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 b02 plr-119153-09 date date ------------------------------------------------------------------- x -------------------------------------------------- state d1 d2 trust ----------------------------------------------------------- -------------------------------------------------- -------------------- -------------------- --------------------------- ----------------------------------------------------------------------------------------- dear ----- -------------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code x was formed under the laws of state and elected to be an s_corporation effective d1 on d2 shares of x were transferred to trust x represents that trust qualified to be an electing_small_business_trust esbt within the meaning of sec_1361 however no election was made under sec_1361 to treat trust as an esbt trust consequently was an ineligible shareholder and as a result x’s s_corporation_election terminated on d2 x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1361 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii no election under plr-119153-09 e applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 of the income_tax regulations provides that the trustee of the esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1 m ii sec_1362 provides in part that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election on d2 was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 this ruling is further contingent upon the trustees of trust filing an esbt election effective d2 with the appropriate service_center and the trust filing amended returns for taxable years beginning d2 and thereafter consistent with the treatment of the trust as an esbt the esbt election and the amended returns must be filed within days following the date of this letter and a copy of this letter should be attached to any such elections or returns if x or its shareholders fail to treat plr-119153-09 themselves as described above this ruling is null and void 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 specifically no opinion is expressed on whether x was or is otherwise eligible to be treated as an s_corporation or whether trust is eligible to be an esbt this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------------------- ---------------------------------------------- ---------------------- ---------------------------- legend x 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-164456-05 date date -------------------------------------------- ----------------------- -------- ------------------ d state dear --------------- correspondence submitted on behalf of x requesting relief under ' b of the internal_revenue_code this responds to your letter dated date and related facts x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation s taxable_year then the corporation will be treated as an s_corporation for the year in which the election plr-164456-05 is made if the election is made after the first two and one-half months of a corporation s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to ' a or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under ' a effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under ' b conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent audrey w ellis sincerely audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court stephen and patricia lindsey petitioners v commissioner of internal revenue respondent docket no 9014-o0l filed date stephen and patricia lindsey pro sese kerry h bryan for respondent memorandum opinion armen special_trial_judge this matter is before the court on respondent’s motion for summary_judgment as supplemented filed pursuant to rule a respondent contends that there is no genuine issue as to any material fact and that respondent’s tt all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all section references are to the internal_revenue_code as amended - - notice_of_determination should be sustained as a matter of law summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 we are satisfied that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law as explained in detail below we shall grant respondent’s motion for summary_judgment as supplemented background on date petitioners filed a petition for redetermination with the court assigned docket no challenging a notice_of_deficiency that respondent issued to them for the taxable_year see sec_6213 on date the court entered a decision in docket no pursuant to agreement of the parties the decision provided that petitioners were liable for a deficiency in income_tax in the amount of dollar_figure and an accuracy-related_penalty under sec_6662 in the amount of dollar_figure on date petitioners executed a form_4549 income_tax examination changes in which they agreed to deficiencies in their federal income taxes for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively on date respondent issued to petitioner stephen lindsey a final notice notice_of_intent_to_levy and notice of your right to a hearing this notice stated that petitioner owed federal_income_tax penalty and interest for and in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively and that respondent was preparing to collect the amounts due by levy on date respondent issued to petitioner patricia lindsey a final notice notice_of_intent_to_levy and notice of your right to q4e- a hearing that was identical to the final notice issued to her husband on or about date petitioners filed with respondent a form request for a collection_due_process_hearing in which they challenged the proposed collection action on the ground that there was no valid summary record of assessment on date settlement officer sherwin cogan wrote a letter to petitioners outlining the collection review process and enclosing transcripts of account taken from respondent’s integrated data retrieval system idrs transcripts of account the idrs transcripts of account listed by date and amount the assessments made against petitioners for the taxable years through on date settlement officer carl carter conducted an appeals_office hearing with petitioners’ representative thomas w roberts during the hearing settlement officer carter incorrectly stated that petitioners had executed agreements during the examination process conceding adjustments to their tax_liabilities for the each of the years in dispute settlement officer carter declined to provide mr roberts with copies of any such agreements during the appeals_office hearing however on date settlement officer carter wrote to mr roberts and provided him with a copy of the form_4549 that petitioners executed on date with respect to their tax_liabilities for and settlement officer carter retired from the internal_revenue_service on date and petitioners’ case was transferred to settlement officer laurel minder in early date settlement officer minder prepared an appeals transmittal_memorandum and case memorandum that stated in part stephen and patricia lindsey signed the form_4549 agreeing to the examination deficiencies for periods ended and the period ended does not indicate that the taxpayers agreed to this examination deficiency review of idrs for the period ended show that the taxpayers signed form_870 with examination on date agreeing to this deficiency ' the taxpayers are also claiming that their tax status is that of non resident_alien they claim that they have no filing_requirements or taxable_income for the above periods the record does not include a copy of the form_870 that petitioners purportedly executed on date with respect to their tax_liability for on date the appeals_office issued to petitioners a joint notice_of_determination concerning collection action s under sec_6320 and or stating that respondent would execution of form_870 waiver_of_restrictions_on_assessment_and_collection of deficiency in tax and acceptance of overassessment by a taxpayer signifies the taxpayer’s agreement to adjustments proposed by the commissioner and the taxpayer’s consent to the immediate_assessment of the resulting tax_liability -- - proceed with collection against petitioners for the taxable years through petitioners filed with the court a timely petition for lien or levy action under code sec_6320 or sec_6330 challenging respondent’s notice_of_determination the petition includes allegations that respondent erred by failing to obtain verification from the secretary that the requirements of any applicable law or administrative procedure were met as required under sec_6330 and identify the assessment officer that prepared the form sec_23c summary record of assessment for the years in issue after respondent filed an answer to the petition respondent filed a motion for summary_judgment and declaration attaching thereto forms certificate of assessments payments and other specified matters for each of the years in issue petitioners filed a response to respondent’s motion petitioners assert that material issues of fact remain in dispute regarding the documents that settlement officer carter relied on at the appeals_office hearing to verify that the requirements of all applicable laws and administrative procedures were met with regard to the disputed assessments this matter was called for hearing at the court's motions sessions held in washington d c on date december at the time that the petition was filed petitioners resided in garden grove california - and date counsel for