department of the treasury certified taxpayer_identification_number person to contact employee id number tel fax refer reply to in re tax years uil index internal_revenue_service tege appeals programs n los angeles street los angeles ca number release date date date redaction legend a c a dear this is a final adverse determination to your exempt status under sec_501 a as an organization described under sec_501 c of the internal_revenue_code our adverse determination was made for the following reason s sec_1_501_c_3_-1 provides that an organization is not operated exclusively for exempt purposes unless it serves a public rather than a private interest you operated for the benefit of private interests as such you failed to meet the requirements of sec_501 c and sec_1_501_c_3_-1 in that you have not demonstrated that you are operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 c contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed before the st ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call1-877-777-4778 and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_61 c if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter cc sincerely nan shimizu appeals team manager -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - department of the treasury internal_revenue_service commerce st ms dal dallas texas tax_exempt_and_government_entities_division date date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax manager name manager number telephone certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action our understanding is that you do not agree with our proposed change in your exempt status we are in receipt of your protest and will forward your case to appeals the appeals_office is independent of the exempt_organizations division and resolves most disputes informally as such a formal response is not required effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you in lieu of letter i contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading ofthis letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation respectively nanette m downing director eo examinations enclosures report of examination form_6018 publication publication form 886a i n arne of taxpayer org issues department of the treasury- internal_revenue_service explanation of items schedule no or exhibit year period ended april 20xx through april 20xx did the foundation fail to file complete and accurate returns with the internal_revenue_service is the foundation liable for failure_to_file penalties for its fiscal_year ending aprii20xx is the foundation liable for excise_taxes under sec_4942 for failure to distribute income did the trustee of the foundation engage in acts of self dealing as defined under sec_4941 did the trustee of the foundation allow the assets to inure for the personal benefit of a disqualified_individual should the exempt status of the foundation be revoked for not operating in a manner consistent with sec_50l c and allowing the assets and income to insure for the benefit of disqualified individuals facts foundation foundation is a private non-operating foundation and a tax exempt_organization under internal_revenue_code irc sec_50l c it was granted this status on december 19xx the foundation is a_trust the trustee is corporation trustee president is the president ofthe law corporation the trust was formed on may l9xx in the state of state the trust was created as irrevocable but it may be terminated at anytime by action of the trustee the trust's initial source of financial support was from the residue of the estate of indv-1 the articles of trust of the foundation were signed by president as executor of the estate of indv-1 and as president of corporation the foundation's primary purpose as stated in its trust agreement is to devote and apply the property by this instrument vested in the trustee and the income to be derived there from exclusively for charitable religious scientific literary and educational_purposes either directly or by contributions to organizations duly authorized to carry on charitable religious scientific literary or educational activities the trust agreement also set out that the trustees will distribute the income of the trust fund for each taxable_year in such time and in such manner as not to become subject_to tax on the undistributed_income imposed by sec_4942 of the internal_revenue_code further the trustees will not engage in any acts of self dealing as defined in sec_4941 nor retain any excess_business_holdings as defined in sec_4943 from making any investments in such manner as to incur tax under sec_4944 nor make any taxable_expenditures as defined in sec_4945 on its form return of private_foundation the organization indicated on part vii-a question that it was in compliance with sec_50s e relating to sec_4941 through the foundation answered in the affirmative on each filed return between 20xx and 20xx on part vii-b the foundation indicated yes to paying compensation to pay or reimburse the expenses of an disqualified_person in addition the foundation indicated that it did not furnish goods services or facilities to or accept them from a disqualified_person engage in the sale exchange or leasing of property with a disqualified_person nor borrow money from lend money to or otherwise extend credit to or accept credit from a disqualified_person the foundation indicated that none of the acts that it participated in failed to meet the exceptions as set out in sec_53 d -3 for each period the returns were signed by president as trustee of the foundation form 886-a rev department ofthe treasury- internal_revenue_service page -1- form 886a n arne oft axpayer org department of the treasury - i ntemal reyenue scrrice ex lanation of items schedule no or exhibit year period ended april zoxx through a ril l'c the foundation owns a four story building the building is located at address in city state the building has retail office and some residential rental spaces an appraiser engaged by the trustee described the property as an older class c office building in a secondary location away from downtown city the foundation did not have a board_of directors untii20xx during the period 19xx to 19xx the trustee administered the foundation's rental property from an office building owned by president at address city state during this time president's law firm was located in the same building this location is located approximately miles from the foundation's building on address in 19xx at the annual trustee meeting president acting as trustee of the foundation moved to have the law firm occupy office space within the foundation's property at address city state zip president as trustee occupied suite which contained square feet of the building's rentable space those minutes note that the move will be in compliance with sec_4941 in addition the minutes stipulate that the law firm would pay prevailing rates the trustee notes that fair rent at the time is about a square foot most of the tenants located at address have month to month lease terms however many of the tenants have been long-term tenants a majority of the tenants originally had one to five-year lease terms with annual rent increases linked to consumer_price_index cpi as such many of the month to month tenants are expected to have annual increases in rent linked to cpi if they remain in the building for longer than one year per the general lease form the foundation as the landlord pays all water gas heat light power refuse and other utilities and services supplied to the premises for the office spaces it rents retail spaces pay their own utility expenses the trustee did not pay rent or certain utility expenses related to its occupation of the foundation's property the expenses for this commercial property have exceeded the rental income eight of the last thirteen years in 19xx the foundation loaned dollar_figure to synagogue in city state the agreement states that the synagogue will repay the loan at an interest rate of percent in accordance with the schedule attached to the note the agreement was signed on december 19xx the first payment was due on july 19xx form 886-a rev department of the treasury- internal_revenue_service page -2- form 886a i name oftaxpayer org department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended april 20xx through april xx as part of the agreement the foundation agreed to make a charitable_contribution to synagogue in an amount equal to the yearly interest which it received from the synagogue but only in those years in which it received interest the contributions were based on the following conditions contributions will be made in those years that both the interest and principle payment checks are received by the foundation exactly on time and in the exact amounts owed in accordance with the note contributions will only be made upon synagogue's providing satisfactory proof of its continued sec_50 c tax exempt status for the year in question contributions will only be made subject_to synagogue's providing satisfactory proof that its operation of the cemetery is within it's sec_50l c tax exempt purposes contributions will only be made if all above proofs are established prior to april of the year in question and no contributions will be made unless the synagogue meets all the conditional requirements set forth herein on march 20xx the foundation's cpa cpa sent synagogue a letter detailing late payments and their agreement on how the delinquent payments would be treated the letter included a revised amortization schedule of the remaining balance at the time of the letter the synagogue was delinquent on three payments january 20xx july 20xx and january 20xx in an agreement between the foundation and the synagogue the foundation agreed to reduce the loan balance by the amount of the missed payments in return synagogue agreed to acknowledge a portion of the delinquent payments as charitable_contributions made to it by the foundation the foundation also agreed to make an additional charitable_contribution to synagogue the letter also stated that synagogue acknowledges it was past due with respect to two additional payments due on july 20xx and january 20xx these payments were to be paid_by april 20xx in 20xx president in his capacity as president of the law firm borrowed dollar_figure the settlement statement dated september 20xx identifies this as the new 2nd loan from indv-2 indv-3 and indv-4 the property securing the loan is the foundation's rental property at address a loan for dollar_figure due to indv-5 is recorded on the foundation's form_990-pf balance_sheet for the period ending april 20xx this loan is identified as a 2nd mortgage to the building located at address the foundation refinanced the mortgage on address three times in