of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c cc ita ----------- conex-120290-08 date number info release date uil the honorable jerry costello member u s house of representative sec_144 lincoln place court suite belleville il attention ------------------- dear congressman costello i am responding to your inquiry dated date on behalf of your constituent ----- -- ------------------ who requests a change in federal tax law regarding the taxation of interest_income earned on a united_states treasury bond treasury bond that she received in termination of a structured_settlement periodic_payment stream -------------- was physically injured in an automobile accident in compensation_for her injuries she was receiving from a structured_settlement company periodic_payments of damages that were excludable from income under sec_104 of the internal_revenue_code code the structured_settlement company subsequently dissipated the assets that were supposed to fund the periodic_payments in ------ ----- ---------- settled a claim of misappropriation against the structured_settlement company by agreeing to receive a treasury bond in termination of the periodic_payment stream sec_104 of the code generally excludes from income the amount of any damages received whether as lump sums or as periodic_payments on account of personal physical injuries or physical sickness thus ----- -------- excluded from income the periodic_payments she was receiving from the structured_settlement company similarly she excluded from income the fair_market_value of the treasury bond that she received as a lump sum in termination of the periodic_payment stream when a taxpayer receives a lump sum payment of damages in satisfaction of a claim for personal physical injuries the taxpayer excludes the lump sum from income under sec_104 of the code and must include interest_paid on the lump sum in income under sec_61 revrul_76_133 1976_1_cb_34 therefore ----- ------- -------- must include in income the interest payments she receives on her treasury bond conex-120290-08 however if ------------- acquired the treasury bond at a premium then she can elect to amortize the premium and reduce the amount of interest includible in income each year by the amount of premium amortizable in that year sec_171 of the code and the regulations thereunder provide rules for ----------------------of bond_premium bond_premium generally is the amount by which the taxpayer’s basis in a bond is greater than its stated principal_amount generally ----- ---------- basis in the bond when she acquired it would be the bond’s fair_market_value at that time if ----- ---------- basis in the treasury bond when she acquired it exceeded its stated principal_amount then she would have acquired the treasury bond at a premium in an amount equal to the excess i have enclosed a copy of publication investment_income and expenses chapter_3 of publication provides additional information about bond_premium amortization ---------------- request to exempt from income_taxation the interest on the treasury bond she acquired to settle her damages claim and terminate the periodic_payment stream of sec_104 damages would require legislative action by congress i hope this information is helpful if we can assist you further please contact me at ------ ---------------------or ------------------- at --------------------- sincerely george j blaine associate chief_counsel income_tax accounting enclosure publication investment_income and expenses


t c memo united_states tax_court christopher a bibby petitioner v commissioner of internal revenue respondent docket no 14687-12l filed date danny m carr for petitioner timothy s murphy robert d heitmeyer and john d davis for respondent memorandum opinion nega judge this action was commenced in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination with respect to petitioner’s and federal_income_tax liabilities the remaining issue for decision is whether the settlement officer abused her discretion in denying petitioner relief from a jeopardy_levy all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure background the stipulated facts are incorporated herein by reference petitioner resided in michigan at the time the petition was filed petitioner filed tax returns for tax years and respondent determined that largely as a result of dollar_figure of overstated withholding credits petitioner received over dollar_figure of refunds to which he was not entitled petitioner admits spending the refunds for the following items dollar_figure for a used car dollar_figure for offerings and tithes to his church dollar_figure for wedding and honeymoon expenses dollar_figure on home repairs dollar_figure for tax_return preparation and filing dollar_figure on furniture purchases and dollar_figure for various items such as food clothing and bill payment petitioner admits transferring his interest in his personal_residence to a property holding_company wholly owned by petitioner and his wife petitioner also made a dollar_figure loan to diamond associates in repayment of which diamond associates quitclaimed three properties to petitioner which petitioner subsequently transferred to emg llc a separate business_entity wholly owned by petitioner and his wife on date respondent’s frivolous filers unit made math error assessments for petitioner’s claimed overwithholding credits and issued forms notice of tax due on federal tax_return for and on date respondent issued to petitioner a notice cp504 notice_of_intent_to_levy pertaining to petitioner’s liability for tax_year the case was then assigned to an internal_revenue_service irs revenue_officer who sought approval from irs counsel’s office to issue a jeopardy_levy having received approval from irs counsel’s office the irs revenue_officer issued a jeopardy_levy against petitioner’s bank accounts and wages on date in reference to petitioner’s and liabilities on date respondent issued a letter cg notice of jeopardy_levy and right to appeal to petitioner on date respondent issued a notice of federal tax levy and your right to appeal hearing to petitioner on date petitioner timely submitted a form request for a collection_due_process or equivalent_hearing sec_6330 an irs settlement officer was assigned to the case the irs settlement officer and petitioner’s counsel conducted a collection_due_process_hearing on date the settlement officer relied on the revenue officer’s notes and the integrated data retrieval system idrs transcripts to verify that all the requirements of applicable law or administrative procedure were met petitioner submitted to the irs settlement officer forms 433-a collection information statement for wage-earners and self-employed individuals two forms 433-b collection information statement for businesses and documentation supporting petitioner’s entries on all those forms at the collection_due_process_hearing petitioner’s counsel sought an installment_agreement in exchange for release of the levy on petitioner’s wages the irs settlement officer found that petitioner’s forms 433-a failed to disclose dollar_figure of wage income and dollar_figure of income from the freudenberg-nok co reported on forms 1099-r distributions from pensions amenities retirements or profit-sharing_plans ira’s insurance contracts etc on date the settlement officer requested from petitioner’s representative clarification about the nature and duration of the freudenberg-nok payments petitioner’s representative promised to contact petitioner and fax a written verification to irs appeals but no response was forthcoming during that same phone conversation petitioner’s representative was informed that among other issues petitioner needed to address the equity interests in the three real properties transferred by diamond associates in repayment of petitioner’s dollar_figure loan on the basis of the sum of petitioner’s disclosed and undisclosed income as well as petitioner’s disclosed monthly expenses the irs settlement officer contacted petitioner’s counsel and conveyed her decision that the wage levy did not constitute a financial hardship on petitioner still in pursuit of an installment_agreement petitioner’s counsel provided upon request of the irs settlement officer additional information listing the disposition of the proceeds of the and refunds one such item was the equity_interest in the three properties diamond associates transferred to petitioner which petitioner then transferred to emg llc the irs settlement officer took the position that the three properties in question were petitioner’s assets alone and suggested that they be transferred back to the direct and sole ownership of petitioner emg llc transferred the three properties by quitclaim_deed to petitioner and his spouse but not solely to petitioner the irs settlement officer made clear that an installment_agreement and lifting of the jeopardy_levy depended on the transfer of the three properties to petitioner’s sole ownership and the subsequent equity liquidation of the three properties petitioner could not or would not agree to these conditions precedent the negotiations having broken down petitioner requested a determination_letter the irs appeals officer mailed the notice_of_determination to petitioner on date citing inter alia petitioner’s failure to provide certain requested information regarding his