respondent appeared at the hearings and presented argument in support of respondent's motion no appearance was made by or on behalf of petitioners at any of the hearings respondent filed a supplement and a second supplement to his motion for summary_judgment attaching thereto declarations executed by settlement officers carter and minder and txmoda transcripts of account with regard to petitioners’ taxable years through petitioners filed a supplemental response to respondent’s motion for summary_judgment attaching thereto a declaration executed by mr roberts discussion sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay such tax within days after notice_and_demand for payment the secretary is authorized to collect such tax by levy upon the person’s property sec_6331 provides that at least days before enforcing collection by way of a levy on the person's property the secretary is obliged to provide the person with a final notice_of_intent_to_levy including notice of the administrative appeals available to the person sec_6330 generally provides that the commissioner cannot proceed with collection by way of a levy action until the person has been given notice and the opportunity for an administrative --- - review of the matter in the form of an appeals_office hearing and if dissatisfied with judicial review of the administrative determination see 115_tc_35 114_tc_176 sec_6330 prescribes the matters a person may raise at an appeals_office hearing in sum sec_6330 provides that a person may raise collection issues such as spousal defenses the appropriateness of the commissioner's intended collection action and possible alternative means of collection sec_6330 b provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing only if the person did not receive a notice_of_deficiency for the taxes in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 goza v commissioner supra sec_6330 provides for judicial review of the administrative determination in the tax_court or a federal district_court as may be appropriate petitioners do not challenge the existence or the amount of their underlying tax_liabilities for the years in question petitioners simply assert that the settlement officer failed either before or during the appeals_office hearing to verify that respondent made valid assessments against petitioners for the taxes alleged to be due we disagree --- - federal tax assessments are formally recorded on a summary record of assessment sec_6203 the summary record must provide identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment sec_301_6203-1 proceed admin regs contrary to petitioners’ position sec_6330 does not require the commissioner to rely on a particular document to verify that the requirements of any applicable law or administrative procedure have been met in a collection matter see kuglin v commissioner tcmemo_2002_51 nor is respondent obliged to provide the taxpayer with a copy of the verification see 118_tc_162 the record in this case shows that the settlement officer obtained and reviewed idrs transcripts of account with regard to petitioners’ taxable years through prior to the appeals_office hearing the idrs transcripts of account contained all the information prescribed in sec_301_6203-1 proced admin regs kugqlin v commissioner supra the record also includes forms and txmoda transcripts that serve to supplement and substantiate the information contained in the idrs transcripts of account see davis v commissioner supra pincite- form is presumptive evidence that an assessment was made against a taxpayer petitioners have not alleged any irregularity in the assessment process that would raise a question about the validity of the assessments or the information contained in the transcripts of account or the forms id mann v commissioner tcmemo_2002_48 accordingly we hold that the settlement officer satisfied the verification requirement of sec_6330 cf 117_tc_117 petitioners have failed to raise a spousal defense make a valid challenge to the appropriateness of respondent’s intended collection action or offer alternative means of collection these issues are now deemed conceded rule b in the absence of a valid issue for review we conclude that there is no dispute as to a material fact and that respondent is entitled to judgment as a matter of law sustaining the notice_of_determination dated date finally we mention sec_6673 which authorizes the tax_court to reguire a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the court has indicated its willingness to impose such penalties in collection review cases 115_tc_576 although we shall not impose a penalty upon petitioners pursuant to sec_6673 we admonish petitioners that the court will consider imposing such a penalty should they return to the court and advance similar arguments in the future to reflect the foregoing an order granting respondent’s motion for summary_judgment as supplemented and decision will be entered


department of the treasury internal_revenue_service washington d c contact person id number ---- telephone number -------------- tax exempt and government entities date date number release date se t eo ra t uil legend a b c d e f g h t w x y z aa bb cc dd ee ff hh mm oo qq dear ------------------ sec_4941 of the internal_revenue_code this is in response to your letter dated date requesting rulings under facts b created two trusts called dd and ee both trusts provide for e f and their x is exempt from federal_income_tax under sec_501 of the code and is a the father of e and f created a_trust called cc the dispositive terms of cc are classified as a private_foundation under sec_509 of the code x was founded in hh with significant substantially equal contributions from a and his brother b a and b are now deceased c who is now deceased was the cousin of a and b c created a testamentary_trust identified as aa which provided for a present beneficial_interest on behalf of two nieces e and f upon the death of either niece the trustee pays the principal and any undistributed_income to the surviving niece’s trust fund upon the death of both nieces the balance of the trust estate will be distributed to x d who is now deceased was also a cousin of a and b d created a testamentary_trust known as bb which is very similar to aa’s dispositive provisions except upon either niece’s death the remaining principal of the particular trust is transferred to the niece’s living descendants if e or f does not have living descendants the balance of the trust is distributed to x similar to those of bb except upon e or f’s death the remaining principal is distributed to such daughter’s living issue-- per stirpes if such daughter has no issue-- then to a’s living issue-- per stirpes if a does not have any issue-- then to x issues upon b b’s sisters in the case of ee a e and f’s death the remaining principal of the trust is paid and distributed to a’s issue-- per stirpes or if there are no issue-- to x collectively known as ff for the benefit of e f e’s and f’s descendants except for aa and then x in each situation the trustee s is given broad investment and discretionary power to distribute income and principal for the benefit of any beneficiary of the trust therefore e and f have a present beneficial_interest while x has a contingent_remainder interest y and z believing the trustees were not distributing sufficient amounts pursuant to the terms of the two trusts f requested the trustees to make larger distributions from the trusts the trustees acceded to most of the requests not receiving similar requests from e during the same period the trustees began distributing larger sums to e but not as much as was distributed to f f continually demanded for greater periodic distributions that led to conflicts with the trustees appropriate state court having jurisdiction over the two trusts after protracted mediation of the disputes the parties reached a settlement agreement the terms of the settlement agreement included the following cash distributions to f distributions of t stock to e having a value that equalized the earlier larger distributions to f periodic cash distributions to e and f until y and z terminated payment of trustee and professional fees fifty-five percent of the remaining trust assets of y and z to be distributed in equal shares to e and f the remainder of the y and z assets to be distributed to x and the child born to e and certain disputes arose between the beneficiaries and trustees of two similar trusts as stated above a b c and d created five trusts aa bb cc dd and ee the trustees of y and z represented by separate counsel petitioned the adopted by third persons is neither a contingent future current beneficiary nor a contingent_remainder beneficiary of y or z and the child has no interest of any type in y or z f expressed similar concerns with respect to ff in light of similar factual situations and under threat of additional protracted court proceedings the trustees and beneficiaries entered into negotiations in an effort to resolve their differences x states if substantial additional distributions are made to e and f during their lifetimes the trusts will likely be exhausted prior to e and f’s deaths and there may be no assets left for the benefit of the remainder beneficiaries x states the grantors’ intent in creating their respective trusts was a to support e and f during their lifetimes b to provide funds for e and f’s surviving children or c in default of