igen x e e department of the treasury internal_revenue_service te_ge eo examinations commerce street dailas tx tax_exempt_and_government_entities_division number release date date date employer_identification_number person to contact id number contact numbers voice fax last date for filing a petition with the tax_court certified mail-return receipt uil dear a final revocation letter as to your exempt status under sec_501 of the this is internal_revenue_code the internal revenue service’s recognition of your organization as an organization described in sec_501 is hereby revoked effective january we have made this determination for the following reasons you exclusively are operated not demonstrated that for you have charitable educational or other exempt purposes within the meaning of lr c sec_501 you failed to repeated reasonable requests to allow the internal_revenue_service to examine your books records and activities you have provided no information showing that you conduct a real and substantial charitable program your organization has been inactive since financial activities conducted or planned as such you fail to meet the operational requirements for continued exemption under i r c sec_501 c and there have been no operations or as such you failed to meet the requirements of sec_501 and sec_1_501_c_3_-1 in that you failed to establish that you were operated exclusively for an exempt_purpose contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a ‘substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition ina united_states court the taxpayer_advocate can however see that a tax matter that may not _have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide-a tetephone-number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha a ramirez director eo examinations letter catalog number 34808f goverment entities davision department of the treasury internal_revenue_service ms dal commerce street dallas tx date taxpayer_identification_number form tax_year s ended december person to contact iid number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter 'f you do not agree with our proposed revnratinn you must submit to us a written request for appeals_office consideration within 3u days from tne date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we issue a determination_letter to you based on technical_advice no letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f form_886 a departement of the treasury - intemal revenue service explanation of items name of taxpayer schedule no or exhibit year period ended ein issue - organization not responding to document request by the irs failing to respond to document requests issue whether the organization qualifies for exemption under sec_501 of the internal_revenue_code facts exhibit a provides copies of the internal_revenue_service correspondence requesting that exempt_organization file the form sec_941 for the tax period ending december november respond to the internal_revenue_service correspondence or file the form sec_941 for the tax period ending december _letters have been mailed out on exempt_organization failed to and december law sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal department of the treasury - internal_revenue_service form 886-a rev page -1- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service ein issue - organization not responding to document request by the irs schedule no or exhibit year period ended revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-2 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations fora certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax taxpayer’s position this area is left blank government's position based on the above cited law it is the government's position that the exempt_organization has failed to meet its reporting requirements as such the tax exempt status of the same should be withdrawn department of the treasury - internal_revenue_service form 886-a rev page -2- form_886 a name of taxpayer explanation of items deparment of the treasury - internal reveaue service ein issue - organization not responding to document request by the irs schedule no or exhibit year period ended conclusion it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 accordinalv the organization's exempt status is revoked effective january form_1120 returns should be filed for the tax periods ending on or after december form 886-a rev department of the treasury - internal_revenue_service page -3-


internal_revenue_service number release date index number --------------------------------- ------------------------ -------------------------------------------- ------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-146582-11 date april legend company ----------------------------------------------------------- ----------------------------------- shareholder ------------------------------------------------------------- ------------------- state date ---------- ------------------- dear ----------- this letter responds to a letter dated date written on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code code facts company was incorporated in state on date company’s sole shareholder intended for company to be an s_corporation effective date however company’s form_2553 election by a small_business_corporation was not timely filed company requests a ruling that it will be recognized as an s_corporation effective date plr-146582-11 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and the representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation effective date by filing a completed form_2553 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be an s_corporation for federal tax purposes in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative plr-146582-11 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely stacy l short senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a 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 tege eb hw plr-111415-13 date date legend statute -------------------------------------------------------------- taxpayer ------------------- --------------------------- employer --------------------------------------------------------- dear ------------- this is in reply to the letter dated date submitted on your behalf requesting a ruling with respect to whether certain disability payments you receive are excludable from gross_income under sec_104 of the internal_revenue_code the code taxpayer was injured while employed as a police sergeant taxpayer’s application_for duty disability_income was approved and he was medically separated from employment employer informed taxpayer that he must elect to receive either retirement income or disability_income taxpayer elected the retirement income amount because it exceeds the disability_income amount section of the statute provides upon retirement of any member for service-connected disability he shall receive an annual allowance payable in monthly installments equal to one-half of his final compensation notwithstanding any other provision of this chapter any member upon retirement for service-connected disability shall receive a current service pension or a current service pension combined with a prior service plr-111415-13 pension purchased by the contributions of the county or district sufficient which when added to the service retirement annuity will equal one-half of his final compensation or if qualified for a service retirement he shall receive his service retirement allowance if such allowance is greater but in no event shall it exceed the limitation as set forth in section as it now reads or may hereafter be amended to read