internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-100630-01 date date legend x a d1 d2 year dear this letter responds to your representative’s letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the represented facts are as follows x was incorporated on d1 a the sole shareholder of x intended x to be an s_corporation effective for the year taxable_year but form_2553 election by a small_business_corporation was not filed timely this intent is evidenced by a letter from the internal_revenue_service to x dated d2 of year that x’s subchapter_s_election filed pursuant to revproc_97_40 requires additional information accordingly x requests a ruling that it will be treated as an s_corporation effective d1 sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 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 plr-100630-01 corporation for x’s year taxable_year accordingly provided that x makes an election 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 set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours jeanne m sullivan assistant to the chief branch office of the associate chief_counsel passthroughs and 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 ------------------------- id no ------------- telephone number --------------------- refer reply to cc corp b1 plr-128614-05 date february -------------------------- ------------------------------------- ---------------------------------------- ------------------------------------------- legend taxpayer --------------------------------------------------------------------------------------------- x --------------------------------------------------------------------------------- ------------------ y --------------------------------------------------------------------------------------- z ------------------------------------------------------------------------------ date date - date date - a - dollar_figureb - c d --------------------------- -------------------------- ----------------- ----------------- --------------- ----------- ----------- ----------- -------- -------- ----------- ----------- ------------ -------------- --------------- --------------- plr-128614-05 e - f - g h i j dollar_figurek dollar_figurel dollar_figurem - n o dollar_figurep dear ------------- which requests a ruling on the application of sec_382 to taxpayer’s transactions the material information submitted for consideration is summarized below summary of facts taxpayer is the parent of an affiliated_group that files a consolidated_return for federal_income_tax purposes as of date taxpayer’s group was a loss group within the meaning of sec_1_1502-91 taxpayer currently has voting common_stock and non-voting common_stock collectively the common_stock series 1-a warrants and series 2-a warrants and one class of preferred_stock the series a preferred_stock outstanding during the time that these instruments or their predecessors have been outstanding taxpayer's common_stock and series 1-a warrants have declined in value relative to the value of the series a preferred_stock this letter responds to your authorized representative’s letter dated may --------------------- -------------- --------- ---- as of date taxpayer had a shares of common_stock issued and outstanding plr-128614-05 as a result the series a preferred_stock shareholders' percentage of the outstanding equity value has increased without regard to any actual owner shifts involving taxpayer’s stock the common_stock per share market price at the close of the day was dollar_figureb on date the day after date taxpayer issued and sold in the aggregate c shares of series a preferred_stock d series 1-a warrants e series 2-a warrants f shares of series b preferred_stock g series 1-b warrants and h series 2-b warrants to entities x y and z the series 1-a warrants and the series 1-b warrants were exercisable at any time for i shares of voting common_stock and j shares of non-voting common_stock respectively at an exercise price of dollar_figurek if the trading price of the common_stock was equal to or greater than dollar_figurel the common_stock per share market price at the close of the day was dollar_figurem because the series 1-a warrants and series 1-b warrants issued on that date were deep-in-the-money when issued taxpayer has treated them as stock for purposes of the sec_382 owner shift analysis on date as a result of the issuances that occurred on date and other equity changes during the testing_period as defined in sec_382 and sec_1_382-2t taxpayer had an ownership_change within the meaning of sec_382 following date testing dates as defined in sec_1_382-2 arose as a result of the following types of transactions the acquisition of various company assets and or stock through the issuance of common_stock the issuance of common_stock through the exercise of options the issuance of series a preferred_stock in lieu of cash dividends the exercise of series 1-a warrants the additional issuance of series 1-a warrants the issuance of non-voting common_stock acquisitions of common_stock by a five-percent shareholder sales of common_stock by a five-percent shareholder offerings of common_stock redemptions of common_stock and the issuance of common_stock in settlement of a lawsuit also following date taxpayer underwent two recapitalizations in the first recapitalization taxpayer converted all of its series b preferred_stock series 1-b warrants and series 2-b warrants into an equal number of series a preferred_stock series 1-a warrants and series 2-a warrants the first recapitalization in the second recapitalization taxpayer converted every n shares of its common_stock into one share of common_stock the second recapitalization dollar_figurep in a private_placement to a group of institutional investors the completed issuance the completed issuance was intended to raise additional equity financing the time period beginning after date and continuing through date is referred to as the analysis period representations on date taxpayer completed an issuance of o shares of common_stock for the following representations have been made in connection with the rulings plr-128614-05 requested a on date taxpayer experienced an ownership_change within the b c d e f g meaning of sec_382 no share of non-voting common_stock the series 1-a warrants or series a preferred_stock has been redeemed during the analysis period neither the common_stock nor the series a preferred_stock meet the description of stock described in sec_1504 accordingly the common_stock and the series a preferred_stock constitute stock for sec_382 purposes the fair_market_value of the instruments exchanged in the first recapitalization and the second recapitalization were in each instance equal to the fair_market_value of the stock received in exchange therefor to the best of the knowledge of taxpayer there have been no material changes in the ultimate beneficial_ownership of entities x y and z since date and no such changes are anticipated to the best of the knowledge of the taxpayer taxpayer has not made any distributions to its shareholders or security holders of the stock and or securities of any subsidiary_corporation to the best of the knowledge of the taxpayer there have been no distributions to the shareholders or security holders other than in the normal course of business based solely on the information submitted and the representations as set forth rulings above we hold that the taxpayer may apply the following principles during the analysis period and on future testing dates in which the testing_period includes any portion of the analysis period on any testing_date in determining the ownership percentage of any five_percent_shareholder the value of such shareholder’s stock relative to the value of all other stock of the corporation shall be considered to remain constant since the date that shareholder acquired the stock and the value of such shareholder’s stock relative to the value of all other stock of the corporation issued subsequent to such acquisition_date shall also be considered to remain constant since that subsequent date plr-128614-05 in applying the methodology described above a value-for-value recapitalization of stock of the corporation for other stock of the corporation including the first recapitalization and the second recapitalization shall be disregarded and the exchanging shareholder shall be considered to have acquired such newly issued stock as of the date it acquired the stock exchanged therefor the rulings contained in this letter are based upon information and 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 further in the event that any shareholder acquired stock prior to the beginning of the testing_period no opinion is expressed regarding whether the principle described above should apply to factor out the effect of fluctuations in value of such stock relative to the value of other stock that occur prior to the testing_period representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party although this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination provides that it may not be used or cited as precedent relevant letter is being sent to your authorized representative this ruling is directed only to the taxpayer s requesting it sec_6110 in accordance with the power_of_attorney on file with this office a copy of this a copy of this letter must be attached to any income_tax return to which it is sincerely ________________________________ mark s jennings branch chief branch corporate