expenditures and his finances and his transfer of title to the properties in a manner designed to shelter his equity the notice_of_determination sustained the jeopardy_levy under the stipulation there is no dispute between the parties as to the underlying tax_liabilities the parties have agreed to submit the case without trial pursuant to rule discussion petitioner argues that the settlement officer failed to independently determine the appropriateness or the legality of the jeopardy_levy respondent argues that the settlement officer independently balanced the efficient collection of the tax with the legitimate concerns of petitioner and determined that the jeopardy_levy was not overly intrusive and that no better method of collecting the tax was available if the secretary believes that the assessment or collection of a tax_deficiency will be jeopardized by delay he shall immediately assess the deficiency and issue notice_and_demand for payment to the person liable for the payment of the tax pursuant to sec_1_6851-1 income_tax regs and sec_301_6861-1 proced admin regs the secretary authorizes certain irs employees to determine continued sec_6861 the existence of one or more of the following conditions supports a determination that collection of the tax is in jeopardy the taxpayer is or appears to be designing quickly to depart from the united_states or to conceal himself or herself the taxpayer is or appears to be designing quickly to place his her or its property beyond the reach of the government by removing it from the united_states by concealing it by dissipating it or by transferring it to other persons the taxpayer’s financial solvency is or appears to be imperiled sec_1_6851-1 income_tax regs sec_301_6861-1 proced admin regs notice_and_demand may be issued for the immediate payment of a tax the collection of which is determined to be in jeopardy sec_6331 upon a failure or refusal to pay such tax the secretary may immediately levy upon the property or rights to property of the person subject_to the tax_liability without regard to the 10-day period otherwise required under sec_6331 pursuant to sec_6330 this court has jurisdiction to review the determination of the irs appeals_office with respect to a jeopardy_levy 119_tc_356 continued whether the collection of a tax is in jeopardy sec_6330 generally provides that the commissioner cannot proceed with levy on a taxpayer’s property until the taxpayer has been given notice and the opportunity for a sec_6330 hearing and if dissatisfied judicial review of the administrative determination in this case the general requirement of sec_6330 affording a prior opportunity for a hearing does not apply because respondent made a finding under sec_6331 that a jeopardy_levy was appropriate rather pursuant to sec_6330 petitioner is to be afforded an opportunity for a hearing within a reasonable period of time after the levy see 130_tc_222 because the underlying liabilities are not in issue here we review the appeals determination for abuse_of_discretion see 114_tc_604 see also 411_f3d_621 6th cir defining abuse_of_discretion as clear taxpayer abuse and unfairness by the irs the administrative record indicates that on date the settlement officer requested from petitioner’s representative clarification about the nature and duration of the freudenberg-nok payments petitioner’s representative promised to contact petitioner and fax a written verification to irs appeals during that same phone conversation petitioner’s representative was informed that among other issues petitioner needed to address the equity interests in the three real properties neither petitioner nor petitioner’s representative ever conveyed any additional information about the freudenberg-nok amounts petitioner did not transfer the three properties to his sole ownership but instead requested a determination_letter petitioner incorrectly claimed and received large tax refunds and then proceeded to freely spend from those refunds petitioner also transferred certain real_property received in satisfaction of a loan to diamond associates to emg llc and then jointly to himself and his wife we find that these facts justify the determination to sustain the jeopardy_levy because petitioner was quickly dissipating the funds or otherwise attempting to put them beyond the reach of respondent by transferring funds to third parties it should also be noted that petitioner has not disputed his tax_liabilities petitioner did not fully cooperate with the settlement officer’s reasonable information requests about sources of unreported income and the transfer of certain real_property other than to petitioner’s direct ownership in the light of petitioner’s failure to provide the requested financial information regarding the freudenberg-nok amounts respondent’s denial of an installment_agreement was not an abuse_of_discretion see 138_tc_228 finding that the appeals officer’s denial of an installment_agreement was not an abuse of discretion where the taxpayer failed to provide requested financial information see also 123_tc_1 installment agreements are based upon the taxpayer’s current financial condition t he appeals officer could have reasonably rejected an installment_agreement proposal by petitioners on the basis of petitioners’ failure to timely provide the requested information internal citations omitted aff’d 412_f3d_819 7th cir in contrast this court finds that respondent afforded petitioner all legal rights required under the code and the regulations the settlement officer independently reviewed the revenue officer’s notes and the idrs transcripts to verify that all the requirements of applicable law or administrative procedure were met her actions satisfied the verification requirements of sec_6330 and a we also find the settlement officer to have complied with the requirements stated in sec_6330 and c upon review of the facts and the administrative record the court finds that petitioner has failed to satisfy his burden of proving that the irs abused its discretion in this matter rather the court finds that the facts and circumstances of the case including petitioner’s failure to fully cooperate justified the jeopardy_levy to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division release number release date date vil legend school trust dear we have considered your ruling_request dated date concerning the federal_income_tax consequences under sec_512 of the internal_revenue_code_of_1986 as amended hereafter code relating to a proposed contractual arrangement in the manner and for the purposes described below facts school is an educational_institution recognized as a tax-exempt_organization under sec_501 and sec_170 of the code school maintains an endowment fund comprised of privately raised endowments which fund was established to provide economic resources to school to provide for its educational activities the endowment fund is heavily diversified in both domestic and international markets and utilizes alternative investment strategies to reduce the overall risk of the portfolio and to enhance investment returns much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains but some income is debt financed or otherwise is treated as unrelated_business_taxable_income school is both the trustee and sole charitable_remainder beneficiary of trust trust is a charitable_remainder_unitrust described under sec_664 of the code under the terms of the trust agreement trust's donors are the income_beneficiary entitled to an annual payout of a unitrust_amount pursuant to sec_643 of the code the remainder_interest is distributable to school upon the death of donors presently trust assets are managed by various investment managers in accordance with a strategy developed by an outsider for-profit advisor school represents that trust’s donors funded trust with the intention that school substantially benefit from the remainder value and that the assets be managed to achieve the greatest possible return on investment school further represents that it wishes to achieve greater economies of scale in the management of trust a potentially higher and more stable investment return for trust and increased diversification of trust’s investments therefore in an attempt to achieve these goals school proposes to allow trust to pool its assets with that of school's endowment fund a higher rate of return on trust’s assets would cause its donors to receive a higher unitrust payout and would cause school to ultimately receive a higher final payment as the remainder beneficiary school proposes to enable trust to participate in school’s endowment fund through the acquisition of shares school proposes to create a contractual obligation pursuant to which it will issue to trust a contract right called shares in its endowment fund in exchange for trust investing its assets in the endowment fund school represents that the number of shares trust will receive will be in proportion to the value of trust’s investment in school's endowment fund the contract will provide that trust will receive an income payout based on the number of shares owned and the annual endowment fund spending rate which rate is determined by school the value of the shares both at the time of acquisition and redemption will be based on the value of all underlying investment_assets held in the endowment fund the contract