such children to benefit x remainder beneficiaries of the trusts additionally e and f have substantial personal estates by reason of the termination and distribution of y and z in light of such changes x states the intent of a b c and d will be served by terminating and distributing ff currently among e f and x accordingly the parties reached a settlement agreement settlement agreement in qq the settlement agreement was approved by the court having jurisdiction over ff the settlement agreement’s provisions are similar to the earlier settlement agreement and include the following terms e and f have reached their middle years and do not have children who qualify a sec_1 payment of trustee and professional fees and unpaid administrative expenses fifty-five percent of the remaining trusts’ assets of each trust to be distributed in equal shares to e and f the remainder of the trusts’ assets to be distributed to x e will provide in her estate plan for any child or children born to or adopted by her and who survive her at least twenty-five percent of the net estate f will provide in her estate plan for any child or children born to or adopted by her and who survive her at least fifty percent of the net estate ruling requested trustee of dd and ee collectively request the following rulings g as the trustee of aa bb and cc h as the trustee of bb and cc and w as the with respect to g in his capacity of foundation_manager of x the proposed termination of aa bb and cc and distribution of aa bb and cc assets as provided in the settlement agreement does not constitute an act of self-dealing described in sec_4941 of the code with respect to e and f the proposed termination of ff and distribution of ffs’ assets as provided in the settlement agreement does not constitute an act of self-dealing described in sec_4941 of the code law sec_4941 of the code imposes certain excise_taxes on direct and indirect acts of self-dealing between a disqualified_person and a private_foundation and also imposes a separate excise_tax on the participation by any foundation_manager in an act of self-dealing between a disqualified_person and a private_foundation knowing it is such an act unless such participation is not willful and is due to reasonable_cause sec_4941 of the code imposes an initial tax of of the amount_involved with respect to the act of self-dealing for each year in the taxable_period if the act of self- dealing is not corrected within the taxable_period then sec_4941 imposes a second tier excise_tax equal to of the amount_involved sec_4941 and sec_4941 of the code impose excise_taxes on a foundation_manager who participates in an act of self-dealing between the private_foundation and a disqualified_person where the foundation_manager knows such act is an act of self-dealing under sec_4941 the initial tax i sec_2 of the amount_involved the maximum amount of tax imposed by sec_4941 is capped at dollar_figure for each disqualified_person sec_4941 provides that in any case in which a tax is imposed on a foundation_manager under sec_4941 a second_tier_tax equal to of the amount_involved is imposed if a foundation_manager refused to agree to part or all of the correction of the self-dealing transaction the tax under sec_4941 is also capped at dollar_figure for each foundation_manager transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation foundation_manager member_of_the_family of a substantial_contributor to the foundation sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations provides that for purposes of sec_4941 of the code the term self-dealing includes any direct or indirect transaction described in sec_53_4941_d_-1 of the regulations sec_4941 of the code defines the term self-dealing to include the sec_4946 of the code defines a disqualified_person to include a sec_4946 of the code defines a disqualified_person to include a sec_53_4941_d_-1 of the regulations provides that the term indirect self- dealing shall not include a transaction with respect to a private foundation’s interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if i the administrator or executor of an estate or trustee of a revocable_trust either a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust ii such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation iii iv such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641 b - of this chapter or in the case of a revocable_trust before it is considered subject_to code sec_4947 the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation’s interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transactions occurring after date the transaction either a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up out of its exempt purposes or b results in the foundation receiving an asset related to the active carrying c is required under the terms of any option which is binding on the estate_or_trust analysis sec_53_4946-1 of the regulations defines member_of_the_family for g is a foundation_manager of x and is therefore a disqualified_person within the e and f nieces of c and d are disqualified persons with respect to x they are sec_4941 of the code defines the term self-dealing to include any direct purposes of sec_4946 of the code to include a lineal descendant the children of a a substantial_contributor to x since e and f are lineal_descendants of a under sec_53_4946-1 of the regulations they would be included as members of the family under sec_4946 of the code meaning of sec_4946 of the code or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person or 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 however sec_53_4941_d_-1 of the regulations provides a transaction with respect to a private foundation’s interest or expectancy in property held by an estate does not constitute indirect self-dealing if five specific conditions are met based on your representations the settlement agreement satisfies each of the five conditions as explained below accordingly its implementation will not result in indirect self-dealing under sec_4941 of the code f including the purpose of simply augmenting their estates therefore x has a mere unvested contingent future_interest in ff which could be defeated either by the trustees’ complete distribution of all of ff’s assets to e and or f or the adoption of a child by e or f first the trustees of ff have complete discretion in making distributions to e and or second the settlement agreement which includes provisions regarding the distribution of the assets among the respective beneficiaries of ff has been approved by the court having jurisdiction over ff third the settlement agreement has been executed before ff is subject_to section fourth ff is receiving an amount that equals or exceeds the fair_market_value of of the code which requires all unexpired interests in a non-exempt trust to be devoted to one or more purposes described under sec_170 of the code in this situation sec_4947 does not apply to any of the trusts because the unexpired interests in the trusts are not devoted to purposes described in sec_170 of the code x’s interest or expectancy in ff because the trustees have complete discretion in making distributions to e f and their descendants x’s contingent_interest could be zero therefore x has a mere unvested contingent future_interest in ff which could be defeated however through arm’s-length negotiations all parties agreed x’s distributions would equal ------ of ff’s total assets therefore ff will receive a distribution of equal or greater than x’s expectancy which could have been zero fifth by executing the settlement agreement x will receive an interest that is at least as liquid as the interest it is giving up prior to the settlement agreement x would be receiving only a contingent_remainder interest in the trusts the amount x would receive is uncertain the settlement agreement eliminates the uncertainty or illiquidity and replaces it with cash and readily saleable publicly_traded_securities d e of the code accordingly there is no basis for finding any self-dealing under section based on the facts and information submitted and the representations made we conclusion conclude as follows with respect to g in his capacity of foundation_manager of x the proposed termination of aa bb and cc and distribution of aa bb and cc assets as provided in the settlement agreements does not constitute an act of self- dealing described in sec_4941 of the code with respect to e and f the proposed termination of ff and distribution of ffs’ assets as provided in the settlement agreements does not constitute an act of self-dealing described in sec_4941 of the code pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative you should keep a copy of this letter in your permanent records this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described if you have any questions about this ruling please contact the person whose name this ruling is directed only to the organizations that requested them section and telephone number are shown in the heading of this letter k of the code provides that they may not be used or cited as precedent debra j kawecki manager eo technical technical group debra j kawecki sincerely yours