id office uilc cca_2010012010271459 ------------ number release date from ------------------ sent wednesday date am to ------------------ cc --------------------------------------------- subject fw cdp questions for ------------- hi ----------- this is a follow up to the two questions you sent to ------------------ on january there are currently no formal procedures for the rescission of a notice_of_determination in regards to the particular case that your question stems from why was the information submitted after the notice_of_determination had been issued in light of the new information how does appeals expect the case to be resolved no the letter 1058-d should still be sent to the taxpayer regardless of the fact that the levy has been released under sec_6330 the service has to provide the tp of a disqualified employment_tax levy with a reasonable period of time after the levy instead of before the issuance of the levy when the ro issued the levy he was unaware of appeals’ efforts with tp to establish an installment_agreement ia that would include the tax period that the levy covered made while an ia offer is pending with the service under sec_6331 a levy may not be although appeals is now considering the applicable tax period in the ia offer the ro’s issuance of the levy established the tp’s right to be notified of his cdp hearing rights for the applicable tax period the act of releasing the levy does not terminate the tp’s statutory right to notice and hearing under sec_6330 the letter 1058-d should be sent to the tp if the ia is rejected the tp has to have been afforded his cdp rights for the tax period at issue in the now released levy


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date contact person identification_number contact number employer_identification_number form required to be filed tax years uil dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter ge ws b o x se tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c date date contact person identification_number contact number fax number employer_identification_number uil sec_501 legend d f l p r s t dear date name name name name name name we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below issues do you qualify for exemption under sec_501 of the code no for the reasons described below do you meet the organizational_test under sec_501 of the code no for the reasons described below do you meet the operational_test under sec_501 of the code no for the reasons described below do you substantiate that you are operating exclusively for exempt purposes within the meaning of sec_501 no for the reasons stated below alternate issue do you meet the provisions described in q no for the reasons described below facts r is the owner of your founder f a for profit business of providing services to the mortgage industry including title searches mortgage recordings and loan closings r also had a loan modification department that provided loan mitigation counseling services for about dollar_figure which was managed by p a bankruptcy attorney t who is f’s son is also a bankruptcy attorney has his own law firm l and also works for r part time there was a law change in your state providing only non-profits or attorneys could provide loan mitigation counseling services therefore f incorporated you as a non-profit corporation under the state law of s on date d to conduct the same loan mitigation services as provided by r’s mortgage mitigation department your articles of incorporation state e e e loan modifications home retention your specific purpose is providing consolidation short_sale and relocation guidance your public objective is to offer solutions to homeowners and tenants in fear of losing their homes due to financial hardship you are organized exclusively for charitable and educational_purposes under sec_501 of the internal_revenue_code or the corresponding section of any future federal tax code debt in addition there are no dissolution provisions in your filed articles which dedicate your net assets to c purposes your provide the following services for clients facing foreclosure e the development of a spending plan a detailed analysis of the mortgage default including the amount of and causes of the default a detailed presentation of reasonable options available to the homeowner assistance in communicating with creditors timely completion of promised actions anexplanation of the collection and foreclosure process referrals to needed resources the mortgage servicer other and e e e e e you will have a paid staff including f as your executive director and p the former head of r's mortgage mitigation department as the supervising attorney the staff positions include one supervising attorney who will oversee all non litigation foreclosure prevention services counsel homeowners conduct follow up calls engage in negotiations with lenders when work outs are imminent and trouble shoot problems that arise with the lenders three homeowner advocate mitigation applications lma they will collect and submit the necessary documents to the lenders conduct follow up phone calls provide status reports to your clients collect and provide other documents requested by the lenders and act as liaison for the homeowner with their lenders paralegals prepare loan who will one full and one part time litigation attorney who will attend mandatory settlement conferences for homeowners provide bankruptcy services short_sales and deed in lieu assistance one part time accounting person who will be responsible for all requirements of the non-profit operation moreover employees of r will be given the opportunity to quit their positions at r and work for you exclusively you will conduct an initial assessment to determine which of your loan mitigation services are appropriate for clients during this initial session you require potential clients to complete numerous documents including your mortgage data sheet the borrower's authorization form your acknowledgement of services form your patriot act compliance sheet borrower credit authorization form client counselor agreement and release of information authorization form your client counselor agreement specifically states you will provide confidentiality respect and honesty professionalism in all services you provide in addition you require clients to give you pay stubs tax returns bank statements current mortgage statements and personal financial statements so you can analyze the client's financial situation with him her after the financial assessment you discuss their options and recommend appropriate courses of action for example for those currently employed and facing foreclosure you will recommend and prepare an lma to submit to the client’s lender which involves the following e completing all the necessary paperwork and then negotiating a new mortgage term with the lender e placing biweekly telephone calls to the everything modification they need to make their decision lender to assure that they have loan possible best the for for those clients whose foreclosure proceedings have begun one of your attorneys will represent the homeowner during the settlement conference and submit an lma for those who are not eligible for a loan modification because of their finances you may recommend bankruptcy a short_sale or a deed in lieu you generally will not provide these services and will give these individuals referrals to others who do you do not plan to provide any workshops classes and seminars in addition you advertise your services by using a non-paid referral system from local bankruptcy lawyers firms including l moreover you plan to be a hud defined local counseling agency and will apply for state and federal grants to fund your services you may charge a sliding fee up to dollar_figure if you are unable to get grants your primary expense is salaries finally you made the following changes during the application process you changed your board three times e e e your initial application indicated only f and a paralegal from r as board members the second change indicated f and three employees from r as your board the third change indicated f and two others from the community unrelated to r and f no information was submitted to show when or how they were appointed or who appointed them you changed your lease agreement terms three times as described below e e e inthe initial submission you included a lease with r for about dollar_figure a month inthe second submission you modified the lease paying r about dollar_figure per month inthe last submission you decided not to pay r anything and will look for another facility you also changed your source of revenue from fees to grants furthermore you initially said that you will share employees with r but these employees will now have the choice to work exclusively either for you or r because of previous errors finally f stated these changes were made law sec_501 of the code provides that corporations may be exempt from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_501 of the code provides that organizations which provide credit_counseling_services as a substantial purpose shall not be exempt from taxation under sec_501 unless they are described in sec_501 or sec_501 and they are organized and operated in accordance with the following requirements d at all times the organization has a board_of directors or other governing body-- _ i which is controlled by persons who represent the broad interests of the public such as public officials acting in their capacities as such persons having special knowledge or expertise in credit or financial education and community leaders ii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees or the repayment of consumer debt to creditors other than the credit_counseling_organization or its affiliates and or who will organization the iii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees or who will organization the sec_501 defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or a combination of the activities described above iii sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified the organizational_test or the