provides that trust could choose to either reinvest part of the payout or redeem additional shares depending on trust’s cash requirements the payout up to the endowment fund spending rate will be characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain ordinary_income or a return_of_capital redemptions of shares by trust over and above receipt of the payout rate will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the shares furthermore the school will pay any_tax owed on unrelated_business_taxable_income earned by its endowment fund school represents that under the contract trust would not have any ownership_interest in the underlying assets of the endowment fund or any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review school’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation trust would not have the right to veto or opt_out of any of the underlying endowment investments the contract would provide that with respect to the issuance of shares school is neither a partner nor an agent of trust trust would also never be or become liable for any cost expense or payment incurred or due by school or for which school is liable or responsible relating to the endowment or the underlying endowment assets and school would indemnify and hold trust harmless from and against any liability arising out of any_action or inaction by school with respect to the endowment fund or the underlying assets as to the issue of fees and cost school represents that it will not charge any fee for internal management costs of trust’s assets although it may recover its actual external costs of management of the endowment fund as a charge against total investment return addition it may recover actual costs of administration of trust as a charge against trust in you have requested the following ruling the issuance of endowment fund shares by school to trust the making or receipt of payments with respect to the shares and the holding or redemption of shares will not generate unrelated_business_taxable_income to school or trust 2e law sec_501 of the code in part provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific and certain other purposes sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_512 of the code excludes from the definition of unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans as defined in subsection a amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income it also excludes all royalties including overriding royalties wnether measured by production or by gross or taxable_income_from_the_property and all deductions directly connected with such income it also excludes certain rents sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 of the code provides that trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services an activity does not lose its identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization sec_664 of the code defines a charitable_remainder_unitrust as a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in subparagraph a and other than qualified gratuitous transfers described in subparagraph c may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in subparagraph a the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in subsection g all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined by subsection g and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in ae such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_1_512_b_-1 of the income_tax regulations regulations defines certain investment_income to include dividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner and all deductions directly connected with any of the foregoing items of income shall be excluded in computing unrelated_business_taxable_income sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions sec_1_513-1 of the regulations provides that the primary objective of adoption of the unrelated_business_income_tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt_organizations upon the same tax basis as the nonexempt business endeavors with which they compete in general any activity of a sec_511 organization which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 - and which in addition is not substantially related to the performance of exempt functions - presents sufficient likelihood of unfair competition to be within the policy of the tax accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services thus the term trade_or_business in sec_513 is not limited to integrated aggregates of assets activities and good will which comprise businesses for the purposes of certain other provisions of the internal_revenue_code activities of producing or distributing goods or performing services from which a particular amount of gross_income is derived do not lose their identity as a trade_or_business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization thus for example the regular sale of pharmaceutical supplies to the general_public by a hospital pharmacy does not lose its identity as a trade_or_business merely because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purposes or in compliance with the terms of sec_513 similarly activities of soliciting selling and publishing commercial advertising do not lose their identity as a trade_or_business even though the advertising is published in an exempt_organization periodical which contains editorial matter related to the exempt purposes of the organization sec_1_513-1 of the regulations provides that in determining whether a trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 of the regulations provides that in general gross_income derives from an unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question - the activities that is of producing and distributing the goods or performing the services involved - and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code the organization received funds from participating exempt_organizations and invested the proceeds in stocks reinvested the income and realized appreciation and upon request liquidated participant's interests and distributed the proceeds to the participant the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the service further held that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for other tax-exempt organizations thus the service concluded that the organization was not tax exempt under sec_501 because it was regularly carrying on a business of providing investment services that would be an unrelated_trade_or_business if carried on by any of the tax-exempt organizations on whose behalf it operated analysis the issue is whether school and trust will each incur unrelated_business_taxable_income upon the issuance of school’s endowment fund shares to trust upon the making or receipt of payments with respect to the shares and upon the holding or redemption of the shares sec_511 of the code imposes a tax on the income earned by an organization described in sec_501 if the income results from the operation of the organization's unrelated_trade_or_business an organization described in sec_501 that provides services will have unrelated_trade_or_business taxable_income if three conditions are satisfied the trade_or_business generates income the trade_or_business is regularly carried on and the trade_or_business is unrelated to the organization's exempt_purpose or function see sec_512 sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 the proposed contractual relationship between school and trust is not a trade_or_business that will generate income for school and therefore it does not meet the first condition for a finding of unrelated_business_income school represents that it will not earn any income from the proposed contractual relationship with trust rather school will only be recovering its actual costs of managing its endowment fund and its actual costs of administrating trust furthermore the relationship between school and trust is not of a commercial nature such as that of a trade_or_business school represents that it is both the trustee and remainder beneficiary of trust’s assets as such school will be engaging in investment activity of trust assets partially on its own behalf school represents that trust neither has any ownership_interest in the underlying assets of the endowment fund nor does it have a right to control school's decisions as to the endowment fund and that trust will not be responsible for any liability relating to the endowment although trust’s donors who are the present income_beneficiary for life may also benefit from the diversification and increased rate of return of pooling trust's assets into school’s endowment fund the unique relationship between school and trust distinguishes it from a trade_or_business this relationship is also distinguishable from revrul_69_258 in which the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit and that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for the benefit of other tax-exempt organizations because school is not charging any fees for investing in its endowment fund and because school is investing funds on its own behalf as sole remainder beneficiary and as trustee revrul_69_258 is not applicable therefore because the services school provides to trust are not a trade_or_business that will generate income school does not meet the first condition listed above for a finding of