t c summary opinion united_states tax_court brandon dean morris petitioner v commissioner of internal revenue respondent docket no 23655-09s filed date brandon dean morris pro_se ardney j boland iii for respondent summary opinion goeke judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court continued 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 respondent determined deficiencies in petitioner’s federal_income_tax of dollar_figure and dollar_figure for and respectively respondent also determined a sec_6651 failure to timely file addition_to_tax of dollar_figure for as well as sec_6662 accuracy-related_penalties of dollar_figure and dollar_figure for and respectively after concessions the issues remaining for decision are whether petitioner is entitled to disputed deductions claimed on schedule c profit or loss from business for car and truck expenses of dollar_figure and dollar_figure for and respectively we hold that he is not entitled to the disputed car and truck expense deductions for but is entitled to dollar_figure of the disputed car and truck expense deductions for continued rules_of_practice and procedure 2all dollar amounts are rounded to the nearest dollar 3after trial respondent conceded that petitioner is entitled to additional deductions above those already allowed totaling dollar_figure and dollar_figure for and respectively these concessions will affect the amounts of the sec_6651 addition_to_tax and the sec_6662 penalties whether petitioner is entitled to disputed schedule c deductions for travel_expenses of dollar_figure and dollar_figure for and respectively we hold that he is entitled to dollar_figure of the disputed travel_expenses for and dollar_figure of the disputed travel_expenses for whether petitioner is entitled to disputed schedule c deductions for meal and entertainment_expenses of dollar_figure and dollar_figure for and respectively we hold that he is not whether petitioner is entitled to a sec_163 mortgage interest_deduction for in excess of the dollar_figure respondent already allowed we hold that he is not whether petitioner is liable for the sec_6651 failure to timely file addition_to_tax for we hold that he is and whether petitioner is liable for sec_6662 accuracy-related_penalties for and we hold that he is background at the time the petition was filed petitioner resided in oklahoma sec_162 business_expense deductions during the years at issue petitioner worked as an independent_contractor for total impact services inc total impact petitioner’s job involved traveling to various locations throughout the united_states to re-merchandise goods in venues such as lowe’s or home depot this work entailed adding new products putting up new displays and rearranging current merchandise to catch the eye of customers during the years at issue petitioner’s significant other now his wife brandi tarwater was also employed by total impact and frequently traveled with petitioner across the country total impact did not pay or reimburse petitioner for automobile meal and entertainment or travel_expenses he incurred because of his work facts regarding the various expenses are discussed infra a car and truck expenses on his and tax returns petitioner claimed that he and ms tarwater4 drove big_number miles in and approximately big_number miles in because of their jobs with total impact petitioner claimed corresponding deductions of dollar_figure and dollar_figure for and respectively in the notice_of_deficiency respondent allowed dollar_figure of petitioner’s reported car and truck expenses but allowed none of the reported car and truck expenses after 4when petitioner and ms tarwater traveled together they used only one vehicle reviewing evidence produced before and during the trial respondent conceded dollar_figure of the reported expenses but no additional expenses for b travel_expenses because of his work travel petitioner often spent nights in hotels petitioner claimed dollar_figure and dollar_figure in travel expense deductions on his and schedules c respectively in the notice_of_deficiency respondent allowed dollar_figure of petitioner’s reported travel_expenses but allowed none of the reported travel_expenses after reviewing evidence produced both before and during trial respondent conceded an additional dollar_figure and dollar_figure of the reported and expenses respectively c meal and entertainment_expenses petitioner often ate meals at restaurants while traveling for work petitioner and ms tarwater also engaged in various recreational activities while traveling such as going to the movies or visiting parks which charged an admittance fee petitioner claimed dollar_figure and dollar_figure in meal and entertainment expense deductions on his and schedules c respectively in the notice_of_deficiency respondent allowed dollar_figure of petitioner’s reported meal and entertainment_expenses but allowed none of the reported meal and entertainment_expenses after reviewing evidence produced before and during trial respondent conceded dollar_figure of the reported expenses but no additional expenses for sec_163 mortgage interest_deduction on his schedule a itemized_deductions petitioner claimed a mortgage interest_deduction of dollar_figure in the notice_of_deficiency respondent allowed a mortgage interest_deduction of only dollar_figure in support of the claimed deduction petitioner introduced a form_1098 mortgage interest statement and a timeshare agreement the form_1098 listed petitioner john d morris and denise r morris as the borrower sec_5 and reflected dollar_figure in total interest points and mortgage_insurance premiums_paid the timeshare agreement was unsigned but listed petitioner and ms tarwater as owners ms tarwater’s credit card information was listed on the timeshare agreement page entitled authorization for auto pay additional information petitioner received an extension to date to file his federal tax_return however petitioner did not sign or mail his self-prepared return until date petitioner timely filed his return which was prepared by a 5the relationship between petitioner john d morris and denise r morris was not established certified_public_accountant on date respondent issued a notice_of_deficiency to petitioner for and petitioner timely filed a petition contesting the deficiencies addition_to_tax and penalties i burden_of_proof discussion the commissioner’s determinations in a notice_of_deficiency are presumed correct and taxpayers bear the burden of proving that the commissioner’s determinations are incorrect rule a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving that they have met all requirements necessary to be entitled to the claimed deductions rule a 503_us_79 petitioner has not argued that sec_7491 applies in this case and the record does not support a conclusion that the requirements of sec_7491 have been met petitioner therefore bears the burden_of_proof ii sec_162 business_expense deductions sec_162 allows a deduction for all ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements of sec_162 is a question of fact 320_us_467 taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the commissioner to determine the correct_tax liability sec_6001 112_tc_183 no deduction is allowed for personal_living_and_family_expenses sec_262 certain expenses described in sec_274 are subject_to strict substantiation rules no deduction under sec_162 shall be allowed for among other things travel_expenses entertainment gifts and expenses with respect to listed_property defined in sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense or other item the time and place of the travel entertainment or use or date and description of the gift the business_purpose of the expense or other item and in the case of entertainment or gifts the business relationship to the taxpayer of the recipients or persons entertained sec_274 we may not use the cohan doctrine to estimate expenses covered by sec_274 hough v commissioner tcmemo_2006_58 slip op pincite passenger automobiles and any other_property used as a means of transportation are generally listed_property as defined by sec_280f sec_274 sec_280f and ii accordingly with certain exceptions none of which petitioner has shown he meets taxpayer’s claiming deductions for car and truck expenses must satisfy the strict substantiation requirements of sec_274 sec_1_274-5a income_tax regs exempts taxpayers from the strict substantiation requirements when there is a loss of records beyond their control although petitioner testified that some of his records were destroyed as a result of water damage to a storage unit he offered no other evidence such as photographs insurance claims or corroborating testimony that such records were indeed destroyed we thus find that sec_1_274-5a income_tax regs does not apply in this case we proceed to determine whether the records petitioner produced are sufficient for us to sustain certain deductions greater than those respondent allowed in the notice_of_deficiency or conceded after trial a car and truck expenses in support of the claimed miles driven for petitioner introduced oil change receipts which showed mileage on his various vehicles emails from total impact listing the dates and locations of the stores he was scheduled to remerchandise and a daily planner which listed many of the cities he traveled to as well as certain odometer readings from his vehicles petitioner introduced fewer supporting documents regarding his mileage although he did introduce emails from total impact listing the dates and locations of the stores he was scheduled to remerchandise during that year on his schedule c petitioner claimed a dollar_figure deduction for car and truck