tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number number release date date date se t -eo ra uil legend founder companies corporation products plantation holding_company partnership dear this is in reply to your ruling_request regarding the proposed recapitalization and related actions pursuant to sec_4943 of the internal_revenue_code code facts you are exempt from federal_income_tax under sec_501 of the code and are a private_foundation within the meaning of sec_509 you have been described in sec_501 since you carry out your charitable purposes through a discretionary program of gifts and grants that supports various programs including medical_research promotion of the performing arts hosting conferences regarding public policy and the protection of endangered wild animal species the information submitted indicates you were established by founder founder was your sole contributor and a substantial_contributor as defined in sec_507 of the code founder was your sole member and had the power to elect appoint and remove directors at will since the members of the foundation elect the directors the number of directors was increased to eight in founder's will founder died in and the entire residue of founder's estate was bequeathed to you under the terms of founder's will the assets in founder's estate included all of the stock of companies the companies comprise six sawmills and corporation accordingly you now own all the stock of the companies and the corporation in you received a ruling from us to the effect that you can continue to hold of the voting_stock of companies and corporation for an additional five-year extension period until date you currently own of the outstanding shares of capital stock and therefore of the vote and value of the companies and corporation through a wholly owned limited_liability_company holding_company a disregarded_entity for federal tax purposes each of the companies and corporation has outstanding one class of voting common_stock each of the companies and corporation holds an interest in partnership partnership owns among other properties products and the assets of plantation in order to reduce your interests to of the voting_stock of companies and corporation by date you decided on a restructuring plan the intention of the restructuring plan is to permit time for you to undertake a planned diversification of your investments in the companies in an orderly manner your first step is to remove the plantation assets from the partnership to corporation in retirement of corporation's interest in partnership you through your holding_company will continue to own of the stock of corporation you represent that this action will result in a more focused structure that reflects the primarily foundation-related activities of plantation in contrast to the for profit businesses of the companies which are unrelated to your charitable purposes and activities except as an investment and a source of funding however the product's headquarters building located on the plantation will be retained by the companies plantation consists of almost big_number acres of woodlands and was established by the founder as a setting of natural beauty the facilities include conference meeting rooms theater and rehearsal spaces housing for approximately guests dining and recreational facilities recreational facilities include a 9-hole golf course and stables the stable is a small remnant of a larger historical operation on the plantation the golf course is primarily provided as part of the recreational offerings available to guests of the plantation the plantation also contains what is one of the country’s leading facilities for breeding endangered wild animal species with full veterinary support as well as undeveloped land and timberlands after the founder's death his executors moved the headquarters offices of the companies into a building at plantation as a cost-saving measure for you during the past years plantation has hosted more than world leaders from all parts of the globe plantation has hosted seminal conferences on energy health and religion as well as conferences on transitions in the pacific rim and the relationship between the united_states and the muslim world you have often partnered with leading philanthropic and policy organizations and in the year ahead meetings are scheduled with the upcoming generation of political social and business leaders from arab nations as well as a mexican-canadian initiative to expand the scope and focus of international summit meetings the plantation consists of almost structures which provide guest accommodations and varied meeting facilities the founder’s idea was to attract to you scholars leaders and thinkers worldwide and provide a venue conducive to the exchange of ideas addressing fundamental issues and problems on all matters of contemporary thought there are also meetings of various charitable organizations and conferences of wildlife conservation groups and veterinary medicine groups these conferences are related to a center for endangered species which is run by you and is a sec_501 of the code and sec_509 public charity this center is located on the plantation the center is a breeding facility for endangered wild animals as a breeding and wildlife research center it works closely in cooperation with local universalities government wildlife agencies and zoos in many countries the plantation houses a dance studio which serves as a rehearsal space for leading choreographers dance companies and performing artists who are selected for residences at plantation you state that for slight incremental costs the facilities at the plantation are used at such times when otherwise idle to generate revenue which would partially offset the fixed costs of the facilities therefore the facilities are sporadically made available for for-profit activities such as corporate retreats day tours golf course play and dinners you represent that all revenue generated from the non-charitable use of plantation including the stables and golf course is used to maintain the plantation defraying its operating costs and to make necessary improvements these non-charitable activities you represent are minimal and incidental in nature you represent any non-charitable use of plantation will occur during the times that you are not using it for charitable purposes plantation is also made available to charitable organizations that qualify as exempt from federal_income_tax under sec_501 of the code in thirty charitable organizations used the plantation either for free or at substantially below cost the plan then calls for a recapitalization of the companies you propose to effect a recapitalization of the equity securities of the companies donate non-voting shares and subsequently exchange the non-voting shares for voting shares as described below to make possible a transfer by you to public_charities shares representing of the outstanding_stock that votes for directors of the companies each of the companies is recapitalized and a portion of each of the companies’ outstanding_stock is donated to one or more public_charities pursuant to the following four steps step the charter of each of the companies is amended to provide for a board_of directors consisting of at least five directors and holding_company selects all of the initial directors of each companies board the members of each of the companies’ boards are identical step the charter of each of the companies is amended to authorize for issuance big_number shares of senior common_stock senior_stock shares of class a junior voting common_stock class a voting_stock and shares of class b junior non-voting common_stock class b non-voting stock collectively called junior stock a plan of recapitalization is then adopted pursuant to which the outstanding shares of common_stock of each company are converted into shares of senior_stock and shares of class b non-voting stock step holding_company then donate sec_40 shares of class b non-voting stock of each of the companies to one or more sec_501 public_charities holding_company and each charity may agree on their mutual intention that dividends and other proceeds from the stock donated to the charity be used for a specified purpose ie a specific endowment step pursuant to the terms of the donations each charity exchanges all of its shares of class b non-voting stock in each of the companies for an equal number of shares of class a voting_stock the specific attributes of the stock are senior_stock you will own shares of the senior_stock constituting all of the outstanding shares dividends are issued if and when the companies board declares but the corporate charter contemplates regular ample annual dividends regarding voting the senior_stock is entitled to i as a class elect one director out of a total of never less than five directors and ii to vote one