_1197 ct_cl loans to disqualified persons promote private rather than charitable purposes 31_tc_1217 at the time of filing for exempt status the organization's only asset was a promissory note signed by the donor but on the application it listed it received cash and that cash was its only asset the application stated that the principal financial support would be contributions from the donors and made no mention of the note the amount of the note was dollar_figure which was a substantial amount of assets of the organization form 886-a cev department of the treasury - internal_revenue_service page -7- ine 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org revised schedule no or exhibit year period ended the organization should be revoked back to inception because it misstated a material fact on its application has not been operating in the manner it represented and it has engaged in prohibited_transactions with the donor accordingly the organization's status as an organization described under sec_501 should be revoked effective november 19xx because it did not operate exclusively for exempt purposes its assets inured to the donor and it served the private interests of its creators taxpayer’s position the organization has agreed to revocation of exempt status on october 20xx the irs received form sec_1041 u s income_tax return for estates and trusts for the years ending december 20xx 20xx 20xx and 20xx included with the returns were checks to pay the taxes owed for the years 20xx and 20xx the taxpayer feels that the transaction entered into in january 20xx was a legitimate loan please see the attached letter from the power_of_attorney explained the taxpayer's position in detail conclusion org needs to be revoked back to inception the organization needs to file form sec_1041 u s income_tax return for estates and trusts for all open years until the organization has terminated its existence form 886-a rev department of the treasury - internal_revenue_service page -8- tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service e 7th st suite 1130b st paul mn taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you thank you for your cooperation f you write please provide a telephone number and sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f