expenses corresponding to the big_number miles he claimed to have driven during that year respondent allowed a deduction for dollar_figure of these expenses in the notice_of_deficiency and conceded no additional_amounts after trial after reviewing the records petitioner provided for we find that petitioner failed to prove that he drove sufficient miles to entitle him to a car and truck expense deduction greater than that respondent already allowed in the notice_of_deficiency because the odometer readings on certain oil change receipts seemed incredible and in any case did not take into account any personal miles petitioner drove we chose to rely primarily on the schedules of cities kept by petitioner and sent to him by total impact using the schedules of cities to calculate the business miles petitioner drove yields a number of miles slightly below the number of miles respondent allowed as a result we find that petitioner has failed to prove entitlement to any additional deduction for car and truck expenses above that respondent already allowed in the notice_of_deficiency on his schedule c petitioner claimed a dollar_figure deduction for car and truck expenses corresponding to the big_number miles he claimed to have driven during that year respondent allowed none of this deduction in the notice_of_deficiency but conceded dollar_figure in car and truck expenses after the trial after reviewing the records petitioner supplied we find that petitioner has proven he traveled big_number miles on business during using the standard mileage rate in effect for of dollar_figure5 we find that petitioner is entitled to a total deduction of dollar_figure for car and truck expenses in or dollar_figure above the amount respondent conceded b travel_expenses petitioner claimed dollar_figure and dollar_figure in travel expense deductions on his and schedules c respectively in the notice_of_deficiency respondent allowed dollar_figure of petitioner’s claimed travel expense deduction but none of the claimed travel expense deduction after trial respondent conceded an additional dollar_figure of the reported expenses and dollar_figure of the reported expenses in support of his claimed travel expense deductions petitioner introduced a number of hotel reservations and receipts after reviewing the records petitioner supplied we find that he has proven entitlement to deduct an additional dollar_figure of travel_expenses for and an additional dollar_figure of travel_expenses for these amounts are in excess of the amounts respondent already allowed or conceded c meal and entertainment_expenses petitioner claimed deductions of dollar_figure and dollar_figure in meal and entertainment_expenses on his and schedules c respectively in the notice_of_deficiency respondent allowed dollar_figure of petitioner’s claimed meal and entertainment expense deductions but allowed none of the claimed deduction after trial respondent conceded dollar_figure of the reported expenses but no additional expenses respondent allowed both the and expenses on a per_diem basis in support of his claimed meal and entertainment expense deductions petitioner introduced numerous receipts from restaurants around the country in addition to the meal receipts petitioner also introduced a multitude of other receipts from movie theaters parks and stores as well as other evidence of expenditures such as copies of checks money orders a large number of petitioner’s records are insufficient in various ways many of the meals were paid for with ms tarwater’s credit card many of the receipts do not clearly reflect the business_purpose of the expenditure and many receipts are illegible or else the item purchased is unclear after reviewing the records petitioner supplied we find that he has failed to prove entitlement to any additional deductions for meal and entertainment_expenses above those already allowed by respondent in the notice_of_deficiency or conceded after trial iii sec_163 mortgage interest_deduction sec_163 allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness as an exception sec_163 generally disallows a deduction for personal_interest personal_interest however does not include qualified_residence_interest sec_163 in general a qualified_residence is defined as a taxpayer’s principal_residence and one other home that is used as a residence by the taxpayer sec_163 qualified_residence_interest means any interest_paid or accrued during a tax_year on acquisition_indebtedness or home 7as ms tarwater and petitioner were not married in or petitioner’s filing_status was single during those years petitioner is not entitled to deduct expenses paid_by ms tarwater 8for example a best buy receipt for dollar_figure was included in petitioner’s records the receipt appears to be for a camera and a warranty no business_purpose for this expense was provided equity indebtedness with respect to the taxpayer’s qualified_residence sec_163 although petitioner introduced a form_1098 reflecting dollar_figure in total interest points and mortgage_insurance premiums_paid as well as a timeshare agreement those items are not sufficient in this case to prove petitioner paid the interest he claims to have paid the form_1098 listed three people as the borrowers petitioner john d morris and denise r morris the amount_paid by each was not specified in addition the timeshare agreement was unsigned and in any case listed ms tarwater’s credit card information on the page entitled authorization for auto pay after reviewing the relevant evidence we find that petitioner has failed to prove that he paid qualified_resident interest above the dollar_figure respondent already allowed in the notice_of_deficiency iv sec_6651 failure_to_file addition_to_tax for sec_6651 provides for an addition_to_tax for failure to timely file federal_income_tax returns determined with regard to any extension of time for filing unless the taxpayer shows that such failure was due to reasonable_cause and not willful neglect 121_tc_308 regarding the amount of the addition_to_tax sec_6651 provides that there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate petitioner filed his return on date one day after the return was due petitioner testified that he planned on filing the weekend before the deadline but was delayed in southern oklahoma due to work however petitioner did not present any additional facts to support whether the delay was due to reasonable_cause similarly petitioner did not introduce any facts or argument regarding why he would not have been able to file before leaving for southern oklahoma considering the facts we find petitioner has not established that the delay in filing was due to reasonable_cause accordingly we find that petitioner is liable for a sec_6651 addition_to_tax v sec_6662 accuracy-related_penalties sec_6662 and b and imposes a accuracy-related_penalty if any part of an underpayment_of_tax required to be shown on a return is due to among other things negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax the penalty is of the portion of the underpayment_of_tax to which the section applies sec_6662 the commissioner bears the burden of production on the applicability of an accuracy-related_penalty in that he must come forward with sufficient evidence indicating that it is proper to impose the penalty see sec_7491 see also 116_tc_438 once the commissioner meets this burden the burden_of_proof remains with the taxpayer including the burden of proving that the penalty is inappropriate because of reasonable_cause and good_faith see higbee v commissioner t c pincite the commissioner satisfies his burden of production by showing that the understatement meets the definition of substantial see janis v commissioner tcmemo_2004_117 aff’d 461_f3d_1080 9th cir and aff’d 469_f3d_256 2d cir an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return less any rebate sec_6662 even considering the additional deductions we have found petitioner to be entitled to the understatement of income_tax still exceeds the greater of of the tax required to be shown on the return or dollar_figure and is thus substantial respondent has therefore met his burden of production the amount of an understatement shall be reduced by that portion of the understatement which is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment or any item if the taxpayer adequately disclosed relevant facts affecting the item’s tax treatment in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of the item by the taxpayer sec_6662 considering the facts and law we find that neither of these reductions applies in this case pursuant to sec_6664 the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment for which a taxpayer establishes that he or she had reasonable_cause and acted in good_faith dunlap v commissioner tcmemo_2012_126 slip op pincite whether a taxpayer has acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including efforts to assess the proper tax_liability the taxpayer’s knowledge and experience and the extent to which the taxpayer relied on the advice of a tax professional sec_1_6664-4 income_tax regs 9petitioner made no argument at trial on this point and did not submit a pre- or post-trial brief generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability id petitioner prepared his own tax_return for using various receipts and logs most of which were introduced into evidence as previously discussed such evidence was insufficient for us