vote per share together with all holders of junior stock on all other matters requiring shareholder vote under applicable state law the sale of the underlying assets contributed to the partnership and certain other major corporate actions major transactions and separate transfers of otherwise stapled shares of junior stock on liquidation the senior_stock is entitled to receive a fixed sum or redemption equal to the value of the holding company’s stock of the companies surrendered in the recapitalization determined at that time above that liquidation preference all shares senior and junior share equally in liquidating distributions additionally in the event of an issuance of additional shares of junior stock of the companies the holder of the senior_stock will be entitled to buy additional shares of senior_stock necessary to avoid dilution of its equity_interest in the companies junior stock the total number of junior stock outstanding at any time is intended to equal of the total number of shares of senior_stock outstanding each outstanding share of junior stock is entitled to annual noncumulative dividends if and when declared by the board equal to an amount such that all shares of junior stock of all the companies will receive an aggregate annual dividend preference of dollar_figure the dividend preference plus the amount of any dividends_paid that year on a share of senior_stock the dividend preference on the junior stock must be paid in order for any dividends to be paid on the senior_stock regarding voting rights - class a voting_stock is entitled i as a class to elect all but one director ie to elect a minimum of four directors and ii to vote one vote per share together with all the holders of senior_stock and junior stock on all other matters requiring a shareholder vote under applicable state law and major transactions and separate transfers of otherwise stapled shares of junior stock class b non-voting stock is not entitled to vote for directors but is entitled to vote one vote per share together with all the holders of senior and junior stock on all matters requiring a shareholder vote under applicable state law and major transactions and separate transfers of otherwise stapled shares of junior stock the restrictions on transfers of junior stock are if you ora i each of the companies has a right_of_first_refusal with respect to transfers of its junior stock each of the companies has the right to purchase or designate a purchaser of the junior stock ii neither the companies nor any person who is a disqualified_person within the meaning of sec_4946 of the code with regard to you can own any class a voting_stock at a time when you own any senior_stock iii disqualified_person acquires any class a voting_stock such class a voting_stock automatically converts into class b non-voting stock to the extent necessary to prevent you from being deemed to own more than of the companies outstanding_stock that votes for directors iv if a holder of class a voting_stock becomes a disqualified_person such stock shall automatically convert into class b non-voting stock to the extent necessary to prevent you from being deemed to own more than of the companies outstanding_stock that votes for directors v shares of junior stock owned by any person other than holding_company or you cannot be transferred separately from shares of junior stock ie all of the junior stock of each of the companies owned by a person other than holding_company or you is stapled together unless a separate transfer of shares of companies junior stock by such person is approved by a majority vote of all outstanding shares of the companies a seller of or more of the outstanding shares of senior_stock must drag along all but not less than all of the junior stock at a price appropriately derived from the price for such senior_stock awarding no premium or discount to differences in voting power such seller can also require the sale of the companies to be implemented as a sale of assets rather than stock based on the above facts you request the following rulings your ownership of the companies after the recapitalization will be permitted holdings under sec_4943 of the code a the senior_stock class a voting_stock and class b non-voting stock of each of the companies to be received by you pursuant to the recapitalization will be treated as equivalent to the voting_stock of each of the companies surrendered by you so that you will be permitted to hold the stock received pursuant to the recapitalization until date pursuant to sec_4943 of the code b after the donations to the charities of class b non-voting stock and the share exchange you and disqualified persons will not own more than of the vote of the companies pursuant to sec_4943 of the code you may continue to hold indefinitely senior_stock of each of the companies representing not more than of the outstanding voting_stock of such companies pursuant to sec_4943 donee charities from freely and effectively using or disposing of the transferred interest pursuant to sec_53_4943-2 of the regulations there are no material restrictions placed on the junior stock that prevent the c your ownership of voting_stock of each of the companies would not increase as a result of the companies’ repurchase of class a voting_stock pursuant to sec_4943 of the code e your ownership of voting_stock of each of the companies would not increase as a result of any acquisition of class a voting_stock by you or a disqualified_person pursuant to sec_4943 of the code since the class a voting_stock will automatically convert into class b non-voting stock your ownership of of the stock of corporation will not be considered excess_business_holdings under sec_4943 of the code because corporation is a functionally_related_business as defined in sec_4943 law sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable or educational_purposes sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_501 is a private_foundation and subject_to the excise_taxes of chapter sec_512 of the code describes the term unrelated_business_taxable_income as the gross_income derived by an exempt_organization from any unrelated_trade_or_business as defined under sec_513 regularly carried on by it less certain deductions but with modifications provided in sec_512 sec_513 of the code provides that the term unrelated_trade_or_business means in the case of any organization subject_to tax under sec_511 any trade_or_business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis of its exemption under sec_501 sec_513 of the code and sec_1_513-1 of the regulations provides that trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods an activity does not lose its identity as 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 not be related to the exempt purposes of the organization sec_4942 of the code provides that the term functionally_related_business means a trade_or_business which is not an unrelated_trade_or_business as defined in sec_513 or an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exempt purposes of the organization sec_4943 of the code imposes a tax on the excess_business_holdings of any private_foundation in a business_enterprise during any taxable_year sec_4943 of the code defines the term excess_business_holdings as the amount of stock in a corporation that a foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in the corporation to be permitted holdings sec_4943 of the code limits the holdings of a private_foundation in a corporation to percent of the voting_stock of the business_enterprise reduced by the percentage of the voting_stock owned by all disqualified persons sec_4943 of the code provides that the permitted holdings of any private_foundation in an incorporated business_enterprise are percent of the voting_stock reduced by i ii the percentage of the voting_stock owned by all disqualified persons sec_4943 of the code provides that a private_foundation shall not be treated as having excess_business_holdings in any corporation in which it together with all other private_foundations which are described in sec_4946 owns not more than percent of the voting_stock and not more than percent in value of all outstanding shares of all classes of stock sec_4943 of the code provides that with certain exceptions not applicable here if after date there is a change in the holdings in a business_enterprise other than by purchase ie by gift or bequest by the private_foundation or by a disqualified_person which causes the private_foundation to have excess_business_holdings in such enterprise the interest of the foundation in such enterprise immediately after such change shall while held by the foundation be treated as held by a disqualified_person rather than by the foundation during the 5-year period beginning on the date of such change in holdings sec_4943 of the code defines business holdings as in