internal_revenue_service department of the treasury significant index no washington dc contact person telephone number in reference to date feb op e eo t d o l y y gq d o n o f a e w t o n o t d u b t o o s e h t dear sir or madam this is in reference to your ruling_request of august as revised by your supplemental submissions dated date concerning a proposed transfer of and september the foundation to two newly-formed non-profit the assets of a corporations the information submitted indicates that the foundation is trust that has been recognized as exempt from federal_income_tax an organization desrcibed in sec_501 of the internal as revenue code the code and is classified as foundation within the meaning of sec_509 foundation’s purpose as reflected in its trust agreement is operate a charitable foundation exclusively for religious charitable scientific literary and educational_purposes foundation makes grants to various publicly supported charitable organizations of the code a private the to the a for the past few years the foundation’s trustees have had difficulty reaching agreements as to the management of the foundation the investment of the foundation’s assets and the distribution of the foundation’s income foundation ‘s trustees propose to distribute of the and foundation’s assets the transferred b assets to b of the foundation’s assets the transferred c assets therefore the a a a a e y o b and are newly created foundations that have been to c recognized as exempt from federal_income_tax as organizations described in sec_501 of the code and have been classified as private_foundations within the meaning of sec_509 the trustees of the foundation are m n and oo n is m’s the foundation’s alternate trustees are is m’s nephew wife p and r managers of the foundation are m and is 0’s wife p r is m’s daughter the principal the directors of b will be qo and pb the president of b is the directors of c will be m is qo husband and m’s son-in-law assistant to the m’s family t r sandf sdollar_figure n a bookkeeper and a long-time is r’s the president of will be m in connection with the transfer of assets by the foundation to b and c the following representations are made a after the transfer the foundation will have transferred the foundation intends to elect to of b and all of its assets to b and cc terminate its private_foundation_status under sec_507 a the code after the transfers by the foundation to b and c expect to continue the foundation’s charitable activities b the foundation currently has no grants outstanding that require the exercise of expenditure_responsibility within the meaning of sec_4945 of the code do not plan any future expenditure_responsibility grants and the foundation b and c the foundation has not committed either willful repeated acts or failures to act failure to act giving rise to liability for tax under chapter or a willful and flagrant act or ad none of the foundations are organizations described in of the code since they are not organized and sec_509 operated exclusively for testing for public safety e prior to the proposed transfers the foundation may or may not have met the distribution however no part of the requirements of sec_4942 of the code proposed transfers will be used to meet the requirements of sec_4942 of the code in the same taxable_year as and holdings within the meaning of sec_4943 amounts invested in the proposed transfers will not involve excess business or to jeopardize within the a manner such as code the of of meaning of foundation’s exempt_purpose section the code the carrying on of the g the foundation currently holds no jeopardizing investments within the meaning of sec_4944 of the code h the legal accounting and other expenses_incurred by the foundation in connection with the rulings requested and in carrying out the proposed transfer will be reasonable and necessary and will not be excessive termination of private_foundation_status sec_507 of the code provides that except as provided in sec_507 the status of any organization as a private_foundation shall be terminated only if notifies the secretary of termination or been either willful repeated acts willful and flagrant act and the secretary notifies liability for tax under chapter such organization that such organization is liable for the tax imposed by sec_507 or failures to act or a or failure to act giving rise to its intent to accomplish such with respect to such organization there have such organization sec_507 of the code provides that in case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 of the code imposes a tax on each organization which terminates its private_foundation_status under sec_507 sec_1_507-1 of the income_tax regulations the regulations provides that if all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 of the code such transferor foundation will not have terminated its private_foundation_status under sec_507 a private_foundation transfers sec_1_507-1 of the regulations provides that for purposes of sec_507 of the code the term willful repeated acts or failures to act means at least two acts or failures to act both of which are voluntary conscious and intentional and flagrant act for purposes of sec_507 a a willful or failure to act is one which is voluntarily consciously and knowingly committed in violation of any provision of chapter other than sec_4940 or sec_4948 a and which appears to a reasonable man to be a gross violation of any such provision it sec_1_507-3 of the regulations provides in part is made by a private_foundation to another private that a transfer of assets is described in sec_507 the code if foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the terms other adjustment organization or reorganization include