to sustain most deductions petitioner claimed for petitioner introduced no other relevant evidence which could establish reasonable_cause and good_faith in the preparation of his tax_return although petitioner testified that many of his records were destroyed he introduced no corroborating evidence unlike the return petitioner’s return was prepared by an unidentified certified_public_accountant petitioner testified that he gave the accountant all relevant information including a box of receipts although petitioner claims to have followed the advice given to him by his accountant he has made an insufficient attempt to establish that the reliance was reasonable see 89_tc_849 aff’d on another issue 904_f2d_1011 5th cir aff’d 501_us_868 sec_1_6664-4 income_tax regs we have previously held that-- for a taxpayer to rely reasonably upon advice so as possibly to negate a sec_6662 accuracy-related_penalty determined by the commissioner the taxpayer must prove that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir considering the records petitioner produced at trial and the lack of information supplied regarding the accountant and the records petitioner supplied to the accountant we find that petitioner did not satisfy these three requirements considering the facts and law we find that petitioner has also failed to prove he meets the reasonable_cause defense of sec_6664 as previously discussed petitioner has also failed to show substantial_authority or a reasonable basis for the positions he took on his and tax returns as a result we hold petitioner is liable for the accuracy-related_penalty with respect to those deficiencies for which we have found him liable vi conclusion we find petitioner is entitled to deduct dollar_figure and dollar_figure of the disputed and schedule c expenses respectively we also find that petitioner is not entitled to deduct mortgage interest for in excess of the dollar_figure respondent already allowed further we find petitioner liable for the addition_to_tax under sec_6651 for as well as the sec_6662 accuracy-related_penalty for both and to reflect the foregoing and concessions by the parties decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax exempt an government entile s division release number release date date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years 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 since 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 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 the instructions in notice further action if you disagree with our proposed deletions you should follow if you agree with our deletions you do not need to take any 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 letter cg catalog number 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 letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil legend founder director employee related for-profit b date c state d legal organization e f g program l m h dollars j dollars k dollars up front fee monthly fee salary director employee director employee dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues e do you meet the organizational_test under sec_501 of the code no for the reasons described below letter cg catalog number 47630w do you meet the operational_test under sec_501 of the code by operating exclusively for an exempt_purpose no for the reasons described below do you qualify for exemption under sec_501 of the code no for the reasons below e facts you are a non-profit corporation formed on b under the laws of the state of c your articles of incorporation were amended to change the type of corporation from mutual benefit with members to public benefit with members sec_3 of the articles describes your business as services for the elderly and persons with disabilities section of the articles provides that your assets are to be disbursed to d upon dissolution f and phone calls file bankruptcy you were formed to provide a program for seniors and disabled persons to prevent creditor harassment your concept was originated by e senior partner of a bankruptcy law firm located in c many seniors and disabled persons are on limited income such as social_security and or pensions yet they carry significant credit card medical and other unsecured debt which they have insufficient income to pay creditors call badger and harass such persons through multiple the letters harassment or filing chapter bankruptcy has increased significantly since the bankruptcy reform act therefore the individuals cannot afford to pay the debt or to file for bankruptcy due to the fact that they are judgment-proof as a result of their limited income filing bankruptcy is not necessary e developed a program within f called g g has been in existence for three years and includes more than seniors g takes advantage of provisions in the law that provide that creditors are not permitted to contact a debtor by telephone or mail once the individual is represented by an attorney f charges an upfront fee of h dollars and monthly fee of j dollars to clients wishing to stop harassment by creditors such individuals alternatives the cost have two deal with of the program is made available to judgment proof seniors and disabled persons receiving primarily social_security pension or disability throughout multiple jurisdictions clients of g as operated by f will be transferred to you you will continue to charge the same fees as those charged by f you do not have a fee schedule fees will be modified down so this service can be provided to all that need help as the program grows you will bring in other attorneys as necessary to represent judgment proof clients to prevent creditor harassment the attorneys will not represent clients in challenging lawsuits the only service provided is to communicate with creditors regarding the client’s judgment proof status as a sec_501 organization you will be able to obtain referrals from legal aid organizations you do not anticipate soliciting contributions you will be self-sustaining from the fees charged for services the fees charged will proviue funds for you to send out mail to fulfill your function hire employees to communicate with clients and creditors and advertise your services in a limited manner clients are interviewed over the phone or via a written application to determine if they qualify for the program as being judgment proof you then send a letter to each creditor as indicated by the client advising that the client is now represented by an attorney if a client is sued by a creditor letter cg catalog number 47630w you will contact the attorney representing the creditor and submit proof that the client's income is exempt from judgment you provide no other legal representation clients may contact you at any time with questions you maintain a website providing information about your services you also submitted a promotional flyer and brochure about your program in addition you submitted a copy of your adopted conflict of interest policy l is e is the managing partner of f e will receive compensation of k dollars annually to oversee your operations approximately hours per week the amount of e’s compensation is based on his active experience as an attorney in the region your board_of directors is composed of e l and m a bankruptcy attorney and partner of f m serves as an employee of f m's services are currently leased to you l and m were voted onto your board by e acting as your sole initial director you also lease the services of three other employees from f eventually m as well as the other leased employees will cease to be employees of f and will work solely for you you sublease your facility from f under the lease agreement you and your visiting clients will share parking lot space with f and have reasonable access to the designated client meeting rooms for your clients in addition your employees and clients will have access to common areas break room bathrooms a main reception area and the computer service room two of the rooms leased by you are segregated by doors and locks from f’s space you also lease office equipment from f including desks chairs computers and a printer law sec_501 of the code provides that corporations may be exempted 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_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 in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that exclusively for one or more exempt purposes only if its articles of organization an organization is organized limit the purposes of such organization to one or more exempt purposes and a b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization's assets must be dedicated to an exempt_purpose either by an express provision in its governing instrument or by operation of law sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activitie sec_3 letter cg catalog number 47630w that accomplish one or more of 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 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 sec_1_501_c_3_-1 of the regulations provides that the applicant organization must show that it serves a public rather than a private interest and specifically 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 help reduce personal bankruptcy by informing the in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to public on personal money management and aiding low-income individuals and families with financial problems was exempt under section