operational_test it is not exempt_organization fails to meet either section such an in if sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an in in themselves are activities that not of insubstantial part furtherance of one or more exempt purposes activities its in c -1 b of not section organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose either by an express provision in its governing instrument or by operation of law regulations provides that an organization the i sec_1_501_c_3_-1 of be section regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the regulations provides that an organization will sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 of the regulations defines the words private_shareholder_or_individual in sec_501 of the code to refer to persons having a personal and private interest in the activities of the organization reg c -1 d states in part that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes the relief of the poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit with films speakers and publications it aided low- income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization holding the funds in a_trust account and disbursing the funds on a partial payment basis to the creditors the organization neither charged fees for counseling services nor prorated their services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon contributions primarily from the creditors participating in the organization's budget plans for its support creditors were not required though to make such contributions as a condition of participation the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling as a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code revproc_2011_9 sec_4 provides that the internal_revenue_service will recognize the tax-exempt status of an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed section dollar_figure provides that exempt status may be recognized in advance of the organization’s operations if its proposed operations are described in sufficient detail to permit a conclusion that it will clearly meet the particular requirements for exemption pursuant to the section of the code under which exemption is claimed sec_4 states that the organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single non- exempt_purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the applicant for tax-exempt status under sec_501 has the burden of showing it comes squarely within the terms of the law conferring the benefit sought 30_tc_1151 in 505_f2d_1068 the court held that an organization seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies the requirements of the particular exemption statute in 70_tc_352 the tax_court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was fees from services and those fees were set profit moreover it did not appear that the corporation ever planned to charge a fee less than cost finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations high enough to recoup all projected costs and to produce a in consumer credit counseling service of alabama inc v united_states u s t c d d c the court held that an organization that provided free information on budgeting for exemption from income_tax because its activities were charitable and educational of consumer credit the sound practices qualified buying and use the consumer credit counseling service of alabama_was an umbrella organization made up of numerous credit counseling service agencies these agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit they also provided counseling on budgeting and the appropriate use of consumer credit to debt-distressed individuals and families they did not limit these services to low-income individuals and families but they did provide such services free of charge as an adjunct to the counseling function they offered a debt management plan approximately percent of a professional counselor's time was applied to the debt management plan as opposed to education the agencies charged a nominal fee of up to dollar_figure per month for the debt management plan this fee was waived in instances when payment of the fee would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs as such the community and education counseling assistance programs were the agency's primary activities the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way thus the court concluded that each of the plaintiff consumer credit counseling agencies was an organization described in sec_501 as a charitable and educational_organization see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts were virtually identical and the law was identical to those in consumer credit counseling service of alabama inc states discussed immediately above an incidental amount of their revenue was from service fees united v the rejected organization's in easter house v u s cl_ct aff'd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the claims_court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a non-exempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court merely complemented the health related_services to unwed mothers and their children rather the court found that the health-related services were merely incident to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities’ purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite argument adoption services that the in 950_f2d_365 the court_of_appeals upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church did not qualify for exemption under sec_501 of the code because the organization was operated for a substantial non-exempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses in 283_fsupp2d_58 d d c the district_court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include among other things whether the organization uses commercial promotional methods eg the organization receives charitable donations advertising to which extent and the and operated exclusively in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not described in sec_501 because it was not organized and impermissibly served private interests the organization was formed by an individual with experience selling debt management plans dmps’ the founder and his spouse were the only members of the organization’s board_of directors the organization did not have any meaningful educational program or materials to provide to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization’s overall activities educational charitable purposes for or the court held that the organization's purposes were not educational because its activities are primarily structured to market determine eligibility for and enroll individuals in dmfs its purposes were not to inform consumers about understanding the cause of and devising personal solutions to consumers' financial problems or to consider the particular knowledge of individual callers about managing their personal finances the tax_court also held that the organization's purposes were not charitable because its potential customers are not members of a charitable_class that are benefited in a 'non- select manner’ because they will be turned away unless they meet the criteria of the participating creditors the tax_court further held the organization would operate for the private interests of its founder because the founder and his spouse were the only directors the founder was the only officer and employee and his compensation was based in part on the organization’s dmp sales activity levels the organization was a family-controlled business that he personally would run for financial gain using his past professional experience marketing dmps and managing a dmp call center the court further held that the organization's principat activity of providing dmp services which were only provided if approved by a caller’s creditors furthered the benefit of the private interests of creditors as well finally the tax_court held that the facts in credit_counseling_services of alabama _v united_states u s t c d d c stand in stark contrast because the sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal application of law sec_501 of the code sets forth two main tests for an organization to be recognized as exempt an organization must be both organized and operated exclusively for purposes described in sec_501 of the code and sec_1_501_c_3_-1 of the regulations you fail both tests organizational_test you do not meet the requirements in sec_1_501_c_3_-1 of the income_tax regulations your articles of incorporation state you are organized to e e provide loan modifications home retention debt consolidation short_sale and relocation guidance offer solutions to homeowners and tenants in fear of losing their homes due to financial hardship because your purpose clause is too broad you are not organized exclusively for purposes described in the regulations moreover your articles of incorporation do not have a dissolution provision as required by sec_1_501_c_3_-1 which also causes you to fail the organizational_test operational_test to satisfy the c operational tests is operated exclusively for one or more exempt purposes see sec_1_501_c_3_-1 of the regulations you failed to establish you are operated exclusively for one or more exempt purposes an organization must establish that it your activities are not educational of providing mortgage mitigation counseling services to homeowners your activitie sec_1_501_c_3_-1 of the facing possible foreclosure are regulations you generally only conduct one counseling session the focus of the session is to gather financial information and financial documents in order to analyze and assess your client’s financial situation and discuss the options available to him her furtheririore you do not not described in section e operate a substantive on-going educational program for