the last three years the first refinance happened in july 20xx through sterling bank and trust the settlement statement dated july 20xx shows the payoff of two pre-existing loans the first payoff is to bank-2 and trust for dollar_figure for the previous mortgage the second payoff of dollar_figure is made to indv-2 indv-3 and indv-4 this loan is not recorded on the form_990-pf balance_sheet for the period ending april 20xx the second time the mortgage was refinanced through bank- i in february 20xx for dollar_figure the mortgage was refinanced again in aprii20xx through bank-3 for dollar_figure president's personal loan obligation is included in these refinances total interest payments on president's portion of the refinanced mortgage were dollar_figure for the period beginning september 20xx through december 20xx the return preparer's worksheet for the secondary loan prepared from a copy of the borrower's settlement statement dated july 20xx shows a computation labeled as b the return preparer's computation reduced the dollar_figure figure appearing on the settlement statement by dollar_figure the foundation's form_990-pf for the year ending december 20xx lists a transaction of dollar_figure this transaction is labeled as a payoff of non-recorded loans for the period ending april 20xx the form_990-pf part ii line shows a receivable ofdollar_figure due from officers directors trustee and other disqualified persons form 886-a rev department of the treasury- internal_revenue_service page -3- form 886a n arne of taxpayer org department of the treasury- internal revenue sen icc ex lanation of items schedule no or exhibit year period ended april 20xx through a ril 20xx at the stated_interest rate in each of the refinanced loans the foundation paid the following amounts in interest to satisfy the portion that were securing personal loans of president on january 20xx in response to an inquiry posed by the revenue_agent regarding the dollar_figure receivable the power_of_attorney poa called president and asked him about the dollar_figure receivable recorded on the form_990-pf balance_sheet poa stated that president used the foundation's property to secure a personal loan president states that this loan was made in order to pay accumulated trustee fees due to him for his services as the property and investment manager form disclosure statement attached to form 990-t for the period ending april 20xx president is not the trustee of the foundation his law corporation is the trustee a tax client who pays fees to a law firm in excess ofdollar_figure in the course ofthe client's trade_or_business is required to issue a form_1099 no forms miscellaneous income nor forms w-2- wage tax statement have been filed by the foundation for any of the years being examined reporting compensation paid to president or to corporation form_990-pf part ii line balance sheets show reductions in the fmv of the dollar_figure loan balance for each fiscal_year between 20xx and 20xx end of year fmv dtftcrcncc the foundation did not receive any payments from president during these periods form 886-a rev department of the treasury- internal_revenue_service page -4- form 886a n arne of taxpayer org department of the treasury - internal_revenue_service ex lanation of items schedule no or exhibit year period ended april 20xx through a ri120xx a borrower's estimated closing costs document dated october 20xx has the foundation's building at address listed as collateral for a loan ofdollar_figure the proceeds of the loan dollar_figure were not deposited in the foundation's bank account for the period ending april 20xx the loan was paid off with a personal check from president and wife's bank account the check is dated june 20xx no rent was collected on three office suites as they were affiliated with building management the foundation trustee suite tenant sq ft relationship lndv-6 corporation lndv-7 total non-rented space total building sq of sq ft not paid in a letter dated june 20xx president gave the following reason for his law firm's occupancy in the foundation's building as my individual and personal commitment to indv-8 and indv-9 for whom this foundation was set up to honor and my obligation to 'make the trust property productive' and to 'use reasonable_judgment in the exercise of my trustee discretion' has dictated that i personally be at the building so that i can benefit the generation of funds for the foundation to assist the numerou sec_501 c3 type charities that the foundation does assist the words 'functionally related' in sec_53 494l d -3 apply to what was needed to build the foundation's asset the forms 990-pf for the period sec_30 april 20xx through april 20xx report a total of dollar_figure being paid for services and related fees the fees were reported as paid for accounting and legal services management and trustee services and other miscellaneous professional services forms miscellaneous income filed by the foundation with the irs from 20xx to 20xx only report dollar_figure as compensation_for services and fees the foundation reported compensation expenses totaling dollar_figure for the same period these payments were not reported on form sec_1 or forms w-3 information returns with the internal_revenue_service irs the foundation did not issue forms nor w- to president or to corporation for this same period the foundation has consistently failed to file its forms 990-pf- return of private_foundation and forms 990-t exempt_organization business tax_return in a timely manner as noted below the organization consistently missed its required_filing_date of september and paid substantial penalties form 886-a rev department of the treasury- internal_revenue_service page -5- form 886a name oftaxpayer org department of the 'l'reasury - internal_revenue_service ex lanation of items schedule no or exhibit year period ended april xx through a ril xx it is noted that the for the period ending april 20xx daily delinquency penalties were assessed by the service_center for failure_to_file but were later abated sec_501 allows for the exemption from federal_income_tax an organization that is organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals sec_1 c -l a provides in general in order to be exempt as an organization described in sec_501 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 l provides an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 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 c -l c provides that the operational_test is not satisfied where any parts of the organization's earnings inure to the benefit of private shareholders or individuals and where the organization serves a private rather than public interest sec_1 50l c -l d l ii provides that an organization is not organized or operated exclusively for one or more of the purposes specified in sec_501 c unless it serves a public rather than a private interest sec_1 50l c -l e provides in general an organization may meet the requirements of sec_50l c although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 form 886-a rev department of the treasury- internal_revenue_service page -6- form 886a i n arne of taxpayer org sec_509 holds department of the treasury- internal_revenue_service explanation of items schedule no or exhibit year period ended april 20x x through april 20xx if an organization is a private_foundation within the meaning of sec_509 a on date or becomes a private_foundation on any subsequent date such organization shall be treated as a private_foundation for all periods after date or after such subsequent date unless its status as such is terminated under sec_507 sec_513 defines unrelated_business_income any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_6033 states except as provided in paragraph every organization_exempt_from_taxation under sec_50l a sec_501 a shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purpose of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_6652 imposes a tax for failure_to_file an information_return as follows there shall be paid_by the exempt_organization dollar_figure for each day during which such failure continues the maximum penalty under this subparagraph on failures with respect to any return shall not exceed the lesser ofdollar_figure or percent of the gross_receipts of the organization for the year in the case of an organization having gross_receipts exceedingdollar_figure for any year with respect to the return required under sec_6033 for such year the first sentence ofthis subparagraph shall be applied by substituting dollar_figure for dollar_figure and in lieu of applying the second sentence of this subparagraph the maximum penalty under this subparagraph shall not exceed dollar_figure irc 604i a states all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income ofdollar_figure or more in any taxable_year or in the case of such payments made by the united_states the officers or employees of the united_states having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for shall render a true and accurate retur n to the secretary under such regulations and in such form and manner and to such extent as may be prescribed by the secretary setting forth the amount of such gains profits and income and the name and address of the recipient of such payment chapter taxes sec_4940 imposes an excise_tax on investment_income as follows there is hereby imposed on each private_foundation which is exempt from taxation under sec_50l a for the taxable_year with respect to the carrying on of its activities a tax equal to percent ofthe net_investment_income of such foundation for the taxable_year sec_4940 defines net_investment_income as form 886-a rev department of the treasury- internal_revenue_service page -7- form 886a n arne of taxpayer i org department of the treasury - internal_revenue_service ex lanation of items schedule no or exhibit year period ended april 20xx through april 20xx net_investment_income is the amount by which a the sum of the gross_investment_income and the capital_gain_net_income exceeds b the deductions allowed by paragraph the term gross_investment_income means the gross amount of income from interest dividends rents payments_with_respect_to_securities_loans as defined in sec_512 and royalties there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred for the production or collection of gross_investment_income or for the management conservation or maintenance of property held for the production of such income irc 494l d l defines self dealing as any direct or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person lending of money or other extension of credit between a private_foundation and a disqualified_person furnishing of goods services or facilities between a private_foundation and a disqualified_person payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 sets out the following special rule the lending ofmoney by a disqualified_person to a private_foundation shall not be an act of self-dealing if the loan is without interest or other charge determined without regard to sec_7872 and if the proceeds of the loan are used exclusively for purposes specified in sec_50l c irc 494l a l defines the initial tax on the self dealer as there is hereby imposed a tax on each act of self-dealing between a disqualified_person and a private_foundation the rate_of_tax shall be equal to percent of the amount_involved with respect to the act of self-dealing for each year or part thereof in the taxable_period the tax imposed by this paragraph shall be paid_by any disqualified_person other than a foundation_manager acting only as such who participates in the act of self-dealing in the case of a government_official as defined in sec_4946 a tax shall be imposed by this paragraph only if such disqualified_person participates in the act of self-dealing knowing that it is such an act irc 494i a defines the initial tax on the foundation_manager as in any case in which a tax is imposed by paragraph there is hereby imposed on the participation of any foundation_manager in an act of self-dealing between a disqualified_person and a private_foundation knowing that it is such an act a tax equal to percent of the amount_involved with respect to the act of self dealing for each year or part thereof in the taxable_period unless such participation is not willful and is due to reasonable_cause the tax imposed by this paragraph shall be paid_by any foundation_manager who participated in the act of self-dealing sec_4941 imposes an additional tax on self dealer in any case in which an initial tax is imposed by subsection a l on an act of self-dealing by a disqualified_person with a private_foundation and the act is not corrected within the taxable_period there is hereby imposed a tax equal to percent of the amount_involved sec_4941 imposes an additional tax on foundation_manager in any case in which an additional tax is imposed by paragraph if a foundation_manager refused to agree to part or all of the correction there is hereby imposed a tax equal to percent of the amount_involved form 886-a rev department ofthe treasury- internal_revenue_service page -8- form 886a i name oftaxpayer org department of the treasury- internal revenue sen ce explanation of items schedule no or exhibit year period ended april 20xx through april 20xx the tax imposed by this paragraph shall be paid_by any foundation_manager who refused to agree to part or all of the correction irc 494l c limits the amount of tax on foundation_manager with respect to any one act of self-dealing the maximum amount of the tax imposed by subsection a shall not exceed dollar_figure and the maximum amount of the tax imposed by subsection b shall not exceed dollar_figure sec_4941 defines correction as with respect to any act of self-dealing undoing the transaction to the extent possible but in any case placing the private_foundation in a financial position not worse than that in which it would be if the disqualified_person were dealing under the highest fiduciary standards sec_53 a -l b defines participation of a foundation_manager shall include silence or inaction on the part of a foundation_manager where he is under a duty to speak or act as well as any affirmative action by such manager however a foundation_manager will not be considered to have participated in an act of self-dealing where he has opposed such act in a manner consistent with the fulfillment of his responsibilities to the private_foundation sec_53 a -l b defines knowing for purposes of sec_4941 a person shall be considered to have participated in a transaction knowing that it is an act of self-dealing only if- i he has actual knowledge of sufficient facts so that based solely upon such facts such transaction would be an act of self-dealing ii he is aware that such an act under these circumstances may violate the provisions of federal tax law governing self-dealing and iii he negligently fails to make reasonable attempts to ascertain whether the transaction is an act of self-dealing or he is in fact aware that it is such an act sec_53 494l a -l b defines willful as participation by a foundation_manager shall be deemed willful if it is voluntary conscious and intentional no motive to avoid the restrictions of the law or the incurrence of any_tax is necessary to make the participation willful however participation by a foundation_manager is not willful if he does not know that the transaction in which he is participating is an act of self-dealing sec_4942 defines undistributed_income as with respect to any private_foundation for any taxable_year as of any time the amount by which- the distributable_amount for such taxable_year exceeds the qualifying distributions made before such time out of such distributable_amount sec_4942 defines the initial tax on the self dealer as there is hereby imposed on the undistributed_income_of_a_private_foundation for any taxable_year which has not been distributed before the first day of the second or any succeeding taxable_year following such taxable_year if such first day falls within the taxable_period a tax equal to percent of the amount of such income remaining undistributed at the beginning of such second or succeeding taxable_year the tax imposed by this subsection shall not apply to the undistributed_income of a private foundation- for any taxable_year for which it is an operating_foundation as defined in subsection j or form 886-a rev department of the treasury- internal_revenue_service page -9- form 886a i n arne of taxpayer org department of the treasury - i ntemal revenue service explanation of items schedule no or exhibit year period ended april 20l x through a_2_ril xx to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection e if-- a the failure to value the assets properly was not willful and was due to reasonable_cause b such amount is distributed as qualifying distributions within the meaning of subsection g by the foundation during the allowable_distribution_period as defined in subsection g c the foundation notifies the secretary that such amount has been distributed within the meaning of subparagraph b to correct such failure and d such distribution is treated under subsection h as made out of the undistributed_income for the taxable_year for which a tax would except for this paragraph have been imposed under this subsection sec_4942 imposes an additional tax on the foundation in any case in which an initial tax is imposed under subsection a on the undistributed_income_of_a_private_foundation for any taxable_year if any portion of such income remains undistributed at the close of the taxable_period there is hereby imposed a tax equal to percent ofthe amount remaining undistributed at such time sec_53_4942_a_-3 defines a qualifying_distribution as the amount of a qualifying_distribution of property as defined in subparagraph of this paragraph is the fair_market_value of such property as of the date such qualifying_distribution is made the amount of an organization's qualifying distributions will be determined solely on the cash_receipts_and_disbursements_method of accounting rev rul78-76 1978_1_cb_377 address the circumstances where a disqualified_person is liable for the tax imposed on an act of self-dealing by irc 494l a l as well as the tax imposed on the participating foundation_manager by sec_4942 in the instance of revrul_78_76 the disqualified_person is also a trustee of a_trust that is a private_foundation as such with respect to the trust he is a foundation_manager as that term is defined in sec_4946 b the disqualified_person acting on his own behalf and as trustee on behalf of the trust sold property he owned to the trust knowing that the transaction was an act of self-dealing under sec_4941 d i a his participation in the transaction was willful and was not due to reasonable_cause sec_4941defines functionally_related_business as a trade_or_business which is not an unrelated_trade_or_business as defined in sec_513 or an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exempt purposes of the organization sec_4946 defines a disqualified_individual as a person who is a substantial_contributor to the foundation a foundation_manager within the meaning of subsection b l an owner of more than percent ofthe total combined voting power of a corporation the profits interest of a partnership or the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation sec_4946 defines foundation_manager as an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation sec_7701 defines a person as form 886-a rev department of the treasury- internal_revenue_service page -10- form 886a name oftaxpayer org department of the treasury- internal_revenue_service ex lanation of items schedule no or exhibit year period ended april 20xx through a ril xx the tenn person shall be construed to mean and include an individual a_trust estate partnership_association company or corporation governments position issue i did the foundation fail to file complete and accurate returns with the internal_revenue_service is the foundation liable for failure_to_file penalties for its fiscal_year ending april 20xx the foundation did not collect rent under its lease agreement from the trustee for a period of nearly years during this time the fonns 990-t- exempt_organization business tax_return of the foundation included amounts attributable to expenses related to the lease of space to corporation since the foundation did not receive income from the rental of this space that corresponding expenses are not includable as deductible expenses on the 990-t in addition amounts originally claimed on the fonn 990-t include amounts attributable to the personal expenses of president these amounts are also not deductible as business_expense the rental income reported on fonn 990-twas incorrect for the period ending april 20xx the foundation reported rental income of dollar_figure on its 990-t financial records provided by the foundation show total rent due for the period ending april 20xx as dollar_figure the examination detennined total rental income received for the period was dollar_figure in addition gross rents received by the organization were underreported by approximately the foundation was not able to provide any documentation that would support the difference between what was found during examination and what was reported on the 990-t for the year ending april 20xx it was detennined that the subsequent years tax returns were also not accurate as such the 20xx-20xx returns were adjusted expenditures were reduced by amounts directly related to the operation of corp interest was reduced by the amount of interest_paid on loans not related to the exempt_activities of the foundation miscellaneous income that could not be substantiated with documentation was removed and non-personal expenses were reduced as they were not connected with the exempt_function of the foundation additionally the foundation failed to file fonns for the calendar years ending december 20xx- 20xx for professionals and contractors paid more than dollar_figure the foundation filed five fonns for calendar_year ending december 20xx since the fees deducted as legal professional and management fees were not reported on fonns they were disallowed as part of expense offset on the fonn 990-t also large and questionable expenses that could not be substantiated were disallowed as such we have adjusted amounts of income and expense reported on the 990-t of the foundation form 886-a rev department of the treasury- internal_revenue_service page -11- form 886a i n arne of taxpayer org department of the treasury- internal_revenue_service explanation of items schedule no or exhibit year period ended april 20xx through april ' issue is the foundation liable for excise_taxes under sec_4942 for failure to distribute income in 19xx the foundation entered into a loan agreement with synagogue in city state the foundation loaned the synagogue dollar_figure on march 20xx the foundation agreed to modify the terms ofthe loan the synagogue was late on payments of principal and interest due on january 20xx july i 20xx and january i 20xx in the agreement the foundation reduced the loan balance by the amount of the missing payments in exchange for acknowledgment of a portion of the missing payments dollar_figure as charitable_contributions the law requires the actual donation of cash or property within the taxable_year for a charitable_contribution to be recognized sec_170 l the law imposes an excise_tax on private_foundations for failure to distribute income for any_tax year which has not been distributed before the first day of the second tax_year following the tax_year or the first day of any succeeding tax_year that falls within the taxable_period sec_4942 the tax_rate i sec_30 of the foundation's undistributed_income for tax years beginning prior to august the tax_rate wa sec_15 pension_protection_act of2006 the taxable_period begins with the first day of the tax_year and ending on the earlier ofthe date of mailing of a notice_of_deficiency with respect to the initial tax or the date on which the tax is assessed sec_4942 l a foundation's undistributed_income equals the excess of the foundation's distributable_amount over its qualifying distributions sec_4942 the distributable_amount is equal to the sum of the minimum_investment_return increased by certain recouped qualifying distributions and reduced by the sum ofthe taxes on income and net_investment_income sec_4942 the minimum_investment_return is five percent of the excess of the aggregate fair_market_value of all non-charitable use assets over the foundation's acquisition_indebtedness sec_4942 qualifying distributions include any amounts paid to accomplish one or more charitable sec_170 purposes other than to organizations controlled directly or indirectly by the foundation or its disqualified persons sec_4942 qualifying distributions also include any amounts paid to acquire assets used or held for use in carrying out charitable sec_170 c b purposes sec_4942 i b the form_990-pf parts i v vi ix x xi xii and xiii provide the computations necessary in determining whether your foundation fails to distribute income in a given year on your form_990-pf for the tax_year ended april 20xx you reported dollar_figure in contributions paid to synagogue this amount includes the dollar_figure in forgiven debt your total charitable disbursements for the year totaled dollar_figure this amount also constitutes your total qualifying distributions for the year you fully subtracted these distributions from your undistributed_income leaving a remaining undistributed_income amount of dollar_figure that carried over to the next year's form_990-pf as such the foundation is liable for excise_taxes under sec_4942 and sec_4942 for failure to distribute income in a manner consistent with sec_50i c the foundation has not made corrections at this time issue did the trustee of the foundation engage in acts of self dealing as defined under irc 494i president in his duty as president of the trustee signed the articles of trust which specifically note that the foundation will not participate in activities that will give rise to chapter taxes president as a representative of the trustee signed the 990-pf return which under part-vii a b points out specific acts of self-dealing and other acts subject_to excise_tax under chapter of the internal_revenue_code as such the trustee and president have form 886-a rev department of the treasury - internal_revenue_service page -12- form 886a i name oftaxpayer org departmc'tlt of the treasury - internal revenue scn icc explanation of items schedule no or exhibit year period ended april 20xx through april 20xx sufficient knowledge of chapter excise_taxes to know what constitutes an act of self dealing as defined under sec_4941 the trustee of the foundation is considered a foundation_manager under sec_4946 it is in charge of the day to day operations ofthe foundation in addition it is responsible for oversight of all the foundation's financial functions and contracts the trustee is also a disqualified_individual as defined in sec_4946 as he has made substantial contributions to the foundation acts as a foundation_manager and controls over of the total voting power of the foundation the foundation owns a four story building located at address city state the building has retail office and some residential rental spaces in 19xx president acting as president of the law firm corporation corp moved to have corp occupy office space within the foundation's property at address city state zip code corp occupied suite contained square feet of rentable space at the time of the move the foundation's minutes reflected that corp would pay rent to the foundation and that corp's occupancy of the foundation's building would be in compliance with sec_4941 despite the representations made in the foundation's minutes corp did not pay rent or certain utility expenses related to its occupancy in the foundation's building which on september 20xx corp borrowed dollar_figure from indv-2 and indv-4 proceeds from this loan were used to pay off a previous loan made by indv-2 and indv-4 to corp which had an outstanding balance ofdollar_figure after payment of loan fees in the amount ofdollar_figure and prepaid_interest in the amount ofdollar_figure the remaining dollar_figure was remitted to corp this loan was secured using the foundation's property at address on july 20xx the foundation refinanced its mortgage on address under your direction and control dollar_figure of the proceeds from the refinancing ofthe foundation's mortgage were used to pay offthe outstanding liability owed by corp to indv-2 indv-4 at the time of the 20xx refinancing corp did not make any restitution to the foundation for this relief of debt the foundation subsequently refinanced its mortgage twice more on january 20xx and march 20xx and each time corp failed to pay any restitution or assume the dollar_figure relief in debt it had received in 20xx all mortgage payments were made by the foundation we have concluded that these activities are acts of self-dealing within the meaning of sec_4941 a private foundation's assumption of a disqualified person's liability is a self-dealing transaction sec_4941 d b in addition the foundation's furnishing offacilities to a disqualified_person is a self-dealing transaction sec_4941 issue did the trustee of the foundation allow the assets to inure for the personal benefit of a disqualified_individual president acting through the trustee of the foundation used the assets of the foundation to secure a series of personal loans payable to him these personal loans were later assumed by the foundation when they were included in the refinance ofthe foundation's mortgages in 20xx as stated in sec_4941 d l acts of self dealing include acts oflending of money between a private_foundation and a disqualified_person or payment of compensation or payment of reimbursement of expenses by a private_foundation to a disqualified_person in addition sec_53_4941_d_-2 notes that an act of self-dealing form 886-a rev department of the treasury- internal_revenue_service page -13- form 886a i n arne of taxpayer org department of the treasury - in temal revenue service explanation of items schedule no or exhibit year period ended april 20x 'c through aq_ril 20xx occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor under the note as in this case the joan was a personal loan to president and transferred to the foundation when it refinanced its mortgages in addition joan fees principal and interest were paid fully by the foundation at no time did president attempt to make restitution to the foundation for these payments at no time did the trustee of the foundation demand payment for assumed debts of president these transactions allowed a portion of the holdings of the foundation to flow to a disqualified_individual making these funds unavailable for use in the charitable mission of the foundation the trustee for the foundation had sufficient knowledge of the terms to know that entering into the agreement would cause the funds of the foundation to be used for personal not charitable endeavors and would constitute an act of self-dealing as defined in sec_4941 d l president had sufficient knowledge of the facts to know that he was transferring his debt obligations to the foundation and that he would personally benefit from no being removed as obligor of his personal loans as trustee corp failed to exercise its due diligence to ensure that the joan was in the best short and long term_interest of the foundation in addition it violated the trust agreement by allowing the foundation to be subject_to sanctions under sec_42 of the irc the trustee could have easily corrected such deficiencies by not assuming the personal loans of president and requiring that he take personal responsibility for his loans president could have taken personal responsibility for his loans and not allowed them to be bundled into the larger mortgage refinance of the foundation the trustee's participation in assuming the personal loans of president falls fully on it as it voluntarily assumed the loans when refinancing the foundation's mortgage it was conscious and intentional as the trustee had to review the loan documents confirm all included amounts pay closing costs and fees and fully accept the terms of