computing the holdings of a private_foundation or a disqualified_person with respect thereto in any business_enterprise any stock or other interest owned directly or indirectly by or for a corporation shall be considered as being owned proportionately by or for its shareholders sec_4943 of the code provides that the term business_enterprise does not include a a functionally_related_business as defined in sec_4942 or b a trade_or_business at least of the gross_income of which is derived from passive sources sec_4946 of the code provides that for the purposes of sec_4943 the term disqualified_person includes a private_foundation which is effectively controlled directly or indirectly by the same person or persons who control the private_foundation in question or one where substantially_all of the contributions where made directly or indirectly by the same persons to include a substantial_contributor or a member of their family sec_53_4942_a_-2 of the foundation and similar excise_tax regulations regulations provides that the term ‘functionally related business means-- a trade_or_business which is not an unrelated_trade_or_business as defined in sec_513 or an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of the organization for income or funds or the use it makes of the profits derived to the charitable educational or other similar exempt_purpose of the organization example sec_1 and of sec_53_4942_a_-2 of the regulations provides the following illustrations of a functionally_related_business example x a private_foundation maintains a community of historic value which is open to the general_public for the convenience of the public x through a wholly owned separately incorporated taxable entity maintains a restaurant and hotel in such community such facilities are within the larger aggregate of activities which makes available for public enjoyment the various buildings of historic interest and which is related to x's exempt_purpose thus the operation of the restaurant and hotel under such circumstances constitutes a functionally_related_business example y a private_foundation as part of its medical_research program under sec_501 publishes a medical journal in carrying out its exempt_purpose space in the journal is sold for commercial advertising notwithstanding the fact that the advertising activity may be subject_to the tax imposed by sec_511 such activity is within a larger complex of endeavors which makes available to the scientific community and the general_public developments with respect to medical_research and is therefore a functionally_related_business the general explanation of the tax reform act of blue_book prepared by the staff of the joint_committee_on_internal_revenue_taxation date includes the following explanation to the exception an exception to the limitation on the holding of business interests is provided in the case of a business which is related under the provisions dealing with taxes on unrelated_business_income another exception is provided even where the business although unrelated to the direct activities of the foundation is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exempt purposes of the organization these exceptions are intended to make clear that certain types of business activities may continue to be held by the foundation notwithstanding the general_rule for example the inn and lodge at colonial williamsburg are separately incorporated taxable entities but are owned by the foundation for the convenience of the general_public visiting williamsburg also many museums maintain cafeterias and snack bars for the convenience of the public visiting the museums although advertising in a foundation's journal may be an unrelated_trade_or_business it comes under the second of these exceptions if the foundation's journal is related to the foundation's exempt purposes such business activities do not have to be disposed of under these provisions sec_53_4943-1 of the regulations provides that generally under sec_4943 of the code the combined holdings of a private_foundation and all disqualified persons as defined in sec_4946 in any corporation conducting a business which is not substantially related to the exempt_purpose of the foundation are limited to percent of the voting_stock in such corporation sec_53_4943-2 of the regulations provides if a private_foundation disposes of an interest in a business_enterprise but imposes any material restrictions or conditions that prevent the transferee from freely and effectively using or disposing of the transferred interest then the transferor foundation will be treated as owning such interest until all such restrictions or conditions are eliminated regardless of whether the transferee is treated for other purposes of the code as owning such interest from the date of the transfer sec_53_4943-3 of the regulations provides that for purposes of sec_4943 the term excess_business_holdings means with respect to the holdings of any private_foundation in any business_enterprise as described in sec_4943 the amount of stock or other interest in the enterprise which except as provided in sec_53_4943-2 the foundation or a disqualified_person would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings sec_53_4943-3 of the regulations provides that except as otherwise provided in sec_4943 and the permitted holdings of any private_foundation in an incorporated business_enterprise are- a percent of the voting_stock in such enterprise reduced but not below zero by b the percent of voting_stock in such enterprise actually or constructively owned by all disqualified persons sec_53_4943-3 of the regulations provides that the percentage of voting_stock held by any person in a corporation is normally determined by reference to the power of stock to vote for the election of directors with treasury_stock and stock which is authorized but unissued being disregarded sec_53_4943-3 of the regulations provides that in general in addition to those holdings permitted by paragraph b of this section the permitted holdings of a private_foundation in an incorporated business_enterprise shall include any share of nonvoting_stock in such enterprise held by the foundation in any case in which all disqualified persons hold no more than percent of the voting_stock in such enterprise all equity interests which do not have voting power attributable to them shall for purposes of sec_4943 be classified as nonvoting_stock for this purpose evidence of indebtness including convertible indebtedness and warrants and other options or rights to acquire stock shall not be considered equity interests sec_53_4943-3 of the regulations provides that stock carry voting rights which will vest only when conditions the occurrence of which are indeterminate have been met such as preferred_stock which gains such voting rights only if no dividends are paid thereon will be treated as nonvoting_stock until the conditions have occurred which cause the voting rights to vest when such rights vests the stock will be treated as voting_stock that was acquired other than by purchase but only if the private_foundation or disqualified persons had no control_over whether the conditions would occur for special rules where stock is acquired other than by purchase see sec_4943 and the regulations thereunder analysis ruling 1a under sec_4943 and c of the code the stock of the companies is held by a disqualified_person until date if immediately prior to a readjustment a private_foundation has holdings in a business_enterprise which are treated as held by a disqualified_person any holdings in a business which are received in a readjustment in exchange for such sec_4943 holdings are treated as holdings surrendered in the exchange to the same extent as provided in sec_53_4943-7 of the regulations with respect to the exchanges involving holdings pursuant to which sec_4943 and c applies sec_53 d the senior_stock class a voting_stock and class b non-voting stock of each of the companies to be received by you pursuant to the recapitalization will be treated as equivalent to the voting_stock of each of the companies surrendered by you so that you will be permitted to hold the stock received pursuant to the recapitalization until january therefore your ownership of the companies after the recapitalization will be permitted holdings under sec_4943 ruling 1b under sec_4943 of the code a private foundation’s permissible business holdings are generally limited to of the voting_stock of the business for these purposes voting_stock is defined as the stock having the power to vote for the election of the directions sec_53_4943-3 of the regulations after the recapitalization there will be two classes of stock outstanding the senior_stock and the class a voting_stock both the senior_stock and the class a stock entitle the holders to vote for directors therefore both classes will be voting_stock