clients e allocate any revenue to activities involving educational programs your counseling sessions are not designed to provide instruction or training useful to the individual and beneficial to the community within the meaning of sec_1 c - d i of the regulations thus you are not operated exclusively for educational_purposes within the meaning of sec_501 of the code you are not like the organizations in consumer credit counseling service of alabama supra and revrul_69_441 because you do not provide any information to the general in addition public on such subjects as budgeting and the sound use of consumer credit the methods used in your counseling sessions are not structured to improve your clients’ understanding of their financial problems or their skills finally the purpose of your counseling sessions is to determine if they are eligible for an lma those who are not good candidates for an lma are generally referred to other organizations in solving them you did not provide evidence that you are similar to the organization in solution plus you help clients develop an understanding of the cause of their financial problems or a you provided no evidence that you intend to plan to address their financial problems establish long-term counseling relationships with your clients in fact you generally only have one session to determine if they are a good candidate for an lma so you can sign an agreement with them rather than conduct any meaningful educational programs you have a substantial nonexempt commercial purpose you are not as described in sec_1_501_c_3_-1 of the regulations because you are primarily providing mortgage mitigation services in a commercial manner in fact you took over the operation of r’s mortgage mitigation department after there was a state law change in addition your staff consists of the same individuals doing the same jobs with a similar salary as they did for r finally you even stated the only difference between you and r’s mortgage mitigation department is the income source however you intend to charge fees if you do not get government grants you are similar to the organizations in easter house supra airlie supra and living faith supra because you are operating like a for profit business this is indicated by the fact that you will provide referrals to those who are not eligible for an lma in fact you have failed to show you are indistinguishable from r since you are a continuation of r's business operation and use the same operational methods the same office and the same personnel inurement private benefits you are not described in sec_1_501_c_3_-1 of the regulations because you are not operated exclusively for exempt purposes your net_earnings inure to the benefit of f and her son this is indicated by the following e you took over the mortgage mitigation department of f’s private business r because of a law change e the fact that f was your incorporator has been on each board modification is your executive director and still owns r e you currently share space with r f’s for profit business which provides mortgage related_services and is in a favorable position to receive any referrals from your operations e the current make up of your board because you did not present any evidence the new board members have been actively involved in your operations and or have participated in any major decisions you are similar to the organizations in nelson v commissioner and christian echoes national ministry inc v united_states because you have failed to show that you are operating exclusively for exempt purposes and not for the private interests of r t and l moreover l the law firm of t that specializes in bankruptcy is in a favorable position to benefit from your activities moreover even though you are not currently paying rent to r the fact that your founder f owns r and r provides mortgage related_services puts r in an advantageous position to benefit from your activities revproc_2011_9 you have not met the requirements of revproc_2011_9 sec_4 which provides that an organization seeking exemption must fully describe all activities including standards criteria and procedures you have submitted numerous changes for example you changed your board from having two compensated board members f and p to having all board members who were employees of r to having two unrelated board members and r you at first were renting and sharing equipment with r for about dollar_figure per month you then modified this arrangement twice and now you are not paying r anything and are looking for a separate venue you initially were going to share employees with r but then decided that they have the option to quit and work for you you may have a sliding scale fee but could not provide specifics except this will be in place if you do not receive grants as described in sec_1_501_c_3_-1 of the regulations and nelson v commissioner supra the burden is on the applicant organization to demonstrate that it has met the operational_test as specified under sec_501 of the code you have not met this burden similar to the organization in harding hospital inc v united_states you have the burden of proving that you satisfy the requirements for tax exemption you have failed to prove that you are not operating for the benefit of r and your founder f you are similar to easter house v united_states cl_ct where the court asserts that it is the responsibility of an organization to establish that it serves public rather than private interests you have failed to prove to us that you are not operating for the benefit of r and f and not in a commercial manner sec_501 of the code you do not meet the requirements of sec_501 and sec_501 because f is compensated and is one of three board members this does not comply with the requirements that at all times the organization must have a board_of directors or other governing body of which not more than percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities because one out of three board members directly benefits from your activities had you established that your mortgage lending business satisfies the therefore requirements of sec_501 and that you otherwise met the requirements of sec_501 your failure to satisfy the requirements of sec_501 would prevent you from being exempt from taxation under sec_501 not properly dedicated to c purposes conclusion in summary you are not organized exclusively for exempt purposes because your articles do not limit your purposes to one or more exempt purposes and upon dissolution your assets are the operational_test because you are not operated exclusively for educational or charitable purposes specifically you fail the operational_test for exemption under sec_501 of the code because your mortgage mitigation counseling services are commercial in nature and you have the substantial private purpose of benefiting f and r in addition you fail to qualify under sec_501 of the code because you compensate one out of three of your governing members and your mortgage mitigation counseling is not tailored to the individual client accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 you also fail file letter a protest if you believe this determination is incorrect you have the right to to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of we will consider your statement and decide if the information affects our this to determination our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues your statement does reconsider provide basis not if a types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal these items include n n n o r a o the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury may be done by adding to the appeal the following signed declaration this under penalties of perjury have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete declare that your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct representative prepared appeal stating that the the an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all it within the irs that a declaratory_judgment or decree shall of the administrative remedies available to part if you do not intend to protest this determination you do not need to take any further action final adverse determination_letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely holly o paz director exempt_organizations rulings and agreements enclosure publication