the provisions of this section shall also apply to any employee who becomes disabled for service connected causes prior to the first day of the calendar month when he would normally become a member sec_61 of the code provides that except as otherwise provided by law gross_income means all income from whatever source derived including compensation_for services sec_104 of the code provides that gross_income does not include amounts received under workmen’s compensation acts as compensation_for personal injuries or sickness sec_1_104-1 of the income_tax regulations states that sec_104 of the code excludes from gross_income amounts received by an employee under a workmen’s compensation act or under a statute in the nature of a workmen’s compensation act that provides compensation to the employee for personal_injury_or_sickness incurred in the course of employment sec_104 also applies to compensation which is paid under a workmen’s compensation act to the survivor or survivors of a deceased employee sec_104 does not apply to a retirement pension or annuity to the extent it is determined by reference to the employee's age or length of service or the employee's prior contributions even though the employee's retirement is occasioned by an occupational injury or sickness sec_104 also does not apply to amounts which are received as compensation_for a non-occupational injury or sickness nor to amounts received as compensation_for an occupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's_compensation_act or acts if benefits are computed by a formula that does not refer to the employee's age length of service or prior contributions and are provided to a class that is restricted to employees with service-incurred injuries sickness or death then the statute under which the benefits are paid qualifies as a statute in the nature of a workmen's_compensation_act see revrul_80_84 1980_1_cb_35 revrul_83_77 1983_1_cb_37 revrul_80_44 1980_1_cb_34 the fact that the amount received is based on a percentage of the employee's salary on the date of the disability does not disqualify the payment from qualifying as one in the nature of workmen's_compensation see revrul_68_10 1968_1_cb_50 under section of the statute if an employee receiving an allowance because of a service-connected disability is also qualified for a service retirement the plr-111415-13 employee may receive the service retirement allowance if the allowance is greater the amount equal to the member’s service-connected disability allowance one-half of the member’s final compensation is excludable under sec_104 of the code benefits received by a member pursuant to section of the statute in excess of percent of the member’s final compensation are not excludable under sec_104 because they are based upon age and years_of_service see revrul_85_104 1985_2_cb_52 based on the information submitted and authorities cited above we conclude that the portion of taxpayer’s retirement income equal to his service connected disability allowance one-half of taxpayer’s final compensation is excludable from gross_income under sec_104 of the code any amount in excess of percent of taxpayer’s final compensation is not excludable under sec_104 of the code because such amount is based upon age and years_of_service no opinion is expressed as to the federal tax consequences of the transaction under any other section of the code or statute other than as specifically stated above this ruling letter is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely harry beker chief health welfare branch office of division counsel associate chief_counsel tax exempt government entities


internal_revenue_service department of the treasury number release date index number re washington dc person to contact telephone number refer reply to cc psi b09-plr-125529-02 date date legend decedent trust executive trustee executive trustee trustee a executive trustee executive trustee trustee b date date x corporation court dear this is in response to your letter dated date in which you requested a ruling under sec_2601 of the internal_revenue_code plr-125529-02 the facts submitted and representations made are as follows decedent created an irrevocable inter_vivos_trust trust on date with executive trustee executive trustee and trustee a as initial co-trustees executive trustee and executive trustee were officers of corporation the current co-trustees of trust are executive trustee and executive trustee who are officers of corporation and trustee b_trust was funded on date with x shares of common_stock of corporation you represent that there have been no modifications or amendments to trust and that there have been no additions to trust on or after date article two of trust provides that the trustees shall until date or until the death of the last to survive of decedent’s six children and eleven grandchildren whichever shall occur first pay the entire net_income each year to and among such educational religious or charitable organizations as are described in sec_501 sec_170 and sec_2522 of the internal_revenue_code as the trustees in their absolute discretion may select and in such amounts as they may determine article three section a provides that no distribution of trust property shall be made until date or until the death of the last to survive of decedent’s six children and eleven grandchildren whichever shall occur first article three section b provides that on date if at that time there shall still be living one or more of the six children and eleven grandchildren of decedent the trustees shall divide the trust property into as many equal shares as there shall be then living children of the decedent’s six children or children of the six children of decedent who died leaving issue who are then living one such equal share for the issue collectively of each such deceased child of the six children and to pay over absolutely and outright and forever each such share so set apart for the issue collectively of a deceased child of the six children to the issue in equal shares per stirpes and to hold each such share so set apart for the benefit of a surviving child of the children in a separate trust the trustees of the trusts may pay to the child for whom the trust was created the parent or guardian of the child or the spouse and issue of the child so much of the net_income in any year as the trustees in their absolute discretion deem to be in the best interests of the child for whom the trust was created trustees may also whenever they deem it to be in the best interest of the child for whom the trust was created pay to the child their parent or guardian or their spouse and issue any or all of the trust property article three section b subsection iii provides that upon the death of the child for whom each trust was created the trustees shall pay over absolutely the then remaining trust property to and among the spouse issue and brothers and sisters of such child in such shares as the child may direct in his last will and testament or failing such testamentary direction then to the issue of such child in equal shares per stirpes plr-125529-02 article three section c provides that upon the death of the last to survive of the six children and eleven grandchildren of decedent in termination of all of the trusts that created under trust that have not then already been terminated under their own terms i if such death occurs on or before date trustees shall divide the trust property into as many equal shares as there shall be then living children of decedent’s six children or children of the six children who died leaving issue who are then living and pay over