you have represented that you will own of a class of stock entitled to elect or one out of five directors and own of a class of stock entitled to elect our four out of five directors therefore based upon the definition of voting_stock under the regulations the percentage of voting_stock held by you will be and you will not own any nonvoting_stock since you state it will be cancelled after the share exchange after the donations to the charities of class b non-voting stock and the share exchange you and disqualified persons will not own more than of the vote of the companies pursuant to sec_4943 ruling 1c if a private_foundation disposes of an interest in a business_enterprise but imposes any material restrictions or conditions that prevent the transferee from freely and effectively using or disposing of the transferred interest then the transferor charity will be treated as owning such interest until all such restrictions or conditions are eliminated regardless of whether the transferee is treated for other purposes of the code as owning such interest from the date of the transfer sec_53_4943-2 of the regulations in the proposed recapitalization the restrictions you have placed on the transferred interest as stated in the facts section above are not deemed material restrictions within the meaning of sec_4943 of the code you represent that the restrictions placed on the stock would all be imposed by the companies and not by you the restrictions do not further any continuing interest of the donor thus there are no material restrictions placed on the junior stock that prevent the donee charities from freely and effectively using or disposing of the transferred interest pursuant to sec_53_4943-2 of the regulations ruling 1d your ownership of voting_stock of each of the companies would not increase as a result of the companies’ repurchase of class a voting_stock in the event of a redemption of the junior stock of a company the holder of the senior_stock of the companies may increase its percentage share of the equity of the companies however you represent that shares of the senior_stock are only entitled to vote for one of five directors therefore any increase in your equity in the companies will not result in an increase in any voting rights ruling 1e you have represented that neither you nor any person who is a disqualified_person with respect to you can own any class a voting_stock at a time when you own any senior_stock if you or a disqualified_person acquire any class a voting_stock of one of the companies such class a voting_stock automatically converts into class b non-voting stock of such company to the extent necessary to prevent you from been deemed to own stock representing more than of the total voting power of the companies outstanding_stock that votes for directors if a holder of class a voting_stock of a company becomes a disqualified_person you represent that such class a voting_stock automatically converts into class b non-voting stock of the company to the extent necessary to prevent you from being deemed to own stock representing more than of the total voting power of the company's outstanding_stock therefore your ownership of voting_stock of each of the companies would not increase as a result of any acquisition of class a voting_stock by you or a disqualified_person pursuant to sec_4943 of the code since the class a voting_stock will automatically convert into class b non-voting stock the taxes on excess_business_holdings do not apply with respect to holdings in a functionally ruling related business because a functionally_related_business is not considered a business_enterprise under sec_4943 of the code a functionally_related_business is a business or activity the conduct of which is substantially related to the exercise or performance by the private_foundation of its charitable educational or other tax exempt_purpose the activities must contribute directly and importantly to the accomplishment of one or more of your exempt purposes through your discretionary program of gifts and grants that support various programs including medical_research promotion of the performing arts hosting conferences on public policy and protection of endangered wild animal species and to focus into a developing a preeminent intellectual center to include conferences and the development of papers on significant ideas for solving problems of this century the facilities will be used primarily for these tax exempt charitable purposes plantation’s exempt_purpose is supporting various programs including medical_research promotion of the performing arts hosting conferences regarding public policy and through a subsidiary the protection of endangered wild animal species the plantation’s facilities are also used by charities that qualify under sec_501 of the code for free or substantially below cost additionally you have represented that any elements of plantation that are not in furtherance of exempt purposes within the meaning of sec_501 will be incidental in nature and amount therefore the corporation which holds the assets of the plantation is a functionally_related_business rulings your ownership of the companies after the recapitalization will be permitted holdings under sec_4943 of the code a the senior_stock class a voting_stock and class b non-voting stock of each of the companies to be received by you pursuant to the recapitalization will be treated as equivalent to the voting_stock of each of the companies surrendered by you so that you will be permitted to hold the stock received pursuant to the recapitalization until january pursuant to sec_4943 of the code b after the donations to the charities of class b non-voting stock and the share exchange you and disqualified persons will not own more than of the vote of the companies pursuant to sec_4943 of the code you may continue to hold indefinitely senior_stock of each of the companies representing not more than of the outstanding voting_stock of such companies pursuant to sec_4943 c there are no material restrictions placed on the junior stock that prevent the donee charities from freely and effectively using or disposing of the transferred interest pursuant to sec_53_4943-2 of the regulations d your ownership of voting_stock of each of the companies would not increase as a result of the companies’ repurchase of class a voting_stock pursuant to sec_4943 of the code this ruling is conditioned on the companies owning some but not all of the class a voting_stock after such repurchase e your ownership of voting_stock of each of the companies would not increase as a result of any acquisition of class a voting_stock by you or a disqualified_person pursuant to sec_4943 of the code since the class a voting_stock will automatically convert into class b non-voting stock your ownership of of the stock of corporation will not be considered excess_business_holdings under sec_4943 of the code because corporation is a functionally_related_business as defined in sec_4943 this ruling does not purport to rule on any other provisions of the code including the application of the unrelated_business_income_tax provisions 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 because it could help resolve 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 sincerely marvin r friedlander manager exempt_organizations eo technical enclosure notice


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc intl br1-plr-108548-00 date date number release date index number ty legend a date b country c year d date e date f date g dear this is in response to a letter dated date and supplemental information dated date submitted by a’s authorized representative requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of u s lawful permanent residence will not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born on date b in country c a came to the united_states in year d due to his employment on date e a acquired lawful permanent residence in the united_states plr-108548-00 a returned to country c to live on date f a relinquished his lawful permanent residence expatriated on date g retroactively effective as of date f on the date a submitted his ruling_request his net_worth exceeded the applicable_threshold set forth in sec_877 of the code sec_877 generally provides that a citizen who loses u s citizenship or a u s long- term resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed on u s source income as modified by sec_877 for such taxable_year unless such loss did not have for one if its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen or former long-term_resident whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen or former long-term_resident is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 an eligible former citizen will not be presumed to have a principal purpose of tax_avoidance if that former citizen submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling under sec_877 and notice_98_34 because a became at birth a citizen of country c and continues to be a citizen of country c in addition both of a’s parents were born in country c a submitted all the information required by notice_98_34 accordingly based on the facts submitted and representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 plr-108548-00 and therefore a will not be presumed to have expatriated with a principal purpose of tax_avoidance however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 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 in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to his loss of u s lawful permanent residence or for taxable periods after his loss of u s lawful permanent residence under sections of the code other than sec_877 sec_2107 and sec_2501 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 is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely w e williams senior technical reviewer branch associate chief_counsel international