the new mortgage based on these facts the trustee of the foundation participated in acts of self-dealing as defined by sec_4941 in addition the trustee of the foundation allowed the foundation's assets to be used in a manner not in furtherance of an exempt_purpose and jeopardized the exempt status of the foundation issue should the exempt status of the foundation be revoked for not operating in a manner consistent with sec_50j c and allowing the assets and income to insure for the benefit of disqualified individuals the internal_revenue_code states for an organization to be exempt under sec_501 the organization needs to meet both the organization and operational tests as defined in sec_1 c -l a in addition sec_501 and sec_1 50l c -l c holds that an organization shall not be exempt if any of its earnings inure to the private benefit of any of its shareholders or individuals treasury regulation dollar_figure i c l c l provides an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes the foundation was unable to provide substantiate that its primary activities were charitable activities or events that further an exempt_purpose during the periods under review the primary activity of the foundation was the management and collection of income from its assets primarily real-estate any charitable_contributions the foundation distributed were incidental in comparison to the private benefits the disqualified_individual and the trustee received form 886-a rev department of the treasury- internal_revenue_service page -14- form 886a i name oftaxpayer org department of the treasury - i ntemal reycnue service explanation of items schedule no or exhibit year period ended april xx through april xx in orange county agricultural society v commissioner the organization had substantial nonexempt activities and acted in a manner consistent with a for-profit business than a non-profit organization the courts held that an organization with substantial nonexempt activities can't avoid revocation of its tax exempt status simply by paying taxes or penalties in the case of the foundation the primary activities of the organization have given rise to substantial excise_taxes and the income generated was used for the private benefit of disqualified individuals as such the foundation does not meet the operational_test as it is not operated exclusively for sec_50l c purposes as defined in treasury regulation dollar_figure c -1 d l i in addition to not showing any charitable activities the foundation engaged in acts of self-dealing that allowed the fund balances of the foundation to inure to benefit of disqualified individuals as noted above the foundation's self-dealing transactions with president and corporation were for the private benefit of a disqualified_individual and a disqualified_corporation owned by that individual the law firm occupied space in the foundation's building for a period of thirteen years during this time the trustee failed to pay rent and the foundation failed to demand that rent be paid on the space occupied during the course of the audit the foundation as well as the trustee was advised that the trustee would need to vacate the building however the trustee continued to maintain its offices in the building until 20xx in addition to the lease the foundation allowed its assets to be used to secure personal loans to a disqualified_person when this individual was no longer able to satisfy the debt the foundation assumed the debt wholly as part of its mortgage refinancing at no time did the foundation demand restitution for assuming the loan this allowed a substantial amount of the foundation's fund balances to be used for the personal_use of a single individual as in orange county supra an organization will not qualify for tax exempt status if even a small part of its income inures to a disqualified_individual as such the foundation has failed to meet the requirements of sec_1 50l c -l c and sec_1 c -1 d ii by engaging in acts of self dealing as defined in sec_4941 d these acts allowed for the income of the foundation to inure for the personal benefits of disqualified individuals and not be available for use for charitable activities taxpayer's position in the protest received november 20xx the foundation holds that issue the foundation did not fail to collect rent from the trustee for nearly years it is also the foundation's position that it correctly reported its income and expenses for the years at issue issue the foundation denies that it purposefully forgave loan payments to president's synagogue the foundation also denies also denies that it is liable for liabilities under sec_4942 or any associated excise_tax form 886-a rev department of the treasury- internal_revenue_service page -15- form 886a i name oftaxpayer org issue department of the treasury- internal rcycnue serricc explanation of items schedule no or exhibit year period ended april xx through april xx the foundation denies that president in his duty as trustee ofthe foundation engaged in acts of self-dealing in the present case corp held an office in the building owned by the foundation president believes that he did not engage in acts of self-dealing by locating the law corporation in a building owned by the foundation the foundation's building is located in a relatively high crime zone in the city of city by having the law corporation located in the building owned by the foundation president was able to provide proper supervision of the premises and on numerous occasions actually assist law enforcement in protecting the foundation's building from criminal activity it is the position of president that the foundation is not liable for any taxes or penalties related to failure to distribute income in matters inconsistent with sec_501 furthermore it is president's position that his law corporation paid all applicable rent to the foundation at the current market rate and that the foundation recognized taxable_income on the rents received issue it is the position of president that the foundation did not provide assets of the foundation to a disqualified_person as the foundation_manager of the foundation president entered into refinance transactions of the foundation's building in order to provide reasonable_compensation for the services that were rendered it is president's position that he was never compensated for the services that he provided to the foundation a part of the refinance transactions was to provide reasonable_compensation for the services that were rendered over the years on august 20xx president provided to the examiner a log of some ofthe services rendered by president based on these facts it is the position of president that the acts of refinancing the foundation's property to pay his reasonable trustee fees was reasonable in light of the circumstances and not acts of self-dealing as defined under sec_4941 issue the foundation denies that it failed to provide substantiation that its primary activities were for charitable activities or events that further an exempt_purpose for lack of complete information and opportunity to compile taxpayer arguments and defenses the foundation also denies that corporation is a disqualified_person described in sec_4946 l b the foundation denies that president is a disqualified_person as described in sec_4946 l b the foundation denies that the foundation participated in acts of self-dealing under sec_4941 d l b the lending of money or other extension of credit between the foundation and a disqualified_person for lack of complete information and opportunity to compile taxpayers arguments and defenses it is the foundation's position that it did not participate in acts of self-dealing under sec_4941 d l b any monies paid to president represented reasonable_compensation to a disqualified_person as permitted under the internal_revenue_code form 886-a rev department of the treasury- internal_revenue_service page -16- form 886a i name oftaxpayer org conclusion department of the treasury- internal_revenue_service explanation of items schedule no or exhibit year period ended april x 'c through april 20xx therefore it is the governments position that the foundation no longer meets the guidelines under internal_revenue_code sec_50l c and sec_1 50l c -l c as the income ofthe organization has inured to the personal benefit of the trustee the foundation subsequently does not meet the operational_test because it is not operated exclusively for sec_501 c purposes as required and defied by treasury regulation dollar_figure o c -1 d l i and has been used as a vehicle to serve the private interests of its trustees rather than public interest as prescribed under treasury regulation dollar_figure c -1 d l ii it is recommended that that exempt status of this organization be revoked as of april 20xx as such the organization will be treated as a taxable private_foundation as of this date until such time that the foundation terminates its private_foundation_status under sec_507 the foundation is still subject_to excise_taxes under chapter of the internal_revenue_code as such is still required to file form_990-pf in addition the foundation is required to file form_1120 as it will also be treated as a for-profit corporation form 886-a rev department of the treasury- internal_revenue_service page -17-


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b02-plr-118079-01 date date legend company state x business y business z market b c d e date f exchanging shareholder a exchanging shareholder b plr-118079-01 exchanging shareholder c this letter responds to your authorized representative’s letter dated date in which you requested rulings under sec_108 sec_305 sec_306 and sec_368 of the internal_revenue_code additional information was submitted in letters dated may november and date the material information submitted for consideration is summarized below company is a state x corporation engaged in business y and business z company has a calendar_year end and uses the accrual_method of accounting the outstanding_stock of company consists of voting common_stock series a b convertible preferred_stock series a stock and two other classes of preferred_stock series b and series c not relevant here company also has outstanding series b warrants the warrants to acquire company common_stock the warrants have an exercise price of c per share company’s common_stock is traded on the market the common_stock is not convertible and is not entitled to a preference on earnings or liquidation proceeds the common_stock may be redeemed but there is no set price for such redemption exchanging shareholder a exchanging shareholder b and exchanging shareholder c own all of the series a stock as an accommodation to exchanging shareholder c company issued the series a stock in exchange for exchanging shareholder c’s one-year promissory note the note the note was repaid on date f in connection with the consummation of an unrelated transaction the series a stock is entitled to votes per share when voting as part of the class of common_stock and is also entitled to vote separately as a class of preferred_stock and as a series of series a preferred_stock as provided by state x law the series a stock pays a preferential_dividend along with certain dividends payable on other preferred_stock and has a liquidation preference the series a stock does not have dividends in arrears to reduce annual dividend payments on the series a stock company has proposed and partially consummated the following transactions i company’s board authorized a new series d convertible preferred_stock series d stock the series d stock will have rights and par_value substantially identical to those of the series a preferred_stock except that it will pay a d preferential_dividend and there will be implemented a dividend protection fund the dividend protection fund which will provide a purely contingent benefit to assure payment of dividends plr-118079-01 ii iii the series a stock held by exchanging shareholder a exchanging shareholder b and exchanging shareholder c will be exchanged for an equal number of shares of series d stock together with e warrants the exchange the purchase_price paid_by exchanging shareholder c for its shares of series a stock and the principal_amount of the note will be reduced as a retroactive purchase_price_adjustment sec_3 of revproc_2001_3 2001_1_irb_111 states that the service will not rule on whether a transaction qualifies under sec_368 for nonrecognition treatment and whether various consequences result from the application of that section unless the service determines that there is a significant issue that must be resolved in order to decide those matters if there is a significant issue the service will rule on an entire transaction you have requested rulings as to whether the transactions described qualify for nonrecognition treatment under sec_368 when preferred_stock is exchanged for preferred_stock with a reduced dividend and warrants the following representations have been made in connection with the proposed transactions a b c d e f g company and its exchanging shareholders will each pay their own expenses if any incurred in connection with the exchange none of company’s outstanding_stock is sec_306 stock within the meaning of sec_306 the fair_market_value of the series d stock and warrants received by each exchanging shareholder in the exchange will approximately equal the fair_market_value of the series a stock surrendered the corporate business_purpose for the exchange is to reduce the annual dividend payments by company on its outstanding preferred_stock company has no plan or intention to redeem or otherwise reacquire any shares of the series d stock issued in the transaction the exchanging shareholders do not have any plan or intention to dispose_of any of the series d stock or warrants received by them in the exchange company will continue to conduct its business operations after the proposed transactions plr-118079-01 h i j k l the proposed transaction is an isolated transaction and is not part of a plan periodically to increase the proportionate interest of any shareholder in the assets or earnings_and_profits of company company is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 neither the series a preferred_stock nor the series d preferred_stock are non-qualified preferred_stock within the meaning of sec_351 although company has the right to redeem the series d stock to be issued in the exchange based upon all the facts and circumstances redemption pursuant to that right is not more_likely_than_not to occur the dividend protection fund does not materially increase the likelihood that company will exercise its right to redeem the series d stock to be issued in the exchange based solely on the information submitted and on the representations set forth above we hold as follows the exchange will qualify as a reorganization under sec_368 company will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by company on receiving the series a stock from an exchanging shareholder in the exchange sec_1032 no gain_or_loss will be recognized by an exchanging shareholder on receiving the series d stock and the warrants in the exchange sec_354 and sec_356 the basis of the series d stock received by an exchanging shareholder will equal the basis of the series a stock surrendered in the exchange sec_358 the holding_period of the series d stock received by an exchanging shareholder will include the period during which the series a stock surrendered in the exchange was held provided the series a stock surrendered was held as a capital_asset on the date of the exchange sec_1223 the exchange will not be treated as a distribution_of_property to which sec_301 applies by reason of the application of sec_305 and sec_305 plr-118079-01 the series d stock received by an exchanging shareholder in the exchange will not be sec_306 stock as that term is defined in sec_306 the warrants received by an exchanging shareholder in the exchange and the common_stock acquired through exercise of the warrants will not be sec_306 stock as that term is defined in sec_306 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion as to whether the purported retroactive purchase_price_adjustment as described in step iii above results in cancellation_of_indebtedness_income this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely charles m levy reviewer branch office of office of associate chief_counsel corporate


cca_2016102413543241 id uilc number release date from sent monday date pm to cc bcc subject electronic signatures form_2678 examination operations has asked whether the service may accept a form_2678 employer payer appointment of agent that displays an electronic signature as we understand the proposed electronic signing procedure the enrollee will fill out the form_2678 online and sign it with a mouse or stylus the signature will be created by the person with a live signature but it will be a digital image of the actual signature the form will be mailed to the service and the vendor will maintain a digital image of the completed form it is our view that an electronic signature should only be accepted by the service when there are published guidance or irm provisions that specifically authorize use of an electronic signature for the specific form involved since there is no guidance or irm provisions authorizing the use of an electronic signature on forms we recommend that the service not accept forms signed electronically until the service authorizes its use for forms either in published guidance or in the irm it is a business decision whether to accept use of electronic signatures on any specific form as discussed more fully below although electronic signatures are legally valid the utility of using electronic signatures on specific documents or forms must be balanced against the risk of disavowal by the signer sec_6061 provides the general_rule that any return statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the secretary although the internal_revenue_code does not define the term signature u s c sec_1 provides that a signature includes a mark when the person declaring the same intended it as such and sec_6061 provides that the service shall establish procedures for accepting signatures in digital or other electronic form the internal_revenue_code does not provide detailed rules for_the_use_of electronic signatures beyond authorizing their use in sec_6061 the use of electronic signatures in transactions involving almost all federal organizations other than the internal_revenue_service is primarily governed by the government paperwork elimination act pub_l_no div c title xvii stat codified pincite u s c a sec_3504 note west supp gpea although gpea by its terms does not apply to the internal_revenue_service see gpea its provisions are useful in analyzing the legal and policy underpinnings of the use of electronic signatures by governmental agencies gpea’s core concern is electronic documents referred to as records or electronic records and signatures that are created communicated and stored in electronic form gpea defines the term electronic signature as a method of signing an electronic message that-- a identifies and authenticates a particular person as the source of the electronic message and b indicates such person’s approval of the information contained in the electronic message gpea term that refers to the universe of all of the various methods by which one can sign an electronic record although all electronic signatures are represented digitally ie as a series of ones and zeroes they can take many forms and can be created by many different technologies it is a generic technology-neutral an electronic signature is legally equivalent to a handwritten signature and may not be denied legal effect validity or enforceability solely because it is in electronic form gpea all signatures however whether paper or electronic are subject_to challenge for other reasons such as claims of forgery lack of authority mistake or duress accordingly although electronic signatures are legally valid the utility of using electronic signatures must be balanced against the risk of disavowal by the signer in the case of signatures signed by irs employees the risk of disavowal is extremely low taxpayers or agents by contrast may challenge an electronic signature especially in the case of documents that may fix the taxpayers’ or agents’ liability and may be introduced in court proceedings documents taxpayers should either be required to sign by non-electronic means or the service should institute heightened authentication security procedures and electronic signing processes to protect the service against the risk of disavowal by the taxpayer in those cases dealing with high-risk relationship between an electronic signature a security procedure and a signing process it is important to distinguish an electronic form of signature from a security procedure and to understand the concept of a signing process that incorporates both while these concepts are all related at their core they are different and must be treated accordingly the essence of an electronic form of signature is data representing a sound symbol or process that is made or adopted by a person with the intent to sign a document 728_fsupp2d_1145 d colo holding that electronic record was not signed where the alleged signature was not executed or adopted by a person with the intent to sign the record person’s intent to associate himself to information or a reason for signing eg approving a document acknowledging receipt of information