any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income of sec_1_507-3 of the regulations provides in part that the term significant disposition of assets to one or more private_foundations includes any disposition for the taxable_year of assets of the transferor foundation at the beginning of the taxable_year percent or more of the fair_market_value of the net sec_1_507-3 of the regulations provides that unless a private_foundation voluntarily gives notice pursuant to sec_507 of the code b will not constitute a termination of the transferor’s private_foundation_status under sec_507 a transfer of assets described in section the proposed transfers from the foundation to b and thus under sec_1_507-3 of the involve a transfer of at least of the assets of the foundation regulations the transaction will result in disposition of the assets of the foundation proposed transfers constitute an other adjustment organization or reorganization within the meaning of sec_1_507-3 of the regulations and therefore the transfers will constitute transfers described in sec_507 of the code accordingly the a significant as transfers described in sec_507 of the code under sec_1_507-1 and d of the regulations the proposed transaction will not result in foundation’s private_foundation_status under sec_507 because no termination will take place the tax imposed by further under sec_507 of the code will not apply sec_507 b and will not be treated as newly created organizations a termination of the the transfer of the assets of the foundation to b and will be a single act and will not be one voluntarily consciously and knowingly committed in violation of any provision of chapter nor would it appear to to a reasonable man to be a gross violation of any such provision sec_507 constitute a willful and flagrant act the meaning of sec_1_507-1 of the regulations giving rise to liability for tax under chapter of the code the proposed transfer will not accordingly for purposes of or failure to act within of the code effect on tax exempt status sec_501 of the code provides for the exemption from federal_income_tax of any nonprofit organization that is organized and operated exclusively for charitable and or other exempt purposes stated in that section the foundation has been recognized as an organization described in sec_501 of the code and is classified as private_foundation within the meaning of sec_509 foundation’s purpose as reflected in its trust agreement is to operate a charitable foundation exclusively for religious charitable scientific literary and educational_purposes transfer of its assets to b and c does not involve a change in the manner of the foundations’s operation nor will its private_foundation_status be terminated will continue to operate as transfer of the assets from the foundation to b and c will not involve a change in the manner of operation of b or and therefore b and will continue to operate as tax exempt entities accordingly the foundation a tax exempt entity likewise the the the a carryover of aggregate tax_benefit sec_1_507-3 of the regulations provides that a a carryover of certain tax sec_507 transfer results in attributes and characteristics of the transferor organization to the transferee foundation sec_1_507-3 of the regulations provides that a transferee private_foundation succeeds to that part of the transferor’s aggregate tax_benefit defined in sec_1_507-5 that is attributable to the assets transferred based on the transferor’s assets held just before the transfer because the transfers from the foundation to b and are transfers described in sec_507 of the code under a u e sec_1_507-3 of the regulations b and will be deemed to possess certain attributes and characteristics of the foundation regulations b and will succeed to a proportionate share of the foundation’s aggregate tax benefits in proportion to the value of the assets transferred by the foundation to b and accordingly under sec_1_507-3 of the chapter private_foundation_excise_taxes and sec_507 and sec_1_507-3 i of the regulations provides that in a sec_507 transfer if the transferee foundation transfers all of its assets to one or more private_foundations which are effectively controlled within the meaning of sec_1_482-1 a now redesignated as sec_1_482-1a by the same person or persons who effectively controlled the transferor private_foundation for purposes of chapter and sec_507 through of the code it were the transferor treated as such transferee shall be if sec_1_482-1a of the regulations provides that the term controlled includes any king of control direct or indirect whether legally enforceable and however exercisable or exercised not the form or the mode of its exercise is the reality of the control which is decisive it the foundation is effectively controlled within the meaning because of the family relationship between b will be effectively controlled within the of sec_1_482-1a of the regulations by its principal managers m and the directors of b meaning of sec_1_482-1a of the regulations by its because of the family and other relationships president q will be effectively existing among the directors of the c controlled within the meaning of sec_1_482-1a of the regulations by its president m managers who exercise effective_control over a will exercise effective_control over b and because one of the two managers who exercise effective_control over the foundation will exercise effective_control over c there is substantial continuity of control between the foundation and b and between the foundation and c because one of the two because the b and c will be effectively controlled within the meaning of sec_1_482-1a of the regulations by the same persons who effectively control the foundation the transfers from the foundation of all of its