unrelated_business_income as for the issue of whether trust will incur unrelated_business_taxable_income upon the proposed transaction with school the answer is dependent in part on whether the income earned by trust is passive_income and subject_to the unrelated_business_taxable_income exception under sec_512 of the code as stated above sec_511 of the code imposes a tax on an organization's unrelated_trade_or_business income if three conditions are met the first of which is that the organization engages in a trade_or_business that generates income see sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 however under sec_512 of the code and b -1 of the regulations investment_income is excluded in computing unrelated_business_taxable_income if the income results from d ividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner here the income that trust is expected to receive from commingling its assets with those of the school’s endowment fund falls within the exception for certain investment_income under sec_512 of the code and b -1 of the regulations school represents that much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains although school represents that some income is debt financed or otherwise is treated as unrelated_business_taxable_income the tax owed on such unrelated_business_taxable_income will be paid_by the school’s endowment fund because trust is only a passive investor and only has a contractual right against school and not any interest in the underlying investment_assets of the endowment fund the unrelated_business_taxable_income generated from any debt-financed_property is not attributable to trust specifically the contractual arrangement between school and trust provides that trust will only receive an income payout based on the number of shares owned in the endowment fund and the annual endowment fund spending rate which payout is characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain or a return_of_capital the redemption of shares will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the units under the terms of the contract trust would neither have any ownership_interest in the underlying assets of the endowment fund nor any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review school’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation based upon the above trust is purely a passive investor in school's endowment fund with the income that trust earns from the endowment fund being substantially_similar to income from ordinary and routine investments therefore trust will not incur unrelated_business_taxable_income upon investing in school’s endowment fund conclusion accordingly based on the information submitted we rule that the issuance of endowment fund shares by school to trust the making or receipt of payments with respect to the shares and the holding or redemption of shares will not generate unrelated_business_taxable_income to school or trust except as we have ruled above we express no opinion as to the tax consequences of the transaction under the cited provisions of the code or under any other provisions of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice


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 psi b03 plr-135112-08 date date x legend ------------------------------------------------- ----------------------- county ------------ date ----------------------- dear ----------- this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election under sec_301_7701-3 facts the information submitted states that x was formed under the laws of country on date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes x intended to elect to be treated as a disregarded_entity for federal tax purposes effective on date however x did not timely file a form_8832 entity classification election law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can plr-135112-08 elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an plr-135112-08 extension of time of sixty days from the date of this letter to elect to be treated as a disregarded_entity for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s 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 will be sent to your authorized representative sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 ------------------------------ ------------ telephone number -------------------- refer reply to cc psi b02 plr-150982-13 date march legend x trust -------------------------------------------------------------------------------------------------------------------- ------ -------------------------------------------------------------------------------------------------------------------- -------- trust -------------------------------------------------------------------------------------------------------------------- ------------------------------- state date date ----------- ------------------ --------------------- dear-------------- this responds to a letter dated date submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on date effective date x elected to be taxed as an s_corporation on date shares of x stock were transferred to trust and trust x represents that trust and trust meet the requirements to be treated as qualified subchapter_s trusts qssts as described in sec_1361 as of date except the respective income beneficiaries of trust and trust failed to make the required election under sec_1361 therefore plr-150982-13 trust and trust were not eligible s_corporation shareholders and as a result x’s s_corporation_election terminated on date x represents that x and x’s shareholders have filed tax returns consistent with x being an s_corporation x further represents that the circumstances resulting in x’s s_corporation termination were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since date agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the beneficiary of such trust shall be treated as the owner for purposes of sec_678 of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the plr-150982-13 termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that x’s s_corporation_election terminated on date when stock in x was transferred to trust and trust we further conclude that the termination was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as an s_corporation from date and thereafter provided that x’s s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 this ruling is conditioned upon the respective beneficiaries of trust and trust filing qsst elections for trust and trust with an effective date of date within days of the date of this ruling a copy of this letter should be attached to each election except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code specifically we express or imply no opinion regarding whether x is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 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 x’s authorized representative sincerely bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court ali and arlene mohammadpour petitioners v commissioner of internal revenue respondent docket no 3787-06s filed date ali mohammadpour pro_se emly b berndt for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax the underlying issue to be resolved is whether ali mohammadpour’s mr mohammadpour gambling activity constituted a trade_or_business resolution of this issue will affect petitioners’ entitlement to a claimed child_tax_credit and the amount of petitioners’ allowable itemized_deductions background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference mr mohammadpour is a certified_public_accountant during he conducted an accounting services business as a sole_proprietorship arlene mohammadpour was employed elsewhere as a payroll clerk petitioners timely filed a joint form_1040 u s individual_income_tax_return for in which they reported adjusted_gross_income of dollar_figure and claimed a child_tax_credit of dollar_figure in computing their adjusted_gross_income petitioners reported dollar_figure of wage income and by means of a schedule c profit or loss from business reported dollar_figure of net profit from mr mohammadpour’s accounting services business petitioners included a second schedule c with their return in which they reported dollar_figure of gross_income from mr mohammadpour’s gambling activity which was offset by gambling_losses in the same amount on the basis of information provided to respondent by means of form w-2g certain gambling winnings respondent adjusted petitioners’ return to reflect gross_income from gambling of dollar_figure dollar_figure more than petitioners reported as well as an additional dollar_figure of interest_income petitioners do not dispute these adjustments respondent also determined that mr mohammadpour’s gambling activity did not constitute a trade_or_business and therefore his losses from gambling should not have 2in their return petitioners reported dollar_figure of wage income and dollar_figure of net profit from mr mohammadpour’s accounting services business in petitioners reported dollar_figure of wage income and dollar_figure of net profit from mr mohammadpour’s accounting services business in petitioners reported dollar_figure of wage income and dollar_figure of net profit from mr mohammadpour’s accounting services business petitioners consistently reported mr mohammadpour’s occupation as that of accountant 3petitioners first reported