absolutely outright and forever one of such equal shares to each child then living and one to the issue per stirpes then living of each deceased child of the six children of decedent if such death occurs after date trustees shall transfer and pay over absolutely outright and forever the trust property in each separate trust as shall then still be in existence to the child of those children of decedent for whose benefit the separate trust was established article nine states that decedent expresses a preference that there be three trustees serving hereunder article nine further provides that executive trustee and executive trustee and each of their successor trustees shall serve as trustees only so long as they hold their executive positions with corporation when they for any reason cease to hold their executive positions with corporation they shall resign if for any reason executive trustee or executive trustee shall cease to serve as trustees then the successor trustee of each such trustee shall be appointed in the following order of preference chairman of the board_of directors of corporation vice chairman of the board_of directors of corporation who has continuously held that office for the longest period of time chairman of the executive committee of corporation vice chairman of the executive committee of corporation who has continuously held that position for the longest period of time some other executive of corporation appointed by a vote of the majority of members of the board_of directors of corporation then in office article fourteen provides that the trust is irrevocable the executive trustees have instituted a proceeding in court requesting that the trust be modified to allow for as deemed to be necessary and in the best interests of trust by the then existing executive trustees three corporation senior executives to serve as co-trustees along with trustee b or his successor the executive trustees of trust have requested a ruling that the proposed judicial modification of trust to allow for as deemed to be necessary and in the best interests of trust by the then existing executive trustees three corporation senior executives to serve as co-trustees along with trustee b or his successor will not result in the loss of trust’s grandfathered status from generation skipping transfer_tax plr-125529-02 law and analysis sec_2601 imposes a tax on each generation-skipping_transfer made by a transferor to a skip_person under section a of the tax_reform_act_of_1986 the gst tax is generally applicable to generation-skipping transfers made after date section b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the generation-skipping_transfer gst tax shall not apply to any generation-skipping_transfer from a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action will not cause a_trust that was irrevocable on date to lose its exempt status under sec_26_2601-1 a modification will not cause a_trust that was irrevocable on date to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst to determine whether a particular amendment to a_trust shifts a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification sec_26_2601-1 example involves an irrevocable_trust for the benefit of the grantor’s issue which names a bank and five other individuals as trustees the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative expenses the example concludes that the modification pertains to the administration of the trust plr-125529-02 and that the trust will not be subject_to the provisions of chapter of the internal_revenue_code in this case trust currently has three trustees two of the trustees are senior executives of corporation and under the terms of trust these trustees are to be succeeded only by individuals who are executives of corporation the executive trustees have requested that court modify the terms of trust in a manner that would allow for three senior executives of corporation to serve as trustees of trust along with trustee b or his successor this modification pertains to the administration of the trust and therefore if the terms of trust modified in the manner discussed above the modification would not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore we conclude that the modification will not result in the loss of trust’s grandfathered status from generation skipping transfer_tax except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely james f hogan james f hogan senior technician reviewer office of associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-108126-02 date date legend h w trust foundation trust trust state d1 d2 dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of trust requesting rulings concerning the partition of trust a charitable_remainder_unitrust into two separate trusts plr-108126-02 the trust was formed on d1 under the laws of state and was a charitable_remainder_unitrust under sec_664 of the internal_revenue_code providing a distribution to h and w or the survivor of a unitrust_amount equal to the lesser_of trust income or five percent of the beginning of the year value of the trust assets the unitrust_amount for any year also includes any amount of trust income for any year that is in excess of the amount required to be distributed to the extent the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as five percent of the net fair_market_value of the assets at the time of the death of both beneficiaries the remaining trust assets were to be distributed to the foundation the foundation is exempt from federal_income_tax under sec_501 and is classified as a private_foundation on d2 trust was partitioned into two separate trusts trust and trust each containing the same provisions as trust each investment held in trust was divided equally between trust and trust at the time of the partition there was no deficiency to be made up with respect to the net_income make-up provisions of trust trust represents that upon the partition of trust into two trusts and upon the distributions by trust to trust and trust any in-kind transfers of trust assets to trust and trust fairly represented the basis and values of the assets held at the time of such transfer h and w propose to convey their unitrust interests in trust to the foundation the remainder beneficiary at which time trust will terminate in consideration for their unitrust interests in trust h and w will receive a lump sum distribution from trust equal to the present_value of their unitrust interests effective on the date of termination determined by using the discount rate in effect under sec_7520 on the date of termination and by using the methodology under sec_1_664-4 of the regulations for valuing interests in charitable_remainder trusts trust represents that when the foundation holds both the unitrust and the remainder interests of trust trust will terminate under the state doctrine_of termination by merger trust represents that the law of state allows the early termination of trust h and w as income beneficiaries of trust and the foundation together with the office of the attorney_general for state on behalf of the remainder beneficiary received approval of the state court for the proposed transaction h and w have signed an affidavit under penalties of perjury that they are aware of no medical_condition expected to result in a shorter-than-average longevity sec_507 provides that except as provided in sec_507 a private_foundation may terminate its private_foundation_status only under the specific rules set forth in sec_507 plr-108126-02 sec_507 provides that in the case of the transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_664 d provides that for