cc ita postu-150848-02 office_of_chief_counsel internal_revenue_service memorandum number release date uil date date to laurence ziegler area_counsel northeast midatlantic area from james l atkinson associate chief_counsel income_tax accounting subject volunteer property_tax reduction under connecticut law you have asked us to determine whether partial property_tax abatements and exemptions offered to volunteer emergency responders volunteers by municipalities in the state of connecticut constitute taxable_income to the recipients senator christopher dodd and congressman john larson have introduced legislation in the senate1 and the house2 respectively that would specifically exclude partial property_tax exemptions and abatements from income we have examined the underlying statute and a similar statute allowing property_tax abatements for massachusetts senior citizens in exchange for services we conclude that the partial abatements and exemptions of property taxes under this program are includible in the gross_income of the recipients overview of the connecticut program under connecticut law municipalities may create a program the program to provide property_tax relief to persons who volunteer their services as emergency responders such as firefighters emts paramedics ambulance drivers etc the program can provide the tax relief as either an abatement of the property_tax liability of up to dollar_figure or as an exemption of up to dollar_figure divided by the mill rate in the assessed value of the property s 107th cong h_r 107th cong conn gen stat 12-81w postu-150848-02 each municipality establishes the program requirements that the volunteers must meet in order to qualify for the abatements and exemptions the requirements of the programs vary but generally include requirements of service measured either in number of calls or hours_of_service performed some also include meetings attended certifications held or years_of_service as a volunteer as additional methods of earning service credits in order to qualify for the partial abatements or exemptions prior chief_counsel_advice cca cc tege issued two ccas on the massachusetts senior citizens program that concluded that the tax abatements earned must be included in income and wages for federal_insurance_contribution_act fica purposes cc ita issued a cca that concluded that the tax abatements and the municipality’s payment of the seniors’ fica_taxes constitute federal taxable_income regardless of whether the abatements are state taxable_income the previous ccas concluded that the abatement constitutes taxable_income because it qualifies as compensation_for services the cca issued by cc ita addressed the possibility that the abatement constituted a gift under sec_102 cancellation of debt under sec_108 or met the requirements for the general welfare exception ultimately the cca concluded that the property_tax abatement program did not meet these or any other exclusion from income discussion inclusion in gross_income gross_income includes all income from whatever source derived except as otherwise provided by law the provision is broad enough to include in taxable_income any economic or financial benefit conferred on the employee as compensation whatever the form or mode by which it is effected unless an exclusion applies gross_income includes income realized in any form whether in money property or services currently there is no applicable_exclusion under which the property_tax abatement or exemption could be excluded from the volunteers’ incomes cca publicly released on date cca publicly released on date cca publicly released on date sec_61 324_us_177 sec_1_61-1 postu-150848-02 the conclusions reached in the foregoing ccas finding that the massachusetts senior citizen property_tax abatement program constitutes income apply to the programs for volunteers established in accordance with the connecticut statute the statute specifically states that the program is to be offered to the emergency responders who volunteer their services in return for their services the volunteers receive compensation in the form of a reduction of their property taxes the reduction results from an in-kind payment for the volunteer’s services as such the property_tax abatements and exemptions constitute compensation_for services performed by the volunteers the services requirement makes the general welfare exception inapplicable to the property_tax reductionsdollar_figure similarly the requirement of services can change all or a portion of a scholarship that is otherwise excludable from income under sec_117 into taxable_income to the scholarship recipient this same analysis can be applied to the evaluation of whether the property_tax abatements or exemptions meet the requirements for exclusion from income for rebates a rebate or discount is generally construed as a reduction in the cost of an item or the reduction of a liability that is not an accession to wealth or taxable incomedollar_figure the connecticut statute allows for the programs to reduce the property taxes through either an abatement or an exemption to the assessed value of the property because the volunteers provide services to the municipalities and the municipalities benefit from the services the abatements and exemptions cannot be treated as a rebate worker status the status of the volunteer firefighters will determine whether a municipality is required to withhold federal_insurance_contributions_act fica_taxes and federal income taxes in determining a worker’s status the primary inquiry is whether the worker is an independent_contractor or an employee under the common_law standard under the common_law the treatment of a worker as an independent_contractor or an employee originates from the legal definitions developed in the law of agency - whether one party the principal is legally responsible for the acts or omissions of another party the agent - and depends on the principal’s right to direct and control the agentdollar_figure guides for determining a worker's status are found in sec_31_3121_d_-1 and conn gen stat 12-81w cca revrul_91_36 1991_2_cb_17 revrul_76_96 1976_1_cb_23 revrul_84_41 1984_1_cb_130 sec_3121 503_us_318 postu-150848-02 c -1 of the employment_tax regulations relating to fica and federal_income_tax withholding respectively for an in-depth discussion see the training materials titled independent_contractor or employee dollar_figure the training materials explain the kinds of facts to be considered including those evidencing behavioral control those evidencing financial control and those evidencing the relationship of the parties the training materials are a guide and are not legally binding if a municipality would like the service to make the determination of whether a worker or class of workers is an employee the municipality should file form ss-8 determination of worker status for purposes of federal employment_taxes and income_tax_withholding conclusion the performance of services in return for a benefit whether it is in the form of money property fringe benefit etc has long been a taxable_event under sec_61 as compensation_for services the volunteers as a result of the program will have a lower property_tax liability regardless if it is established as an abatement or an exemption this reduction in the volunteers’ property taxes is an in-kind payment in recognition of the services performed by the volunteers and as such results in taxable_income to the volunteers training rev tpds84238i http www irs gov pub irs- utl emporind pdf


t c summary opinion united_states tax_court patricia conway petitioner v commissioner of internal revenue respondent docket no 20085-08s filed date patricia conway pro_se angela b friedman for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless 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 for respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax and an accuracy-related_penalty of dollar_figure the issues for decision are whether petitioner is required to report dollar_figure of rental income is entitled to charitable_contribution deductions in excess of those respondent allowed is entitled to deduct unreimbursed employee_expenses of dollar_figure and is liable for the accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference at the time petitioner filed her petition she resided in illinois for petitioner reported dollar_figure of income on her federal_income_tax return on schedule a itemized_deductions petitioner claimed job expenses and certain miscellaneous deductions of dollar_figure and charitable_contribution deductions of dollar_figure on date respondent issued to petitioner a notice_of_deficiency disallowing petitioner’s claimed job expenses and certain miscellaneous deductions of dollar_figure for lack of substantiation and dollar_figure of petitioner’s claimed dollar_figure charitable_contribution deductions respondent further determined that petitioner failed to report dollar_figure of rental income during petitioner worked as a nurse for the veterans affairs medical center va hospital she also taught as a licensed practical nurse lpn instructor affiliated with the va hospital on a part-time basis as part of her employment contract as an instructor she was not entitled to receive benefits normally given to regularly paid employees such as leave or retirement in addition to her position at the va hospital petitioner and her son coowned rental property in the jointly owned rental property generated rental income and the chicago housing authority issued to petitioner form 1099-misc miscellaneous income reporting rental income of dollar_figure i burden_of_proof discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in certain circumstances however sec_7491 places the burden_of_proof on the commissioner petitioner has not alleged that sec_7491 is applicable nor has she established compliance with the requirements of sec_7491 therefore the burden_of_proof does not shift to respondent ii unreported rental income under sec_6201 the burden of production may shift to the commissioner where an information_return such as a form_1099 serves as the basis for a deficiency determination if a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on a third-party information_return and has fully cooperated with the commissioner the commissioner will have the burden of producing reasonable and probative information concerning the item_of_income in addition to the information_return id the taxpayer must provide timely access to witnesses information and documents within the control of the taxpayer id petitioner admitted that the rental property she coowned with her son in generated rental income and she did not dispute the form 1099-misc issued in her name reporting dollar_figure of rental income in petitioner has failed to raise a reasonable dispute as to any item_of_income reported on the information_return therefore the burden of production does not shift to respondent petitioner contends that she was not required to report the rental income shown on the form 1099-misc because her son received and reported all their rental income regardless of whether petitioner’s son received all their rental income she is taxed on the rental income because income from property is taxed to the