mr mohammadpour’s gambling activity on their return where they reported dollar_figure of gambling income and claimed a deduction of dollar_figure on schedule a itemized_deductions for a gambling loss in their return petitioners reported by means of schedule c dollar_figure of gambling income offset by gambling_losses in the same amount in their return petitioners reported by means of schedule c dollar_figure of gambling income offset by gambling_losses in the same amount 4generally gambling winnings are reportable to the internal_revenue_service irs by the payer with a statement provided to the winner if the payment is dollar_figure or more see sec_6041 been reported as a loss from business instead respondent allowed a deduction of dollar_figure for the claimed loss from gambling as a schedule a itemized_deduction reclassification of mr mohammadpour’s gambling activity resulted in the disallowance of petitioners’ claimed child_tax_credit and in a reduction in the amount of otherwise allowable itemized_deductions discussion as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the burden of proving an error is on the taxpayer rule a 290_us_111 petitioners have neither claimed nor shown that they satisfied the requirements of sec_7491 to shift the burden_of_proof to respondent hence petitioners bear the burden of proving that respondent’s deficiency determinations are incorrect in general all ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business during the taxable_year are deductible sec_162 a taxpayer may have more than one trade_or_business 73_tc_766 calvao v commissioner tcmemo_2007_57 barrish v commissioner tcmemo_1984_602 for a taxpayer engaged in the trade_or_business of gambling gambling_losses are deductible from gross_income in arriving at adjusted_gross_income see sec_62 however for a taxpayer not in the trade_or_business of gambling gambling_losses are not taken into account in computing adjusted_gross_income but rather are deductible as an itemized_deduction in arriving at taxable_income see sec_63 petitioners do not dispute that if they are required to report mr mohammadpour’s gambling_losses as an itemized_deduction they are not entitled to the child_tax_credit and their itemized_deductions are as determined by respondent however they contest respondent’s categorization of mr mohammadpour’s losses from gambling as an itemized_deduction claiming that his gambling activity was a trade_or_business the supreme court in 480_us_23 held that a taxpayer may be in the trade_or_business of gambling where he or she engages in the gambling activity with continuity and regularity and with the primary purpose of making a profit a sporadic activity hobby or amusement diversion 5regardless of whether a taxpayer’s gambling activity constitutes a trade_or_business sec_165 provides losses from wagering transactions shall be allowed only to the extent of the gains from such transactions see also sec_1_165-10 income_tax regs petitioners do not dispute that sec_165 limits their gambling loss deduction to the amount of their winnings nor do they seek to offset gambling_losses against income from other sources or to carry over gambling_losses to other tax years does not qualify id pincite resolution of the issue of whether gambling activity constitutes a trade_or_business requires an examination of the facts in each case id pincite 312_us_212 the taxpayer in groetzinger pursued his gambling activity full time attending the racetrack days a week for weeks or days during the tax_year in question and devoting to hours each week to gambling-related endeavors he had no profession or type of employment other than gambling during the 48-week period and kept detailed records of his daily winnings and losses mr mohammadpour in contrast dedicated approximately hours to his gambling activity in or approximately hours per week on average which appear to have been distributed over days petitioners reported no net_income from mr mohammadpour’s gambling activity on their return for the year in issue or but reported substantial amounts of wage income and net profit from mr mohammadpour’s accounting services business over that period it is evident and mr mohammadpour admitted that petitioners relied on other sources of income for their livelihood for as in other years 6cf barrish v commissioner tcmemo_1984_602 in which the taxpayer listing his occupation on his returns as continued also in contrast to the taxpayer in commissioner v groetzinger supra petitioners did not keep reliable records of mr mohammadpour’s gambling activity this was due in part to error and also to the fact that mr mohammadpour intentionally ignored for record-keeping purposes bets on which he won less than dollar_figure and which therefore were not reported to the irs by means of form w-2g these winning bets of less than dollar_figure made up approximately percent of all mr mohammadpour’s bets in other words petitioners adopted record-keeping practices which would merely approximate mr mohammadpour’s gambling performance such is inconsistent with a conclusion that mr mohammadpour engaged in his gambling activity with the primary purpose of making a profit as we found in calvao v commissioner supra p etitioner’s efforts are consistent with the desire to win money however we find petitioner’s desire to win money and his strategy for doing so is also consistent with gambling purely for its entertainment or recreational aspects on the record before us we are unable to conclude that mr mohammadpour’s gambling activity was a trade_or_business even continued attorney handicapper and attorney greyhound racing wagerer reported dollar_figure of net_income from his gambling activity and dollar_figure from his business as an attorney 7mr mohammadpour testified that in preparing petitioners’ return he overlooked some records of winnings and we did not account for the recent amounts of perhaps no more than dollar_figure maximum as a second trade_or_business to that of mr mohammadpour’s accounting services business we do not detect the level of continuity or regularity of gambling activity that is required by commissioner v groetzinger supra furthermore we cannot say that the primary purpose of mr mohammadpour’s gambling activity was to make a profit concluding we hold that respondent properly disallowed petitioners’ claimed gambling loss other than as an itemized_deduction consequently petitioners are not entitled to the child_tax_credit and their itemized_deductions are as determined by respondent to reflect the foregoing decision will be entered for respondent


t c summary opinion united_states tax_court lawrence k and ruth l harrell petitioners v commissioner of internal revenue respondent docket no 17918-05s filed date ruth l harrell pro_se brian a pfeifer for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax the issues for decision are the amount of noncash charitable_contribution deductions which petitioners are entitled to claim on schedule a itemized_deductions and the amount of the excess unreimbursed employee and other miscellaneous expenses deduction1 to which petitioners are entitled background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioners resided in miami florida petitioners timely filed a joint form_1040 u s individual_income_tax_return for taxable_year in which they claimed as schedule a deductions medical and dental expenses charitable_contributions and excess unreimbursed employee and other miscellaneous expenses respondent determined that the amounts claimed for these latter deductions were overstated and accordingly sent petitioners a notice_of_deficiency petitioners timely petitioned this court petitioners concede and thus no 1the excess unreimbursed employee and other miscellaneous expenses deduction is a schedule a deduction the amount equals the sum of unreimbursed employee expenses--job travel union dues job education etc tax preparation fees and other expenses--investment safe deposit box etc less an amount equal to percent the 2-percent floor of the taxpayer’s adjusted_gross_income see sec_67 longer challenge respondent’s determinations that they are not entitled to the medical and dental expense deduction however they continue to challenge respondent’s other determinations discussion as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the burden of proving an error is on the taxpayer rule a 290_us_111 however pursuant to sec_7491 the burden_of_proof with respect to any factual issue relating to ascertaining the liability for tax shifts to the commissioner if the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner’s agents and during the court_proceeding introduced credible_evidence with respect to the factual issue involved petitioners did not meet the substantiation requirements or introduce credible_evidence regarding the disallowed amounts therefore the burden_of_proof does not shift to respondent it is settled law that deductions are a matter of legislative grace and the taxpayer must prove that he she is entitled to the claimed deductions 503_us_79 292_us_435 with these well-established propositions in mind we decide whether petitioners have satisfied their burden of proving entitlement to deduct noncash charitable_contributions and excess unreimbursed employee and other miscellaneous expenses in amounts greater than those respondent determined