purposes of sec_664 a charitable_remainder_unitrust is a_trust -- a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in sec_664 all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined in sec_664 and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 provides that the term self-dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 provides that the term disqualified_person with respect to a private_foundation includes a substantial_contributor to the foundation including the creator of a_trust a family_member of a substantial_contributor including children and a foundation_manager including a trustee sec_4946 together with sec_4946 define the term disqualified_person to include a spouse of a substantial_contributor among others sec_4947 provides generally that split-interest_trusts are subject_to the provisions of sec_507 sec_4941 and sec_4945 in the same manner as if such trusts were private_foundations but under sec_4947 not with respect to any amounts payable under the terms of such trust to income beneficiaries unless a deduction was allowable under plr-108126-02 sec_170 sec_2055 or sec_2522 sec_1_507-1 of the income_tax regulations provides in part that if a private_foundation transfers all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 such transfer foundation will not have terminated its private_foundation_status under sec_507 sec_1_507-3 provides in part that as used in sec_507 of the code the term other adjustment organization or reorganization shall include any partial_liquidation or any other significant disposition of assets to one or more private_foundations sec_1_507-3 provides that the term significant disposition of assets means the transfer of percent or more of the net assets of the foundation at the beginning of the year which disposition may be made in a single year or in a series of related dispositions over more than one year sec_1_507-4 provides that private_foundations which make transfers described in sec_507 or are not subject_to the tax imposed under sec_507 with respect to such transfers sec_1_664-3 provides that a_trust is not a charitable_remainder_unitrust if any person has the power to alter the amount to be paid to any named person other than an organization described in sec_170 if such power would cause any person to be treated as the owner of the trust or any portion thereof if subpart e part subchapter_j chapter subtitle a of the code were applicable to such trust sec_1_664-3 provides in part that the trust may not be subject_to a power to invade alter amend or revoke for the beneficial use of a person other than an organization described in sec_170 notwithstanding the preceding sentence the grantor may retain the power exercisable only by will to revoke or terminate the interest of any recipient other than an organization described in sec_170 sec_53_4947-1 of the foundation and similar excise_tax regulations foundation regulations provides that under sec_4947 of the code sec_4941 does not apply to any amounts payable under the terms of a split-interest trust to income beneficiaries unless a deduction was allowed under sec_170 or sec_2522 with respect to the income_interest of any such beneficiary in the present case trust and trust contain the same provisions and beneficiaries as trust and the investments once held by trust are equally divided between trust and trust therefore the unitrust and remainder beneficiaries are entitled to the same benefits immediately after the partition as before plr-108126-02 as a charitable_remainder_unitrust trust is a split-interest trust described in sec_4947 and therefore subject_to sec_4941 which imposes an excise_tax on acts of self-dealing although split-interest_trusts are not sec_501 or sec_4947 private_foundations that are exclusively charitable they are subject_to sec_507 termination rules that are appropriate sec_4947 subjects split-interest_trusts to the provisions of sec_507 sec_507 is applicable to the division of trust since trust transferred all of its net assets to trust and trust under sec_1 b of the regulations trust will not have terminated its private_foundation_status under sec_507 accordingly the excise_tax imposed under sec_507 is not applicable to it h and w are disqualified persons with respect to trust under sec_4946 because they are substantial contributors to trust because trust is a split-interest trust it is treated as a private_foundation under sec_4947 the only interest that h and w had in trust was the payment of the unitrust_amount under the provisions of sec_664 upon the division of trust and before the proposed distribution of trust 3's assets they are receiving the same unitrust payments as before except that the payment is derived from two trusts instead of one thus prior to trust 3's termination they are likely to receive more or less the same unitrust payment as before however it makes no difference for purposes of sec_4941 whether either one or both is receiving more or less of a unitrust payment after the division of trust assets sec_53_4947-1 of the foundation regulations provides in substance that the amounts payable under charitable_remainder split-interest_trusts to the income beneficiaries are not subject_to sec_4941 or sec_507 or sec_4945 thus the disqualified persons are insulated from self-dealing as far as each of their income interests in trust is concerned based on the fact that the unitrust payment is the same before and after the division of trust since neither of the disqualified persons h and w receive any additional interest in the assets of the trust principal no self-dealing transaction will occur withing the meaning of sec_4941 regarding the proposed termination of trust after the transfer of assets to it by trust the critical question for self-dealing purposes is whether early termination may be expected to result in a greater allocation of trust 3's assets to the income_beneficiary to the detriment of the charitable_beneficiary the foundation than a non-early termination h and w’s proposed allocation method is reasonable if the income_beneficiary has no knowledge of a medical_condition or other circumstance likely to result in a shorter life expectancy than that predicted by the actuarial_tables otherwise an early termination would tend to deprive the foundation of its benefit and would be inconsistent with the charitable deduction allowed to h and w we conclude that the proposed termination of trust by the conveyance of h and w’s unitrust interests to foundation will not constitute a direct or indirect act of self-dealing within the meaning of sec_4941 because of all of the following circumstances state law allows the early termination all beneficiaries favor the early termination trust plr-108126-02 will use the regulations’ formula for determining the present values of the income and remainder_interest in a charitable_remainder_trust and h and w have signed affidavits under penalties of perjury that they are aware of no medical_condition expected to result in a shorter-than-average longevity based solely on the representations made and the information submitted we have reached the following conclusions the partition of trust into trust and trust will not cause either trust trust or trust to fail to qualify as charitable_remainder trusts under sec_664 following the partition of trust the proposed conveyance of all of h and w’s interest in trust to foundation followed by the termination of and distribution of all assets by trust to h w and the foundation in proportion to the valuation under the rules of sec_7520 of the respective term and remainder interests will not constitute a prohibited_transaction