of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the code c board its of the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of 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 not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate finally the organization relied upon contributions primarily from the loans on their behalf creditors participating in the organization’s budget plans for its support the organization did the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and 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 revrul_72_124 1972_1_cb_145 describes an organization that operated a home for letter cg catalog number 47630w ie security the elderly it qualified for exemption under c as a charitable_organization because it met the special needs of the elderly for housing healthcare and financial security the need for financial risks first the associated with later years of life organization must be committed to an established policy whether written or in actual practice of maintaining in residence any persons who become unable to pay their regular charges as to the second condition respecting the provision of financial security the organization must operate at the lowest feasible cost taking into consideration its expenses the aged person's need for protection against the will generally be satisfied if two conditions exist financial revrul_76_244 1976_1_cb_155 describes a charitable_organization that provided volunteers delivered the meals a home delivered meals to elderly and disabled persons nominal fee that was insufficient to cover the costs of the meals and delivery was charged in some cases the organization qualified for exemption under sec_501 of the code no fees were charged depending on recipients’ abilities pay the to revrul_77_246 1977_2_cb_190 describes an organization that was formed to provide low cost bus transportation for senior citizens and disabled persons in a community where public transportation was unavailable or inadequate although the organization charged a nominal fee it was dependent upon contributions and federal and local governmental grants in order to meet its operating_expenses the organization qualified for exemption under sec_501 of the code in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the ruling in 35_tc_490 provided that where an exempt_organization engages in a purpose to benefit the private interest rather than the organization exemption may be lost even though the transaction ultimately proves profitable for the exempt_organization a transaction with a related interest and there is or in 70_tc_352 the 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 the educational organization's financing did not resemble that of typical sec_501 organizations it had not solicited its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations nor had it received voluntary contributions from the public rather commercial court found that scientific addition the but in in p p l scholarship v commissioner t c an organization operated bingo at a bar for the avowed purpose of raising money for scholarships the board included the bar owners the bar accountant also the director of the bar as well as two players the board was self- letter cg catalog number 47630w perpetuating the court reasoned that since the bar owners controlled the organization and appointed the organization’s directors the activities of the organization could be used to the advantage of the bar owners children for adoption in 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 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 nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health related_services to unwed mothers and their children rather 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 and accumulated with substantial profits accordingly the the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite a manner indistinguishable from the business_purpose and not agencies engaged in court found that health-related advertising substantial adoption for-profit services incident merely found court were held that that that the the of to in 893_f2d_529 2d cir the appellate court affirmed the tax court's holding that loans extended on advantageous terms to its founders or to an entity controlled by them indicates private_inurement in orange county the loans were interest-free and while some payments were made the repayments did not match the loan amounts and there was no evidence in the record that the full amount_loaned would ever be repaid 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 nonexenipt 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 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 financial reserves additional factors include inter alia whether the organization uses and reasonableness of provided services policies pricing letter cg catalog number 47630w commercial promotional methods eg advertising and the extent to which the organization receives charitable donations 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 sec_1_501_c_3_-1 you fail both tests organizational_test it to demonstrate that is organized exclusively for exempt purposes thus satisfying the organizational_test an organization must have a valid purpose clause and a valid dissolution provision as specified in sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations you do not have a valid purpose clause a valid purpose clause must limit your purposes to those described in sec_501 of the code your articles of incorporation in sec_2 identifies your description of business as services for the elderly and persons with of your articles of disabilities’ you also do not have a valid dissolution clause section incorporation states that your assets are to be disbursed to d upon dissolution there is no evidence that d is a sec_501 organization in addition your articles do not contain a provision to ensure that in the event d is not a sec_501 organization the assets will be distributed to another sec_501 organization or used for sec_501 purposes you do not have a valid purpose or dissolution clause therefore you do not meet the organizational_test operational_test to satisfy the operational_test of sec_501 an organization must establish that it is operated exclusively for one or more exempt purposes as specified in sec_1 c - c of the regulations as noted in better business bureau of washington d c v u s the presence of a single non-exempt purpose precludes exemption regardless of any valid exempt purposes you failed to establish that you are operated exclusively for one or more exempt purposes your proposed activities are not charitable as provided in sec_1_501_c_3_-1 of the regulations your activities are not charitable all of your time and resources are devoted to providing legal services for a fee to individuals on limited income who are being harassed by creditors providing legal services for a fee does not provide relief to the poor and distressed within the meaning of sec_1_501_c_3_-1 of the regulations or serve any other purpose recognized as charitable although your service is limited to seniors or the disabled on limited income providing a service for a fee is a commercial activity not a charitable one the legal services you provide to individuals do not further charitable purposes you represent individuals being harassed by creditors your clients cannot afford to pay their debts or file for letter cg catalog number 47630w - a creditor notifying creditors for a fee that you are a legal_representative of bankruptcy due to their limited income the service you provide is limited to notifying creditors that the client is represented by an attorney thereby preventing the creditor from further contact with the debtor your client you do not provide representation in the event a client is actually sued by a charitable_beneficiary does not relieve the poor and distressed accordingly you are unlike the organization described in revrul_69_441 supra which aided low-income individuals and families who have financial problems thereby relieving the poor and distressed you do not provide counseling or assistance in paying off the debts of your clients in addition you charge a fee for your service the organization in the revenue_ruling provided their services free of charge you are distinguishable from the organization described in revrul_72_124 although you provide a service to stop verbal and written harassment of seniors by creditors you do not meet their special needs such as financial security housing or healthcare while your services are provided to low income seniors or disabled individuals you charge an upfront fee and a monthly fee for your services although you do waive or reduce fees for those who cannot afford them you do not have an established fee waiver policy nor have you submitted evidence that you operate at the lowest feasible cost you are you are distinguishable from the organization described in revenue_ruling your fees cannot be dependent on the service fees you bill your clientele in order to operate a commercial manner like any law firm you determine described as nominal your costs and set your fees to meet your financial obligations finally you are not like the organization described in revrul_77_246 because you are dependent on the fees you charge to cover your expenses the majority of your expenses are salaries and wages thus you failed to establish that your activities are charitable within the meaning of sec_501 of the code you operate in you have a substantial nonexempt commercial purpose the courts have developed guidelines intended to help discern whether an organization has a substantial nonexempt commercial purpose see eg b s w group supra easter house supra airlie supra living faith supra generally the factors proffered by courts focus on the nature of the activities and how an organization conducts its business your only activity consists of providing legal services for a fee providing legal services for a fee is not an exempt_purpose as recognized by statute or by case law but rather a substantial nonexempt commercial purpose you charge h dollars up front and j dollars monthly to provide letters to the client's creditors notifying the creditor that the clients are judgment proof based upon their incomes and are represented by you these fees do not entitle your clients to any educational programs or services beyond those that are offered by for-profit attorneys a situation similar to that found in living faith supra this is evidenced by the fact that f charged exactly the same rates for exactly the same services adopting a fee structure that is identical to a commercial organization seeking to maximize profits rather than a charitable or educational_organization seeking to serve the public b s w group supra as you stated you do not plan to solicit donations or other contributions but will be self-sustaining on fees for services you did not also demonstrates that you are operating like that used by for-profit a letter cg catalog number 47630w budget any money for educational or charitable activities thus similar to the organization in easter house supra the profit-making fee structure of your consulting services overshadows any of your other purposes your financial structure further demonstrates that you operate for a substantial nonexempt commercial purpose you indicated that you will not fundraise or solicit government grants the only donation you received was from f you do not have a plan to solicit donations in the future as you expect to be self-sustaining based upon fees for services there is also no evidence that you have received contributions or gifts from disinterested members of the public accordingly you are unlike the organizations described in revrul_69_441 supra that received the and contributions your operations are financed entirely by revenue earned from selling services to clients receiving support primarily from legal fees is indicative of a nonexempt business_purpose similar to the organization in easter house supra their support from government and private_foundation grants bulk of like the organizations in easter house supra airlie supra and living faith supra you are in direct competition with commercial businesses because you conduct activities generally conducted for a profit in fact you share office space supplies directors and employees with f a commercial firm that provides legal services including bankruptcy representation in addition your program was begun and conducted in the same manner as a commercial enterprise for example you use similar pricing financial structure advertising and relationships with other for- profit companies your activities evidence a substantial nonexempt commercial purpose thus more than an insubstantial part of your activities are in furtherance of a nonexempt purpose in contravention of sec_1_501_c_3_-1 of the regulations and sufficient for disqualification of exemption as noted in better business bureau of washington d c supra therefore you are not operated for an exempt_purpose inurement as stated in sec_501 of the code and sec_1_501_c_3_-1 of the regulations 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 you are similar to the organization in leon a beeghly v commissioner supra in that you engage in transactions with a purpose to benefit a private interest you provided a lease agreement entered into between f and a jessor as well as a sublease between you and f the sublease covers an office and a meeting room the sublease calls for you to pay annual rent of approximately of the total lease amount_paid by f you indicated that f is charging a reduced_rate although you did not submit any independent documentation of the fair market rental value of the space the sub lease states that the leased space is square feet however you stated elsewhere that the lease covers big_number square feet f also leases office equipment to you no documentation has been submitted to establish the fair market rental value of the leased equipment finally you lease several employees from f no information has been submitted regarding how the amounts of compensation were determined all three of your directors are either employees or partners of f you have not established that your net_earnings do not inure to the benefit of f through your sub-lease employee lease and equipment lease agreements letter cg catalog number 47630w you are similar to the organization in p p l scholarship v commissioner supra where the bar owners controlled the organization and appointed the organization’s directors you submitted a conflict of interest policy however all three of your directors are considered interested parties under the policy your directors determine their own salaries how much they pay themselves is based on industry levels and the value they attach to their own experience the amounts have not been negotiated at arm’s length nor are they based on objective factors or an independent appraisal your initial aggregate fixed payments including compensation and lease payments to f equal approximately of your projected revenues like the organization in the p p l scholarship decision your activities could be used to the advantage of your directors you do not have adequate safeguards to protect you in your dealings with f under the terms of your conflict of interest policy all of your directors are prevented from determining whether a conflict exists with regards to transactions or arrangements with f in addition your directors are charged with determining each other's salary thus you failed to demonstrate that insiders will not benefit from your relationship with f despite your inability to determine whether a conflict of interest exists with regard to dealings with f you continue to share office space employees and equipment you did not provide evidence your directors will be prevented from using you to reduce the expenses of their for-profit business you did not indicate how or when you determine which potential clients are seeking your services as opposed to f’s services as was the case in orange county agricultural society supra your directors have control_over financial decisions with f and your directors stand to benefit from the decisions yet you provided no evidence that net_earnings will not inure to your directors’ benefit you failed to establish net_earnings will not inure to the benefit of your directors you failed to establish that transactions with f are at arm’s length you did not establish that you will segregate your clients in a way that ensures f does not benefit conclusion based on the facts and information provided you are not organized or operated exclusively for exempt purposes you are not organized exclusively for exempt purposes because you do not have a valid purpose or dissolution clause you are not operated exclusively for an exempt_purpose because your primary purpose is the provision of legal services for a fee you are organized and operated for commercial purposes any public purposes for which you may operate are only incidental to this primary non-exempt purpose you have not demonstrated that you do not allow your net_earnings to inure to private individuals you do not serve a public rather than a private interest therefore you are not described in sec_501 of the code 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 have the right to file a protest if you believe this determination is incorrect 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 this letter we will letter cg catalog number 47630w consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider 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 types of information that should be included in your appeal can be found on page publication these items include of the organization’s name address and employer_identification_number astatement 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 astatement outlining the law or other authority the organization is relying on and astatement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury done by adding to the appeal the following signed declaration this may be under penalties of perjury declare that 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 your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal 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 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 a protest within days you will not be able to file if you do not 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 part that a declaratory_judgment or decree shall 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 of the administrative remedies available to it within the irs letter cg catalog number 47630w if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 applicable address and any supporting documents to the 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 letter cg catalog number 47630w