as noted petitioners claimed deductions on their return for charitable_contributions consisting of dollar_figure in cash and dollar_figure in noncash contributions at trial the parties stipulated that petitioners were entitled to a deduction of dollar_figure for cash charitable_contributions and that the dollar_figure balance was improperly claimed because the disallowed portion was made not by petitioners but by their family members respondent disallowed the dollar_figure deduction for noncash contributions for lack of substantiation at trial respondent conceded that petitioners are entitled to a deduction for noncash charitable_contributions of dollar_figure sec_170 allows a deduction for charitable_contributions during the taxable_year if verified as provided in the regulations sec_170 the term charitable_contribution includes a contribution or gift to a corporation trust or community chest fund or foundation with certain provisos sec_170 for example the recipient organization must have been created or organized in the united_states or in any possession thereof or under the law of the united_states any state the district of columbia or any possession_of_the_united_states sec_170 furthermore no part of the net_earnings of a qualified_organization may inure to the benefit of any private_shareholder_or_individual sec_170 the charitable_contribution_deduction is subject_to certain substantiation requirements sec_170 no deduction is allowed for any contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the qualified donee organization sec_170 this written acknowledgment must state the amount of cash and a description but not necessarily the value of any property other than cash the taxpayer donated and whether any consideration was given to the taxpayer sec_1_170a-13 income_tax regs petitioners attached to their form_1040 a form_8283 noncash charitable_contributions listing eight dates on which they claimed to have made noncash donations to charitable organizations at trial petitioners presented as evidence receipts that were furnished blank by charitable organizations and admittedly filled in by petitioners the receipts which total dollar_figure purport to show that petitioners made noncash contributions on seven separate dates during january march may june august september and november in addition petitioners submitted a list which they prepared of items allegedly contributed on december with a value of dollar_figure but no receipt for this contribution was produced the dates on the receipts for january and september appear to have been altered and we are not satisfied that those contributions were in fact made during the list of items with respect to the purported december contribution does not support the sec_170 deduction because it was prepared exclusively by petitioners and is therefore not a contemporaneous written acknowledgment of the contribution by the donee organization the remaining five receipts are supported by detailed lists of items that petitioners allegedly contributed but the values listed for the individual items do not add up to the total amount claimed for each contribution additionally the list of items purportedly contributed on june includes a situp table and weights that were also listed in the receipt prepared for the purported january charitable_contribution and as noted we are not satisfied that these items in fact were contributed to charity in 2we note that the sums listed on the various receipts petitioners produced plus the amount on the list of items they allegedly contributed on dec is less than the amount claimed for noncash contributions on their tax_return moreover the values claimed for the individual contributed items listed in the receipts do not total the claimed sum when a taxpayer establishes that he she has incurred deductible expenses but is unable to establish the exact amounts we can estimate the deductible amounts but only if the taxpayer presents sufficient evidence to establish a rational basis for making the estimates see 39_f2d_540 2d cir 85_tc_731 in estimating the amount allowable we bear heavily on the taxpayer whose inexactitude in substantiating the amount of the expense is of his own making see cohan v commissioner supra pincite however without a rational basis for making the estimate any allowance we made would amount to unguided largesse 245_f2d_559 5th cir respondent concedes that petitioners made noncash contributions during but maintains that the value of those contributions did not exceed dollar_figure considering the record before us we do not doubt that petitioners made noncash charitable_contributions during however they failed to provide reliable evidence to prove that the amount thereof exceeded the dollar_figure respondent conceded we therefore hold that for petitioners are entitled to a dollar_figure charitable_contribution_deduction rather than the claimed dollar_figure deduction comprising dollar_figure for cash contributions and dollar_figure for noncash contributions we now turn to the amount of the excess unreimbursed employee and other miscellaneous expenses deduction to which petitioners are entitled on their return petitioners claimed a deduction for excess unreimbursed employee and other miscellaneous expenses of dollar_figure after considering the 2-percent floor petitioners claimed a deduction for excess unreimbursed employee and other miscellaneous expenses of dollar_figure of this amount respondent does not dispute that petitioners are entitled to a deduction of dollar_figure for unreimbursed employee expenses--union dues the remaining components of the claimed deduction are uniforms dollar_figure supplies and equipment dollar_figure job search expenses dollar_figure telephone expenses dollar_figure and tax preparation fees dollar_figure respondent disallowed the deduction for all of these components sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business for an expense to be ordinary the transaction that gives rise to it must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite u s pincite the performance of services as an employee constitutes a trade_or_business see sec_1_162-17 income_tax regs the employee must show the relationship between the expenditures and the employment see evans v commissioner tcmemo_1974_267 affd 557_f2d_1095 5th cir the taxpayer bears the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses as previously noted the court may in some circumstances estimate the amount of a deduction to which the taxpayer is otherwise entitled cohan v commissioner supra pincite petitioners deducted dollar_figure for uniforms for the taxable_year and stipulated that the uniforms mr harrell wore were washed and ironed at petitioners’ home the expense of uniforms is deductible under sec_162 if the uniforms are of a type specifically required as a condition_of_employment the uniforms are not adaptable to general usage as ordinary clothing and the uniforms are not so worn see 30_tc_757 beckey v commissioner tcmemo_1994_514 mr harrell in his position with united parcel service was required to work in a clean uniform every day mrs harrell washed and ironed mr harrell’s work uniforms at home the employer_provided the uniforms but did not reimburse mr harrell for the cleaning of his uniforms although petitioners would be entitled to a deduction for the cost of washing and ironing the uniforms they provided no evidence upon which we can estimate the amount thereof at trial mrs harrell testified that the amount claimed was a guess that was based on the hypothesis of paying to have the uniforms cleaned commercially deductions are based on actual not hypothetical costs as the uniforms were not sent to a commercial cleaner but were laundered and ironed at home the amount claimed is not allowable moreover the amount claimed dollar_figure per month appears grossly inflated in the absence of a rational basis for estimating the cost of the cleaning of the uniforms we sustain respondent’s disallowance of this component of the claimed unreimbursed employee and other miscellaneous expenses see cohan v commissioner supra pincite petitioners deducted dollar_figure for supplies and equipment for the taxable_year in issue taxpayers carrying supplies on hand can deduct the costs of those supplies to the extent that the supplies are actually consumed or used in operation during the taxable_year for which the return is made if the cost of the supplies was not deducted in a previous year if the supplies are incidental and are carried on hand with no record of consumption kept the taxpayer may deduct the total cost of such supplies purchased during the taxable_year for which the return was made sec_1_162-3 income_tax regs petitioners presented no documentation to support their claimed deduction of dollar_figure for supplies and equipment there is no rational basis in the record on which we can estimate the magnitude of this expense we therefore sustain respondent’s disallowance of this component of the claimed excess unreimbursed employee and other miscellaneous expenses deduction petitioners deducted dollar_figure for job search expenses in connection with mrs harrell’s efforts to secure employment as well as deducting dollar_figure for telephone cell phone expense for the taxable_year in issue we consider these two expenses together because they are subject_to