h department of the treasury vate c 0aug oq irs internal_revenue_service independent office of te_ge a eals pp capitol street suite fresno ca release number release date person to contact name 1d number telephone fax employer 1d number d uniform issue list uil certified mail dear this is a final adverse determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in sec_501 of the code we have hereby revoked the favorable determination_letter to you dated june longer exempt under sec_501 of the code effective january and you are no we made the adverse determination for the following reasons you operate as a sponsoring_organization for donor advised funds in which you routinely accept non- cash contributions of llc interests the non-cash contributions you accept are substantially_similar to the type of transaction described in irs notice_2004_30 in conducting your activities you used the services of an individual who is permanently enjoined by a federal district judge for promoting an abusive contribution scheme similar to contributions to your organization your activities served purposes other than charitable purposes and benefited private interests as such you did not operate exclusively for tax-exempt purposes as is required for an organization to be described in sec_501 of the code because you operated in a manner materially different than you represented in your exemption application this revocation is effective retroactively to the year in which you began accepting the referenced non-cash contributions you're required to file federal_income_tax returns on forms u s_corporation income_tax return mail your form to the appropriate internal_revenue_service center per the form's instructions you can get forms and instructions by visiting our website at www irs gov forms-pubs or by calling 800-tax-form we'll make this letter and the proposed adverse determination_letter available for public inspection under sec_6110 of the code after deleting certain identifying information we provided to you in a separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice r letter rev catalog number 40683r if you decide to contest this determination you can file an action for declaratory_judgment under the provisions of sec_7428 of the code in either the united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia - you must file a petition or complaint in one of these three courts within days from the date we mailed this determination_letter to you contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment you can write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc us district_court for the district of columbia constitution avenue nw washington dc note we will not delay processing income_tax returns and assessing any taxes due even if you file a petition for declaratory_judgment under sec_7428 of the code please refer to the enclosed publication how to appeal an irs determination on tax-exempt status for more information about the appeals process you also have the right to contact the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call tas assistance is not a substitute for established irs procedures such as the formal appeals process tas cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court if you have questions contact the person at the top of this letter sincerely appeals team manager enclosures publication cc e letter rev catalog number 40683r department of the treasury internal_revenue_service ‘2g gh irs tax exempt and government entities exempt_organizations examinations date date taxpayer_identification_number form_990 return tax_year s ended 20xx 20xx person to contact employee id telephone fax manager's contact information employee id telephone response due_date november 20xx certified mail - return receipt requested dear why you’re receiving this letter we enclosed a copy of our audit report form 886-a explanation of items explaining that we propose to revoke your tax-exempt status as an organization described in internal_revenue_code irc sec_501 if you agree if you haven't already please sign the enclosed form_6018 consent to proposed action and return it to the contact person shown at the top of this letter we'll issue a final adverse letter determining that you aren't an organization described in sec_501 for the periods above after we issue the final adverse determination_letter we'll announce that your organization is no longer eligible to receive tax deductible contributions under sec_170 lf you disagree request a meeting or telephone conference with the manager shown at the top of this letter send any information you want us to consider file a protest with the irs appeals_office send additional information as stated in with irs appeals_office after the meeting or after we consider the information if you request a meeting with the manager or and above you'll still be able to file a protest the irs appeals_office is independent of the exempt_organizations division and resolves most disputes informally sign a consent to extend the period of limitations for assessing tax this is to allow the if you file a protest the auditing agent may ask you to letter rev catalog number 34809f for your protest to be valid it irs appeals_office enough time to consider your case must contain certain specific information including a statement of the facts applicable for specific information needed for a law and arguments in support of your position valid protest refer to publication how to appeal an irs determination on tax- exempt status fast track mediation ftm referred to in publication the examination process generally doesn’t apply now that we've issued this letter request technical_advice from the office of associate chief_counsel tax exempt government entities if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the irs if you’re considering requesting technical_advice contact the person shown at the top of if you disagree with the technical_advice decision you will be able to appeal this letter to the irs appeals_office as explained above a decision made in a technical_advice_memorandum however generally is final and binding on appeals if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final adverse determination_letter contacting the taxpayer_advocate office is a taxpayer right the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call for additional information you can get any of the forms and publications mentioned in this letter by visiting our website at www irs gov forms-pubs or by calling 800-tax-form ' if you have questions you can contact the person shown at the top of this letter enclosures form 886-a form_6018 sincerely maria hooke director eo examinations letter rev catalog number 34809f form 886-a date name of taxpayer department of the treasury - internal_revenue_service seneaue number tax identification_number last digits year period ended 20xx 20xx explanations of items issue sec_1 whether internal_revenue_code irc sec_501 should be revoked for failure to operate exclusively in furtherance of an exempt_purpose exempt status under whether date exempt status should be revoked retroactively to january 20xx the first failed to qualify for exempt status background was formed by for the primary purpose of providing assistance to individuals who live in poverty and are unable to provide for themselves and their family on april 20xx in although located in domestic limited_liability_company is also registered with secretary of state as a is the registered agent see exhibit on august 20xx under sec_501 of the internal_revenue_code seeking federal tax-exempt status under sec_501 filed form_1023 application_for recognition of exemption in subsequent correspondences letters dated march and 20xx irs that he hoped in the future to have individuals and or organizations advised the received donner sic advised funds from various in the letter dated june 20xx the irs recognizes under sec_501 and sec_170 a vi effective april 20xx as a tax-exempt_entity described ownership_interest and cash from the same donors who contributed the llc interest and distributing the cash contributions to other charities sole activity is receiving donation of llc board_of directors is operated on a calendar_year basis e board_of directors comprised of the following director and president director and treasurer are husband and wife director and secretary and signs all acknowledgement letter after receiving llc interest donation check and makes deposit maintains the books_and_records runs daily activities also signs form 886-a rev catalog number 20810w www irs gov page form 886-a date name of taxpayer alee number department of the treasury - internal_revenue_service explanations of items tax identification_number last digits 20xx 20xx year period ended nor neither emails exchange between about with his charitable scheme received compensation from and for their services however discussed later under section show that compensated personally for assisting in an email dated march 20xx from do treat the dollar_figure advance for the llc in send a or what today is our appointment with tax preparers to that you sent me was that a gift or do you wrote also how replied just have your cpa add dollar_figure to the income section of your return should not be an issue thx in another email dated october 20xx from also sometime back you mentioned that you would try to find some compensation_for my work here am just wondering is that’s still a possibility or not to wrote on october 20xx personally for all you do as well replied as follows will send you something this year yes send me financial asap and will get the return done followed up with an email dated december 20xx as follows will send you a account you keep the check for dollar_figure for year end take a few hundred dollars and fund the rest okay filed form_990 for the tax years 20xx and 20xx and reported the following filed form_990 assets 20xx 20xx cash investment - llc interest total ‘ disclosed during an interview on february 20xx that has only one bank account maintained at _ which is also reflected in general ledger emails exchange between account the existence of the books_and_records and located in show that also maintain a checking did not disclose account the account also did not appear on in an email dated october 20xx from another item should close the inactivity you gave me dollar_figure when we opened the account but it’s been idle since then wrote to in it’s taking dollar_figure a month for catalog number 20810w form 886-a rev www irs