assets to the b and c will be transfers described in sec_1_507-3 i of the regulations therefore for purposes of the chapter private foundation excise_tax provisions and sec_507 through of the code b and will each be treated as in the proportion which the net fair_market_value of the assets transferred by the foundation to b and c bears to the net fair_market_value of all the foundatioin’s assets immediately before the transfer proportionate share of the foundation’s tax_attributes under chapter and sec_507 through accordingly b and c will each succeed to their is the foundation it if tax on net_investment_income sec_4940 of the code imposes on each private_foundation with respect to the carrying on tax equal to two percent of the net_investment_income of such foundation for the taxable_year of its activities a under sec_507 of the code in the case of a transfer of assets of one private_foundation to another private_foundation the transferee foundation will not be treated as a newly created organization will not constitute a sale_or_other_disposition of property or other realizable event within the meaning of sec_4940 accordingly the transfer will not constitute a realizable event giving rise to net_investment_income to either the foundation b or sec_4940 therefore the transfer will not give rise to tax under therefore the transfers to b and c because the b and will each be treated as if it is the foundation under sec_1_507-3 of the regulations for purposes of sec_4940 of the code the net_investment_income of the foundation for the taxable_year of the transfers will be apportioned to b and c and will be includible in the computation of the net_investment_income of both b and c in the taxable_year of the transfers a proportionate share of self-dealing sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code imposes a tax on the participation of any foundation_manager in between a disqualified_person and a private_foundation knowing that it is such an act an act of self-dealing sec_4941 of the code defines self-dealing as or use by or for the benefit any direct or indirect transfer to of foundation a disqualified_person of the income or assets of a private sec_4946 of the code defines the term disqualified_person to include with respect to a private_foundation any person who is a foundation_manager sec_53_4946-1 of the foundation and similar excise_taxes regulations also the regulations provides that for purposes of sec_4941 of the code only the term disqualified_person shall not include any organization which is described in sec_501 sec_509 other than an organization described in for purposes of sec_4941 of the code the term the foundation will make the disqualified_person does not include any organization which is described in sec_501 contemplated distributions to the b and c both of which are described in sectin c disqualified persons as to the foundation at the time of the transfers and no transfer between a disqualified_person and a accordingly the transfer the private_foundation will occur foundation’s assets to the newly created private_foundations will not constitute acts of self-dealing under sec_4941 of the code and the transfers will not subject the foundation b to tax under sec_4941 therefore b and c will not be or distribution_requirements sec_4942 of the code imposes a tax on the undistributed_income_of_a_private_foundation sec_1_507-3 of the regulations provides that except as provided in sec_1_507-3 a private_foundation is required to meet the distribution_requirements of sec_4942 of the code for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation sec_1_507-3 i of the regulations provides that in a sec_507 transfer if the transferee foundation transfers all of its assets to one or more private_foundations which are effectively controlled within the meaning of sec_1_482-1 now redesignated as sec_1_482-1a the same person or persons who effectively controlled the transferor private_foundation for purposes of chapter and by sec_507 through it were the transferor such transferee shall be treated as if because b and c will be effectively controlled within the meaning of sec_1_482-1a by the same persons who effectively control the foundation the transfers from the foundation of all of its assets to b and c will be transfers described in sec_1_507-3 of the regulations therefore b and will be treated as as a result the foundation will not be required to foundation meet the sec_4942 qualifying_distribution requirement in the year in which the transfer of all its assets to b and c instead b and c will be responsible for satisfying their proportionate share of the foundation’s distribution_requirements under sec_4942 to the extent that such distribution_requirements are not satisfied by the foundation if they were the excess_business_holdings sec_4943 of the code imposes a tax annually on the value of a private foundation’s excess holdings in a business_enterprise provided that none of the assets transferred would place the foundation b holdings the proposed transfers do not involve the application of sec_4943 of the code concerning excess_business_holdings in the position of having excess business or tax on investments jeopardizing charitable purposes sec_4944 of the code imposes a tax on a private_foundation that invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_4944 of the code imposes a tax on any foundation_manager who participates in the making of investment which jeopardizes the carrying out of a private foundation’s charitable purposes unless such participation is due to reasonable_cause and is not willful an sec_4944 of the code and sec_53_4944-3 of the regulations provide that an investment the primary purpose of which is to accomplish one or more of the purposes