more stringent substantiation requirements than the other components of the disallowed employee expense deduction job search expenses are deductible under sec_162 to the extent they are incurred in searching for new employment in the employee’s same trade_or_business see 54_tc_374 however if the employee is seeking a job in a new trade_or_business the expenses are not deductible under sec_162 see 20_tc_511 job search expenses include résumé preparation expenses postage and travel and transportation_expenses see murata v commissioner tcmemo_1996_321 before the taxable_year in issue mrs harrell was employed as an administrative assistant and during she was unemployed searching for employment petitioners’ substantiating evidence for the job search expenses consists of correspondence between mrs harrell and potential employers a work search form required by the state of florida for purposes of administering the state unemployment_compensation program and a mileage log which shows the addresses of companies which mrs harrell visited over the course of the year and the dates of the visits the correspondence and work search forms were prepared contemporaneously with the search for employment and establish to our satisfaction that mrs harrell incurred deductible job search expenses hampered by a lack of evidence in the record as to the amount thereof but recognizing that expenses for a job search were in fact incurred we place the amount for that portion of her job search expenses consisting of résumé preparation telefax transmission and postage at dollar_figure mrs harrell’s remaining job 3the work search form contains the following language each employer you contact in your search for work must be shown below it is important to make as many in person applications as possible during each week for which you claim benefits mrs harrell certified that the information she provided on the report was correct and complete to the best of her knowledge search expenses consisted of the cost of travel in her own automobile to potential employers’ places of business this portion of her job search expenses is supported by the work search record with respect to three interviews and by the mileage log in the case of travel_expenses entertainment_expenses and expenses paid_or_incurred with respect to certain listed_property sec_274 overrides the cohan doctrine discussed previously and those expenses are deductible only if the taxpayer meets the stringent substantiation requirements of sec_274 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_274 contemplates that no deduction may be allowed for expenses_incurred for travel on the basis of any approximation or the unsupported testimony of the taxpayer sec_1_274-5t temporary income_tax regs fed reg date sec_274 specifically proscribes deductions for travel_expenses in the absence of adequate_records or of sufficient evidence corroborating the taxpayer’s own statement at a minimum the taxpayer must substantiate the amount of such expense the time and place such expense was incurred and the business_purpose for which such expense was incurred mrs harrell’s unemployment_compensation work search record constitutes substantiation within the meaning of sec_274 with respect to three job interviews that required travel the record shows that her round trip travel to those interviews was dollar_figure miles per trip for a total of dollar_figure miles petitioners did not present receipts for the actual cost of this travel but we may apply the standard mileage rate to determine the allowable deduction the standard mileage rate for wa sec_36 cents per mile so that the total allowable deduction amounted to dollar_figure unlike the work search record mrs harrell’s travel log was not prepared contemporaneously with the purported travel and appears inaccurate in some respects the travel log includes entries that do not appear on the work search record that was prepared contemporaneously for unemployment_compensation purposes the job seeker in preparing the work search record is exhorted to document each employer that had been contacted and those records certified by mrs harrell contain only three reports of job interviews yet the travel log indicates that she attended eight interviews and traveled on more than occasions for a total of more than big_number miles to apply for jobs we find that the travel log is unreliable and does not constitute adequate 4the standard mileage rate is a matter of administrative convenience by which a taxpayer may compute the amount of deductible automobile expenses using a standard rate rather than separately establishing the amount of an expenditure for travel or transportation sec_1_274-5 income_tax regs in part grants the commissioner the authority to establish a method under which a taxpayer may use mileage rates to substantiate for purposes of sec_274 the expense of using a vehicle while traveling away from home see revproc_2001_54 2001_2_cb_530 substantiation for the claimed deductions for mrs harrell’s travel in the course of her job search in addition to applying to traveling expenses the strict substantiation requirements of sec_274 apply to deductions with respect to any listed_property as defined in sec_280f sec_280f in turn includes any cellular telephone in the definition of listed_property the only substantiation petitioners submitted with respect to their cellular telephone expenditures was a letter from mr harrell’s employer stating that mr harrell used his cellular telephone to communicate and conduct business with the company and that he was not reimbursed for those charges no substantiation was introduced as to specific telephone calls made using the cellular telephone the portion of the use that might be related to mr harrell’s work rather than to personal calls or any other matter that would support a claim that the cellular telephone was property used in mr harrell’s trade_or_business of performing services as an employee we therefore sustain respondent’s disallowance of this component of the claimed excess unreimbursed employee and other miscellaneous expenses deduction finally petitioners deducted dollar_figure for tax preparation fees petitioners used a commercial software package to prepare their tax_return the record does not reveal the cost of the software package but we recognize that there in fact was a cost we estimate this cost to be dollar_figure and allow a deduction for tax preparation fees in that amount petitioners’ adjusted_gross_income for was dollar_figure as previously noted see supra note there is a 2-percent floor in calculating the deduction for excess unreimbursed employee and other miscellaneous expenses thus petitioners may deduct only their unreimbursed employee and other miscellaneous expenses that exceed dollar_figure percent times dollar_figure the amount of the unreimbursed employee and other miscellaneous expenses that we have found are deductible does not exceed that amount to reflect the foregoing and concessions by the parties decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-102816-01 date feb legend x d1 this letter responds to the ruling_request dated date you submitted on behalf of x which requests relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 x intended to be treated as an s_corporation for federal_income_tax purposes effective on d1 but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective on d1 x has however established reasonable_cause for not making a timely plr-102816-01 election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the internal_revenue_code this ruling 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 s david r haglund sincerely yours senior technician reviewer branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------- ------------- ------------------ ------------------------ - department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-107764-03 date date x a date year dear ------------- ----------------------------------------- ein ---------------- ---------------------- ssn ----------------- ----------------------- ------- this responds to a letter dated date submitted on behalf of x requesting a ruling under ' b of the internal_revenue_code the information submitted states that x was incorporated on date a the president of x represents that the shareholders of x intended for x to be an s_corporation effective date however no timely form_2553 election to be a small_business_corporation was filed sec_1362 of the code provides that if b a an election under ' a is made for any taxable_year after the date prescribed by ' b for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x s year taxable_year accordingly provided that x makes an election plr-107764-04 to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under ' b 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x enclosures copy of this letter copy for ' purposes sincerely yours carolyn hinchman gray senior counsel branch office of the associate chief_counsel passthroughs and special industries