gov page form 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit tax identification_number last digits year period ended 20xx 20xx explanations of items revenue 20xx 20xx cash contributions non-cash contribution llc income - total income cash contributions represent contributions and distributions from the llcs and donors who donated llc interest to the llc instead of separately reporting the cash on the return contributions received dollar_figure cash contributions distributions from combined it with non-cash in 20xx most donors instruct disbursement request form’ on this form the donors list other charities they wanted to receive their distribution and amount the donors then send the form along with a check to to cover the contribution plus administrative fee to distribute the cash to other charities the donors fill out a deposits the check into its checking account then issues a check to each charity stated that listed on the form and retains of cash received for administrative fee the fee is for processing receiving and disbursing the donor’s cash the fee totaled dollar_figure and dollar_figure for the tax years 20xx and 20xx respectively llc income represents income allocated by the llcs the amounts were reported on schedule_k-1 share of oncome such as interest dividends royalties and rental expenses 20xx 20xx grants to other charities other expenses total grants to other charities equated to dollar_figure and dollar_figure percent of total revenue for the tax years 20xx and 20xx respectively preparation of form_990 states that he prepares emails exchange between return for example in an email dated july 20xx from return form_990 with the help of his team however and prepared the show that to wrote ' and at the return will be due in weeks need k-1s for all llc utilizing as the charity catalog number 20810w page www irs gov form 886-a rev eorm 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit tax identification_number last digits year period ended 20xx 20xx explanations of items once have this can complete the return no problem please advise thx in an email dated november 20xx from attached is the and schedule r which should be attached to the federal only once you have these signed mail to then mail the returns with the statute extension attached to both state and fed returns the following please print both and sign also attached is a detail for let me know if you have any questions blessing to wrote the address for mailing is the fed mailing address is department of treasury internal_revenue_service center ogden ut does not have a form 990-t filing requirement and has not filed that form donated llcs interest received substantial non-cash contributions in the form of llc ownership_interest from received ownership_interest donation in the following llcs by financial planners cpas attorneys and llc llc various donors since 20xx discloses that the donors were referred to members of his team catalog number 20810w page www irs gov form 886-a rev _ internal_revenue_service i schedule number or exhibit form 886-a department of the treasury explanations of items date name of taxpayer tax identification_number last digits year period ended 20xx 20xx ownership_interest in to in 2oxx operating_agreement shows that the donor assigned his her and are owned by the same donor are owned by the same donor ' membership interest in ‘was transferred from per secretary of state and the original shareholder in donated percent of his her interest in the llc to during the audit provided the following for and and discussed later in the report is listed as their registered agent for ' statement of assets and liabilities balance_sheet bank statement from april 20xx to january 20xx for checking account maintained at the statement of assets and liabilities shows owns percent of valued at dollar_figure the bank statements show account was a purchase of checks for dollar_figure there was no deposit into this account the account was closed on january 20xx and the dollar_figure was transferred to an unknown account had dollar_figure in its account the only activity in this did not provide profit loss statement or similar for that since bank service charges were the only activity no financial statements were created ‘ explains provided statement of assets and liabilities for _ the statement of assets and liabilities shows that ' the value of shares is dollar_figure million each holds shares in catalog number 20810w page www irs gov form 886-a rev department of the treasury - internal_revenue_service seta number explanations of items form 886-a date name of taxpayer tax identification_number last digits year period ended 20xx 20xx states that no bank account was opened for in 20xx because they were received late in 20xx in the letter dated april 20xx from dollar_figure to dollar_figure revised the amount of llc interest received in 20xx 20xx 20xx llc amount llc amount total total how llc ownership_interest is donated to the process begins with the donors creating a donor-advised account or donor-advised_fund with by filling out a donor application and paid initial set-up fee ranging from dollar_figure to dollar_figure the donors provide their information and name their donor-advised account the donors then assign their ownership_interest in their llc to assignment agreement called gift assignment of membership interest gift assignment the gift assignment specify either the number of preferred non-voting membership units or percentage of non-voting membership interest to be assigned to requires to agree to the terms and conditions of the operating_agreement by executing a gift the gift assignment also - upon accepting the llc interest _membership units acknowledgment on behalf of specifically requires signs the acknowledgment of assignment of in most case the acknowledgment to read and understand section of the operating_agreement section states maintenance of a tax exempt member in the event a gift of membership units is made to an organization which holds tax exempt status the company shall retain the right to reclaim any or all membership units of such member and transfer them to an alternate tax exempt_organization in good standing and which holds a similar mission in the event the member's tax exempt status is revoked audited or otherwise jeopardized in the determination and at the absolute and unquestionable discretion of a majority in interest of the catalog number 20810w page www irs gov form 886-a rev form 886-a date name of taxpayer department of the treasury - internal_revenue_service area number explanations of items tax identification_number last digits year period ended 20xx 20xx common members a gift of membership units of the company to such tax exempt_organization shall be deemed null and void unless this retained right is specifically communicated to with reference to this section of the agreement expressly acknowledged and agreed to by the receiving tax exempt_organization notwithstanding any provision to the contrary herein under no circumstance shall any tax-exempt member of the company be liable for any debt of the company separately from signing the acknowledgment agreeing to its terms conditions and provisions allocation exhibit b agreeing to the allocation set forth in schedule of allocation further signs the schedule of also signs the operating_agreement review of operating_agreement provides operating_agreement for the llcs the operating agreements reveal the following ownership information including profit and loss allocation llc donor’s common preferred common preferred authorized donor’s ’s 's units units units units units authorized authorized common units preferred capital profit units loss operating_agreement not provided no shares info - - - - operating_agreement not provided - catalog number 20810w page www irs gov form 886-a rev department of the treasury - internal_revenue_service scheae number explanations of items form 886-a date name of taxpayer tax identification_number last digits year period ended 20xx 20xx see note - no shares info - - - - - - is the owner of - - the units owned by a member determine the member's capital and profit percentage for example if a member owns units of units issued he she owns percent of capital and profit interest in the company article of most operating_agreement the operating agreements reveal the following notable provisions e e e e majority interest means the interest of the common members holding greater than percent of the total interest held by the common members article dollar_figure preferred member means the holder of nonvoting units article dollar_figure preferred_return article means with regard to a preferred member starting on date capital_contribution is made an annual amount equal to the lesser_of o o o o o percent of the company's net pre-tax profit or o percent or other agreed percentage of the net asset value nav of the unrecovered capital_account balance of such preferred member as such balance may change from time to time and only in the year company generates positive net revenue or o percent of the company's net revenue gross revenues minus cost_of_goods_sold net_revenues to be calculated on an annual basis or any other calculation as may be agreed upon unanimously by and between the members from time to time preferred allocation account article means a separate_account maintained for each preferred member which is increased by i the amount of net profits allocable to the preferred member in each fiscal_year and reduced by any amount credited to the preferred distribution account along with any interest earned on such amount and ii interest on the preferred distribution account the balance of this account shall be distributed to the preferred member's capital_account at the end of the current_year page www irs gov form 886-a rev catalog number 20810w form 886-a date name of taxpayer schedule number or exhibit department of the treasury - internal_revenue_service explanations of items tax identification_number last digits year period ended 20xx 20xx preferred allocation account beginning balance preferred_return annual other allocated net_profits_interest earned on preferred distribution account - amount credited to the preferred distribution account ending balance _ preferred member's capital_account e preferred distribution account article means a separate_account maintained for each preferred member which is increased by i the amount of the preferred_return credited to such preferred member and ii interest