etc a security procedure by contrast is employed for among other purposes verifying that an electronic record signature or performance is that of a specific person attribution or it indicates a for detecting changes or errors in the information in an electronic record integrity security procedures help identify parties and verify the integrity of information whereas signatures associate the signer to a legally binding statement or representation security procedures can be used either inside or outside of the signing process for example in the context of a signing process a security procedure might be used to verify the signer’s identity a digital signature is a term for a technology-specific process often used to authenticate identity and or to verify the integrity of electronic records while the process is not an electronic form of signature per se notwithstanding its name it has properties that make it particularly well suited for use as an electronic form of signature where it is expressly intended for that purpose the service is already using digital signature technology for enforcement forms see eg interim guidance memorandum for electronic approval of enforcement actions sbse-05-01112-006 also note that an electronic signature may be used by the official who approves a lien release under the automated lien system see irm requests for release of lien such signatures are legally sufficient under gpea section and sec_6061 consequently if the service should make the business decision to accept electronic signatures on forms we recommend that the service adopt procedures that not only are consistent with gpea but also incorporate security procedures to protect the service from taxpayer challenges either that the taxpayer did not sign the form or that the electronic signature process is invalid accordingly for purposes of creating a valid and enforceable electronic signature the service should adopt electronic signing procedures that satisfying the following signing requirements a person ie the signer must use an acceptable electronic form of signature the electronic form of signature must be executed or adopted by a person with the intent to sign the electronic record eg to indicate a person’s approval of the information contained in the electronic record the electronic form of signature must be attached to or associated with the electronic record being signed there must be a means to identify and authenticate a particular person as the signer and there must be a means to preserve the integrity of the signed record these guidelines are consistent with those issued in office of management and budget use of electronic signatures in federal organization transactions date which was designed to assist federal organization officials in complying with the signing requirements applicable to electronic transactions should the service choose to authorize use electronic signatures on forms the appropriate internal_revenue_manual provision and form instructions should be revised to set forth the procedures under which these forms can be electronically signed please contact this office if we can be of further assistance


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom it a plr-106133-99 date date re legend dollar_figurea w x z date dear this is in reply to your request for a ruling under sec_453 of the internal_revenue_code and sec_15a_453-1 of the temporary income_tax regulations that w a corporation which elected to be taxed as a small_business_corporation be allowed to use an alternative method of basis recovery to report the contingent_payment_sale of one of its lines of business prior to the sale which is the subject of this ruling w operated two lines of business one line_of_business involved the sale of products at wholesale the second line_of_business known as z on date w sold z to x for dollar_figurea plus contingent payments equal to the after-tax profits of z in excess of a specified amount during the period beginning with the month of the sale there was no limitation on the amount of payments that might be required under the earnout provision sec_453 provides that except as otherwise provided income from an installment_sale shall be taken into account under the installment_method sec_453 defines installment_sale to mean a disposition of property where at least one payment is to be received after the end of the taxable_year in which the disposition occurs plr-106133-99 sec_453 defines installment_method as a method under which the income recognized for any taxable_year from a disposition of property is that proportion of the payments received in that year which the gross_profit realized or to be realized when the payment is complete bears to the total_contract_price sec_453 directs treasury to issue regulations to carry out the provisions of sec_453 including regulations to provide for ratable basis recovery in transactions where the gross_profit or the total_contract_price or both can not be readily ascertained sec_15a_453-1 provides generally that contingent payments sales are to be reported on the installment_method unless the taxpayer otherwise elects in the manner prescribed in sec_15a_453-1 the term contingent_payment_sale means a sale_or_other_disposition of property in which the aggregate selling_price cannot be determined by the close of the taxable_year in which such sale_or_other_disposition occurs sec_15a_453-1 provides generally that when a stated maximum selling_price cannot be determined as of the close of the taxable_year in which a sale_or_other_disposition occurs but the maximum period over which payments may be received under the contingent sale price agreement is fixed the taxpayer’s basis inclusive of selling_expenses shall be allocated to the taxable years in which payments may be received under the agreement in equal annual increments sec_15a_453-1 generally provides that a taxpayer may use an alternative method of basis recovery if the taxpayer is able to demonstrate prior to the due_date of the return including extensions for the taxable_year in which the first payment is received that application of the normal basis recovery rules will substantially and inappropriately defer recovery_of basis the taxpayer must show that the alternative method is a reasonable method of ratably recovering basis and that under that method it is reasonable to conclude that over time the taxpayer likely will recover basis at a rate twice as fast as the rate at which basis would have been recovered under the otherwise applicable normal basis recovery rule sec_15a_453-1 provides guidelines as to what type of data is acceptable in demonstrating that application of the normal basis recovery rule would substantially and inappropriately defer recovery_of the taxpayer’s basis the section provides that the taxpayer in appropriate circumstances may rely upon contemporaneous or immediate past relevant sales profits or other factual data that are subject_to verification the section further provides that the taxpayer ordinarily is not permitted to rely upon projections of future productivity receipts profits or the like however in special circumstances a reasonable projection may be acceptable if the projection is based upon a specific event that already has occurred plr-106133-99 under w’s proposed alternative method of basis recovery the amount of basis allocated to an installment_payment would bear the same ratio to w’s total basis in the property sold that the installment_payment bears to the estimated amount of the aggregate payments_to_be_received by w during the term of the installment_obligation the estimate of the aggregate payments_to_be_received during the term of the installment_obligation was determined on the basis of historical data and earnings trends based on the information provided and the representations made it is reasonable to conclude that w’s use of the proposed alternative method of basis recovery over time will result in basis recovery at a rate twice a fast as the rate at which basis would be recovered under the normal basis recovery rules the proposed alternative method of basis recovery represents a reasonable method of basis recovery accordingly w’s use of the proposed alternative method of basis recovery is approved no opinion is expressed as to the tax treatment of any aspect of the subject transaction under the provisions of any other section of the code and regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from the transaction which are not specifically covered by this ruling in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer and the second authorized representative indicated on the power_of_attorney this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax accounting acting chief branch by douglas a fahey cc


t c memo united_states tax_court damon aaron redfield petitioner v commissioner of internal revenue respondent docket no filed date damon aaron redfield pro_se jeffrey e gold and stephen c welker for respondent memorandum opinion lauber judge this case is currently before the court on respondent’s motion for partial summary_judgment respondent contends that petitioner is not entitled to a foreign_earned_income_exclusion under sec_911 for tax_year because he failed to make a timely election as required by the governing regulations we agree with respondent and accordingly will grant the motion background the following facts are derived from the parties’ pleadings and motion pa- pers including the declaration of respondent’s counsel and the exhibits attached thereto petitioner resided in virginia when he filed his timely petition petitioner served for years in the u s marine corps including several tours of duty in afghanistan sometime before he left the marines as a dis- abled veteran suffering from memory loss and post-traumatic stress disorder in late he was offered a civilian position at the kandahar air field in kandahar province afghanistan believing that he had made sufficient progress toward recovery he accepted that position arriving in kandahar in date unfor- tunately his physical and mental condition worsened and he was forced to return to the united_states before completing his one-year assignment petitioner received an extension of time until date to file hi sec_2010 federal_income_tax return he did not file a return by that date on date the internal_revenue_service irs or respondent prepared a substitute for 1all statutory references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar return sfr that met the requirements of sec_6020 on date the irs sent petitioner a timely notice_of_deficiency based on that sfr determining a tax_deficiency of dollar_figure and various additions to tax petitioner did not petition this court in response to that notice instead on date he submitted to the irs a delinquent_return for on which he reported wages of dollar_figure and total income of dollar_figure he included with this return form_2555 foreign_earned_income on which he sought to exclude dollar_figure of earnings from his work in afghanistan after giving effect to that exclusion he reported total_tax of dollar_figure payments of dollar_figure and tax due of dollar_figure following an examination of that return the irs sent petitioner a second no- tice of deficiency upon which this case is based in that notice the irs dis- allowed petitioner’s claim for a foreign_earned_income_exclusion feie because he had not elected to exclude foreign_earned_income on a prior federal_income_tax return and had failed to make a valid election for that disallowance in con- junction with certain computational adjustments produced a deficiency of dollar_figure the irs also determined late-filing and late-payment additions to tax 2because petitioner did not petition this court in response to the first notice_of_deficiency sec_6212 did not bar the issuance of a second notice_of_deficiency for under sec_6651 and and an accuracy-related_penalty under sec_6662 on date respondent filed a motion for partial summary judg- ment under rule petitioner responded to that motion on date a summary_judgment standard discussion the purpose of summary_judgment is to expedite litigation and avoid costly time-consuming and unnecessary trials fla peach corp v commissioner 90_tc_678 the court may grant summary_judgment upon all or any part of the legal issues in controversy when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law rule a 98_tc_518 aff’d 17_f3d_965 7th cir in deciding whether to grant summary_judgment we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party ibid however the nonmoving party may not rest upon the mere allegations or denials of his pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial rule d see sund- strand corp t c pincite respondent seeks summary_judgment on a narrow legal ground namely that petitioner did not satisfy the procedural requirements for making a timely feie election we conclude that there are no material disputes of fact affecting disposition of this issue and that it may be adjudicated summarily b analysis sec_61 provides that gross_income means all income from whatever source derived citizens of the united_states are taxed on their worldwide in- come unless a specific exclusion applies eram v commissioner tcmemo_2014_60 107_tcm_1320 exclusions from gross_income are construed narrowly and a taxpayer must clearly establish his entitlement to any such exclusion ibid sec_911 provides that a t the election of a qualified_individual there shall be excluded from the gross_income of such individual for any taxable_year the foreign_earned_income of such individual subject_to limitations set forth in subsection b to be a qualified_individual eligible for this exclusion a taxpayer must satisfy a three-part test first he must be a u s 3we leave for further proceedings respondent’s determinations as set forth in the second notice_of_deficiency that petitioner is liable for additions to tax un- der sec_6651 and and for an accuracy-related_penalty under sec_6662 the other adjustments set forth in the notice_of_deficiency appear to be computational citizen who is either a bona_fide_resident of a foreign_country for the entire year or physically present in a foreign_country during at least days in a month period id subsec d second he must have earned_income from personal services rendered in a foreign_country id subsec d third his tax_home for the applicable_period must be outside the united_states id subsec d foreign_earned_income does not include amounts paid_by the united_states or an agency thereof to an employee of the united_states or an agency thereof id subsec b b ii in addition to satisfying these substantive tests the taxpayer must also make an affirmative election to exclude foreign_earned_income id subsec a first sentence the statute is silent as to the timing of a valid election however sec_911 directs the secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and sec_7805 provides that e xcept to the extent otherwise provided by this title any election under this title shall be made at such time and in such manner as the secretary shall prescribe 4respondent alleges that there exist material disputes of fact concerning petitioner’s satisfaction of one or more of the requirements outlined in the text since we hold that petitioner’s failure to make a proper feie election renders him ineligible for the exclusion as a matter of law we need not address these factual matters pursuant to this delegation of authority the secretary promulgated sec_1_911-7 income_tax regs which establishes the timing requirements under which a valid election can be made this regulation sets forth four alternative timing methods the first three methods which can be addressed briefly are as follows i in general --in order to make a valid election under this paragraph a the election must be made a with an income_tax return that is timely filed including any extensions of time to file b with a later return filed within the period prescribed by sec_6511 amending the foregoing timely filed return or c with an original income_tax return that is filed within one year after the due_date of the return determined without regard to any extension of time to file the parties agree that petitioner did not make a timely election under any of these methods he did not file hi sec_2010 federal_income_tax return by date the extended due_date the return that he filed in date did not amend a timely filed return and that delinquent_return was not filed within one year after the due_date of hi sec_2010 return 5petitioner does not challenge the validity of this regulation which we have previously sustained see 92_tc_1204 mcdonald v commissioner tcmemo_2015_169 110_tcm_239 n the fourth specified timing method is a bit more complicated subdivision i d provides that if a taxpayer makes an feie election on a return filed after the periods specified in subdivisions i a b and c the election will nevertheless be valid if the taxpayer owes no federal_income_tax after taking into account the exclusion or the taxpayer owes federal_income_tax after taking into account the exclusion and files form_1040 with form_2555 or a comparable form attached before the irs discovers that the taxpayer failed to elect the exclusion a taxpayer filing an income_tax return pursuant to paragraph a i d or of this section must type or legibly print the following statement at the top of the first page of the form_1040 filed pursuant to sec_1_911-7 the parties agree that petitioner did not make a timely election under sub- division i d the return he filed in date after taking the feie ex- clusion into account reported total_tax of dollar_figure and tax due net of payments of dollar_figure this is not a case where the taxpayer owes no federal_income_tax after taking into account the exclusion the parties’ dispute focuses on subdivision i d petitioner contends that he met this exception by filing his form_1040 with form_2555 attached and paid the income_tax due before the irs discovered that he failed to elect the ex- clusion respondent disputes that contention urging that the irs discovered that petitioner failed to report his income for filed a substitute for return and issued a notice_of_deficiency before petitioner eventually filed hi sec_2010 return in date respondent has the stronger side of this argument as shown by mcdonald v commissioner tcmemo_2015_169 110_tcm_239 the facts there were remarkably similar to those here the taxpayer did not file a return for the irs prepared an sfr in date and issued a notice_of_deficiency based on that sfr rather than petitioning this court the taxpayer filed a delinquent return in date more than two years after the due_date accompanied by a form_2555 claiming an feie the irs examined that return and sent the tax- payer a second notice_of_deficiency disallowing the feie for failure to make a timely election in mcdonald as here the parties’ dispute eventually focused on sub- division i d of the governing regulation we ruled that the taxpayer had not satisfied the requirements of that subdivision for making a timely election reason- ing as follows t he irs discovered that the taxpayer had failed to make a valid election before she filed her form_1040 for specifically the irs discovered that she had failed altogether to file any return-- and thus discovered that she had failed to file form 2555--no later than the date on which it issued the sfr in date ie months before the taxpayer filed her first form_1040 for in date mcdonald t c m cch pincite the same reasoning applies here by preparing for petitioner on date an sfr that treated all of his wages for as gross_income the irs evi- denced its discovery that he had failed to elect the feie for that year by filing a form_1040 accompanied by a properly completed form_2555 petitioner did not file his delinquent return accompanied by a form_2555 until date more than four months later we acknowledge petitioner’s military service to this country and recognize that he emerged far from unscathed from his tours of duty in afghanistan we understand that the procedural requirements for making a timely feie election are not exactly intuitive and that the scars petitioner incurred during his military ser- vice may have contributed to the tax delinquency at issue while these facts may 6as was also true of the taxpayer in mcdonald petitioner did not follow the instruction set forth in subdivision i d of the governing regulation namely that a taxpayer filing a return under these circumstances must type or legibly print the following statement at the top of the first page of the form_1040 ‘filed pursu- ant to sec_1_911-7 ’ we need not decide whether this omission standing alone would be sufficient to invalidate an otherwise timely feie elec- tion we simply note here as we did in mcdonald t c m cch pincite that petitioner did not qualify under subdivision i d or and failed to comply with subdivision i d be relevant to the penalty and additions to tax that the irs determined they do not alter the requirement of a timely election as to that requirement we must give effect to the regulations that the secretary has issued under his delegated authority from congress and to this court’s prior construction of those regu- lations that being so we unfortunately have no alternative but to hold that peti- tioner did not make a timely and valid feie election for he is therefore not entitled to exclude from gross_income any foreign earnings under sec_911 to reflect the foregoing an order will be issued granting respondent’s motion for partial summary_judgment