described in sec_170 b which is the production_of_income or the appreciation of property is a program-related_investment and will not be of the code and no significant purpose of lee oeuuds considered as an investment which would jeopardize the carrying out of a private foundation’s exempt purposes of the code because b and c will be organizations described in sec_501 of the code the primary purpose of the transfers will be to accomplish one or more of the purposes described in sec_170 b constitute an adjustment organization or reorganization within the meaning of sec_1 c of the regulations the production_of_income or the appreciation of property will not be a significant purpose of the transfers within the meaning of sec_4944 of the code and sec_53_4944-3 of the regulations to be investments jeopardizing charitable purposes within the meaning of sec_4944 of the code accordingly the transfers will not be considered since the proposed transfers taxable_expenditures sec_4945 of the code imposes a tax on each taxable_expenditure made by private_foundations sec_4945 of the code defines the term taxable_expenditure as an amount_paid or incurred by a private_foundation as a grant to an organization other than an organization described in paragraph a unless the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with subsection h or of section sec_4945 of the code provides that expenditure_responsibility means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary example of sec_1_507-3 iii of the regulations indicates that when all net assets are transferred from one private_foundation to one or more controlled foundations there are no expenditure_responsibility requirements that must be exercised under sec_4945 and sec_4945 of the code with respect to the transfer under sec_4945 of the code a transfer from one private_foundation to another private_foundation is expenditure unless the transferor private_foundation exercises expenditure_responsibility with respect to such grant in a taxable lsg sec_2 - 1l1- however under section i of the regulations expenditure_responsibility accordance with sec_4945 a over the transferred assets need not be exercised if the transferor organization transfers all of its assets to controlled as indicated organizations as defined in sec_1_482-1a iii of the regulations in example when all net assets are transferred from one private_foundation to one or more controlled foundations the transferee foundations are treated as as recipients of expenditure_responsibility grants and therefore there are no expenditure_responsibility requirements which must be exercised under sec_4945 respect to the transfers of assets to the transferee foundation if they are the transferor foundation rather than of sec_1_507-3 h with and since the foundation is transferring all of its assets to b and c which are private_foundations effectively controlled within the meaning of sec_1_482-1a by the same person or persons who effectively controlled the foundation the transfers meet the requirements of sec_1 a i regulations and accordingly the foundation will not have to exercise expenditure_responsibility with respect to the transfers to b and c of the expenses of the transaction sec_4942 of the code imposes a tax on the undistributed_income_of_a_private_foundation defined in part as the amount by which qualified distributions are less than the minimum_investment_return the undistributed_income is sec_4942 of the code and sec_53_4942_a_-3 of the regulations provide that the term qualifying any amount including that portion of b other than any contribution to i distribution means a reasonable and necessary administration_expenses paid to accomplish one or more purposes described in sec_170 controlled directly or indirectly by the foundation or one or more disqualified persons as defined in sec_4946 with respect to the foundation except as provided in paragraph a private_foundation which is not an operating_foundation or as defined in subsection j except as provided in paragraph for use directly in carrying out or more purposes described in sec_170 b - any amount_paid to acquire as assets used or held an organization ii i b or under sec_4942 of the code and sec_53_4942_a_-3 distribution means any amount including reasonable and of the regulations the term qualifying i necessary administration_expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to a controlled organization of all of the assets of the foundation to b and c meet the requirements of sec_1_507-3 of the regulations the if they are the transferor transferee foundations are treated as foundation rather than as recipients of contributions from the foundation reasonable and necessary administration_expenses which relate to the transfers are not contributions to controlled organizations for purposes of sec_4942 of the code accordingly the transfers to b and c since the transfers and the under sec_4942 of the code reasonable and because b and c will be organizations described necessary administration_expenses paid to accomplish one or more purposes described in sec_170 b distributions in sec_501 of code the primary purpose of the transfers will be to accomplish one or more of the purposes described in sec_170 b legal accounting and other expenses paid_by the foundation that relate to the transfers to b and c will be qualifying distributions under sec_4942 a - accordingly the are qualifying of the code sec_4945 of the code imposes a tax on each taxable_expenditure made by private_foundations sec_4945 provides that the term taxable_expenditure means any amount_paid or incurred by a private foundation-- to carry on propaganda or otherwise to attempt to influence legislation within the meaning of subsection e except as provided in subsection