on the balance of such account the balance of this account shall be distributed to the preferred member by of the following fiscal_year preferred distribution account beginning balance preferred_return annual interest earned on preferred distribution account ending balance _ distribution to be paid to preferred member by dec 31st of following fiscal_year e e e e supermajority interest means a member or members holding among them at least percent of all voting rights article dollar_figure the manager in most cases is the same as the donor has exclusive management duties the manager has exclusive authority discretion power and control to manage the business article with respect to certain transactions the manager must obtain written consent or affirmative vote of members holding supermajority interest article preferred shareholder has no voting_right or consent right article article c - notwithstanding anything to the contrary herein unless otherwise agreed upon under the schedule of allocations attached hereto and incorporated herein as exhibit b and to the extent permitted by all applicable law o o o for all activity considered active resulting income or loss shall be allocated to the common members in proportion to each such common member’s membership interest deductions related to income expenses and losses shall be allocated to the common members in proportion to each such common member’s membership interest except that no such ductions shall be allocated to any tax-exempt member the profit of all activities including royalty income not considered active shall be allocated as follows to the extend a preferred member is a tax-exempt_organization one hundred percent to such preferred member or as otherwise agreed as identified in exhibit b ‘form 886-a rev catalog number 20810w www irs gov page 886-a form - date name of taxpayer schedule number department of the treasury - internal_revenue_service explanations of items tax identification_number last digits year period ended 20xx 20xx an or exhibit to the extend a tax-exempt preferred member is allocated less than one hundred percent remaining profits shall be allocated to the other members according to their respective membership interest held or as otherwise agreed as identified in exhibit b and o amortization expenses shall be allocated to the common members in proportion to each such common member’s membership interest in most cases the allocation set forth in the schedule of allocation is the same as article c e article - net losses - except as specifically provided elsewhere in this agreement net losses shall be allocated as follows o o first to common members who have positive capital_account balance in proportion to their respective capital_account balances until such capital_account balances are reduced to zero and second to preferred members in proportion to their respective ownership of non- voting units the manager shall cause the company llc to distribute net operating cash_flow on a quarterly basis or at such other time as the manager reasonably determine however subject_to section return of distributions neither the company nor the manager shall be liable for the making of distributions in accordance with the provision of this section article transfer of membership interest is restricted article all transfers must be approved by the manager and all members article restrictions do not apply to transfers o o o o tothe company toa trust for the benefit of member by inter vivo gift or by testamentary transfer to any spouse parent sibling in-law child or grand-child of the member or charitable_remainder_trust or donor-advised family_foundation or to any affiliate as defined in article of the member article incase of transfer to a third party the company as the first right to purchase the membership interest from the member article any transfer of membership units made involuntarily except for those pursuance to section shall be deemed null and void and not be recognized by the manager and the transferee shall have no rights associated with the ownerships of such units maintenance of tax exempt member article see complete description above e e e e e e form 886-a rev catalog number 20810w www irs gov page 886-a form - date name of taxpayer schedule number department of the treasury - internal_revenue_service explanations of items tax identification_number last digits year period ended 20xx 20xx or exhibit e provisions in llc agreement of and are essentially identical in particular article of llc’s agreement provides that the manager has sole discretion in determining the timing and amount of distribution of cash_flow and net_proceeds no less than percent of net_cash_flow and net_proceeds shall be distributed each year beginning in the third year of the company’s existence the manager’s determination regarding whether or not to make distribution in excess of necessary distribution and the amount of distribution to be made shall be final and binding on all members llcs cash distributions to schedule_k-1 shows the following cash distributions from the llcs to 20xx llc 20xx - - - - - - - - - - - - catalog number 20810w page www irs gov form 886-a rev form 886-a date name of taxpayer department of the treasury - internal_revenue_service scnene number tax identification_number last digits year period ended 20xx 20xx explanations of items form_8283 during the audit contributed llc membership units to amount of deduction for all noncash gifts is more than dollar_figure provided forms noncash charitable_contributions for donors who in 20xx and 20xx form_8283 is required when the appraised the value of llc ownership units for charitable_contribution_deduction purposes and signed all form_8283 on april 20xx the united_states of america plaintiff filed a complaint for permanent injunction and other relief against defendant per the complaint about has organized from 19xx to the present promoted and operated an elaborate-and bogus-charitable giving tax scheme creates an entity for throughout the united_states through this scheme each scheme participant and advises them to transfer assets to the new entity then causes the participants to purportedly donate or assign an interest in these entities to charities that purportedly donated interests in a manner that fails to comply with the law and generally accepted appraisal standards finally income_tax return documents to claim the bogus charitable_contribution deductions then appraises the prepares the federal controls this entire tax scheme occurs only on paper participants never actually transfer purported charities in some egregious instances or donate anything to participants claim bogus charitable deductions for nonexistent fictional assets that fabricates advises scheme participants to take regardless of the purported form unwarranted tax deductions for charitable donations that never made and in some instances for assets that did not exist scheme to the clients of financial planners and certified public accountants by misrepresenting his experience his credentials and the merits of his charitable giving tax scheme in return scheme participants pay substantial fees to based on the purported value of the assets initially transferred to the entities knows were sells thi sec_3 catalog number 20810w page www irs gov form 886-a rev form 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit explanations of items tax identification_number last digits 20xx 20xx year period ended charitable giving tax scheme has harmed the united_states by depriving the government of tax revenue the irs has identified specific transactions that lost tax through 20xx cost the united_states treasury more than dollar_figure revenue and while the irs has assessed and will continue to assess scheme participants with significant tax_liabilities it will likely never fully recover the monies bilked from the treasury the united_states brings this complaint pursuant to u s c sec_7402 sec_7407 and sec_7408 to enjoin participation with and all persons and entities in active concert or from among other things directly or indirectly a b c d making or furnishing or causing another person to make or furnish a statement with respect to the allowability of any deduction or credit the excludability of any income or the securing of any other tax_benefit or otherwise providing tax_advice in exchange for compensation preparing or assisting others in preparing appraisals in connection with any federal tax matter acting as federal tax_return_preparers or filing assisting in or directing the preparation or filing of federal tax returns amended returns or other related documents or forms for any person or entity other than his own tax returns and organizing or assisting in the organization of a partnership or other entity any investment plan or arrangement or any other plan or arrangement concerning charitable_contribution deductions the united_states also seeks to disgorge the ill-gotten gains that from this bogus charitable giving tax scheme derived bogus charities has established at least three purported charities in c’ controlled all three purported charities since 19xx y and collectively the bogus charities and operated them in the same manner catalog number 20810w page according to their respective articles of incorporation the bogus charities were purportedly organized for charitable purposes application_for recognition of exemption under sec_501 of the internal_revenue_code tax exempt status application on behalf of each of the bogus charities the irs granted the bogus charities tax exempt status based on the tax exempt status applications that submitted a form_1023 submitted secretary of over the years state’s office as an officer treasurer director incorporator or registered agent for the bogus charities has also attempted to avoid irs scrutiny by is listed on documents filed with the www irs gov form 886-a rev form 886-a date name of taxpayer department of the treasury - internal_revenue_service sone number explanations of items tax identification_number last digits year period ended 20xx 20xx affiliating his parents or other individuals with the bogus charities on filings with the controlled the bogus charities and was the only true officer and director the bogus charities had no employees secretary of state’s office at all times however executed an agreement with the irs on behalf of on may 20xx retroactively revoking concluded and activities for exempt purposes and its net_earnings inured to the benefit of private individuals-ie