owner at the time the income is earned 311_us_112 281_us_111 the assignment_of_income_doctrine prevents petitioner from avoiding taxation on her rental income by assigning that income to her son see lucas v earl supra accordingly respondent’s determination is sustained iii business_expenses deductions are strictly a matter of legislative grace and taxpayers must satisfy the specific requirements for any deduction claimed see 503_us_79 292_us_435 taxpayers bear the burden of substantiating the amount and purpose of any claimed deduction see 65_tc_87 affd per curiam 540_f2d_821 5th cir a car expenses with respect to certain business_expenses subject_to sec_274 more stringent substantiation requirements apply than with respect to other ordinary and necessary business_expenses 1it is unclear whether the form 1099-misc issued to petitioner included all of the rental income from the property or only petitioner’s portion of the income sec_274 imposes strict substantiation requirements for claimed deductions relating to the use of listed_property which is defined under sec_280f to include passenger automobiles under this provision any deduction claimed with respect to the use of a passenger_automobile will be disallowed unless the taxpayer substantiates specified elements of the use by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement see sec_274 sec_1_274-5t temporary income_tax regs fed reg date to meet the adequate_records requirements of sec_274 a taxpayer must maintain some form of records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use see sec_1_274-5t temporary income_tax regs fed reg date a contemporaneous log is not required but corroborative evidence to support a taxpayer’s reconstruction of the elements of an expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra the elements that must be substantiated to deduct expenses for the business use of an automobile are the amount of the expenditure the mileage for each business use of the automobile and the total mileage for all use of the automobile during the taxable_period the date of the business use and the business_purpose of the use of the automobile see sec_1_274-5t temporary income_tax regs fed reg date transportation_expenses for substantiated trips between two places of business are deductible but transportation to and from work is a nondeductible personal commuting expense see 73_tc_766 326_us_465 439_f2d_296 9th cir affg 52_tc_964 roy v commissioner tcmemo_1997_562 affd without published opinion 182_f3d_927 9th cir sec_1_162-2 sec_1_262-1 income_tax regs petitioner provided a mileage log for her vehicle for containing the destination of each business trip the month of the trip and the mileage for her trip petitioner did not identify or otherwise explain whether she drove to the other hospitals directly from the va hospital or from her home the court is unable to determine whether petitioner’s trips originated from the va hospital which would entitle her to a business_expense deduction or whether they originated from her home the court concludes that the evidence petitioner presented is insufficient to satisfy the strict substantiation requirements of sec_274 b miscellaneous expenses in addition to car expenses petitioner claimed additional job expenses and miscellaneous deductions petitioner provided receipts for expenditures associated with mailings and the purchase of stationery products although petitioner provided receipts for these expenditures she did not provide an explanation as to how these expenses were ordinary and necessary to her position as an lpn instructor or her work with the hospital in addition petitioner provided no other evidence of and did not testify about the remaining expenses she claimed for accordingly respondent’s disallowance is sustained iv charitable_contributions petitioner claimed dollar_figure in charitable_contribution deductions respondent disallowed dollar_figure of the dollar_figure petitioner claimed as a charitable_contribution_deduction for lack of substantiation as is relevant here sec_170 provides that no deduction is allowed for all or part of any charitable_contribution of dollar_figure or more unless the contribution is substantiated by a contemporaneous written acknowledgment from the organization see also sec_1_170a-13 income_tax regs a written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of the date the taxpayer files the original return for the taxable_year of the contribution or the due_date including extensions for filing the original return for the year sec_170 sec_1_170a-13 income_tax regs the written acknowledgment must state the amount of cash and a description but not necessarily the value of any property other than cash that the taxpayer donated and whether the organization provided any consideration to the taxpayer in exchange for the donation sec_170 and ii sec_1_170a-13 and ii income_tax regs petitioner provided a donation receipt from goodwill industries dated date demonstrating that she donated a total of seven items the receipt lists several of the items donated including a bed clothing and furniture and includes a total value of dollar_figure for the donated items the court is satisfied that petitioner has substantiated her charitable_contribution deductions to the extent of dollar_figure but because petitioner has not proven that this amount was not included in the dollar_figure that respondent allowed as a charitable_contribution_deduction she nevertheless is not entitled to deduct the dollar_figure consequently respondent’s disallowance is sustained v accuracy-related_penalty sec_6662 and b imposes a 20-percent accuracy-related_penalty on the portion of an underpayment that is attributable to a substantial_understatement_of_income_tax an understatement of income_tax is the excess of the amount of income_tax required to be shown on the return for the taxable_year over the amount of income_tax that is shown on the return reduced by any rebate see sec_6662 an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or in the case of an individual dollar_figure see sec_6662 the commissioner bears the burden of production with respect to the applicability of an accuracy-related_penalty determined in a notice_of_deficiency see sec_7491 in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate 116_tc_438 once he has met his burden the burden is upon the taxpayer to prove that the accuracy-related_penalty does not apply because of reasonable_cause substantial_authority or the like see sec_6662 sec_6664 higbee v commissioner 2the court need not determine whether petitioner is liable for the accuracy-related_penalty due to negligence supra pincite because petitioner’s understatement of income_tax for exceeded dollar_figure respondent has met his burden for the determination of an accuracy-related_penalty based on substantial_understatement_of_income_tax an accuracy-related_penalty is not imposed on any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 sec_1 b income_tax regs incorporates a facts_and_circumstances_test to determine whether the taxpayer acted with reasonable_cause and in good_faith the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability id petitioner has failed to demonstrate that she acted with reasonable_cause and in good_faith in failing to report rental income and substantiate the disallowed job expense and charitable_contribution deductions accordingly the court finds that petitioner is liable for the accuracy-related_penalty to reflect the foregoing for respondent decision will be entered


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc intl 1-plr-114259-00 date date number release date index number do ty a country b date c date d year e dear this is in response to a letter dated date as supplemented by a letter 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 long-term_resident status did 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 ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by the taxpayer 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 a former long-term_resident of the united_states within the meaning of sec_877 relinquished her u s lawful permanent resident status expatriated on date c a is a citizen of country b by reason of her birth on date d in country b a's parents were also born in country b a became a lawful permanent resident_of_the_united_states in year e on the date of a’s expatriation her net_worth exceeded the applicable_threshold in sec_877 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 under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of 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 presumed to have expatriated with a plr-114259-00 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 exceeds certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen 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 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 long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will also not be presumed to have a principal purpose of tax_avoidance if that former long-term_resident is described within certain categories and 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 pursuant to notice_98_34 because she is described in three categories of individuals eligible to submit ruling requests first on the date of a’s expatriation a was and continues to be a resident fully liable to income_tax in country b the country where a was born second on the date of a’s expatriation a was and continues to be a resident fully liable to income_tax in country b the country where a’s spouse was born third a is eligible to submit a request because on the date of a’s expatriation a was and continues to be a resident fully liable to tax in country b the country where her parents were born a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 and therefore a will not be presumed to have expatriated with a principal purpose of tax_avoidance it is further concluded that a will not be treated under sec_877 as having as one of her principal purposes of expatriating the avoidance of u s taxes because the information submitted clearly established the lack of a principal purpose to avoid taxes under subtitle a or b of the code a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return plr-114259-00 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s authorized representative cc sincerely w edward williams senior technical reviewer cc intl br1