t c memo united_states tax_court robert l rowden petitioner v commissioner of internal revenue respondent docket no filed date orin christopher meyers for petitioner g chad barton and garrett d gregory for respondent memorandum findings_of_fact and opinion marvel judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’ sec_2002 and federal income taxes and accuracy-related_penalties under section of dollar_figure and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and continued dollar_figure respectively after concession sec_2 the issues for decision are whether petitioner was in the trade_or_business of environmental consulting and aircraft maintenance during and environmental aviation during whether petitioner substantiated deductions claimed on schedules c profit or loss from business and whether petitioner is liable for the accuracy-related_penalties under sec_6662 findings_of_fact the parties have stipulated some of the facts which we incorporate in our findings by this reference petitioner resided in oklahoma when his petition was filed during and petitioner was employed full time as an environmental engineer by engineering and environment inc eei a government contractor he earned dollar_figure and dollar_figure respectively petitioner’s employment contract was renewable annually during petitioner also performed environmental continued procedure monetary amounts are rounded to the nearest dollar 2petitioner concedes that he is not entitled to deduct the dollar_figure depreciation expense for and unreimbursed employee_expenses of dollar_figure and dollar_figure before application of the percent floor of sec_67 for and respectively after the latter concession petitioner’s remaining miscellaneous_itemized_deductions do not exceed the 2-percent floor of sec_67 and therefore also are not at issue consulting services that were an outgrowth of services he had performed and been paid for before petitioner grew up in a family of pilots and enjoys working on and being around airplanes petitioner has been a licensed pilot for about years in the 1980s petitioner completed a year program at the spartan school of aeronautics in tulsa oklahoma after passing written and oral federal aviation administration faa tests petitioner obtained a mechanic’s certificate with airframe and powerplant ratings in after passing another faa test petitioner obtained an inspection authorization petitioner also attended specialized aviation- related seminars in date petitioner attended a seminar on aircraft rigging held by the cessna pilots association on date petitioner purchased a 50-percent interest in a cessna 182p aircraft cessna from denrow 3a certified mechanic may perform or supervise the maintenance preventive maintenance or alteration of an aircraft or a part thereof for which he is rated c f_r sec_65 a a certified mechanic with an airframe rating may also approve and return to service an airframe or related part or appliance after he has performed supervised or inspected its maintenance or alteration c f_r sec dollar_figure a certified mechanic with a powerplant rating has similar additional privileges with respect to a powerplant propeller or any related part see c f_r sec dollar_figure 4in general a holder of an inspection authorization may inspect and approve for return to service any aircraft or related part after a major repair or major alteration he may also perform certain other types of inspections see c f_r sec dollar_figure limited l c denrow for dollar_figure using loan proceeds denrow is owned by petitioner’s brother william j rowden mr rowden a commercial airline pilot and mr rowden’s wife denrow retained the other 50-percent interest in the cessna the cessna continued to be hangared at the prague oklahoma municipal airport although occasionally it was stored at the lawton oklahoma municipal airport where in petitioner rented hangar space under the purchase agreement petitioner was responsible for one-half of the maintenance repair storage and operation costs of the cessna when petitioner purchased his interest in the cessna it was not in airworthy condition because its engine required a major overhaul at some point during the years at issue petitioner sent the engine to an outside shop for an overhaul at a cost of approximately dollar_figure 5at the time of trial mr rowden held a mechanic’s certificate with airframe and powerplant ratings and an inspection authorization and he was a flight instructor for single-engine and multi-engine aircraft and instruments and a commercial glider pilot mr rowden bought undervalued airplanes used them for charter and instruction and then sold them denrow purchased the cessna 182p cessna in for dollar_figure during the years at issue petitioner was not a partner member or agent of denrow and he was not involved in making any of its business decisions 6airworthy means that the aircraft conforms to its type design and is in a condition for safe operation c f_r a overhaul is a type of aircraft maintenance c f_r defined under the word maintenance during the years at issue petitioner spent to hours weekly working on the cessna on airplanes owned by other people and on related matters neither mr rowden nor denrow paid petitioner for work he performed on the cessna during the years at issue the cessna was for sale petitioner followed market prices using various sources for aircraft valuation such as trade periodicals in the cessna was appraised at dollar_figure as of the date of trial mr rowden did not believe the cessna could be sold at a profit petitioner timely filed hi sec_2002 and form sec_1040 u s individual_income_tax_return and returns on the return he reported two businesses on two schedules c schedules c1 and c2 the schedule c1 described petitioner’s business as env environmental consulting and the schedule c2 described petitioner’s other business as aircraft maintenance petitioner reported one business on a schedule c attached to the return schedule c and described his business as environmental aviati on on his schedules c petitioner reported gross_income and expenses and net_profit_or_loss as shown in the following table schedule c schedule c1 schedule c2 schedule c gross_income -0- dollar_figure big_number expenses dollar_figure big_number big_number net_profit_or_loss dollar_figure big_number big_number the following table compares the adjusted_gross_income agi that petitioner would have reported if he had not engaged in his activities with the agi that he actually reported on hi sec_2002 and returns year agi without the activities dollar_figure big_number agi reported dollar_figure big_number in the notice_of_deficiency respondent disallowed all schedule c1 and schedule c deductions respondent also disallowed deductions for tools parts and training expenses totaling dollar_figure claimed on the schedule c2 respondent disallowed these schedule c deductions for the following reason your deductions have been adjusted to reflect the amount verified as paid_or_incurred for business purposes because respondent disallowed the deductions for business use of home of dollar_figure and dollar_figure claimed on the schedule c1 and schedule c respondent allowed additional home mortgage interest deductions of dollar_figure and dollar_figure for and respectively 7respondent contends that in the notice_of_deficiency he erroneously allowed the schedule c2 deductions totaling dollar_figure but he does not assert an increased deficiency for respondent made computational adjustments to self-employment_tax for and determined that petitioner was liable for accuracy- related penalties under sec_6662 of dollar_figure and dollar_figure for and respectively opinion the commissioner’s determinations are presumed correct and the taxpayer ordinarily bears the burden of proving that those determinations are erroneous rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any deduction claimed 503_us_79 petitioner does not contend that sec_7491 shifts the burden_of_proof to respondent and petitioner has not established that he satisfies the sec_7491 requirements respondent contends that petitioner may not deduct his schedule c expenses because none of the schedule c activities was a trade_or_business sec_162 allows a taxpayer to deduct 8in the notice_of_deficiency respondent disallowed the deductions as not verified as paid_or_incurred for business purposes at trial respondent argued that petitioner did not engage in the trade_or_business of environmental consulting and aircraft maintenance during and environmental aviation during petitioner does not contend that the argument represents a new issue on which respondent should have the burden_of_proof see rule a in addition petitioner listed the profit-motive issue with respect to the aviation-related activities in his trial memorandum as one for decision ordinary and necessary expenses of carrying on the taxpayer’s trade_or_business to be engaged in a trade_or_business with respect to which deductions are allowable under sec_162 the taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit 480_us_23 a sporadic activity or a hobby does not qualify id i the environmental consulting activity in petitioner testified that he engaged in the environmental consulting activity when available and that the aviation activity had become his priority during petitioner reported no gross_income from the activity and only performed followup services he attended two client meetings and conducted online research related to the activity petitioner did not introduce any evidence regarding how much time he spent on the activity we conclude petitioner failed to establish that in 9although respondent states in his reply brief that petitioner has conceded the issue of the environmental consulting activity because he failed to address it on brief petitioner in his opening brief continues to challenge the full amount of deficiency and identifies the schedule c1 amounts as still in dispute nevertheless we agree with respondent that petitioner does not address the environmental activity elsewhere in briefs and we note that petitioner also agrees with respondent’s proposed finding of fact that petitioner failed to introduce credible_evidence that he was in the environmental consulting business in we address the environmental consulting activity for the sake of completeness he engaged in the environmental consulting activity with the requisite continuity and regularity see id consequently we do not need to address whether petitioner engaged in the environmental consulting activity for profit and whether he substantiated deductions claimed on the schedule c1 ii aircraft maintenance activity in and environmental aviation activity in a in general sec_162 allows deductions for ordinary and necessary expenses of carrying on an activity which constitutes the taxpayer’s trade_or_business to be engaged in a trade_or_business under sec_162 the taxpayer’s primary purpose for engaging in the activity must be for income or profit commissioner v groetzinger supra pincite sec_212 allows deductions for expenses paid_or_incurred in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income the profit standards applicable to sec_212 are the same as those used in sec_162 see 72_tc_28 petitioner contends that respondent has conceded the profit- motive issue we disagree respondent has not conceded the issue respondent argued during trial and on brief that to establish that petitioner was engaged in a trade_or_business petitioner must prove he engaged in an activity with continuity and regularity and with the primary purpose of making a profit see commissioner v groetzinger supra pincite we begin our analysis of whether petitioner’s aircraft maintenance activity or environmental aviation activity was a trade_or_business by examining whether petitioner engaged in either activity with the requisite profit_motive sec_183 which restricts taxpayers from deducting losses from an activity that is not engaged in for profit is often applied to determine whether an alleged trade_or_business is conducted with the requisite profit_motive 949_f2d_345 10th cir affg tcmemo_1990_148 99_tc_132 affd sub nom 28_f3d_1024 10th cir sec_183 defines any activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 absent a stipulation to the contrary see sec_7482 this case is appealable to the court_of_appeals for the tenth circuit which has applied the dominant or primary objective standard to test whether an alleged business activity is conducted for profit hildebrand v commissioner f 3d pincite cannon v commissioner supra pincite oswandel v commissioner tcmemo_2007_183 under the standard applied by the court_of_appeals for the tenth circuit a taxpayer’s dominant or primary objective in conducting the activity must be to earn a profit whether an activity was engaged in for profit is a factual determination to be resolved on the basis of all the surrounding facts and circumstances hildebrand v commissioner f 3d pincite sec_1_183-2 income_tax regs provides a nonexclusive list of factors to be considered in determining whether a taxpayer has the requisite profit objective the factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and 10in both 28_f3d_1024 10th cir affg 99_tc_132 and 949_f2d_345 10th cir affg tcmemo_1990_148 the court_of_appeals for the tenth circuit applied the dominant or primary objective test at the partnership level in analyzing whether a partnership was engaged in an activity for profit under sec_183 elements of personal pleasure or recreation no single factor is determinative see id while the taxpayer’s expectation of profit need not be reasonable it must be in good_faith allen v commissioner supra pincite we give greater weight to the surrounding objective facts than to the taxpayer’s mere statement of intent cannon v commissioner supra pincite n 78_tc_642 affd without published opinion 702_f2d_1205 d c cir b nature of the environmental aviation activity in petitioner testified that the environmental aviation activity reported on the schedule c combined two activities environmental consulting and aircraft maintenance petitioner received his schedule c gross_income from two clients for performing annual inspections in the course of the aircraft maintenance activitydollar_figure the record establishes that most schedule c expenses such as interest on the aviation loan the cessna insurance and parts expenses were incurred for petitioner’s aircraft maintenance activity consequently for purposes of this opinion we treat the environmental aviation 11while petitioner’s testimony is not clear as to whether such annual inspections were performed in the course of environmental consulting services or aircraft maintenance services petitioner contends in his brief that his schedule c gross_income was derived from aircraft activities activity as a continuation of the aircraft maintenance activity c applying the factor sec_1 manner in which petitioner conducted the activity in deciding whether a taxpayer has conducted an activity in a businesslike manner we consider whether complete and accurate books_and_records were maintained whether the activity was conducted in a manner substantially_similar to those of other activities of the same nature that were profitable and whether changes in operating methods adoption of new techniques or abandonment of unprofitable methods were done in a manner consistent with an intent to improve profitability see 72_tc_659 sec_1 b income_tax regs petitioner’s recordkeeping was disorganized and unreliable for example although petitioner retained all receipts for his expenses petitioner’s files mistakenly contained receipts for unrelated years petitioner did not introduce any records pertaining to gross_income such as copies of customer work orders logbooks or customer invoices petitioner testified that approximately percent of the parts he purchased were used for airplanes other than the cessna and that he kept records for larger inventory_items however petitioner did not introduce any inventory records into evidence we are not convinced that petitioner’s recordkeeping represented anything other than an effort to substantiate expenses claimed on his return for a taxpayer’s books_and_records to indicate a profit_motive the taxpayer should use books_and_records for measuring profits cutting expenses and evaluating the overall performance of the operation 72_tc_411 affd without published opinion 647_f2d_170 9th cir petitioner’s records however consisted of a collection of receipts petitioner presented no evidence that he used them to evaluate the profitability of his operations petitioner testified that he had engaged in the aircraft maintenance activity since however