him and his family tax exempt status as of january 20xx the irs was not engaged primarily in did not dispute that 20xx on against it in u s tax_court for past due taxes for 20xx and 20xx taxes on its income because it was not a tax exempt entity stipulated to an entry of judgment owed on behalf of executed agreements with the irs on behalf of retroactively revoking on may 20xx and january 20xx and january 20xx respectively because and scheme and as tools for promoting organizing and executing his charitable giving tax tax exempt status as of used bogus charitable transactions under the first step in liability company the entity or entities for scheme participants regardless of their form the entities are holding_companies that exist solely to facilitate creates a partnership or limited scheme scheme prepares and files all paperwork necessary to create the entities including the partnership or llc agreements next the scheme participants transfer property to the newly formed entities using contractual documents prepared by direction claim to transfer cash or real_property to the entities while others purportedly transfer backdated promissory notes and fabricated intellectual_property over time variations were meaningless from both economic and federal_income_tax perspectives varied how he executed this scheme step but the some participants at then drafts the paperwork necessary to cause the scheme participants to donate or assign an interest in the newly-created entities to one of the three bogus charities some participants purport to donate a while others a interest in some cases to the participants telling such participants that they were contributing a non-controlling interest when in fact paperwork to show a contribution non-controlling interest in their entity misrepresents the transaction completed the transactional catalog number 20810w form 886-a rev www irs gov page form 886-a date year period ended name of taxpayer explanations of items department of the treasury -- internal_revenue_service scheae number tax identification_number last digits 20xx 20xx then causes the bogus charities to send contemporaneous written acknowledgments of the purported contributions to the scheme participants appraises each contribution to facilitate the bogus charitable deductions is prohibited by law from not only are the appraisals baseless but providing them completes signs and provides to each scheme participant irs forms noncash charitable_contributions form which are necessary to claim a non cash charitable_contribution of more than dollar_figure scheme participants the following instructions please find irs form_8283 which has been completed and signed please attach the form_8283 with your tax_year form_1040 after you have done this then simply file the return the value_of_the_gift on form_8283 page part i as a deduction on schedule a - itemized_deduction - charitable_contribution sends the use instructions the scheme participants then attach the in following prepared form_8283 to their personal federal_income_tax returns to claim unwarranted charitable deductions the forms are based entirely on the bogus appraisals that prepares to facilitate this scheme on paper it appears that the participants donate something of value to the repeatedly advises the scheme participants to take bogus charities actions to give his scheme substance this was mere window dressing however tax_shelter in reality the scheme participants retain designed to disguise complete control_over their entities and their entities’ assets and continue to use the purportedly donated assets as if nothing ever happened after executing the transaction the bogus charities do not take dominion or control_over the entities or their assets the bogus charities are simply vehicles through which executes his elaborate charitable giving tax scheme told potential participants that they could establish donor advised funds ‘dafs through the bogus charities but this was a false statement to establish a daf the bogus charities were required to take control of the purportedly contributed entity interests as explained throughout this complaint the scheme participants never gave up control of the purportedly contributed knew if scheme participants actually wanted to make a assets which donation to a charity through a bogus charity- which many participants did not required them to send to him a disbursement request form along do- with a check made out to one of the bogus charities these disbursement request forms merely gave the appearance of a valid daf but a valid daf would never have required an additional check from the participant this process catalog number 20810w page www irs gov form 886-a rev sche number department of the treasury internal_revenue_service explanations of items form 886-a date name of taxpayer tax identification_number last digits year period ended 20xx 20xx shows that the bogus charities never had dominion or control_over any of the purported contributions tax scheme upon some participants in assistance have taken out substantial loans from their respective entities even after transferring their ownership_interest to one of the bogus charities these loans are made on beneficial terms and sometimes go unpaid a the assets as collateral for some other purpose testified in deposition that most participants borrowed their entities’ assets or used advice and with his consequently participants in deduction and still get the use and enjoyment of the assets that generated the deduction scheme receive a large income_tax because each of contributions of over dollar_figure on their tax returns based on the purported donation of their entity interests to the bogus charities they were required to obtain qualified appraisals of the purportedly donated entity interests from qualified appraisers scheme participants claimed non-cash charitable performs the appraisals for the scheme participants in reality not tell scheme participants that he is the appraiser prior to performing the appraisals participants which often listed the following credentials on the form_8283 after his signature completed and signed the form_8283 for each of the based entirely on the bogus appraisals he prepared does claims that he implemented and consulted on over charitable plans in states encompassing dollar_figure' since 19xx and performed over qualified appraisals of closely-held businesses since 20xx uses in his tax scheme are bogus because the appraisals excluded by law from preparing appraisals in connection with this scheme the appraisals are not qualified appraisals within the definition of the internal_revenue_code and the appraisals are based on unreliable methods is profits from his scheme by charging a percentage fee based on the value of the purportedly donated assets his standard fee is o of net assets transferred to the bogus charities up to but not in excess of dollar_figure plus of net assets transferred which exceed dollar_figure charitable giving scheme sold his charitable giving tax scheme to based participant through participant 1’s financial planner participant claimed a dollar_figure charitable_contribution_deduction on his 20xx federal_income_tax return participant to participate in this scheme charged dollar_figure for examples of catalog number 20810w page www irs gov form 886-a rev department of the treasury - internal_revenue_service explanations of items ene re number form 886-a date name of taxpayer tax identification_number last digits year period ended 20xx 20xx participant decided to participate in april 20xx he prepared for participant so that participant could claim a charitable deduction on his 20xx federal_income_tax return used an existing llc and illegally backdated every document charitable giving tax scheme in on april 20xx transfer an llc that backdated the llc agreement to december 20xx and participant completed an llc agreement to had previous established in 20xx to participant drafted a promissory note through which participant promised to backdated the promissory note to december 20xx then pay his llc dollar_figure the promissory note was not secured_by any collateral and charged a interest rate on outstanding balances in 20xx and on any outstanding balances thereafter also drafted an assignment agreement through which participant purported to assign of hisllcto agreement as well to december 20xx backdated the assignment despite executing the assignment agreement participant believed based on misrepresentations that participant only assigned a non-controlling llc interest to on april 20xx participant opened a bank account in the llc’s name participant was the only person with signature_authority over this account participant never gave control_over the account or anyone at later in 20xx participant transferred dollar_figure to the llc’s bank account to repay the bogus note’s principal participant did not pay any interest then prepared an appraisal report backdated to january 20xx-more than two months prior to the transfer of the llc to participant 1-in which appraised participant 1’s purported gift of llc units to at dollar_figure backdated appraisal does not describe or analyze the llc’s only asset- the promissory note rather lack of control despite stating that discount for lack of marketability for these discounts applied his standard discount for owned of participant 1’s llc and a provided no meaningful explanation then prepared an irs form_8283 so that participant could claim a dollar_figure charitable_contribution for the purported donation to income_tax return on his 20xx federal catalog number 20810w form 886-a rev www irs gov page form 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit explanations of items tax identification_number last digits 20xx 20xx year period ended the irs audited participant 1’s contribution tax_return and disallowed the dollar_figure charitable in january 20xx after the irs initiated the audit of participant 1’s 20xx tax_return participant made four charitable distributions totaling dollar_figure to to do so participant completed sent a check to disbursement request form but also in that amount -_ in order additional information can be found - _ and his bogus charities’ connections to and his bogus charities’ connections to include but are not limited to per secretary of state is the registered agent for membership units in were transferred from bogus entities formed and controlled by ' ' ' to is one of the and is the registered agent for i ' form_8283 provided by donors