within the meaning of sec_4941 and sec_4947 following the partition of trust the proposed termination and distribution of assets by trust will not constitute a termination of private_foundation_status within the meaning of sec_507 the above conclusions are based on the assumptions that the proposed termination of trust is not prohibited by state law that the proposed termination will be made pursuant to a court order resulting from a proceeding to which the state attorney_general is a party and that the amounts distributed are determined and distributed pursuant to the valuation rules set forth in sec_7520 in addition we conclude that the conveyance of h and w’s unitrust interests in trust to the foundation is a sale or disposition within the meaning of sec_1001 and that h and w have zero basis in their unitrust interests in trust therefore the amount h and w will realize from the sale of their interest in trust is the amount of money and the fair_market_value of the property distributed to h and w by trust 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 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 plr-108126-02 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to trust and to trust’s other authorized representative sincerely yours j thomas hines chief branch 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 date of communication month dd yyyy person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc intl plr-155841-03 date february legend taxpayer ------------------------------------------------------------------------------------------------- -------------------------- -------------------------- -------------------------- date date dear ------------ this replies to taxpayer’s letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to elect the provisions of revproc_2002_23 2002_1_cb_744 copy enclosed for the tax_year ended on date additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer is a citizen of canada and has resident_alien status in the united_states during the tax_year ended on date taxpayer rolled over his canadian registered retirement savings_plan to his canadian registered retirement income fund taxpayer did not attach a statement as provided by revproc_2002_23 to his timely filed irs form_1040 with respect to his canadian registered retirement savings_plan for the tax_year ended on date nor with respect to his canadian retirement income fund for the tax_year ended on date plr-155841-03 the facts submitted under penalties of perjury show that as soon as taxpayer noticed this inadvertent omission taxpayer requested relief as provided under sec_301_9100-3 sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith within the meaning of sec_301_9100-3 subject_to the conditions set forth in sec_301_9100-3 and the grant of relief will not prejudice the interests of the government within the meaning of sec_301_9100-3 in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to elect the provisions of revproc_2002_23 for the tax_year ended on date pursuant to section dollar_figure of revproc_2002_23 the election once made cannot be revoked except with the consent of the commissioner pursuant to section dollar_figure of revproc_2002_23 taxpayer must attach a copy of the election statement required by paragraph dollar_figure to his timely filed including extensions u s federal_income_tax return for each year subsequent to the election_year until the tax_year in which a final distribution is made from the plan or from any transferee_plan within the meaning of paragraph for the tax_year ended on date and each subsequent year until the tax_year in which a final distribution is made from taxpayer’s registered retirement income fund or from any transferee_plan within the meaning of paragraph dollar_figure of rev_proc taxpayer also must attach a copy of the statement required by paragraph dollar_figure of revproc_2002_23 with respect to the failure_to_file a statement for date this statement should be filed with an amended tax_return for date plr-155841-03 as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to make the election for the tax_year ended on date no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented a copy of this ruling letter should be associated with taxpayer’s tax_return for the tax_year ended on date and with taxpayer’s amended tax_return for the tax_year ended on date this ruling is directed only to taxpayer who has requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer enclosures copy of revproc_2002_23 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 psi b01 plr-118899-15 date date legend x ------------------------- ----------------------------------------------------------- state date ---------- ------------------ dear -------------------------- this letter responds to your letter dated date submitted on behalf of x by x’s representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x is a single member llc formed under the laws of state on date x intended to be treated as a disregarded_entity for federal tax purposes effective date x represents that granting relief to allow it to file a late election to be treated as a disregarded_entity will not prejudice the interests of the government in addition x represents that it acted reasonably and in good_faith law and analysis plr-118899-15 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association_taxable_as_a_corporation or a partnership sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of x filing within days of this letter all required returns or amended returns for all open years consistent with the requested relief except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-118899-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries david r haglund by david r haglund chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court raymond and kathleen vandegrift petitioners v commissioner of internal revenue respondent docket no filed date j richard greenstein for petitioners james h harris jr for respondent memorandum findings_of_fact and opinion goeke judge respondent determined an income_tax deficiency for and an accuracy-related_penalty pursuant to sec_6662 as a result of the parties’ concessions before 1all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure trial the issues remaining for decision all center around the real_estate business activities of petitioner raymond vandegrift mr vandegrift specifically whether he was a real_estate_professional under sec_469 and whether several real properties sold in were part of his real_estate business for the reasons explained herein we hold that mr vandegrift was not a real_estate_professional the properties sold were part of his real_estate business and the sale proceeds must be netted against the loss on passive activities we also uphold the accuracy-related_penalty but only regarding the underpayment related to the overstated basis in the properties sold findings_of_fact petitioners resided in pennsylvania at the time they filed their petition they timely filed a joint federal_income_tax return for petitioners had nine children whom they claimed as dependents on their return some of the facts have been stipulated and those facts are incorporated by this reference respondent issued a notice_of_deficiency to petitioners in date in which he determined for a deficiency of dollar_figure and an accuracy-related_penalty of dollar_figure during petitioners owned nine real_estate properties in addition to their residence six of which were actively rented the remaining three of these properties were acquired as rental properties and were to be rehabilitated to be prepared as