department of the treasury washington dc person to contact telephone number refer reply to cc ita - plr-145455-02 date date internal_revenue_service number release date index no re ein legend taxpayer law firm year first paralegal second paralegal associate dear this is in reply to your private_letter_ruling request dated date in which you request on behalf of taxpayer an extension of time to make an election under sec_311 of the taxpayer_relief_act_of_1997 sec_311 election for tax_year facts taxpayer is a_trust that is treated as a partnership for federal_income_tax purposes taxpayer is a calendar_year taxpayer plr-145455-02 taxpayer has three partners taxpayer and the partners engaged law firm to prepare their partnership and individual tax returns law firm has prepared the partners’ individual tax returns for over years and has prepared taxpayer’s partnership tax returns since its inception in year throughout this period of more than years law firm has never filed a tax_return on behalf of taxpayer or its partners later than the extended due_date first paralegal was employed by law firm and had prepared the partners’ individual tax returns for the past years first paralegal had prepared taxpayers’ partnership tax returns since its inception in first paralegal retired from law firm associate and second paralegal are employed by law firm and were responsible for preparing the tax returns of taxpayer and the partners associate has an ll m in taxation and has a broad range of experience in partnership and individual tax matters associate works under the supervision of a partner in law firm who has been with law firm for more than years second paralegal has been a paralegal at law firm for years and has prepared and filed tax returns throughout her 27-year professional career associate took primary responsibility for preparing taxpayer’ sec_2001 partnership tax_return second paralegal took primary responsibility for preparing the partners’ individual tax returns in early associate and other tax professionals at law firm advised taxpayer of its option to make a sec_311 election for certain capital assets taxpayer decided to make the sec_311 election which necessitated the appraisal of certain assets second paralegal filed an extension for taxpayer to file it sec_2001 partnership tax_return until date second paralegal filed an extension for the partners to file their individual tax returns until date through the spring and summer of law firm was working with appraisers and others to value assets held by taxpayer for purposes of making the sec_311 election associate and others at law firm mistakenly assumed that second paralegal had extended the due_date for taxpayer’ sec_2001 partnership tax_return until date the extended due_date for the partners’ individual tax returns consequently taxpayer’ sec_2001 partnership tax_return was not filed by date the extended due_date taxpayer filed it sec_2001 partnership tax_return in date and included on it information about the sec_311 election taxpayer represents that the late filing of its partnership tax_return was the result of an honest mistake by law firm at all relevant times it intended to make the sec_311 election it is not requesting an extension as a result of hindsight it provided law firm with all of the information necessary for the preparation of it sec_2001 partnership tax_return and relief granted under sec_301_9100-3 the procedure and administration regulations will not result in taxpayer having a lower tax that it would have had it made a timely election plr-145455-02 law under sec_1 of the internal_revenue_code gain resulting from the sale_or_exchange of most capital assets is taxed at a capital_gains_rate of percent percent for gain otherwise taxed at an ordinary rate of percent or less sec_1 provides that the 20-percent capital_gains_rate is reduced to percent for qualified 5-year gain resulting from the sale_or_exchange of property with a holding_period beginning after date qualified 5-year gain is defined generally by sec_1 as the aggregate long-term_capital_gain from property held for more than years sec_311 of the taxpayer_relief_act_of_1997 tra97 allows a noncorporate taxpayer holding a capital_asset on date to elect to treat that asset as having been both sold and reacquired on that date date for readily_tradable stock for an amount equal to its fair_market_value if a taxpayer makes a sec_311 election the holding_period for the elected asset begins after date this makes the asset eligible for an 18-percent rate capital_gains_rate if it is later sold after having been held by the taxpayer for more than years from the date of the deemed sale and reacquisition a taxpayer makes a sec_311 election by following the instructions for the appropriate schedule d or form_4797 under these instructions the taxpayer must report the resulting gain in gross_income on the tax_return for the tax_year that includes the date of the deemed sale and attach a statement to the return stating that the election is being made under sec_311 of tra97 and listing the assets for which the election is being made the tax_return on which the gain is reported must be filed by its due_date including extensions taxpayers who timely filed their tax returns without making the sec_311 election for one or more eligible assets may still make the election by filing an amended_return within months of the due_date of the original return excluding extensions under appropriate circumstances the internal_revenue_service will grant requests to make a late sec_311 election under sec_301_9100-1 through of the procedure and administration regulations notice_2002_58 2002_35_irb_432 sec_301_9100-3 of the regulations provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 of the regulations will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 of the regulations states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer-- plr-145455-02 i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election due to intervening events beyond the taxpayer's control iii failed to make the election because after exercising reasonable 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 sec_301_9100-3 of the regulations states that a taxpayer will not be considered to have reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was not i competent to render advice on the regulatory election or ii aware of all relevant facts sec_301_9100-3 of the regulations provides that a taxpayer is deemed to have not acted reasonably and in good_faith if the taxpayer-- i seeks to alter a tax_return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was fully informed 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 due_date for making the election that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 of the regulations states that the service will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief the interests of the government will be prejudiced if i granting relief would result in a 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 and ii 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 before the taxpayer’s receipt of a ruling granting relief under this section plr-145455-02 analysis taxpayer acted reasonably and in good_faith with respect to making the sec_311 election taxpayer reasonably relied on qualified_tax professionals at law firm the tax professionals engaged by taxpayer advised it to make the sec_311 election and were taking steps necessary to make the sec_311 election but due to an oversight failed to ensure that taxpayer made the sec_311 election on a timely basis granting relief to taxpayer to make a late sec_311 election will not prejudice the interests of the government granting relief would not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the sec_311 election had been timely made the tax_year the taxable_year in which the regulatory election should have been made is not closed by the period of limitations on assessment sec_301_9100-3 of the regulations does not apply in the instant case because law firm was competent to render advice on the regulatory election and taxpayer informed law firm of all relevant facts sec_301_9100-3 of the regulations does not apply in the instant case because taxpayer i is not seeking to alter a tax_return position for which an accuracy-related_penalty has been or could be imposed ii did not chose not to file the sec_311 election and iii did not use hindsight in requesting relief conclusion based solely on the facts as represented and the applicable law we conclude that the request for relief under sec_301_9100-3 of the regulations should be granted accordingly taxpayer is granted an extension of time to make the sec_311 election through the date taxpayer filed it sec_2001 partnership tax_return therefore the sec_311 election made on taxpayer’s late-filed return was timely made a copy of this letter must be attached to any income_tax return to which it is relevant and should be kept with taxpayer’s records the ruling contained in this letter is based on information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any of the material submitted or facts assumed in support of the ruling_request it is subject_to verification on examination except as expressly provided therein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this letter does not rule on whether taxpayer is eligible to make a sec_311 plr-145455-02 election or the validity of the sec_311 election made on taxpayer’s late-filed partnership tax_return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely christopher f kane branch chief office of associate chief_counsel income_tax accounting enclosures copy for sec_6110 purposes