who donated their ownership_interest to shows that appraised the value of llcs for all emails exchange between below are some of the emails exchange and show involved with e e e e in an email dated september 20xx from name personally with a zero k-1 need wrote thx please check k-1 for this llc to and it has k-1 at ’s here are the clients who have llcs with k-1s to the charities please send these to me you have sent asap need all of these before can prepare the some but not all of these to date returns thx and the clients is listed in his email were donors who donated llc interest to one of bogus charities in an email dated april 20xx from we did finally get the large deal closed told you about earlier this year to wrote will be sending you the form to sign this week for the gift page www irs gov form 886-a rev catalog number 20810w department of the treasury - internal_revenue_service sone iat number form 886-a date explanations of items name of taxpayer tax identification_number last digits year period ended 20xx 20xx will get everything else later but we need to get this formed sic signed so that clien donor can prepare his tax_return this gift willbe around dollar_figurec _- nice case thx for your assistance as always hope to have some more this year god bless the deal discussed in this email is in an email dated november 20xx from will be working at clients and having them contribute dollars to wrote office next week and part of that will be having them call the to will keep you posted god bless in an email dated november 20xx from will fax you a request from by december also fyi the bank there is charging the account dollar_figure a month for inactivity maybe another deposit will for stall any further charge secretary of state to submit a business_entity report wrote to law sec_501 exempts from income_tax corporations and any community chest fund or foundation 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 no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office treasury regulations treas regs sec_1_501_c_3_-1 provides 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_501_c_3_-1 provides that the term exempt_purpose or purposes as used in this section means any purpose or purposes specified in sec_501 as defined and elaborated in paragraph d of this section sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which catalog number 20810w form 886-a rev www irs gov page form 886-a date name of taxpayer department of the treasury internal_revenue_service schedule number explanations of items tax identification_number last digits year period ended 20xx 20xx 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 the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 notice_2004_30 the internal_revenue_service and the treasury_department are aware of a type of transaction described below in which s_corporation shareholders attempt to transfer the incidence of taxation on s_corporation income by purportedly donating s_corporation nonvoting_stock to an exempt_organization while retaining the economic benefits associated with that stock this notice alerts taxpayers and their representatives that these transactions are tax_avoidance transactions and identifies these transactions and substantially_similar transactions as listed transactions for purposes of sec_1_6011-4 of the income_tax regulations and sec_301 b and b of the procedure and administration regulations this notice also alerts parties involved with these transactions to certain responsibilities that may arise from their involvement with these transactions facts in a typical transaction an s_corporation its shareholders and an organization exempt from tax under sec_501 and described in either sec_501 or sec_401 of the internal_revenue_code such as a tax-qualified retirement_plan maintained by a state_or_local_government the exempt party undertake the following steps an s_corporation issues pro_rata to each of its shareholders the original shareholders nonvoting_stock and warrants that are exercisable into nonvoting_stock for example the s_corporation issues nonvoting_stock in a ratio of o shares for every share of voting_stock and warrants in a ratio of warrants for every share of nonvoting_stock thus if the s_corporation has shares of voting_stock outstanding the s_corporation would issue shares of nonvoting_stock and warrants exercisable into shares of nonvoting_stock to the original shareholders the warrants may be exercised at any time over a period of years the strike_price on the warrants is set at a price that is at least equal to percent of the purported fair_market_value of the newly issued nonvoting_stock on the date the warrants are granted for this purpose the fair_market_value of the nonvoting_stock is claimed to be substantially reduced because of the existence of the warrants shortly after the issuance of the nonvoting_stock and the warrants the original shareholders donate the nonvoting_stock to the exempt party the parties to the transaction claim that after the donation of the nonvoting_stock the exempt party owns percent of the stock of the s_corporation the parties further claim that any taxable_income allocated on the nonvoting_stock to the exempt party is not subject_to tax on unrelated_business_income ubit under sec_511 through or the exempt party has offsetting ubit net operating losses the original shareholders might also claim a charitable_contribution_deduction under sec_170 for the donation catalog number 20810w form 886-a rev www irs gov page form 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit explanations of items tax identification_number last digits year period ended 20xx 20xx of the nonvoting_stock to the exempt party in some variations of this transaction the s_corporation may issue nonvoting_stock directly to the exempt party pursuant to one or more agreements typically redemption agreements rights of first refusal put agreements or pledge agreements entered into as part of the transaction the exempt party can require the s_corporation or the original shareholders to purchase the exempt party's nonvoting_stock for an amount equal to the fair_market_value of the stock as of the date the shares are presented for repurchase in some cases the s_corporation or the original shareholders guarantee that the exempt party will receive the fair_market_value of the nonvoting_stock as of the date the stock was given to the exempt party if that amount is greater than the fair_market_value on the repurchase date because they own percent of the voting_stock of the s_corporation the original shareholders have the power to determine the amount and timing of any distributions made with respect to the voting and nonvoting_stock the original shareholders exercise that power to cause the s_corporation to limit or suspend distributions to its shareholders while the exempt party purportedly owns the nonvoting_stock for tax purposes however during that period percent of the s corporation’s income is allocated to the exempt party and percent of the s corporation’s income is allocated to the original shareholders the transaction is structured for the original shareholders to exercise the warrants and dilute the shares of nonvoting_stock held by the exempt party or for the s_corporation or the original shareholders to purchase the nonvoting_stock from the exempt party at a value that is substantially reduced by reason of the existence of the warrants in either event the exempt party will receive a share of the total economic benefit of stock ownership that is substantially lower than the share of the s_corporation income allocated to the exempt party discussion the transaction described in this notice is designed to artificially shift the incidence of taxation on s_corporation income away from taxable shareholders to the exempt party in this manner the original shareholders attempt to avoid paying income_tax on most of the s corporation’s income over a period of time the service intends to challenge the purported tax benefits from this transaction based on the application of various theories including judicial doctrines such as substance over form under appropriate facts and circumstances the service also may argue that the existence of the warrants results in a violation of the single class of stock requirement of sec_1361 thus terminating the corporation’s status as an s_corporation see eg sec_1_1361-1 and iii transactions that are the same as or substantially_similar to the transaction described in this notice are identified as listed transactions for purposes of sec_1_6011-4 sec_301_6111-2 and sec_301_6112-1 effective april 20xx the date this notice was released to the public independent of their classification as listed transactions transactions that are the same as or substantially_similar to the transaction described in this notice may already be subject_to the catalog number 20810w form 886-a rev www irs gov page form 886-a date name of taxpayer schedule number department of the treasury - internal_revenue_service or exhibit explanations of items tax identification_number last digits year period ended 20xx 20xx disclosure requirements of sec_6011 sec_1_6011-4 the tax_shelter_registration requirements of sec_301_6111-1t and sec_301_6111-2 or the list maintenance requirements of sec_6112 sec_301_6112-1 under the authority of sec_1_6011-4 the exempt party in the listed_transaction described in this notice will also be treated as a participant in the transaction whether or not otherwise a participant the exempt party will be treated as participating in the transaction for the taxable_year of the purported donation the taxable_year of the reacquisition and all intervening taxable years pending further review and possible additional guidance this notice does not apply to any investment in employer_securities as defined in sec_409 by an employee_stock_ownership_plan subject_to the requirements of sec_409 persons who are required to register these tax_shelters under sec_6111 but have failed to do so may be subject_to the penalty under sec_6707 persons who are required to maintain lists of investors under sec_6112 but have failed to do so or who fail to provide those lists when requested by the service may be subject_to the penalty under sec_6708 in addition the service may impose penalties on parties involved in these transactions or substantially_similar transactions including the accuracy-related_penalty under sec_6662 the service and the treasury_department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transaction