rental units but they were sold before they were rented the three properties which were sold were acquired as part of the rental operations mr vandegrift directed these three properties were pincite gilbert street dowitcher street and g street the three properties the three properties sold were held for less than year before sale petitioners treated all nine properties as rental properties on their return and deducted losses from all nine of the properties from the gains they reported from the sale of the three properties the return reflected a total real_estate loss of dollar_figure of which dollar_figure including depreciation was associated with the three properties petitioners sold and the remaining dollar_figure was from the six properties which were generating rent the return reflected a gain on the three sales of dollar_figure respondent maintains the actual gain is dollar_figure mr vandegrift in addition to his real_estate activity was employed as a salesman by hillyard inc he earned roughly dollar_figure in this position in he maintains that he spent over one-half of his business-related time and over hours on the real_estate activities he did not maintain contemporaneous_records of his time and the trial record does not reflect any objective measure of the time he spent as either an employee of hillyard inc or as a real_estate businessman the sale of the property pincite dowitcher street in philadelphia required petitioners to pay dollar_figure in state transfer_taxes which was not allowed as an offset of the sale proceeds by respondent and is properly treated as additional basis i burden_of_proof opinion the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the commissioner’s determinations are incorrect rule a 290_us_111 however sec_7491 provides that subject_to certain limitations where a taxpayer introduces credible_evidence with respect to a factual issue relevant to ascertaining the taxpayer’s tax_liability the burden_of_proof shifts to the commissioner with respect to such issue sec_7491 provides that sec_7491 shall apply with respect to a factual issue only if the taxpayer has complied with certain substantiation requirements and maintained all records required by the code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews petitioners did not maintain contemporaneous_records accurately accounting for the time mr vandegrift spent as an employee of hillyard inc or as a real_estate businessman accordingly we find that petitioners have the burden_of_proof in this case under rule a because sec_7491 does not operate to shift the burden to respondent on this record we note also that respondent does have the burden of production regarding the penalty see sec_7491 ii whether mr vandegrift was in the real_estate business under sec_469 sec_469 operates to generally disallow passive_activity_losses a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for a year over the aggregate income from all passive activities for the year sec_469 passive activities include any trade_or_business in which the taxpayer does not materially participate sec_469 sec_469 provides that except as provided in sec_469 the term passive_activity definitively includes any rental_activity sec_469 defines the taxpayers relieved from passive loss treatment as those who perform more than one-half of their personal services in real_property trades_or_businesses in which they materially participate and who perform more than hours of services in real_property trades_or_businesses in which they materially participate for taxpayers filing a joint_return only one need qualify petitioners maintain mr vandegrift qualifies as such an individual he testified that over one-half of the total time he spent in business activity was devoted to the real_estate business we found mr vandegrift to be generally honest and forthright but his time estimate is suspect given his employment as a salesman for an employer in a business unrelated to the real_estate activity his subjective estimate also suffers from a lack of contemporaneous verification by records or other evidence sec_1_469-5t temporary income_tax regs fed reg date sets forth the requirements necessary to establish the taxpayer’s hours of participation as follows the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries we have held that the regulations do not allow a postevent ballpark guesstimate of time committed to participation in a rental_activity 135_tc_365 bailey v commissioner tcmemo_2001_296 goshorn v commissioner tcmemo_1993_578 we are forced to find on the record before us that petitioners have failed to carry their burden of establishing that mr vandegrift spent over one-half his work time in the real_estate business accordingly we hold that mr vandegrift does not satisfy the terms of sec_469 for iii whether the properties sold were part of the rental real_estate business and whether the rental losses may be netted against the sale gains respondent argues that because the three properties sold in were not rented there is short-term_capital_gain on the sales which may not be offset by the losses on the other real_estate activity because of our prior holding the rental real_estate loss is passive respondent argues the loss may not be offset against petitioners’ income because petitioners’ gross_income exceeds the limitations on allowable passive real_estate losses see sec_469 petitioners counter that regardless of whether the rental real_estate loss is passive all of the real_estate activities were part of one single business and the sec_469 provides in the case of any natural_person subsection a shall not apply to that portion of the passive_activity_loss or the deduction_equivalent of the passive_activity_credit for any taxable_year which is attributable to all rental_real_estate_activities with respect to which such individual actively participated in such taxable_year the sec_469 exception is limited to dollar_figure sec_469 the dollar_figure maximum offset however begins to be phased out for taxpayers whose adjusted_gross_income exceeds dollar_figure and is completely phased out for taxpayers whose adjusted_gross_income is dollar_figure or more sec_469 losses and gains in that single business must be netted to determine passive_income this issue is resolved by our factual determination that the real_estate activities constituted one trade_or_business and by the definitions of passive_activity in sec_469 and of passive_activity_loss in sec_469 sec_469 provides that passive_activity means an activity involving the conduct_of_a_trade_or_business in which the taxpayer does not materially participate mr vandegrift’s real_estate activities meet this definition sec_469 requires that aggregate losses from passive activities be netted with aggregate income from such activities mr vandegrift testified he initially acquired the three properties sold in with the intent to rent them however various circumstances eventually made a quick sale of the properties more advantageous to his real_estate business his testimony in this regard was credible and we hold that the properties sold were part of the same passive real_estate activity as the rental properties and that the proceeds should be netted with the rental loss to determine the correct amount of passive_income for iv whether the penalty is applicable sec_6662 authorizes the commissioner to impose a percent penalty on an underpayment_of_tax that is attributable to among other items negligence or any substantial_understatement_of_income_tax sec_6662 and b and for purposes of sec_6662 negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code and disregard includes any