internal_revenue_service number release date index number ------------------------ ----------------------------------------------------------- ------------------------------------ --------------------------------- in re ------------------------------------------- ------------------------------------------- ---------------------------------------- department of the treasury washington dc person to contact ----------------- id no ------------ telephone number -------------------- refer reply to cc fip - plr-119889-05 date date ----------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------- ------ -------------- taxpayer -------------------------------------------------- parent -------------------------------------------------- subsidiary ---------------------------------------------------- company x state v w x y z dear ------------------ ----- --- --- --- -- this is in response to the letter submitted by your authorized representative dated date requesting a ruling on whether assets held in certain variable_contract segregated_asset accounts are to be treated for federal_income_tax purposes as owned by taxpayer additional information was submitted in letters dated date and date taxpayer issues deferred and immediate variable_annuity contracts the taxpayer is a life_insurance_company taxable under sec_816 of the internal facts revenue code and is licensed to conduct an insurance_business in states and the district of columbia taxpayer is a wholly owned subsidiary of parent and is a stock_life_insurance_company organized under the laws of state taxpayer and its wholly owned subsidiary subsidiary file a consolidated_income_tax_return on a calendar_year basis contracts the contracts currently offer up to v variable investment options and a fixed investment option only taxpayer can add or remove investment options under the contracts the portion of a premium less any applicable state and local_taxes related to the premium a net premium allocated by the owner of a contract to the fixed investment option under the contract is held in taxpayer’s general account the portion of a net premium allocated to the variable investment options under a contract is held in a separate_account the separate_account which is registered with the securities_and_exchange_commission the sec as a unit_investment_trust under the investment_company act of as amended the act the assets of the separate_account are currently allocated among sub-accounts the existing sub-accounts that correspond to the variable investment options under the contracts taxpayer represents that the owners of the contracts do not possess investment control and sufficient other incidents_of_ownership over the assets in the existing sub-accounts to be considered the owner of those assets for federal_income_tax purposes each existing sub-account invests all of its assets in a regulated_investment_company an existing fund separate_account each new sub-account will represent an investment strategy based on the approximate year of a contract holder’s retirement each new sub- account will invest all of its assets in a regulated_investment_company a new fund adequately diversified within the meaning of sec_817 taxpayer represents that except as otherwise permitted by sec_1_817-5 of the income_tax regulations all the beneficial interests in each of the existing funds and new funds insurance funds are held by one or more insurance_companies and that public access to each of the insurance funds is available exclusively through the purchase of a variable_contract each insurance fund is a massachusetts business_trust registered with the sec under the act as an open-end management investment_company and shares of each taxpayer represents that all segregated_asset accounts under the contract are taxpayer will establish w new sub-accounts the new sub-accounts of the insurance fund are registered with the sec under the securities act of as amended initially each new fund will invest solely in funds from a certain subset of the existing funds the second-tier insurance funds however each new fund can choose to invest a portion of its assets from among x funds that are available to investors other than through the purchase of a variable_contract public funds all public funds are managed by company x or its affiliates company x is an affiliate of taxpayer and is a wholly owned subsidiary of parent no more than y of a new fund’s total assets will be invested in any single public fund and no more than z of a new fund’s total assets will be invested in any combination of public funds if fluctuations in the market values of second-tier insurance funds and public funds cause a new fund’s investments in public funds to exceed the y and z limits as of the last day of any fiscal quarter the new fund’s investments will be reallocated to comply with the limits within days of the end of such quarter each public fund invests in many assets the specific assets held by each new fund will be determined by an investment manager investment manager and will be subject_to change at any time other than a contract owner’s ability to allocate premiums and transfer dollars among the various new funds all investment decisions regarding the new funds will be made by the investment manager in its sole and absolute discretion a contract owner will not be able to direct a new fund’s investment in any particular asset and there will be no agreement or plan between taxpayer and a contract owner or between the investment manager and a contract owner regarding such an investment a contract owner has no knowledge of the present assets invested by a new fund and has no knowledge of the specific investment techniques of the investment manager interest in any of the new fund assets rather the contract owner will have only a contractual claim against taxpayer to collect cash under the terms of the contract requested ruling purposes as owned by taxpayer and not by the owner of a contract law the assets of each new sub-account will be treated for federal_income_tax a contract owner will have no legal equitable direct or indirect ownership sec_61 provides that the term gross_income means all income from whatever source derived including gains derived from dealings in property interest and dividends sec_817 defines a avariable contract as a contract that provides for the allocation of all or part of the amounts received under the contract to an account that pursuant to state law or regulation is segregated from the general asset accounts of the company and that provides for the payment of annuities or is a life_insurance_contract sec_817 provides that for purposes of subchapter_l and sec_7702 relating to definition of life_insurance_contract a variable_contract other than a pension contract that is otherwise described in sec_817 and that is based on a segregated_asset_account shall not be treated as a life_insurance_contract for any period and any subsequent period for which the investments made by such account are not in accordance with regulations prescribed by the secretary adequately diversified sec_817 provides in certain situations a look-through_rule for meeting the diversification requirements if all of the beneficial interests in a regulated_investment_company or trust are held by one or more a insurance_companies or affiliated companies in their general account or in segregated_asset accounts or b fund managers or affiliated companies in connection with the creation or management of the regulated_investment_company the diversification requirements of sec_817 are applied by taking into account the assets held by such regulated_investment_company sec_1_817-5 are the regulations prescribed by the secretary that set forth the diversification requirements for variable_contracts generally the investments of a segregated_asset_account will be considered to be adequately diversified for purposes of sec_817 and sec_1_817-5 if no more than percent of the value of the total assets of the account is represented by any one investment no more than percent by any two investments no more than percent by any three investments and no more than per cent by any four investments see sec_1_817-5 sec_1_817-5 provides that if the look-through_rule applies a beneficial_interest in an investment_company partnership or trust will not be treated as a single investment of the segregated_asset_account instead a pro_rata portion of each asset of the investment_company partnership or trust is treated for purposes of sec_1_817-5 as an asset of the segregated_asset_account sec_817 was enacted by congress as part of the deficit_reduction_act_of_1984 pub_l_no the 1984_act in the legislative_history of the 1984_act congress expressed its intent to deny annuity or life_insurance treatment to any variable_contract if the assets supporting the contract include funds publicly available to investors the conference agreement allows any diversified fund to be used as the basis of variable_contracts so long as all shares of the funds are owned by one or more segregated_asset accounts of insurance_companies but only if access to the fund is available exclusively through the purchase of a variable_contract from an insurance_company in authorizing treasury to prescribe diversification standards the conferees intend that the standards be designed to deny annuity or life_insurance treatment for investments that are publicly available to investors h_r conf_rep no pincite approximately two years after enactment of sec_817 the treasury_department issued proposed and temporary regulations prescribing the minimum level of diversification that must be met for an annuity or life_insurance_contract to be treated as a variable_contract within the meaning of sec_817 the preamble to the regulations stated as follows the temporary regulations do not provide guidance concerning the circumstances in which investor_control of the investments of a segregated_asset_account may cause the investor rather than the insurance_company to be treated as the owner of the assets in the account for example the temporary regulations provide that in appropriate cases a segregated_asset_account may include multiple sub-accounts but do not specify the extent to which policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets guidance on this and other issues will be provided in regulations or revenue rulings under sec_817 relating to the definition of variable_contracts fr date the text of the temporary regulations served as the text of proposed_regulations in the notice of proposed rulemaking see fr date the final regulations adopted with certain revisions not relevant here the text of the proposed_regulations a long standing doctrine_of taxation provides that ataxation is not so much concerned with the refinements of title as it is with actual command over the property taxed--the actual benefit for which the tax is paid 281_us_376 the incidence of taxation attributable to ownership of property is not shifted if the transferor continues to retain significant control_over the property transferred 435_us_561 333_us_591 309_us_331 without regard to whether such control is exercised through specific retention of legal_title the creation of a new equitable but controlled interest or the maintenance of effective benefit through the interposition of a subservient agency 749_f2d_513 8th cir rev g 578_fsupp_398 n d iowa revrul_77_85 1977_1_cb_12 considers a situation in which the individual purchaser of a variable_annuity contract retains the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the purchaser also is able to exercise an owner s right to vote account securities either through the custodian or individually the service concludes that the purchaser possesses asignificant incidents_of_ownership over the assets held in the custodial_account the service reasons that if a purchaser of an investment annuity_contract can select and control the investment_assets in the separate_account of the life_insurance_company issuing the contract then the purchaser is treated as the owner of those assets for federal_income_tax purposes thus any interest dividends or other income derived from the investment_assets is included in the purchaser s gross_income in revrul_80_274 1980_2_cb_27 the service applying revrul_77_85 concludes that if a purchaser of an annuity_contract can select and control the certificates of deposit supporting the contract then the purchaser is considered the owner of the certificates of deposit for federal_income_tax purposes similarly revrul_81_225 1981_2_cb_12 concludes that investments in mutual_fund shares to fund annuity_contracts are considered to be owned by the purchaser of the annuity if the mutual_fund shares are available for purchase by the general_public revrul_81_225 also concludes that if the mutual_fund shares are available only through the purchase of an annuity_contract then the sole function of the fund is to provide an investment vehicle that allows the issuing insurance_company to meet its obligations under its annuity_contracts and the mutual_fund shares are considered to be owned by the insurance_company finally in revrul_82_54 1982_1_cb_11 the purchaser of certain annuity_contracts can allocate premium payments among three funds and has an unlimited right to reallocate contract value among the funds prior to the maturity_date of the annuity_contract interests in the funds are not available for purchase by the general_public but are instead only available through purchase of an annuity_contract the service concludes that the purchaser’s ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto does not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares in christoffersen v u s the eighth circuit considered the federal_income_tax consequences of the ownership of the assets supporting a segregated_asset_account the taxpayers in christoffersen purchased a variable_annuity contract that reflected the investment return and market_value of assets held in an account that was segregated from the general_asset_account of the issuing insurance_company the taxpayers had the right to direct that their premium payments be invested in any one of six publicly traded mutual funds the taxpayers could reallocate their investment among the funds at any time the taxpayers also had the right upon seven days notice to withdraw funds surrender the contract or apply the accumulated value under the contract to provide annuity payments the court_of_appeals held that the taxpayer not the insurance_company that issued the annuity_contract owned the mutual_fund shares for federal_income_tax purposes thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares in revrul_2003_91 2003_33_irb_347 a variable contractholder does not have control_over segregated account assets sufficient to be deemed the owner of the assets the variable_contracts at issue are funded by a separate_account that is divided into sub-accounts the issuing insurance_company can increase or decrease the number of sub-accounts at any time but there will never be more than sub-accounts available under the contracts each sub-account offers a different investment strategy interests in the sub-accounts are available solely through the purchase of a contract the investment activities of each sub-account are managed by an independent investment_advisor there is no arrangement plan contract or agreement between the contractholder and the issuing insurance_company or between the contractholder and the independent investment_advisor regarding the availability of a particular sub- account the investment strategy of any sub-account or the assets to be held by a particular sub-account other than a contractholder's right to allocate premiums and transfer funds among the available sub-accounts all investment decisions concerning the sub-accounts are made by the issuing insurance_company or the independent investment_advisor in their sole and absolute discretion a contractholder has no legal equitable direct or indirect interest in any of the assets held by a sub-account but has only a contractual claim against the issuing insurance_company to collect cash in the form of death_benefits or cash surrender values under the contract the service concludes that based on all the facts and circumstances the contractholder does not have direct or indirect control_over the separate_account or any sub-account asset and therefore the contractholder does not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes analysis incidents_of_ownership over new sub-account assets to be deemed the owner of the assets depends on all of the relevant facts and circumstances investment manager in its sole and absolute discretion a contract owner will not be able to direct a new fund’s investment in any particular asset and there will be no agreement or plan between taxpayer and a contract owner or between the investment manager and a contract owner regarding such an investment sufficiently broad to prevent the owner of a contract from making particular investment decisions through investment in a new sub-account only taxpayer can add or remove investment options under the contracts accounts of one or more insurance_companies or to investors described in sec_1 shares of each new fund will be available only to one or more segregated_asset the investment strategies of the new sub-accounts currently available are the determination of whether the owner of a contract possesses sufficient all investment decisions regarding the new funds will be made by the based on all the facts and circumstances a contract owner does not have direct f for the purpose of funding variable_contracts thus new fund shares are not sold directly to the general_public or indirect control_over the separate_account or any sub-account asset taxpayer represents that the owners of the contracts do not possess investment control and sufficient other incidents_of_ownership over the assets in the existing sub-accounts to be considered the owner of those assets for federal_income_tax purposes the owner of a contract will not be treated as the owner of the investments underlying the contract by reason of the addition of the new funds therefore the assets of each new sub- account will be treated for federal_income_tax purposes as owned by taxpayer and not by the owner of a contract so long as the contracts continue to satisfy the diversification requirements of ' h and taxpayer’s and contract owner’s future conduct is consistent with the facts of this ruling_request the contract owner will not be required to include the earnings on the assets held in the new sub-accounts in income under ' a except as expressly provided herein no opinion is expressed concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by insurer 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 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s donald j drees jr senior technician reviewer branch office of associate chief_counsel financial institutions products