described in this notice these taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly taxpayer's position sec_1_501_c_3_-1 provides in order to be exempt under sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in sec_501 sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if 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 see also better business bureau of washington d c v u s it engages primarily in activities which issue position is not known government's position the facts shows that more than an insubstantial part of an exempt_purpose these activities included participating in the s_corporation tax_shelter scheme operating as a vehicle to assist catalog number 20810w page carrying out his abusive charitable scheme www irs gov form 886-a rev activities are not in furtherance of department of the treasury - internal_revenue_service form 886-a date name of taxpayer tax identification_number last digits year period ended 20xx 20xx explanations of items seta number these two activities disqualify from exempt status under sec_501 discussion of the activities above is a participant in the s_corporation tax_shelter scheme transactions that are the same or substantially_similar to those described in notice_2004_30 are designed to artificially shift the incidence of taxation on s_corporation income away from taxable shareholders to the exempt party in this manner the original shareholders attempt to avoid paying income_tax on most of the s corporation’s income over a period of time the shifting of taxation away from the taxable shareholders is possible due to the exempt party generally does not pay tax on its income since inception designated these type of transactions as listed transactions has not paid any_tax on its income notice are the same in determining whether the donations of non-voting llc membership units to or substantially_similar to notice_2004_30 the provisions in the operating agreements and other relevant facts are examined these provisions include i ii ii iv v the original shareholders donated nonvoting membership units to the original shareholders retain control of the llc via their holdings of voting membership units and exclusive management rights the original shareholders have the power to determine the amount and timing of any distributions although the operating_agreement requires annual distributions in practice some llcs have not made a distribution to is allocated percent or more of the profit while the original shareholders are allocated percent of the loss nonvoting membership units with the the llcs have the first right to purchase original shareholders owning all of voting units and their exclusive management right they can issue additional share to dilute the share of nonvoting_stock held by discussion of the above factors i the original shareholders donated nonvoting membership units to similar to notice_2004_30 the original shareholders donated nonvoting membership units to while retaining voting membership units as the holder of nonvoting membership units has no voting_right and consent right article and the only two exceptions were these two llcs donated voting membership units to voting rights even in these two isolated cases rule set forth in article supermajority interest means a member or members holding among them at least percent of all voting rights with percent of voting rights votes to override the decision of the original shareholder even in these two cases article gives the donors the rights to take back the donated interest if exempt status is revoked was powerless due to the supermajority was to be audited or its percent of which give lacks the the original shareholder of page www irs gov form 886-a rev catalog number 20810w form 886-a date name of taxpayer department of the treasury - internal_revenue_service explanations of items scher number tax dentification number last digits year period ended 20xx 20xkx ii the original shareholders retain control of the llc via their holdings of voting membership units and exclusive management rights similar to notice_2004_30 after the original shareholders donated nonvoting membership units they still own to percent of voting membership units furthermore article gives to the original shareholders exclusive management rights being the holder of voting units and manager of the llc allows the original shareholder to retain contro of the llc furthermore article gives the donors the rights to take back the donated interest if was to be audited or its exempt status is revoked this shows not only the original shareholders retain control of the llc they also retain control of the ownership_interest donated to iii the original shareholders have the power to determine the amount and timing of any distributions in notice_2004_30 because they own percent of voting_stock of the s_corporation the original shareholders have the power to determine the amount and timing of any distributions in this case the original shareholders also manager of the llcs have the power to determine the amount and timing of distributions per the operating_agreement a preferred member only receive a fixed percentage of the llc's income as distribution the distribution is the lesser_of percent of llc income or percent of their capital_account balance the distribution is to be made by december of the following fiscal_year see preferred_return preferred allocation and preferred distribution in practice some llcs did not make any distributions to in 20xx and 20xx in the case of ' and the manager who is also the original donor or his her representative has the sole discretion in determining the amount and timing of distributions which won't occur until the third year of the llc’s existence _ is allocated o percent or more of the profit while the original shareholders are allocated percent of the loss the special_allocation provisions further allocate all passive_income to and all active income and deductions to the original shareholders in notice_2004_30 percent of the s_corporation income is allocated to the exempt party and percent to the original shareholders it’s the same in this case in many instances regardless of interest article c of the operating_agreement and schedule of allocation allocate percentage of membership a preferred member percent of losses to the common members iv oto percent of income to all passive_income to oto catalog number 20810w e e e page www irs gov form 886-a rev form 886-a date name of taxpayer schecue number department of the treasury - internal_revenue_service explanations of items tax identification_number last digits year period ended 20xx 20xx e all active income deductions amortization expenses and losses to the common members v the llcs have the first right to purchase nonvoting membership units in notice_2004_30 the exempt party can require the s_corporation or the original shareholder to purchase its nonvoting stocks although there were no indications that warrants were issued in this case the operating nonvoting units in these agreement provides the llc with the first option to repurchase llcs the donors their spouse and or family members are the sole holders of voting units they also act as the llc’s manager they have the power to issue additional shares to the llc or increase the authorized shares so they can issue additional preferred shares such issuance of has no additional shares may dilute the value of those share already held by voting and consent rights there’s nothing it can do to prevent the issuance of additional shares given in summary the facts show the transactions in this case are the same or substantially_similar to was a participant in the those described in notice_2004_30 therefore it is concluded that s-corporation tax_shelter scheme as described in notice_2004_30 acts as a vehicle of bogus charitable scheme _ as stipulated in scheme is designed to assist his wealthy clients unwarranted charitable_contribution deductions states by depriving the government of tax revenue the irs has identified specific transactions that through 20xx cost the united_states treasury more than dollar_figure charitable giving improperly reducing their tax_liability by taking scheme has harmed the united in lost tax revenue to facility his scheme bogus contributions as contributions to such charity is tax deductible in the beginning created his bogus charities once exempt status which scheme was exposed the irs revoked so he could facilitate his scheme needed a charity described under sec_501 to take the agreed to -’s tax and and then looked for other charity to carry on his scheme is that charity facts connecting to scheme included but are not limited to e per secretary of state is the registered agent for prepared return form_990 appraised the value of ownership_interest for donors who donated their interest to signed all form_8283 page www irs gov form 886-a rev catalog number 20810w -____------ ----------------_-----______________ __ _ tt ttt form 886-a date name of taxpayer ane number department of the treasury - internal_revenue_service explanations of items tax identification_number last digits 20xx 20xx year period ended e account at money to sought approval from on important matters such as closing the bank the emails exchange show that gave to open a checking account at under name emails exchange between emails exchange involved matters ranging from preparation and filing of closing a big deal that donation to was facilitating for his client the dollar_figure and dating back to january 20xx the form_990 to i llc interest in conclusion the facts show that charitable scheme was operated as a vehicle of bogus the two activities discussed above were more than an insubstantial part of these two activities did not further one or more exempt purposes described in sec_501 therefore exempt status under sec_501 should be revoked activities issue activities remain the same since inception the operating began accepting llc interest donation in 20xx this shows that agreement shows became a participant in tax_avoidance scheme in 20xx therefore it’s warranted to revoke first date it was determined exempt status retroactively to january 20xx the was not operated to further its exempt_purpose conclusion is not operated exclusively in furtherance of an exempt_purpose described in irc i sec_501 its exempt status should be revoked retroactively to january 20xx required to file form_1120 u s_corporation income_tax return for the tax years 20xx 20xx and all future years form 886-a rev catalog number 20810w www irs gov page


t c memo united_states tax_court robert j hoaglund petitioner v commissioner of internal revenue respondent docket no filed date robert j hoaglund pro_se margaret c tinagero for respondent memorandum opinion jacobs judge this case is presently before the court on respondent's motion for judgment on the pleadings pursuant to rule respondent determined a dollar_figure deficiency in petitioner's federal_income_tax for and a dollar_figure accuracy-related_penalty pursuant to sec_6662 unless indicated otherwise all section references are to the internal_revenue_code for the year in issue and all rule references are to the tax_court rules_of_practice and procedure on date respondent filed a motion for judgment on the pleadings pursuant to rule claiming that the undisputed facts in the pleadings require judgment in favor of respondent as a matter of law on date petitioner filed a response to respondent's motion for judgment on the pleadings the sole issue for decision is whether an order of the u s bankruptcy court for the central district of california discharged petitioner's debt to respondent for the 10-percent additional tax pursuant to sec_72 on premature distributions from an individual_retirement_account ira the facts set forth below are derived from the pleadings filed by the parties background at the time the petition was filed petitioner resided in thousand oaks california by a notice_of_deficiency dated date respondent determined various increases in petitioner's federal_income_tax for including a 10-percent additional tax pursuant to sec_72 for premature distributions from an ira in a petition to this court filed on date petitioner disputed only respondent's attempt to collect the additional tax for premature distributions asserting that such debt was discharged by order of the bankruptcy court effective date attached to the petition filed by petitioner was a copy of the bankruptcy court's discharge order the order indicates that petitioner filed a petition with the bankruptcy court on date pursuant to chapter of the bankruptcy code u s c the order further provides that no complaint objecting to the discharge of petitioner's debt was filed or in the alternative that if one was filed it was not sustained consequently the bankruptcy court ordered the following the above-named debtor petitioner is released from all dischargeable debts except those pending complaints which will be determined later any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor petitioner with respect to any of the following a debts dischargeable under u s c section b unless heretofore or hereafter determined by order of this court to be nondischargeable debts alleged to be excepted from discharge under clauses and of u s c section a c debts determined by this court to be discharged all creditors whose debts are discharged by thi sec_3 order and all creditors whose judgments are declared null and void by paragraph above are enjoined from instituting or continuing any_action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor the order of discharge was entered on date in answer to petitioner's petition respondent generally denied petitioner's allegation that the bankruptcy court had discharged petitioner's debt for the additional tax on premature distributions in reply to that answer petitioner asserted that respondent failed to object to the discharge of petitioner's debts after notice by the u s trustee assigned to the case and petitioner argued that the doctrines of res_judicata and collateral_estoppel prohibited respondent from attempting to collect the additional tax on premature distributions discussion rule provides that after the pleadings in a case are closed but within such time as not to delay the trial a party may move for judgment on the pleadings the granting of a motion for judgment on the pleadings is proper only where the pleadings do not raise a genuine issue of material fact and the moving party is entitled to judgment as a matter of law 82_tc_403 66_tc_367 affd without published opinion 566_f2d_1168 3d cir we find that no genuine issue of material fact is in dispute herein respondent is not herein entitled to judgment as a matter of law because we do not have jurisdiction to address the issue raised by respondent's motion for the reason explained below however because no justiciable issue is raised in the petition we shall on our own initiative dismiss petitioner's case for failure to state a claim on which relief can be granted respondent argues that it is a legally sic impossibility for the amounts at issue to have been discharged in the bankruptcy case respondent reaches this conclusion through a reading of u s c sec which provides exceptions to the dischargeability of debts under the bankruptcy code including chapter petitions respondent directs us specifically to section a a and a of the bankruptcy code which identifies the type of taxes that are nondischargeable section a provides in part as follows sec exceptions to discharge a a discharge under section a b or b of this title does not discharge an individual debtor from any debt-- for a tax or customs duty-- a of the kind and for the periods specified in sec_507 or sec_507 of this title whether or not a claim for such tax was filed or allowed sec_507 of the bankruptcy code sets forth a priority listing for the payment of expenses and claims against a debtor's estate sec_507 of the bankruptcy code provides a priority for unsecured claims of governmental units for taxes measured by income or gross_receipts within the time periods set forth therein to the extent such debt is for a fine penalty or forfeiture payable and for the benefit of a governmental_unit and is not compensation_for actual pecuniary loss other than a tax penalty-- a relating to a tax of a kind not specified in paragraph of this subsection or b imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition respondent asserts that the additional tax under sec_72 falls within the confines of these exceptions and therefore is nondischargeable by the bankruptcy court petitioner argues in essence that the additional tax under sec_72 is a tax penalty rather than an income_tax and that the penalty is a dischargeable debt petitioner further reiterates his position in the petition and reply to respondent's answer that the bankruptcy court has already resolved this issue through its order alternatively petitioner asks us to remand the issue back to the bankruptcy court for resolution the parties apparently request us to determine the characterization of the deficiency arising under sec_72 for purposes of determining its dischargeability in this regard we note the existence of various tests for analyzing the proper characterization of items as taxes for purposes of priority under the bankruptcy code see eg 313_us_283 in re cassidy 983_f2d_161 10th cir in re lorber indus of cal inc 675_f2d_1062 9th cir the tax_court is a court of limited jurisdiction conferred by statute sec_7442 320_us_418 85_tc_527 as such our jurisdiction does not extend to deciding whether a deficiency was discharged in a prior bankruptcy proceeding 94_tc_1 75_tc_389 in exercising our jurisdiction to redetermine deficiencies we are without jurisdiction to 'allow or disallow a claim against a debtor's estate or to discharge taxes as a bankruptcy court might ' neilson v commissioner supra pincite quoting 57_tc_842 consequently we are unable to address the proper characterization of the deficiency arising under sec_72 for purposes of determining its dischargeability under the bankruptcy code this issue is properly resolved by the bankruptcy court not the tax_court therefore respondent's motion will be denied however because petitioner does not dispute any of the underlying deficiencies nor the interestingly the court_of_appeals for the tenth circuit in in re cassidy 983_f2d_161 10th cir held that the 10-percent additional tax under sec_72 was characterized as a nonpecuniary loss penalty rather than a tax for purposes of priority under the bankruptcy code accuracy-related_penalty determined by respondent in the notice_of_deficiency and because there is no justiciable issue before us we shall dismiss petitioner's case for failure to state a claim on which relief can be granted to reflect the foregoing an order denying respondent's motion will be issued an order of dismissal and decision in favor of respondent will be entered


t c memo united_states tax_court larry a and kathleen t monico petitioners v commissioner of internal revenue respondent docket no filed date ps claim certain payments received in and are a return_of_capital held ps have failed to so prove rodger g mohagen and daniel j frisk for petitioners gail k gibson for respondent memorandum opinion halpern judge by notice_of_deficiency dated date respondent determined the following deficiencies in petitioners' federal income taxes tax_year deficiency dollar_figure big_number big_number after concessions the only issue is whether payments received by petitioners in and should have been reported as income in those years unless otherwise noted all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure some of the facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated by this reference we need find few facts in addition to those stipulated and accordingly will not separately set forth those findings we include our additional findings_of_fact in the discussion that follows petitioners bear the burden_of_proof on all questions of fact rule a background at the time the petition was filed petitioners resided in park rapids minnesota petitioners filed joint returns for the taxable calendar years in question and used the cash_method_of_accounting from about date until sometime in the late 1980's petitioner larry a monico larry monico was an equal partner with r d offut co offut co a minnesota corporation in a minnesota general_partnership m o farms m o farms was in the business of growing potatoes m o farms' annual_accounting_period was a fiscal_year ending on october and it used the cash_method_of_accounting ronald offut owned offut co and was part owner of a business called chef-reddy foods chef- reddy a food processing business that made frozen french fries during its fiscal_year m o farms sold potatoes valued at dollar_figure to chef-reddy the potatoes were sold on credit and m o farms treated the amount due as an account receivable the account receivable m o farms never received payment for the potatoes m o farms distributed the account receivable to its partners petitioners reported nothing with respect to the account receivable on either their or income_tax return petitioners have failed to prove that they have ever reported anything with respect to the account receivable by agreement executed date the purchase agreement larry monico and offut co agreed that offut co would purchase larry monico's interest in m o farms under the heading other matters the purchase agreement recites it is hereby agreed that offutt chef-reddy owes monico five hundred eighty-six thousand dollars dollar_figure which debt is unrelated to the purchase of the partnership_interest described herein a note will be signed by offutt in favor of monico for that sum at closing which will provide for the payment of interest at the rate of ten percent per annum commencing as of date with the term of said note to be five years from the date of closing with interest only being payable on date and each july thereafter until date when the entire principal balance together with accrued interest shall be due and payable notwithstanding that it was executed on date the purchase agreement recites that it was made and entered into as of date in and petitioners received payments from chef-reddy the chef-reddy payments in the amounts of dollar_figure dollar_figure and dollar_figure respectively which payments petitioners did not report on their income_tax returns for those years respondent determined deficiencies in petitioners' federal income taxes for and on the grounds in part that the chef-reddy payments were items of gross_income improperly omitted from gross_income by petitioners petitioners contend that the chef-reddy payments are not items of gross_income because they represent a return_of_capital ie the chef-reddy payments represent amounts that previously should have been taken into income discussion1 rule e deals with the form and content of briefs and provides as follows e form and content all briefs shall contain the following in the order indicated on the first page a table of contents with page references followed by a list of all citations arranged alphabetically as to cited cases and stating the pages in the brief at which cited citations shall be in italics when printed and underscored when typewritten a statement of the nature of the controversy continued i arguments of the parties a petitioners' receipt of a note petitioners' argument that returns of capital are not gross_income is well supported 247_us_179 unfortunately for petitioners they have failed continued the tax involved and the issues to be decided proposed findings_of_fact in the opening brief or briefs based on the evidence in the form of numbered statements each of which shall be complete and shall consist of a concise statement of essential fact and not a recital of testimony nor a discussion or argument relating to the evidence or the law in each such numbered statement there shall be inserted references to the pages of the transcript or the exhibits or other sources relied upon to support the statement in an answering or reply brief the party shall set forth any objections together with the reasons therefor to any proposed findings of any other party showing the numbers of the statements to which the objections are directed in addition the party may set forth alternative proposed findings_of_fact a concise statement of the points on which the party relies the argument which sets forth and discusses the points of law involved and any disputed questions of fact the signature of counsel or the party submitting the brief as to signature see rule a petitioners have failed to follow the requirements of rule e by failing in their opening brief to individually set forth and number each statement of a proposed finding of fact and by failing in many instances to insert references to appropriate sources for the statements they make in their reply brief petitioners have failed to set forth any objections to the proposed findings_of_fact set forth in respondent's opening brief the record in this case is not large and we have reviewed it completely nevertheless by their failure to follow our rules petitioners have assumed the risk that we have not considered the record in a light of their own illumination to prove that the chef-reddy payments constitute a return_of_capital see rule a burden_of_proof is on petitioners the parties have locked horns on whether sometime prior to receipt of the chef-reddy payments larry monico received a payment in liquidation of his interest in the account receivable petitioners describe the nature of the controversy as follows petitioners exchanged a short term account receivable for a long term promissory note in a preceding year petitioners assert the receipt of the promissory note was a cash_equivalent right requiring the petitioners to recognize taxable gain in the year of exchange which they failed to recognize petitioners claim basis in the promissory note equal to the gain that should have been recognized in the year of the exchange respondent describes the principal question presented as whether the account receivable distributed to petitioner larry monico by m o farms was converted to a note receivable at a specific point in time between and there is some confusion in petitioners' argument as to when income should have been recognized by them with respect to the account receivable petitioners conclude their opening brief with the following argument when the petitioners exchanged their rights to collect the account receivable for a long term promissory note pursuant to the other matters section of the purchase agreement they should have recognized income in that year in their reply brief petitioners propose a finding of fact that larry monico accepted a promissory note from chef-reddy in rather than collecting full payment on the account receivable also in that brief they propose an ultimate finding of fact petitioners should have recognized gain in the year of exchange evidence concludes the exchange was definite by we need not resolve the confusion in petitioners’ briefs because whenever it is that petitioners allege larry monico received a note or notes they have failed to prove that larry monico received any note and we so find petitioners produced no note and alan knoll the chief financial officer of offut co and an employee of offut co since could recall no note petitioners failed to produce ronald offut who would have knowledge of any note and we infer from that unexplained failure that his testimony would have been adverse to petitioners 886_f2d_1237 9th cir affg 89_tc_1063 6_tc_1158 affd 162_f2d_513 10th cir b cash_method_of_accounting despite petitioners' failure to prove that larry monico received any note we must still address petitioners' argument based on the cash equivalence doctrine see 289_f2d_20 5th cir negotiability is not the test of taxability in an equivalent of cash case revg and remanding 32_tc_853 sec_1_446-1 income_tax regs makes clear items of gross_income which are elements in the computation of taxable_income need not be in the form of cash it is sufficient that such items can be valued in terms of money nevertheless generally a cash-method taxpayer only takes into account an item_of_gross_income when actually or constructively received sec_1_446-1 income_tax regs a promise to pay is includable in gross_income when received by a cash-method taxpayer if it is the equivalent of cash cowden v commissioner supra pincite not all promises received by a cash- method taxpayer however are the equivalent of cash e g 76_tc_512 notes received for noncompetition fees affd 693_f2d_1189 5th cir the characteristics of a promise to pay that is the equivalent of cash were described by the court_of_appeals for the fifth circuit in cowden we are convinced that if a promise to pay of a solvent obligor is unconditional and assignable not subject_to set-offs and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for_the_use_of money such promise is the equivalent of cash and taxable in like manner as cash would have been taxable had it been received by the taxpayer rather than the obligation cowden v commissioner supra pincite accord 98_tc_54 petitioners have failed to prove that the obligation of either chef-reddy or offut co to make the chef-reddy payments is a cash_equivalent among other failures petitioners have failed to prove that either chef-reddy's or offut co 's obligation to make the chef-reddy payments is the kind of promise to pay that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for_the_use_of money we therefore find that the obligation to make the chef-reddy payments is not the equivalent of cash c cottage sav association v commissioner petitioners attempt to buttress their argument by citing 499_us_554 exchange of property gives rise to a realization event under sec_1001 so long as the exchanged properties are materially different ie so long as they embody a legally distinct entitlement petitioners argue that when larry monico exchanged the account receivable for the promissory note the petitioners realized and should have recognized income petitioners have failed to prove that there was any such exchange moreover they have failed to prove any material_change in the obligation cottage savings association is inapplicable ii conclusion petitioners have failed to prove that the chef-reddy payments constitute a return_of_capital that being the exclusive basis on which they assigned error to respondent’s determination_of_a_deficiency with respect to the chef-reddy payments respondent’s determination_of_a_deficiency in tax with respect thereto is sustained decision will be entered under rule


internal_revenue_service number release date index number date attn dear i am responding to your letter of date forwarding correspondence you received from your constituent excise_tax of percent of amounts paid for telephone service has been repealed he asked whether the federal the excise_tax on local and toll_telephone_service has not been repealed h_r the legislative branch and the treasury and general government appropriations act included legislation to repeal the federal excise_tax on communications_services however president clinton vetoed h_r on date and the congress took no subsequent action i hope this information helps you respond to please contact me or if you have any questions sincerely associate chief_counsel passthroughs and special industries by richard a kocak chief branch