careless reckless or intentional disregard sec_6662 see also 85_tc_934 negligence is lack of due care or failure to do what a reasonably prudent person would do under the circumstances a return position that has a reasonable basis is not attributable to negligence sec_1 b income_tax regs similarly under sec_6664 no penalty is imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion respondent has determined that the 20-percent penalty under sec_6662 is applicable on the basis of negligence and a substantial_understatement_of_income_tax petitioners argue that they relied in good_faith on their return preparer and that such reliance was reasonable_cause for their underpayment regarding the underpayment related to the overstated itemized_deductions which they did not contest at trial we find petitioners’ reliance on their return preparer to be reasonable also we find that because of the technical nature of the question of whether mr vandegrift was a real_estate_professional they were acting in good_faith in claiming the activities were not passive however we find that their underpayment is not subject_to a reasonable_cause defense with regard to the overstated basis and expenses in the real_estate business the errors in reporting these items cannot be laid solely at the feet of the return preparer mr vandegrift is primarily responsible for the numbers on the return regarding the real_estate business to the extent excess basis and expenses were claimed on the return an underpayment results and the accuracy-related_penalty is applicable and upheld to reflect the foregoing and concessions by the parties decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b07-plr-139818-01 date date legend taxpayer year year parent year date date dear we received a letter from taxpayer’s authorized representative requesting permission for taxpayer to revoke its election under sec_41 of the internal_revenue_code this letter responds to that request the facts and representations submitted are as follows taxpayer is a calendar_year taxpayer formed in year in year taxpayer was acquired by parent in year parent elected to determine its credit_for_increasing_research_activities under the alternative_incremental_research_credit airc rules of sec_41 for itself and on behalf of its consolidated_group on date parent completed a plan to divest itself of taxpayer through a stock exchange which resulted in taxpayer’s stock being distributed to parent’s shareholders before the due_date of its return including extensions for the taxable_year ending on date taxpayer requested permission to revoke its airc election under sec_41 and to determine its credit_for_increasing_research_activities using sec_41 for the taxable_year ending on date and all subsequent years for taxable years beginning after date taxpayers may elect to determine their research_credit under the alternative_incremental_research_credit rules of sec_41 sec_41 provides that any election under sec_41 shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary based solely on the facts submitted and representations made we grant permission for taxpayer to revoke its election to determine the credit_for_increasing_research_activities under the airc rules of sec_41 taxpayer should compute its credit_for_increasing_research_activities under the general_rule of sec_41 for the taxable_year ending on date and all subsequent years provided that taxpayer does not make a new election to determine its credit_for_increasing_research_activities under the airc rules of sec_41 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures taxpayer or parent treated as qualified_research_expenses the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely s brenda m stewart senior counsel office of associate chief_counsel passthroughs and special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 lpazmon postn-116084-17 third party communication none date of communication not applicable uilc date date to jeremy h fetter area_counsel cc tegedc gcdal alpha road 13th floor mc ndal dallas texas tege division counsel from paul carlino branch chief employment_tax branch exempt_organizations employment_tax government entities tege associate chief_counsel subject whether an employment_tax audit concerns worker classification this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent question sec_1 whether the employment_tax audit of involves worker classification for the taxable periods and taxable years at issue when the taxpayer used the services of a professional_employer_organization peo to pay compensation to its sole corporate officer and the service has determined that the taxpayer is liable for additional employment taxe sec_1 due to the service’s recharacterization of payments made by the taxpayer to its corporate officer as wages the taxpayer conclusion for purposes of this memo employment_taxes means the federal_insurance_contributions_act fica tax under i r c the federal_unemployment_tax_act futa_tax under i r c and the collection of income_tax at source on wages under i r c postn-116084-17 the employment_tax audit does not involve worker classification for the taxable periods and years at issue because the taxpayer treated its corporate officer as an employee either by withholding employment_taxes from wages paid to the corporate officer or pursuant to the terms of the contractual agreement between the taxpayer and the peo facts the taxpayer is currently under an employment_tax audit for each of the four taxable quarters included in the -------------------- taxable years as well as the taxable years ending ------------------------------------------------------------- on -------------------- the taxpayer entered into a contract entitled client service agreement with ----------------------------------------------------------entire workforce including its corporate officer assigned employees under the terms of the contract the taxpayer was required to supervise all assigned employees and set their times wages and other terms and conditions of employment the contract further provides that control_over the day-to-day job duties of assigned employees and over the job site at which or from which the assigned employees perform their duties is solely and exclusively assigned and assumed by the taxpayer the duties of the peo under the contract include administering taxpayer payroll designated benefits and personnel policies and procedures related to the assigned employees providing human resource administration and payroll administration with respect to the assigned employees furnishing and keeping workers compensation insurance covering the assigned employees processing and paying wages from its own accounts to the assigned employees based on the hours and wage information reported by the taxpayer and filing all employment_tax returns ie form_940 employer's annual federal unemployment futa_tax return and form_941 employer's quarterly federal tax_return with the government and furnishing information returns to the workers the peo’s duties under the contract however were limited to only those wages that were reported and verified by the taxpayer to the peo for each pay_period in the event the taxpayer paid wages to the assigned employees that were not reported to the peo the contract provides that the taxpayer will be solely responsible for damages of any nature out of the client’s failure to report payment of unreported wages to any of the assigned employees the third party was part of an industry that among other things markets its ability to assist employers with ministerial tasks associated with the reporting and payment of employment_taxes