f outcome of any specific public election or to carry on directly or indirectly any voter registration drive to influence the as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection or a grant to an organization unless-- such organization is described in paragraph as a foundation as defined in sec_4940 or b responsibility with respect to such grant in accordance with subsection h or the private_foundation exercises expenditure is an exempt operating of sec_509 or for any purpose other than one specified in section c b sec_53_4945-6 of the regulations provides that if a private_foundation makes a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization to any person the transferred assets will be considered used exclusively for purposes described in sec_170 if the assets are transferred to a fund or organization described in sec_501 the legal accounting and other expenses paid_by the foundation that relate to the transfers to b and c amounts paid_or_incurred to carry on propaganda to attempt to influence legislation to influence the outcome of any specific public election or to carry on directly or indirectly any voter registration drive and do not constitute grants to an individual for travel study or other similar purposes or grants to an organization are not under sec_53_4945-6 of the regulations a transfer of assets described in sec_507 of the code will be considered as used exclusively for purposes described in sec_170 b where the assets are transferred to an organization described in sec_501 favorable determinations under sec_501 the proposed distribution will be regarded as made for purposes within the meaning of sec_170 accounting and other expenses paid_by the foundation that relate to the transfers to b and c regarded as made for sec_170 b purposes in conformity with sec_53_4945-6 of the regulations the payment of these expenses will not constitute a taxable_expenditure under sec_4945 if reasonable in amount will be since b and have received accordingly the legal therefore savings provisions and provisional rules sec_1_507-3 of the regulations provides that i except as provided in subdivision ii of this subparagraph or subparagraph whenever a private_foundation makes a transfer of assets described in sec_507 foundations the transferee foundation or of the code to one or more private of this paragraph or a will not be treated as being in existence prior to date with respect to any transferred assets b will not be treated as holding the transferred assets prior to date and c will not be treated as having engaged in or become subject_to with respect to the transferred assets prior to january any transaction lease contract or other obligation ii notwithstanding subdivision i of this subparagraph the provisions enumerated in shall apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in sec_507 not been effected of this subdivision a through g a sec_4940 b and the regulations thereunder with respect to basis_of_property b sec_4942 and the regulations thereunder with respect to distributions of income c sec_101 of the tax reform act of as amended by sec_1301 and of the tax with respect to the stat reform act of provisions of sec_4941 stat of the tax reform act of d sec_101 a with respect to the provisions of sec_4942 but stat only if the transferor qualified for the application of such section immediately before the transfer and at least percent of the fair_market_value of the net assets of the transferee immediately_after_the_transfer was received pursuant to the transfer e sec_101 through e of the tax reform act of stat with respect to the provisions of section stat f sec_101 of the tax reform act of with respect to the provisions of sec_4945 and stat with respect to the provisions of sec_508 g sec_101 of the tax reform act of since the transaction is a transfer described in section b and will be entitled to the benefit of the saving sec_507 provisions and provisional rules applicable to the foundation with respect to the transferred assets as set forth in sec_1_507-3 of the regulations subsequent termination of the transferor foundation sec_507 of the code provides in part that the a private_foundation shall be status of any organization as terminated if the organization notifies the secretary of its intent to accomplish a termination sec_507 of the code imposes on each organization the a tax equal to the lower_of private_foundation_status of which is terminated under section all of the income estate a and gift_tax benefits with interest received by the foundation and any of its substantial contributors since or value of its net assets the as transfers described in sec_507 under sec_1_507-1 and d of the regulations the proposed transfer of all of the foundation’s assets to b and c will not a termination of the foundation’s private_foundation result in status under sec_507 if after the transfers the foundation properly notifies code the service that it intends to terminate its private_foundation_status then such notice will be effective to terminate the private_foundation_status of the foundation under sec_507 of the since the tax imposed by sec_507 of the code on zero assets is zero should the value of the net assets of the foundation equal zero at such time as the foundation gives the required notice and terminate its private_foundation_status then the foundation will not be liable for any termination_tax under sec_507 accordingly we rule as follows the proposed transfer of the transferred b assets by the foundation to b will constitute a transfer described in sec_507 of the code the proposed transfer of the transferred c assets by the foundation to c will constitute a transfer as described in sec_507 of the code as transfers described in sec_507 b of the code the