he offered no evidence regarding the past performance of the activity and whether he considered changes in his operating methods we conclude that during the years at issue petitioner did not conduct his aircraft maintenance activity in a businesslike manner this factor favors respondent’s position expertise of petitioner or his advisers preparation for an activity by an extensive study of its accepted business economic and scientific practices or consultation with those who are experts therein may indicate a profit objective engdahl v commissioner supra pincite sec_1_183-2 income_tax regs efforts to gain experience and a willingness to follow expert advice may indicate a profit_motive engdahl v commissioner supra pincite petitioner established that he had acquired technical expertise by completing studies at the spartan school of aeronautics and by obtaining faa certifications however petitioner did not establish that he had had experience or had acquired expertise in running a profitable business this factor is neutral time and effort devoted to the activity the fact that a taxpayer devotes personal time and effort to carrying on an activity may indicate an intention to derive a profit particularly where there are no substantial personal or recreational elements associated with the activity sec_1 b income_tax regs petitioner testified that he spent between and hours weekly working on the cessna and his clients’ airplanesdollar_figure however the time petitioner spent working on the cessna is consistent with the use of the cessna for recreation see warden v commissioner tcmemo_1995_176 finding that the time the taxpayers spent on cleaning and maintaining their yacht was consistent with the use of the yacht for recreation affd without published opinion 111_f3d_139 9th cir petitioner did not introduce any evidence regarding what portion of hours per week he spent working 12petitioner also testified that he spent between and hours weekly on the aircraft maintenance activity on clients’ airplanes although petitioner testified that at the time of trial he spent less than hours annually flying predominantly using the cessna he did not introduce any evidence regarding how much of his use of the cessna after the repairs during the years at issue was for personal flying and how much was for income-producing activities given the lack of evidence regarding the appropriate allocation we conclude this factor is neutral expectation that assets used in the activity may appreciate the term profit encompasses appreciation of assets used in the activity sec_1_183-2 income_tax regs an activity may produce an overall economic profit even if there is no operational profit when appreciation of the assets of the activity is taken into account id petitioner claims that his business’s value increased because the cessna appreciated after the overhaul and because the cessna ownership provided his business additional client exposure the only evidence in the record that the cessna was an advertising tool is petitioner’s uncorroborated testimony which we are not required to accept see 87_tc_74 as to petitioner’s expectations regarding the appreciation of the cessna although both petitioner and his brother testified that the cessna had always been for sale and they had hoped to sell it at a profit petitioner did not offer into evidence any listing prices for the cessna or comparable aircraft or any other credible_evidence in support of his claim that he had a good-faith expectation of selling the cessna at a profit even if we were to conclude however that petitioner had a good-faith expectation of selling the overhauled cessna at a profit we must still examine whether petitioner had a good-faith expectation of realizing a profit on his entire operation 45_tc_261 affd 379_f2d_252 2d cir such an expectation should be based on analyzing estimated future earnings from the activity the likely appreciation of the cessna and whether the resulting amount would be sufficient to recoup losses from the activity because an airplane is generally a wasting asset we fail to see how petitioner could expect in good_faith to recoup his dollar_figure cost of a one-half interest in the cessna the capital expenditures_for the overhaul and repair of the cessna and his accumulated operating losses petitioner’s expectation of making a profit was not based on careful analysis and it is not supported by credible_evidence this factor favors respondent success in carrying on other similar or dissimilar activities the fact that a taxpayer has engaged in similar activities and converted them from unprofitable to profitable enterprises may indicate that the taxpayer is engaged in the present activity for a profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs although petitioner testified he engaged in the environmental consulting activity before the years in issue he offered no evidence regarding his success in the activity this factor is neutral petitioner’s history of income or loss from the activity a taxpayer’s history of income or loss with respect to any activity may indicate the presence or absence of a profit objective see golanty v commissioner t c pincite sec_1_183-2 income_tax regs however a series of startup losses or losses sustained because of unforeseen circumstances beyond the control of the taxpayer may not indicate a lack of profit_motive kahla v commissioner tcmemo_2000_127 citing engdahl v commissioner t c pincite and sec_1_183-2 income_tax regs affd without published opinion 273_f3d_1096 5th cir petitioner testified that he had been providing maintenance services such as aircraft maintenance rigging inspection sale and refurbishing since however petitioner introduced no credible_evidence regarding the financial performance of his aircraft maintenance activity before the years at issue the failure to introduce such evidence raises a presumption that the evidence would be unfavorable to petitioner see 6_tc_1158 affd 162_f2d_513 10th cir this factor favors respondent’s position amount of occasional profits the amount of profits earned in relation to the amount of losses_incurred the amount of the investment and the value of the assets in use may indicate a profit objective see sec_1_183-2 income_tax regs the opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced see id during and the aircraft maintenance activity generated net losses which significantly reduced petitioner’s agi petitioner offered no credible_evidence regarding what profits if any his aircraft maintenance activity generated between and failure of a party to introduce evidence within his possession which if true would be favorable to him gives rise to the presumption that such evidence is unfavorable wichita terminal elevator co v commissioner supra pincite this factor favors respondent’s position petitioner’s financial status the fact that a taxpayer does not have substantial income or capital from sources other than the activity in question may indicate that the activity is engaged in for profit see sec_1_183-2 income_tax regs substantial income from sources other than the activity especially if the losses from the activity generate substantial tax benefits may indicate a lack of profit_motive particularly where elements of personal pleasure or recreation are involved see id during and petitioner was employed as an environmental engineer earning dollar_figure and dollar_figure respectively petitioner is single and has no children although the income did not support a lavish lifestyle it provided petitioner with a comfortable living and allowed him to conduct the aircraft maintenance activity at a loss this factor favors respondent’s position elements of personal pleasure or recreation the presence of personal pleasure or recreation relating to the activity may indicate the absence of a profit objective see sec_1_183-2 income_tax regs an activity is not treated as an activity_not_engaged_in_for_profit merely because the taxpayer also has purposes or motivations other than to make a profit id petitioner grew up around airplanes and has been a licensed pilot for years he enjoys working on airplanes and takes pride in his workmanship and in his family’s aviation history we cannot overlook significant elements of recreation and pleasure that petitioner derived from working on airplanes this factor favors respondent’s position d petitioner’s argument petitioner relies on 65_f2d_191 d c cir revg 23_bta_744 to suggest that a profit_motive exists if a taxpayer enters into and carries on an activity with a good-faith intention to make a profit or with the belief that a trade_or_business can be profitable however in determining a taxpayer’s intent the court_of_appeals for the tenth circuit gives less weight to the taxpayer’s statement of intent than to objective factors cannon v commissioner f 2d pincite n moreover such reliance on objective factors is consistent with sec_1_183-2 income_tax regs providing the determination whether an activity is engaged in for profit is to be made by reference to objective standards taking into account all of the facts and circumstances of each case although a reasonable expectation of profit is not required the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the objective of making a profit emphasis added after a review of the objective factors discussed above we are not convinced that petitioner engaged in his aircraft maintenance activity with the objective of making a profit e conclusion after considering the factors listed in sec_1 b income_tax regs and the facts and circumstances of this case we conclude that petitioner has not established that he engaged in the aircraft maintenance activity with the primary or dominant objective of making a profit accordingly we hold that petitioner’s aircraft maintenance activity did not constitute a trade_or_business or profit- seeking activity in or f deductibility of the schedule c2 and schedule c expenses because we have sustained respondent’s determination that petitioner’s aircraft maintenance activity was not a trade_or_business under sec_162 we must decide what deductions if any he may claim under sec_183 sec_183 permits deductions which are otherwise allowable without regard to whether the activity is engaged in for profit such as state and local_taxes and casualty losses sec_183 allows deductions that would be allowable if the activity were engaged in for profit but only to the extent of gross_income received from the activity reduced by deductions under sec_183 with respect to the schedule c2 respondent allowed dollar_figure in deductions this amount exceeds petitioner’s dollar_figure gross_income from the activity consequently no additional deductions are allowed for for petitioner did not claim any deductions that are allowable under sec_183 in his brief respondent concedes that if the court finds that petitioner was in the trade_or_business of environmental aviation in petitioner has substantiated the following expenses to be ordinary and necessary business_expenses respondent lists the following expenses as substantiated expense insurance office expense rent of other business property supplies tools training certifications professional subscription total amount substantiated dollar_figure big_number big_number big_number big_number although we hold that in and petitioner’s aircraft maintenance activity did not constitute a trade_or_business under sec_162 or an activity for the production_of_income under sec_212 under sec_183 petitioner’s substantiated expenses from the activity are deductible for to the extent of dollar_figure the gross_income generated by the activity iii accuracy-related_penalty under sec_6662 respondent contends that petitioner is liable for the accuracy-related_penalty on the grounds of substantial_understatement_of_income_tax under sec_6662 and b for and or alternatively negligence or disregard of rules or regulations under subsection b dollar_figure 13respondent argues that petitioner has conceded the issue of penalties because petitioner does not address it in his brief we address the issue for the sake of completeness because continued sec_6662 and b authorizes the commissioner to impose a 20-percent penalty if there is a substantial_understatement_of_income_tax an understatement is substantial if the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 the commissioner bears the initial burden of production with respect to the taxpayer’s liability for the sec_6662 penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty see sec_7491 respondent established that for both years at issue the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure because respondent has met his burden of production petitioner must produce sufficient evidence to prove that respondent’s determination is incorrect see 116_tc_438 the accuracy-related_penalty is not imposed with respect to any portion of the underpayment if the taxpayer can establish that he acted with reasonable_cause and in good_faith sec_6664 the taxpayer bears the burden continued petitioner lists the issue as one for decision in his reply brief of producing evidence to demonstrate reasonable_cause under sec_6664 see higbee v commissioner supra pincite we determine reasonable_cause and good_faith on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs in his posttrial briefs petitioner did not address why the penalties should not be imposed petitioner did not contend that he was not negligent or that he had reasonable_cause or acted in good_faith therefore we sustain respondent’s determination to impose the sec_6662 and b accuracy-related_penalty for and we have considered all arguments raised by either party and to the extent not discussed we find them to be irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


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 ita b04 plr-133075-08 date date --------------------------------------------------------------------------------------------- ------- year year property b ------------------------------------------------------ dollar_figurec dollar_figured dollar_figuree f ------------- ------------- ----------- ---- dear ----------------------- this letter refers to your request for a private_letter_ruling requesting to revoke an election out of the installment_method for the sale of property b under sec_453 of the internal_revenue_code and sec_15a_453-1 of the temporary regulations under the installment_sales_revision_act_of_1980 in year you sold property b to an unrelated_person for dollar_figurec receiving cash of dollar_figured and a promissory note for dollar_figuree payable in f years you wished to report the sale on the installment_method inadvertently your return preparer did not report the gain from the sale on the installment_method but instead reported all of the gain on your year federal_income_tax return you first became aware of the error after you engaged an accounting firm to prepare your year federal_income_tax return you subsequently requested this ruling sec_453 provides that income from an installment_sale shall be taken into account under the installment_method sec_453 provides that sec_453 shall not apply to any sale if the taxpayer elects not to have sec_453 apply to the sale sec_453 provides that except as otherwise provided by regulations an election under sec_453 with respect to a sale may be made only on or before the due_date prescribed by law including extensions for filing the taxpayer's return for the plr-133075-08 taxable_year in which the sale occurs such an election shall be made in the manner prescribed by regulations sec_453 provides that an election under sec_453 with respect to any sale may be revoked only with consent of the secretary sec_15a_453-1 states that an election out of the installment_method may be revoked only with consent of the internal_revenue_service a revocation will not be permitted when one of its purposes is the avoidance of federal taxes or when the taxable_year in which any payment was received is closed you have represented that your return preparer did not prepare your year federal_income_tax return in accordance with your intent to report the sale of property b on the installment_method your return preparer represents that she should have reported the sale of property b on the installment_method soon after you discovered the mistake you requested this ruling seeking the service’s consent to revoke your election out of the installment_method the information submitted indicates that your request to revoke your election out of the installment_method is due to inadvertence rather than hindsight or a purpose of avoiding federal taxes accordingly based on the information submitted you may revoke your election out of the installment_method for reporting the sale of property b but only if you revoke the election during the period ending days after the date of this letter except as expressly provided in the preceding paragraph no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including the amount of gain on the sale of property b that is eligible to be reported on the installment_method the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination you must attach a copy of this letter to any income_tax return to which it is relevant if you file your returns electronically you may satisfy this requirement by attaching a statement to the returns that provide the date and the control number of this letter_ruling this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent attached is a copy of the letter showing the deletions proposed to be made when it is released under sec_6110 plr-133075-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely michael j montemurro branch chief office_of_chief_counsel income_tax and accounting cc