a professional_employer_organization peo is the name commonly used to reference entities in this industry and we will reference the third party as such for the duration of this memo postn-116084-17 for the taxable quarters included in the ------ taxable_year as well as the -------taxable year the taxpayer’s corporate officer received wage payments through the peo these wages were reported on a form_w-2 wage and tax statement issued by the peo under the peo’s ein and included on forms and filed under the peo’s ein during this same year the corporate officer also received distributions directly from the taxpayer reported on a schedule_k-1 form_1120s shareholder’s share of income deductions credits etc under the taxpayer’s ein the distributions were not reported or verified by the taxpayer to the peo as wages so were not included on the employment_tax returns filed under the peo ein for the taxable quarters included in the ------ taxable_year as well as the ------- taxable_year the taxpayer did not contract with the peo instead the taxpayer withheld employment_taxes from wages it paid to its common_law employees and corporate officer the taxpayer reported these wage payments on forms and and issued forms w-2 to its common_law employees and its corporate officer during the --- ------- taxable_year the corporate officer also received distributions directly from the taxpayer reported on a schedule_k-1 form_1120s under the taxpayer’s ein during the audit the service determined that the wages reported for the -------------------- tax years with respect to its corporate officer are unreasonably low thus the service is proposing to recharacterize portions of the distributions paid_by the taxpayer directly to the corporate officer as wages and is proposing to assess additional employment_tax liabilities on such wages law and analysis for employment_taxes to apply an employer-employee relationship must exist an officer of a corporation who performs more than minor services and receives remuneration for such services is a considered an employee sec_3121 sec_31_3121_d_-1 sec_31_3306_i_-1 c -1 f see 119_tc_121 aff’d 93_fedappx_473 3d cir when an employer has provided additional compensation to an employee but has not subjected that compensation to withholding because it believes an exception from the definition of wages or of employment applies the service will assess employment_taxes under code sec_6201 against the portion of the payment that is being recharacterized as wages in contrast a worker classification issue arises when a service_recipient employer has classified an individual performing service as an independent_contractor or some other non-employee designation and has not withheld employment_taxes from compensation paid to the individual code sec_7436 provides the tax_court with jurisdiction to review certain employment_tax determinations made by the service in a worker postn-116084-17 classification case and the proper amount of employment_tax under such determinations in the present case there is no dispute that at all times during the taxable periods and taxable years at issue the taxpayer’s corporate officer performed more than minor services for the taxpayer received compensation_for such services and was an employee of the taxpayer pursuant to code sec_3121 for ------ the taxpayer treated the corporate officer as an employee evidenced by its issuance of a form_w-2 to the corporate officer reporting wage compensation as well as inclusion of such wage compensation on the forms and it filed with the service thus the audit of the ------- taxable periods and taxable_year with respect to the corporate officer is not properly considered worker reclassification the service should assess employment_taxes for ------- under sec_6201 against the portion of the payment that is being recharacterized as wages the position taken in this memorandum ie that the audit of the ------ taxable periods and taxable_year does not involve worker classification is consistent with the tax court’s orders in martin s azarian p a v commissioner docket no azarian and patricia arroyo dds corp alex mansilla and mercedes p arroyo v commissioner docket no arroyo these cases were dismissed by the court for lack of jurisdiction on the basis that the service had not made any determinations for purposes of sec_7436 when the corporations treated the officers as employees by issuing them a form_w-2 reporting wages and did not claim entitlement to sec_530 relief the court stated that sec_7436 only confers jurisdiction on the court to determine the correct amount of employment_tax when the service makes a worker classification determination or a determination that a taxpayer was not entitled to sec_530 relief not when the service concludes that a taxpayer underreported reasonable wage compensation_for ------ the corporate officer also received a form_w-2 reporting wages for services rendered to the taxpayer and the wages were also reported on forms and however the forms were filed under the peo’s ein and not the taxpayer’s the use of a peo by the taxpayer as a conduit for paying wages to its corporate officer however specifically the court has jurisdiction to review determinations that individuals are employees for purposes of employment_taxes under subtitle c of the code ie requiring reclassification of a nonemployee to employee status or the person for whom services are performed is not entitled to relief under sec_530 of the revenue act of sec_530 the tax_court has held that it has jurisdiction under sec_7436 when four required elements are present an examination in connection with the audit of any person a determination by the secretary that one or more individuals performing services for such person are employees of such person for purposes of subtitle c or such person is not entitled to the treatment under subsection a of sec_530 of the revenue act of with respect to such individual an actual controversy involving the determination as part of an examination and the filing of an appropriate pleading in the tax_court 144_tc_24 see also 142_tc_225 the taxpayer has not claimed entitlement to sec_530 relief postn-116084-17 does not affect whether the audit for ------- with respect to the distribution made by the taxpayer to its corporate officer is considered a worker classification audit the contractual arrangement demonstrates that no underlying issue of employment_tax classification status exists because the taxpayer specifically contracted with the peo to fulfill its obligations as an employer with respect to the treatment of the corporate officer as its employee thus the dispute is not whether the corporate officer performed more than minor services for the taxpayer and received compensation_for those services ie whether the corporate officer was an employee rather the dispute is limited to the amount of compensation required to be treated as wages paid to the corporate officer - including distributions paid directly by the taxpayer that did not flow through the peo - for employment_tax purposes ie whether the additional payments constitute wages rather than distributions consistent with the tax court’s reasoning in azarian and arroyo the service has not made a worker classification determination for the ------ taxable periods and taxable_year with regard to the corporate officer when the service concludes that the taxpayer underreported reasonable wage compensation therefore the service should also assess employment_taxes for ------- under sec_6201 against the portion of the payment that is being recharacterized as wages this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions