internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable -------------------------------------- --------------------------------------------------------------- --------- ---------------- ---------------------------------------------- ------------------ 263a 263a tam-155106-05 number release date index uil no case-mis no --------------------------------- ------------------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference legend legend taxpayer f b c d e g h j k -------------------------------------- -------------------- ------------------ -------------------------- -------------- -------- ---------------- ------ ---------- ----------- tam-155106-05 x y z t u v w s year year year n ts ab ih cd tp sp gg np t wc l ------ ----------------------- ------------ ----------- --------------- ----------------- -------------------------------------------- ----------------------- ------- ------- ------- ------- ----------------------------- ----------------- ---------------------------------------- --------------------------- ----------------------------- ----------------------------------- ---------------------------- ------------------- -- ---------------------- ---------- tam-155106-05 aa cc ac cb cz cd mt pn hm date date date city b city m w -------- ------------ ---- -------- ---------- ------- -------------------- -------------- ----------------------- ----------------------- ----------------------- ------------------- ---------------------------------- ------------------- ------------------ issue s whether the commissioner’s letter_ruling permits taxpayer to use the simplified_resale_method pursuant to sec_1_263a-3 of the income_tax regulations whether taxpayer qualifies to use the simplified_resale_method pursuant to sec_1_263a-3 whether the commissioner’s ruling letter authorizing taxpayer to use the simplified_resale_method should be modified or revoked and if so whether the modification or revocation should apply retroactively tam-155106-05 conclusion s the commissioner’s letter granting taxpayer permission to change its method to the simplified_resale_method is a letter_ruling taxpayer ordinarily may rely on the letter_ruling and use the simplified_resale_method unless the commissioner determines that the consent was granted in error and revokes the letter_ruling taxpayer does not qualify to use the simplified_resale_method pursuant to sec_1_263a-3 taxpayer is a producer and does not qualify for the exceptions that permit taxpayers engaged in both production and resale activities to use the simplified_resale_method the commissioner’s letter_ruling was issued in error taxpayer does not satisfy the conditions for relief under sec_7805 of the internal_revenue_code the letter_ruling is revoked retroactively facts taxpayer is a retailer that operates stores selling f b and c products for h j and k under the x y and z brands taxpayer operates retail stores under the following names x t u v w z and s as of early year the number of stores operated by taxpayer was more than n taxpayer designs virtually all of its products the products in turn are manufactured by independent sources vendors taxpayer sells the products under its brands specifically taxpayer creates designs for its products consistent with its ts once designs are created ab samples of the designs are created by outside vendors to help taxpayer choose the right assortment of products for its stores however if there is insufficient time between the creation of the designs and the need for the samples taxpayer creates the samples in-house once the samples are created taxpayer selects the designs that it would like to see in the stores taxpayer does not manufacture any products and does not own_production facilities of any kind rather taxpayer provides vendors with the specifications that detail how the final products should look and the vendors produce the products which are sold in taxpayer’s stores these specifications include sketches and other details that convey how the final products should look the specifications account for cd ih tp etc for gg taxpayer selects most of the e and other material used to make its finished products taxpayer also selects the g that supplies the e and materials used to make tam-155106-05 the finished products further taxpayer works with the g in developing the precise e needed to make the finished products however taxpayer does not purchase the e and other materials from the g used to produce the finished goods in addition to the ab samples taxpayer obtains np samples and t samples from the vendors the np samples are sent to the taxpayer for approval that the raw material wc etc are as agreed in addition to the np samples vendors send samples to taxpayer to use to t l the t samples are put on l to check for aa mt and pn these samples are cc adjusted ac and reproduced pursuant to taxpayer’s comments until taxpayer and the vendors are satisfied that the product meets taxpayer’s needs and can be manufactured by the vendors in the typical contract between taxpayer and vendors vendors warrant that they will not disclose nor have disclosed to any third party nor have used or will use for their own benefit any taxpayer trade secrets or information which may reasonably be believed to be confidential to taxpayer such as designs cb etc further taxpayer requires vendors to offer all seconds overruns unused goods and rejected goods collectively seconds of goods produced for taxpayer to its cd prior to making such goods available to any third party additionally taxpayer requires the vendors to remove all reference to its tradenames and trademark on goods in those situations where its cd cannot accept the goods and authorizes their transfer to a third party the vendors assume all risk of loss prior to delivery of goods to taxpayer or its agent the vendors also assume all risk of loss after delivery if the goods are not accepted nonconforming or if they have otherwise breached any term of the agreement with taxpayer on date taxpayer filed a form_3115 application_for change in accounting_method requesting the commissioner’s consent to change certain aspects of its method of inventory costing pursuant to sec_263a in the form_3115 taxpayer requested to use the simplified_resale_method without the historic absorption ratio election to allocate additional sec_263a costs to ending inventory taxpayer’s response in its form_3115 to the question asking it to describe its trade_or_business was as follows the taxpayer is a d retailer that operates stores selling its brand name f b and c for h j and k as well as hm the taxpayer operates retail stores under the x t u v y and z names the taxpayer operates state-of-the-art distribution centers to receive merchandise manufactured to its specifications and purchased from unrelated third party manufacturers the taxpayer has headquarters in city b product development offices in city m and offices coordinating sourcing activities around the globe tam-155106-05 on date the internal_revenue_service irs national_office issued a ruling to taxpayer granting it permission to change its method_of_accounting to the simplified_resale_method under sec_1_263a-3 for the w taxable_year beginning date the examination team currently examining taxpayer’s returns for fiscal years year and year believes that taxpayer is ineligible to use the simplified_resale_method and that the consent to use that method should be revoked law and analysis whether the commissioner’s letter_ruling permits taxpayer to use the simplified_resale_method pursuant to sec_1_263a-3 sec_601_204 of the statement of procedural rules provides in part that written permission to a taxpayer by the national_office consenting to a change in his accounting_method is a ruling similarly revproc_2005_1 i r b provides in part that a letter_ruling includes the written permission or denial of permission by an associate office to a request for a change in a taxpayer’s accounting_method section dollar_figure of revproc_2005_1 provides that a taxpayer may rely on a change in accounting_method letter_ruling received from the associate office subject_to certain conditions and limitations see and of revproc_97_27 1997_1_cb_680 as modified and amplified by revproc_2002_19 2002_1_cb_696 section of revproc_97_27 sets forth the condition that a taxpayer that changes to a method_of_accounting pursuant to a change in method letter_ruling may be required to change or modify that method upon written notice to the taxpayer that the change in method_of_accounting was granted in error or is not in accord with the current views of the service moreover sec_601_201 of the statement of procedural rules provides that a ruling found to be in error or not in accord with the current views of the service may be revoked or modified in this case taxpayer submitted a request for permission to change its method_of_accounting to the simplified_resale_method on date the commissioner through the national_office granted taxpayer permission to change its method_of_accounting to the simplified_resale_method therefore the date letter is a ruling it is written permission consenting to a change in accounting_method accordingly taxpayer ordinarily may rely on the letter_ruling and use the simplified_resale_method unless the commissioner determines that the consent was granted in error and revokes the ruling whether taxpayer qualifies to use the simplified_resale_method pursuant to sec_1_263a-3 tam-155106-05 with respect to property to which sec_263a applies sec_263a provides for the nondeductibility of certain direct and indirect_costs sec_1_263a-1 provides that taxpayers subject_to sec_263a must capitalize all direct costs and certain indirect_costs properly allocable to real_property and tangible_personal_property produced_by_the_taxpayer and real_property and personal_property described in sec_1221 which is acquired by the taxpayer for resale sec_1_263a-1 provides that taxpayers that produce real_property and tangible_personal_property producers must capitalize all the direct costs of producing the property and the property’s properly allocable share of indirect_costs regardless of whether the property is sold or used in the taxpayer’s trade_or_business sec_1_263a-1 provides that retailers wholesalers and other taxpayers that acquire property described in sec_1221 for resale resellers must capitalize the direct costs of acquiring the property and the property’s properly allocable share of indirect_costs for purposes of sec_263a the term produce includes construct build install manufacture develop improve create raise or grow sec_263a sec_1 263a- a i in general except in the case of property produced for the taxpayer under contract and home construction contracts a taxpayer is not considered to be producing property unless it is considered an owner of the property produced under federal_income_tax principles sec_1_263a-2 generally property produced for the taxpayer under a contract with another party is treated as property produced_by_the_taxpayer to the extent the taxpayer makes payments or otherwise incurs costs with respect to the property sec_263a sec_1_263a-2 except in the case of a routine purchase order for fungible property a contract is any agreement providing for the production of property if the agreement is entered into before the production of the property to be delivered under the contract is completed sec_1_263a-2 sec_1_263a-2 provides that a routine purchase order for fungible property is not treated as a contract for purposes of determining whether a taxpayer is a producer sec_1_263a-2 also provides that an agreement will not be treated as a routine purchase order for fungible property however if the contractor is required to make more than de_minimis modifications to the property to tailor it to the customer’s specific needs or if at the time the agreement is entered into the customer knows or has reason to know that the contractor cannot satisfy the agreement within days out of existing stocks and normal production of finished goods tam-155106-05 sec_1_263a-1 sets forth various detailed or specific facts-and- circumstances cost allocation_methods that taxpayers may use to allocate direct and indirect_costs to property produced and property acquired for resale in lieu of a facts- and-circumstances allocation method sec_1_263a-1 authorizes taxpayers to use the simplified methods provided in sec_1_263a-2 and sec_1_263a-3 to allocate direct and indirect_costs to eligible_property produced in general these simplified methods determine aggregate amounts of additional sec_263a costs allocable to ending inventory additional sec_263a costs are those costs other than interest that were not capitalized under the taxpayer’s method_of_accounting immediately prior to the effective date of sec_263a but that are required to be capitalized under sec_263a sec_1_263a-1 regarding the simplified methods sec_1_263a-2 provides that producers may elect to use the simplified_production_method to determine the additional sec_263a costs properly allocable to ending inventories of property produced and other eligible_property on hand at the end of the taxable_year similarly sec_1_263a-3 provides that resellers may elect to use the simplified_resale_method to determine the additional sec_263a costs properly allocable to property acquired for resale and other eligible_property on hand at the end of the taxable_year in general a taxpayer may elect the simplified_production_method if engaged in both production and resale activities with respect to items of eligible_property sec_1 263a- a however generally the simplified_resale_method is only available to a trade_or_business exclusively engaged in resale activities sec_1_263a-3 therefore as a general_rule if a reseller is engaged in both production and resale activities with respect to the items of eligible_property then the reseller may only elect the simplified_production_method and is not allowed to elect the simplified_resale_method sec_1 263a- a despite the general_rule prohibiting resellers engaged in production activities from using the simplified_resale_method sec_1_263a-3 provides two exceptions which allow resellers engaged in both production and resale activities to elect the simplified_resale_method under the first exception a reseller otherwise permitted to use the simplified_resale_method may use the simplified_resale_method if its production activities with respect to the items of eligible_property are de_minimis and incident to its resale of personal_property described in sec_1221 sec_1_263a-3 in determining whether the reseller’s production activities are de_minimis all facts and circumstances must be considered production activities are presumed de_minimis if gross_receipts from the sale of property are less than ten percent of the total gross_receipts of the trade_or_business and labor costs allocable to the trade or business’ production activities are less than ten percent of the reseller’s total labor costs allocable to its trade_or_business sec_1_263a-3 tam-155106-05 under the second exception a reseller otherwise permitted to use the simplified_resale_method may use the simplified_resale_method even though it has personal_property produced for it eg private label goods under a contract with an unrelated_person if the contract is entered into incident to its resale activities and the property is sold to its customers sec_1_263a-3 taxpayer argues that it is entitled to use the simplified_resale_method in support of its position taxpayer contends that it is a reseller and is subject_to the provisions under which resellers that enter into contracts for the production of property private label goods may use the simplified_resale_method if the contracts are entered into incident to its resale business we disagree taxpayer is a producer and does not qualify for the exceptions that permit taxpayers engaged in both production and resale activities to use the simplified_resale_method therefore taxpayer does not qualify to use the simplified_resale_method accordingly the commissioner’s letter_ruling granting taxpayer’s consent to use the simplified_resale_method was issued in error taxpayer is a producer because virtually all if not all of taxpayer’s goods are produced for taxpayer under a contract with another party the agreement between taxpayer and its vendors providing for the production of goods is a contract pursuant to sec_1_263a-2 this is because it is entered into before the production of the goods to be delivered under the agreement is completed the agreement between taxpayer and its vendors does not qualify as a routine purchase order for fungible_goods this is because the vendors have to make more than de_minimis modifications to the property to tailor it to the taxpayer’s specific needs or specifications in this regard the vendors cannot begin to make taxpayer’s products until they receive taxpayer’s designs of the products which must conform to taxpayer’s specifications further the vendors who manufacture taxpayer‘s products transform basic material to finished goods thus far from resulting in de_minimis modifications the manufacturing process involves significant changes to the property tailored to the specific needs of taxpayer additionally taxpayer exercises a significant degree of control_over the manufacturing process it selects the raw materials used to make the products as well as the suppliers further taxpayer controls the manufacturing process of its products through strict oversight and precise cz demands because taxpayer is a producer taxpayer is prohibited from using the simplified_resale_method unless taxpayer qualifies for the reseller with de_minimis production activities exception under sec_1_263a-3 or the reseller with property produced under contract incident to resale activities exception under sec_1_263a-3 to meet the reseller with de_minimis production activities exception taxpayer must be a reseller and its production activities with respect to the items of eligible_property must be de_minimis and incident to its resale of personal_property described in sec_1221 tam-155106-05 taxpayer does not qualify for the reseller with de_minimis production activities exception because its primary activity is the production of products for sale in its stores and its resale activities are at best de_minimis its production activities are not incident to its resale activities to satisfy the resellers with property produced under contract exception taxpayer’s contract with vendors for the production of products must be entered into incident to its resale activities taxpayer does not qualify for the resellers with property produced under contract exception because these contracts are not entered into incident to taxpayer’s resale activities taxpayer is engaged exclusively or nearly exclusively in production activities under sec_263a taxpayer has little if any activities that qualify as resale activities under sec_263a thus taxpayer’s contracts are not entered into incident to a resale activity the conclusion that taxpayer is a producer and not eligible to use the simplified_resale_method is consistent with the holding of the ninth circuit in 273_f3d_875 9th cir there the taxpayer was in the business of creating cartoon characters that were imprinted on greeting cards and other merchandise that it sold to retail stores however the taxpayer also sold licensee products at its own store the ninth circuit concluded that the taxpayer was a producer and not a reseller for purposes of sec_263a even though the taxpayer contracted with independent contractors to manufacture its greeting cards and other merchandise and to have the cartoon characters it created imprinted on those products in so concluding the ninth circuit noted that the taxpayer exercised significant control_over the manufacturing process and did not qualify for the exceptions to the capitalization requirement of sec_263a available to small resellers engaged in production and resale activities because the taxpayer’s only resale activity was the sale of licensee products at its own store the revenue for which was a small percentage of its gross revenue as in suzy’s zoo taxpayer’s resale activity is only a small or de_minimis percentage of its business activity therefore as noted taxpayer’s production contracts are not incident to its resale activities and taxpayer is not eligible to avail itself of the exceptions for resellers engaged in production and resale activities whether the commissioner’s letter_ruling authorizing taxpayer to use the simplified_resale_method should be modified or revoked and if so whether the modification or revocation should apply retroactively sec_601_201 of the statement of procedural rules provides that a ruling found to be in error or not in accord with the current views of the service may be revoked or modified sec_601_201 of the statement of procedural rules provides in part that a ruling except to the extent incorporated in a closing_agreement may be revoked or modified at any time in the wise administration of the taxing statutes tam-155106-05 because taxpayer is a producer and is not eligible to avail itself of the exceptions for resellers engaged in production and resale activities to use the simplified_resale_method the date ruling letter granting taxpayer consent to change to the simplified_resale_method was issued in error therefore the consent to change to the simplified_resale_method granted in that letter_ruling is hereby revoked sec_601_201 of the statement of procedural rules provides that if a ruling is revoked or modified the revocation or modification applies to all open years under the statutes unless the commissioner or_his_delegate exercises the discretionary authority under sec_7805 to limit the retroactive effect of the revocation or modification sec_7805 provides that the secretary may prescribe the extent if any to which any ruling including any judicial decision or any administrative determination other than by regulations relating to the internal revenue laws shall be applied without retroactive effect sec_601_201 of the statement of procedural rules provides in part that except in rare or unusual circumstances the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling originally was issued or to a taxpayer whose tax_liability directly was involved in such ruling if i there has been no misstatement or omission of material facts ii the facts subsequently developed are not materially different from the facts on which the ruling was based iii there has been no change in the applicable law iv the ruling originally was issued with respect to a prospective or proposed transaction and v the taxpayer directly involved in the ruling acted in good_faith in reliance upon the ruling and the retroactive revocation would be to his detriment similarly section dollar_figure of revproc_2005_1 provides in part that an associate office will revoke or modify a letter_ruling and apply the revocation retroactively to the taxpayer for whom the letter_ruling was issued or to a taxpayer whose tax_liability was directly involved in the letter_ruling if among other things there has been a misstatement or omission of controlling facts see also section dollar_figure of revproc_97_27 in the instant case the only factor at issue is whether taxpayer omitted or misstated material facts taxpayer’s position is that no basis exists for the retroactive revocation of the letter_ruling in support of its position taxpayer contends that it provided complete information of its business activities on the form_3115 thus taxpayer claims that there is sufficient information on the form_3115 for the commissioner to understand that taxpayer was engaged in product development activities and to determine whether taxpayer is eligible to use the simplified_resale_method taxpayer argues that if it is not entitled to use the simplified_resale_method the letter_ruling should be modified prospectively when a taxpayer files a form_3115 requesting the commissioner’s consent to a change in method_of_accounting the taxpayer has a duty to reveal all material factors pertinent to its request for an accounting_method change and must fully inform the tam-155106-05 commissioner about all material facts cochran hatchery inc v commissioner tcmemo_1979_390 in this case that duty requires disclosure of all facts that are material to the determination of whether taxpayer is a producer or reseller and eligible to use the simplified_resale_method under sec_1_263a-3 therefore taxpayer in this case had an affirmative obligation to disclose in its application sufficient relevant material information about its inventory business operations and arrangement with vendors for the national_office to determine that taxpayer is a producer under sec_263a and did not qualify for the exceptions under sec_1_263a-3 and iii permitting taxpayers engaged in both production and resale activities to use the simplified_resale_method taxpayer disclosed on form_3115 that it was a d retailer selling its brand name products according to taxpayer d retailers selling f commonly have most or all of their products produced to their specifications under contract taxpayer contends that by disclosing it was a d retailer the national_office should have understood and was alerted that taxpayer did not qualify for the sec_1_263a-3 exception permitting resellers with property produced under a contract with an unrelated_person to use the simplified_resale_method we disagree it is not the obligation of the national_office to know or understand that if a taxpayer is a d retailer selling its brand name products then all of the brand name goods the taxpayer sells constitute property produced for the taxpayer under a contract as defined in sec_1_263a-2 if an industry term or industry jargon is a critical fact related to a requested change in accounting_method the term must be defined or the jargon explained in the form_3115 if the taxpayer wants to rely on the consent letter on the form_3115 taxpayer also stated that it operates distribution centers to receive merchandise manufactured to its specifications and purchased from unrelated third party manufacturers additionally taxpayer disclosed that it had product development offices and offices coordinating sourcing activities taxpayer contends that this information was sufficient for the national_office to have understood that taxpayer sold only private label goods produced for the taxpayer under a contract as defined in sec_1_263a-2 taxpayer did not state on its form_3115 that all or virtually all of the products sold at its retail stores were produced under contract nor did taxpayer state that few if any of its products were purchased for resale it is not sufficient to provide information on the form_3115 that could have or in taxpayer’s opinion should have caused the national_office to seek clarification or request additional information whether or not the national_office requested additional information or could have requested information it is the obligation of the taxpayer to provide all of the relevant facts with the form_3115 moreover it is not the obligation of the national_office to design specific questions covering every conceivable circumstance relating to an accounting_method change request see cochran hatchery inc for example it is not the obligation of the national_office to ask or to know to ask a taxpayer that identifies itself as a d retailer eligible to use the simplified_resale_method whether it sells only products that qualify as goods produced for the taxpayer under tam-155106-05 contract or whether its resale activities are de_minimis further as suggested in cochran hatchery inc it is not the obligation of the national_office to be adept at jigsaw puzzles or connecting disparate facts to arrive at a complete picture of the facts pertinent to a taxpayer’s request for an accounting_method change rather it is the taxpayer’s obligation to provide all the information necessary for the national_office to make a determination as to taxpayer’s eligibility for a requested accounting_method change taxpayer did not disclose on its form_3115 that it was a producer it did not disclose that it created or designed virtually all if not all of the goods produced for it under contract with vendors and sold in its stores also it did not disclose that it exercised significant control_over the production process further it did not disclose that virtually all if not all of the products produced for it by vendors qualified as goods produced for taxpayer under contract pursuant to sec_263a and sec_1 263a- a ii b taxpayer’s failure to disclose these factors was an omission of material facts taxpayer claims that it qualifies to use the simplified_resale_method by virtue of the exception for goods produced under contract in sec_1_263a-3 however it is significant that taxpayer failed to provide with its form_3115 an explanation of the legal basis supporting its proposed use of the simplified_resale_method or a discussion of the reason s it met the requirements of sec_1_263a-3 to use the simplified_resale_method in this regard in response to part ii line of form_3115 which requested taxpayer to attach an explanation of the legal basis supporting its proposed use of the simplified_resale_method taxpayer merely described the manner in which the simplified_resale_method works a taxpayer’s failure to provide the legal basis for its eligibility to use the proposed simplified_resale_method and to apply the law to the facts provided is a significant factor that is material to the determination of a taxpayer’s entitlement to a requested method change as a result of taxpayer’s omissions of material facts the national_office did not have a complete picture of taxpayer’s inventory and business operations thus the national_office did not have sufficient information to conclude that taxpayer was not entitled to use the simplified_resale_method and did not satisfy the exceptions which allow resellers engaged in both production and resale activities to elect the simplified_resale_method in summary the form_3115 should be complete as filed ie it should include all the information necessary to make a correct legal determination a consent letter is based on the facts presented and can only be relied upon to the extent those facts are accurate and complete thus the taxpayer bears the risk of undisclosed facts here taxpayer failed to provide all the necessary information in its application_for change in accounting_method therefore the consent to use the simplified_resale_method granted in the date letter_ruling is hereby revoked retroactively tam-155106-05 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


fij irs department of the treasury internal_revenue_service p o box cincinnati oh number release date date date employer id number contact person number contact telephone number form you must file tax years uil dear this letter is our final_determination that you don't qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn't receive a protest within the required days the proposed determination is now final because you don't qualify as a tax-exempt_organization under sec_501 of the code donors can't deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top ofthis letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code 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 if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don't need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 ofthe code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter4038 rev catalog number if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 c -no protest letter4038 rev catalog number date date employer id number contact person id number contact telephone number contact fax number uil fj irs department of the treasury internal_revenue_service p o box cincinnati oh legend b name c name d name e name f name g group name h state j date v number w dollars amount x dollars amount y dollars amount z dollars amount dear we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don't qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated in the state ofh on j your articles state in part that you were formed to defend the civil rights and constitutional rights secured_by the laws of the united_states for gin america letter rev catalog number 47630w provide qualified legal representation and assistance for criminal civil appellate habeas corpus and immigration proceedings for g in america to promote and develop civil rights and constitutional rights ofg in america and to provide legal assistance and representation to g organizations and individuals regarding compliance with trade regulations established by the treasury_department or other federal criminal statutes for charitable activities you are operating a law center that will provide legal representation and assistance to defend g individuals against injustice in american courtrooms prisons and communities you will focus on federal criminal cases involving constitutional issues dealing with national security religious freedoms and constitutional torts on the federal level as well as religiously motivated deportation issues habeas petitions on constitutional grounds and federal violations of constitutional law in civil cases you have a close connection with f a 501_c_3_organization because your charitable purposes are compatible and connected with each other c and d who are your officers and directors as well as husband and wife are equal shareholders of b a law firm you have entered into a contract with b negotiated by f on your behalf to receive a total of v hours of legal services annually from b you wrote that because f has had prior experience in negotiating fees with attorneys negotiated your contract with bat arm's length fused its professional contacts to determine the appropriate fair_market_value fee based on experience the contract was signed by the governing body members off as well as by c and d on behalf of b as well as by c on your behalf it was signed on date j the services b is providing to you consist of lead counsel responsibilities individual c this includes determining client selections with f developing pro bono liaison with lawyers and law firms for national work developing and delivering training for attorneys interested in providing assistance on your behalf developing and delivering legal assistance and education programs for g serving as your administrative director individual d this includes preparing an employee handbook preparing and administering your budget monitoring pro bono cases file maintenance conflicts checks for any potential client or case writing annual performance reviews for all your employees reporting the status of your budget to f' s executive director and your board_of directors on a monthly basis heading your criminal division individual c this includes acting as criminal division servicer lead or supervising counsel for all criminal appellate and habeas corpus cases that you accept c will also develop a network of pro-bono attorneys for witness representation serving as staff attorney for criminal and immigration individual d this involves serving as staff counsel on criminal and immigration cases you accept if time permits legal assistance will be provided to individuals seeking assistance with removal from no-fly lists and special security measures under the terms of the agreement you must furnish b the following professional liability insurance for c and d for w dollars reimburse b for annual h bar association fees dues and the minimum required for continuing legal education costs for membership in the state bar assume b' s copiers printers and lexus contracts if transferable letter rev catalog number 47630w provide b fully functional and equipped legal offices including office space conference rooms secretarial and staff lawyers etc the contract shows you have provided z dollars to b to relocate the law practice to h to pay for b' s early lease termination website termination moving_expenses temporary_living_expenses the h bar application fee for both c and d and relocation travel for d the contract indicates that the compensation b receives is for exclusive legal services you stated that your activities will compose ofb's business the contract also specifies the amounts you are to pay b annually for its services which will increase each year for the cost of living as well as for increases in its duties as your scope of work and case loads expand the contract further indicates the parties agree to a five year contract term the first two years of the contractual period is non-cancellable by either part except for cause if you terminate the contract after two years but less than three years then x dollars must be paid to b if the contract is cancelled after three years but less than four years then y dollars is paid to b if you cancel the contract with b after four years then you pay z dollars the contract also specifies the paid vacation time that c and d will receive annually business days as well as ten business days for bereavement and sick leave as well as nine holidays in addition to the annual paid leave they were also both entitled to days of leave to relocate to h besides c and d you have one other director e who is a lawyer that helped with your formation he is being reimbursed for his services as outside corporate co-counsel which you stated is about less than his normal fees article iv of your bylaws concerning your directors specifically reads the members of the initial board_of directors shall be designated and appointed by f the number of members ofthe board_of directors shall not be less than three and not more than six the members of the board_of directors following the appointment of the initial board_of directors shall be designated and appointed by f all members of the board_of directors shall be duly licensed to practice law in the state of h or duly licensed to practice law in another jurisdiction but with at least one board member being a duly licensed attorney to practice law in the state of h no more than two persons serving on the board_of directors may be interested persons an interested person is a any person compensated by the corporation for services rendered to it within the previous twelve months whether as a full time or part time employee independent_contractor or otherwise excluding any reasonable_compensation paid to a director as director and b any brother sister ancestor descendant spouse brother-in-law sister-in-law daughter-in-law mother-in-law or father-in-law of such person however any violation of this paragraph shall not affect the validity or enforceability of transactions entered into by the corporation moreover you provided minutes from your organizational meeting and first meeting of your directors held about four months after your formation c and d were present and e was present telephonically c was appointed chairman and d acted as secretary of the meeting the minutes read letter rev catalog number 47630w the chairman stated that nominations were in order for the election of directors of the corporation to hold office until the first annual meeting of directors and until their successors shall be elected and shall qualify the following persons were named c d and e d is the president and treasurer while c was nominated for the vice president and the treasurer your activities are funded by grants from private_foundations and public_charities including f about of your annual expenditures are for salaries and wages approximately of your revenues will be expended for professional fees law sec_501 c of the internal_revenue_code code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational and scientific purposes sec_1 c -1 a of the income_tax regulations regulations states 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 c -l c of the regulations provides 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 c -1 d ii of the regulations provides that an exempt_organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated to benefit 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 thus if an organization is operated to benefit private interests rather than for public purposes or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals it may not retain its exempt status in 326_us_279 the presence of a single nonexempt purpose if substantial in nature will preclude tax exemption under sec_501 ofthe code in 71_tc_1067 several for-profit est organizations exerted significant indirect control_over est of hawaii a nonprofit entity through contractual arrangements the tax_court concluded that the for-profits were able to use the nonprofit as an instrument to further their for-profit purposes neither the fact that the for-profits lacked structural control_over the organization nor the fact that amounts paid to the for-profit organizations under the contracts were reasonable affected the court's conclusion that the organization did not qualify as an organization described in sec_501 of the code in 74_tc_846 the organization's founder and his wife executed vows of poverty and transferred all their possessions and income to the organization on the condition that it qualified under sec_50l c the founder controlled all financial decisions of the organization the court found that a substantial purpose of the organization was to serve the private interests of the founder and his wife accordingly the court held that the organization did not qualify under sec_501 letter rev catalog number 47630w in 82_tc_196 an organization operated bingo at a bar a for-profit enterprise for purposes of raising money for scholarships the board_of directors included the bar's owners and accountant and two other persons the court reasoned that because the bar owners controlled the organization and appointed its directors the organization's fundraising activities could be used to the advantage of the bar owners and thus provide them with a maximum private benefit the organization claimed that it was independent because there was a separate_accounting and that no payments were going to the bar the court maintained that the organization's and the bar's activities were so interrelated as to be functionally inseparable a separate_accounting did not change that fact thus the organization did not operate exclusively for exempt purposes but rather benefited private interests -the bar owners exemption was properly denied in church by mail inc v commissioner the court affirmed a tax_court decision t c church by mail sent out sermons in numerous mailings this required a great deal of printing services twentieth century advertising agency provided the printing and mailing twentieth century was controlled by the same ministers it also employed family members the services were provided under two contracts the contracts were signed by the two ministers for both church by mail and twentieth century church by mail business comprised two-thirds of the business of twentieth century in deciding for the government the court made the following statement there is ample evidence in the record to support the tax court's finding that the church was operated for the substantial non-exempt purpose of providing a market for twentieth's services in international postgraduate medical foundation v commissioner tcmemo_1989_36 the tax_court considered the qualification for exemption under sec_501 c of the code of a nonprofit corporation that conducted continuing medical education tours the petitioner had three trustees mr helin who was a shareholder and the president ofh c tours a for profit travel agency mr regan an attorney and a third director who was ill and did not participate mr helin served as executive director the petitioner used h c tours exclusively for all travel arrangements there is no evidence that the petitioner ever sought a competitive bid the court found that a substantial purpose of the petitioner was benefiting the for-profit travel agency it concluded that when a for-profit organization benefits substantially from the manner in which the activities of a related_organization are carried on the latter organization is not operated exclusively within the meaning of sec_501 even if it furthers other exempt purposes the court found that a substantial purpose ofthe applicant's operations was to increase the income ofh c tours h c tours benefits from the distribution and production of brochures which solicit customers for tours arranged by h c tours application of law you are not as described in sec_501 ofthe code because you are not exclusively organized and operated for charitable purposes you are not as described in sec_1_501_c_3_-1 ofthe income_tax regulations because you fail the operational_test as described in sec_1_501_c_3_-1 of the regulations you are not operated exclusively for exempt purposes because your net_earnings inure to the benefit of private shareholders or individuals this is evidenced by the fact that the majority of your board members have an interest in b with whom you have a comprehensive contract you have adopted a conflict of interest policy and stated that f an unrelated tax exempt_organization negotiated the contract with bat arm's length however this does not change the fact that two ofthree of your board members are profiting from your relationship with b letter rev catalog number 47630w you are not as defined in sec_1 c -l d l ii ofthe income_tax regulations because you are operating for the private interests of b this is evidenced by the following terms in your contract with b you are paying b' s relocation expenses you are assuming b's copiers printer and lexus contracts if transferable you are providing b fully functional and equipped legal offices including office space conference rooms secretarial and stafflawyers etc in addition the fact that you are b's only client shows you are operating to benefit b moreover you are not defined in sec_1 50l c -l d l ii of the income_tax regulations because you are operating for the private interests of c and d as evidenced by the following the compensation package for c and d professional liability insurance for c and d for w dollars personal relocation expenses and personal travel_expenses you are like the organization in better business bureau v commissioner although you may have some charitable purposes the presence of the non-exempt purposes of providing the benefit of tax-exempt status to b and operating for the private interests of c and d precludes exemption you are similar to the organization in est of hawaii v commissioner because you are primarily dependent on one for-profit b for your operations you have a comprehensive contract with b the contract states c on behalf of b is leading your criminal division as well as acting as your staff attorney for criminal and immigration in addition d on b' s behalf is serving as your administrative director which includes determining client selections with f consequently b has considerable influence over your operations you are unable to remove yourself from b because your public interest law firm could not operate without b without b you have no function you are similar to the organization described in international postgraduate medical foundation your founder and his wife are in positions of control and are co-owners of the for-profit law firm b b benefits substantially from the manner in which your activities are conducted like impf you are not operated exclusively for exempt purposes within the meaning of sec_501 c even if you further other exempt purposes you are also similar to the organization described in p l l scholarship fund your operations and management are so interrelated with b that you are functionally inseparable from b because without you b would not be operational therefore you operate for the substantial private benefit of c and d and their law firm b you are comparable to the organization in church by mail because you and b are substantially controlled by the same persons two out of three board members are in position of control and own a for-profit company which benefits substantially from the manner in which your activities are conducted like impf you are not operated exclusively for exempt purposes within the meaning of sec_50l c even ifyou further other exempt purposes moreover b benefits substantially from your operations you have provided a market forb's law services letter rev catalog number 47630w your position you stated that your principal present activity is to provide legal representation and assistance by your licensed lawyers employees or independent contractors for criminal civil appellate habeas corpus and immigration proceeds for g individuals and to promote and develop the civil rights and constitutional rights of g individuals and to eliminate prejudice and discrimination of g individuals in america and lastly to provide legal assistance and representation to g organizations and individuals regarding compliance with trade regulations established by the treasury_department or other federal criminal statutes for charitable activities our response to your position you failed to provide any additional information from which it can be concluded that you are operating exclusively for 50l c purposes your net_earnings are inuring to the benefit of your directors as described in the preceding facts and analysis and you are serving substantial private interests rather than public interests this precludes exemption under sec_501 conclusion based on the information provided you do not qualify for exemption under sec_501 of the code you are not organized and operated exclusively for charitable purposes within the meaning of sec_501 c of the code because you operate for the private benefit ofb and your earnings are inuring to c and d any charitable purpose is incidental to these private purposes ifyou don't agree you have a right to file a protest ifyou don't agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include your name address employer_identification_number ein and a daytime phone number a copy of this letter highlighting the findings you disagree with an explanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete letter rev catalog number 47630w your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven't provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax exempt status if you don't file a protest within days you can't seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service 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 can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it ifyou agree if you agree with our proposed adverse determination you don't need to do anything if we don't hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter we sent a copy of this letter to your representative as indicated in your power_of_attorney letter rev catalog number 47630w sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


internal_revenue_service number release date index numbers ------------------------------------ --------------------------- ----------------------------------------- ----------------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number --------------------- refer reply to cc psi b03 plr-104316-09 date date legend x --------------------------------------------------------------------------------------------------- ------------------------ country ----------------- date1 -------------------------- date2 ----------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes facts x was formed under country law on date1 x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended that it be classified as a disregarded_entity effective date2 however due to inadvertence a valid form_8832 entity classification election to treat x as a disregarded_entity effective date2 was not timely filed law and analysis plr-104316-09 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion plr-104316-09 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days from the date of this letter to elect to be classified as a disregarded_entity for federal tax purposes effective date2 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ----------------- --------------------------------------------- ------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number -------------------- refer reply to cc psi b03 plr-105409-08 date date legend x a d1 ----------------- ---------------------- ------------------------ ------------------------- ----------------- state -------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under the laws of state x’s sole shareholder a intended for x to be an s_corporation as of d1 however x’s form_2553 election by a small_business_corporation was not filed timely x requests a ruling that it will be recognized as an s_corporation effective d1 plr-105409-08 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that x is eligible for relief under sec_1362 accordingly provided that x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 with an effective date of d1 within days following the date of this letter then such election shall be treated as timely made for x’s taxable_year effective d1 a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-105409-08 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely s leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


-------------------------------------------------- office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b02 ---------------- postf-153046-06 uilc date date --------------------------- -------------------------------- large mid-size business ----------------------- --------------------------------------------------- income_tax accounting_income recognition on sale of permanent seat licenses this chief_counsel_advice responds to your request dated date this advice may not be used or cited as precedent legend taxpayer stadium date authority team year ----------------------------------------------------- -------------------------------------------------------------------- --------------------------------- -------------------------- ------------------------------------------------------ ---------------------- ------- to from subject postf-153046-06 year year year year ------- ------- ------- ------- issue sec_1 whether taxpayer is required to include in income the total sales proceeds from the sale of permanent seat licenses psls in the first year an agreement is executed even though payments are received in ------- taxable years whether taxpayer may elect to use the installment_sales provisions of sec_453 of the internal_revenue_code if taxpayer recognizes the total sales proceeds from the sale of the psls in the first taxable_year conclusion sec_1 taxpayer recognizes income from the sale of psls when each installment_payment becomes due and payable or each installment_payment is received whichever happens first because taxpayer does not recognize the total sales proceeds in the first year the agreement is executed sec_453 does not apply facts on date authority licensed taxpayer as its agent to sell psls to team games to be played at stadium -------------------------------------- taxpayer began marketing psls and received some applications and initial payments in year -------------------------------------- --------------------------------------------- the terms of the psl sales are provided in psl agreements taxpayer executed psl agreements for year year and year the psl agreements provided that the purchase_price of a psl was payable in ------- installments the first payment was due at the time the psl was executed the remaining ----- installments usually were due in each of the following ----- years the agreements granted the purchaser the right to buy season tickets for designated seats at team's games at stadium as long as stadium was team's home field this right was not evidenced by any other document for example no certificate was issued rather taxpayer maintained a list of psl purchasers who had rights to seats under a psl agreement postf-153046-06 the psl agreements provided for a ------------------------------ that required the purchaser to pay the required_deposit pay the remaining installments due in each of the next ----- succeeding years and return the signed agreement within --- days ----- --------------------------------- of the psl agreements provided that the purchaser would receive a psl in consideration of the purchaser paying the required_deposit promising to pay the next ----- installments and returning the signed agreement within --- days ----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- --- -------------------------------------------- taxpayer may withhold tickets and or terminate the rights of the licensee these terms constituted taxpayer’s sole recourse if a purchaser failed to make a payment when due or otherwise defaulted the agreements included no specific provisions granting taxpayer the right to collect a missed payment the default provisions applied to a purchaser’s failure to pay amounts due for tickets as well as for the psl --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------- law and analysis sec_451 of the internal_revenue_code provides that the amount of any item_of_gross_income is included in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income the amount is to be properly accounted for as of a different period sec_1_451-1 of the income_tax regulations provides that under an accrual_method of accounting_income is includible in gross_income when all the events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy all the events that fix the right to receive income under an accrual_method of accounting occur when the required performance occurs payment is due or payment is made whichever happens first see revrul_2003_10 2003_1_cb_288 revrul_2004_52 2004_1_cb_973 see also 372_us_128 we assume as a factual matter that taxpayer received payment from the sale of psls in each of ------- succeeding taxable years beginning with the year a purchaser signed an agreement or in year when a purchaser signed an application and made an initial payment the terms of the psl contracts and the parties’ actions are relevant in determining when the payments were due and when taxpayer’s performance occurred we conclude that the ---------------------- installments were not due and payable until the year and date established under the psl agreements generally the ----- succeeding postf-153046-06 years after the purchaser signed an agreement under the ----------- terms taxpayer had no right to enforce payment of the installments or accelerate the due_date for payment if a purchaser failed to make the payments as required taxpayer’s recourse was to terminate the purchaser’s rights under the contract including withholding tickets therefore taxpayer had no fixed unqualified right to a payment until the due_date occurred see schlude v commissioner 86_f2d_637 2nd cir 281_us_11 we conclude that taxpayer’s performance under the contract occurs when all payments are made under the psl agreements’ ------------------------------- a psl is ------------------ only when all installments are paid additionally under the default provisions taxpayer may deny the purchaser the right to purchase tickets until all required_payments are made therefore the purchaser has no right to and does not receive a psl until all payments are made taxpayer has no right to enforce payment of the installments in the year an agreement is signed by a licensee purchaser and the ---------------------- payments are not due and payable until the ---------------------- years of the agreement under the terms and conditions of the psl contracts the purchaser does not have the right to a psl until all payments are made under the agreement and taxpayer’s performance does not occur until that time as the performance requirement is not met until the final installment is paid we conclude that taxpayer must properly accrue income as each installment is due and payable or payment is made whichever occurs first as taxpayer does not recognize the total sales proceeds in the first year the agreement is executed sec_453 does not apply we note that the contingencies provided in ---------------------------------------- the psl agreement ---------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------- would not prevent taxpayer from accruing the income if the all_events_test were otherwise satisfied when applying the all_events_test courts have distinguished between conditions precedent which must occur before the right to income arises and conditions subsequent the occurrence of which will terminate an existing right to income but which do not preclude accrual of income 107_tc_282 aff’d 161_f3d_1231 9th cir the contingencies specified are remote and do not constitute a condition_precedent to taxpayer recognizing income this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


significant index number department of the treasury internal_revenue_service washington d c government entities division apr se t ep ra aq re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases established as of date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the and to the this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours od hm david m ziegler manager ep actuarial group


internal_revenue_service number info release date cc psi 1-genin-161944-02 dec uilc dear we are responding to your correspondence requesting automatic late s_corporation relief for an effective taxable_year of the information submitted explains that your former accountant failed to file your form_2553 you are ineligible for automatic relief under revproc_98_55 which superceded rev_proc because the window of opportunity expired on date relief is also unavailable pursuant to revproc_97_48 because your first tax_return was filed late announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2002_1 copy enclosed in addition revproc_2002_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2002_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides a special website www irs gov smallbiz which is dedicated to providing information to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2002_1 copy of submission