proposed transfers by the foundation to b and will not result in a termination of the foundation’s private_foundation_status under sec_507 and will not cause the imposition of the termination_tax described in sec_507 a eo rs wy the proposed transfer from the foundation to b and c will not adversely affect the tax exempt status of the foundation b or the proposed transfers by the foundation to b and c will not constitute a willful and flagrant act giving rise to liability for tax under chapter or failure to act of the code b and c will not be treated as a newly-created organization b and will succeed to the aggregate tax_benefit of the foundation in proportion to the value of the assets transferred by the foundation to b and c it for purposes of the chapter private_foundation excise b will be treated as is the foundation but only in the proportion which the net tax provisions and sec_507 through if fair_market_value of the assets transferred by the foundation to b bears to the net fair_market_value of all the foundation’s assets immediately before the transfer of all of a’s assets b will succeed to of the foundation’s tax_attributes under chapter and sec_507 through including the following since b will receive a for purposes of sec_4940 sec_44 of the net_investment_income of the foundation for the taxable_year of the transfer to b will be apportioned to b will be includible in the computation of the net_investment_income of the b in the taxable_year of the transfer b the transfer to b will not be an event giving rise to net_investment_income pursuant to sec_53_4940-1 of the regulations to tax under sec_4940 of the code therefore such transfer itself will not give rise c b will be responsible for satisfying of the for purposes of determining the assumed foundation’s distribution_requirements under sec_4942 to the extent that such distribution_requirements are not satisfied by the foundation distribution requirement responsibilities of b for the foundation’s taxable_year of the transfer of the value of the foundation’s assets calculated on a monthly basis as of the end of each calendar month falling within the taxable_year of the transfer from the foundation to b and then expressed as monthly average will be attributed to b have held net assets equal to of such monthly average as of the last day of each month during b’s taxable_year of the transfer extending through the last day of the month immediately b will be deemed to a preceding the transfer transfers are made during more than one month appropriate adjustments will be made if it for purposes of the chapter private_foundation_excise_tax provisions and sec_507 through c will be treated as is the foundation but only in the proportion which the net if fair_market_value of the assets transferred by the foundation to cc bears to the net fair_market_value of all the foundation’s assets immediately before the transfer of all of the foundation’s assets c will succeed to of the foundation’s tax_attributes under chapter and sec_507 through including the following since c will receive a for purposes of sec_4940 sec_55 of the net_investment_income of the foundation for the taxable_year of the transfer to c will be apportioned to and will be includible in in the taxable the computation of the net_investment_income of year of the transfer b the transfer to will not be an event giving rise to net_investment_income pursuant to sec_53_4940-1 of the regulations to tax under sec_4940 of the code therefore such transfer itself will not give rise c c will be responsible for satisfying of the for purposes of determining the assumed foundation’s distribution_requirements under sec_4942 to the extent that such distribution_requirements are not satisfied by the foundation distribution requirement responsibilities of for the foundation’s taxable_year of the transfer of the value of of the foundation’s assets calculated on a monthly basis as the end of each calendar month falling within the taxable_year of the transfer from the foundation to c and then expressed as monthly average will be attributed to cc have held net assets equal to of such monthly average as of the last day of each month during c s taxable_year of the transfer extending through the last day of the month immediately appropriate adjustments will be made if preceding the transfer transfers are made during more than one month will be deemed to a c the transfers by the foundation to b and will not result in any liability for tax under sec_4940 of the code since the transfers will not constitute a sale_or_other_disposition of property or other realizable event within the meaning of sec_4940 the transfers by the foundation to b and will not constitute self-dealing under sec_4941 of the code because for purposes of sec_4941 the term disqualified_person does bvouxny rod not include an organization described in sec_501 other than an organization described in sec_509 additionally such transfer will not subject the foundation b or c tax under sec_4941 the proposed transfers do not involve the application of sec_4943 of the code concerning excess_business_holdings provided that none of the assets transferred would place b or c in the position of having excess_business_holdings the transfers by the foundation to b and will not constitute a jeopardizing investment within the meaning of sec_4944 of the code the transfers by the foundation to b and c will not constitute a taxable_expenditure within the meaning of sec_4945 of the code and a will not be required to exercise expenditure_responsibility as the term is defined in sec_4945 with respect to the transferred b assets or the transferred c assets the legal accounting and other expenses_incurred by the foundation b and in effectuating the proposed transfer will not constitute taxable_expenditures pursuant to sec_4945 and will be considered qualifying distributions under sec_4942 in connection with this ruling_request or c b and will be entitled to the benefit of the savings provisions and provisional rules applicable to the foundation with respect to the transferred b assets and the transferred c assets as set forth in sec_1_507-3 of the regulations if after the transfer of all of its assets to the b the foundation properly notifies the service of and cc to terminate private_foundation_status then such notice will be effective to terminate the private_foundation_status of the foundation under sec_507 of the code its intent if after the transfer of all of its assets to b and c the foundation properly notifies the service of its intent to terminate its private_foundation_status and if the value of the foundation’s net assets at the time it gives the notice and terminates its private_foundation_status is zero then the foundation will not be liable for any termination_tax under sec_507 of the code this ruling is based on the understanding that there will be no material changes in the facts upon which it is based also this ruling is directed only to the organization that sec_6110 of the code provides that this requested it ruling may not be used or cited by others as precedent we are informing your key district_director of this action please keep a copy of this ruling in your permanent records sincerely i kappa rgbert cc harper chief exempt_organizations ur technical branch


internal_revenue_service number release date index number -------------------------- ------------------------------- -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc ita b05 plr-140568-05 date date -------------- do ---ty ------- do ---ty ------- --------------------------------------- legend taxpayer ---------------------------- ---------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------- residence ----------------------------------------------------- city date date date date dear -------------- this is in response to a letter received on date requesting a ruling that taxpayer is entitled to exclude gain from the sale of the residence under sec_121 of the internal_revenue_code -------------------------- ------------------------- ----------------------- ---------------------- according to taxpayer’s statement signed under penalties of perjury taxpayer is employed as a narcotic investigator for the street crimes unit of city police facts plr-140568-05 department taxpayer and his wife purchased a house that they used as their principal_residence starting on date on date taxpayer conducted a highly-publicized arrest of an alleged drug dealer after the arrest the city police department learned that associates of the arrested individual had discovered taxpayer’s home address and planned to kill taxpayer in his home in response to this threat the police provided 24-hour security for taxpayer and his family and the city police department transferred taxpayer out of the street crimes unit because taxpayer feared for the safety of his family taxpayer’s family moved out of the house on date and taxpayer sold the residence on date on the sale date of the residence taxpayer had not owned and used the property as taxpayer’s principal_residence for two years during the five-year period preceding the sale however taxpayer requests that he be entitled to exclude gain from the sale of the residence under the reduced maximum exclusion provisions of sec_121 of the code law analysis sec_121 of the code provides that a taxpayer s gross_income will not include gain from the sale_or_exchange of property if during the five-year period ending on the date of the sale_or_exchange such property has been owned and used by the taxpayer as the taxpayer s principal_residence for periods aggregating two years or more the full exclusion is available only once every two years for a husband and wife who are sole sellers of a residence sec_121 of the code provides that the maximum exclusion amount is dollar_figure if the husband and wife file a joint_return for the year of the sale both spouses meet the 2-year use test at least one of the spouses meets the 2-year ownership test and neither spouse used the sec_121 exclusion during the last two years under sec_1_121-3 of the income_tax regulations taxpayers who fail to satisfy the ownership and use tests or the limit of one sale every two years may be eligible for a reduced maximum exclusion if the primary reason for sale_or_exchange is a change in place of employment health or unforeseen circumstances a sale is by reason of unforeseen circumstances if the primary reason for the sale_or_exchange is the occurrence of an event that the taxpayer does not anticipate before purchasing and occupying the residence a taxpayer’s primary reason for the sale_or_exchange is deemed to be unforeseen circumstances if one of the safe_harbor events such as death divorce or multiple births from the same pregnancy occurs during the period of the taxpayer’s ownership and use of the residence as the taxpayer’s principal_residence in addition the commissioner may designate other events or situations as unforeseen circumstances in published guidance of general applicability or in a ruling directed to a specific taxpayer see sec_1_121-3t e of the income_tax regulations plr-140568-05 sec_1_121-3 of the income_tax regulations provides that the reduced maximum exclusion is computed by multiplying the maximum dollar limitation of dollar_figure dollar_figure for certain joint filers by a fraction the numerator of the fraction is the shortest of the following periods the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale_or_exchange the period of time that the taxpayer used the property as the taxpayer s principal_residence during the 5-year period ending on the date of the sale_or_exchange or the period of time between the date of a prior sale_or_exchange of property for which the taxpayer excluded gain under ' and the date of the current sale_or_exchange the numerator of the fraction may be expressed in days or months the denominator of the fraction is days or months depending on the measure of time used in the numerator based on the facts as represented and the authority set forth above we conclude that taxpayer’s primary reason for the sale was the occurrence of an event that taxpayer did not anticipate before purchasing and occupying the residence thus taxpayer’s sale of the residence was by reason of an unforeseen circumstance consequently even though taxpayer sold the residence before taxpayer had owned and used it as taxpayer’s principal_residence for two of the preceding five years taxpayer is entitled to exclude gain up to the reduced maximum exclusion amount under sec_121 of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent 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 william a jackson branch chief branch income_tax accounting cc


department of the treasury internal_revenue_service washington d c o f f ic e o f c h ief c o u n sel number info release date dear date cc tege eoeg et2 conex-128155-02 uil this responds to your letter dated date your inquiry concerns the federal_income_tax rules for social_security_benefits the income_tax treatment of social_security_benefits is governed by sec_86 of the internal_revenue_code sec_86 was added to the code by the social_security amendments act of and provides that a portion of social_security_benefits may be subject_to income_tax when a taxpayer’s adjusted_gross_income exceeds a certain dollar limitation effective after date see public law sec_121 codified pincite u s c sec_86 we have enclosed publication social_security and equivalent railroad retirement benefits which explains in detail when and how a taxpayer is taxed on a portion of social_security_benefits we are unable to determine from the social_security_benefits statements you provided why there is a slight increase in the amount of benefits you receive in december or january we recommend that you contact the social_security administration for an explanation we hope this information is useful to you the attorney assigned to this matter is stephen suetterlein he can be reached at sincerely lynne camillo chief employment_tax branch office of the assistant chief_counsel exempt_organizations employment_tax government entities


department of the treasury internal_revenue_service washington d c tax exempt and government entities aug uniform issue list legend taxpayer a l t taxpayerb ira c ira d company e companyf amount g amount h country _ kkk kak rak kkk hak wk _ ee ee dear rothiiray rothirax the following facts and representations have been submitted in support of your ruling_request this is in response to a ruling_request dated date from your authorized representative as supplemented by correspondence dated date and date in which you request relief under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations regulations at the time of the conversion taxpayer a and taxpayer b were married and expected to have a modified_adjusted_gross_income in below the dollar_figure big_number limit specified in sec_408a of the internal_revenue_code code taxpayer b maintained a traditional individual_retirement_account ira d with company e on she converted ira d with a value of amount h to a roth_ira y maintained with company e transferred subsequently to company f taxpayer a maintained a traditional individual_retirement_account ira c with company e on he converted ira c with a value of amount g to roth_ira x maintained with company e weak y page in taxpayer a had income on foreign accounts from interest dividends and capital_gains these foreign accounts were located in a country financial_institution taxpayer a overlooked this additional income because taxpayer a’s father was responsible for handling these accounts and had complete authority over said accounts including the right to use the funds taxpayer a was operating under the belief that the company accounts were the property of taxpayer a’s father as long as his father was alive and accordingly did not believe these accounts were his property subject_to u s taxation as such taxpayer a personally prepared his calendar_year federal_income_tax return federal form_1040 which he filed jointly with taxpayer b taxpayer a and taxpayer b timely filed their original income_tax return taxpayer a and taxpayer b elected to pay the income_tax attributable to their roth conversions over a four year period pursuant to code sec_408a during calendar_year taxpayer a and taxpayer b realized that the additional income derived from country sources should have been reported on their federal_income_tax return due to this additional income taxpayers a and b filed amended joint federal_income_tax returns federal form sec_1040 for tax years that reflected the recharacterization of roth_ira funds back to traditional_ira funds these amended returns also eliminated the taxable deemed_distribution resulting from the original conversion s of ira c and ira d to roth_ira x and roth_ira y respectively amended federal form sec_1040 for calendar years through that accompanied this request for letter_ruling included the following notation including additional income disqualifies taxpayers from eligibility to convert their traditional ira’s to roth ira’s and thus the deemed_distribution equal to of the value of the account on has been eliminated from income on the amended retum’ in short the amended federal form sec_1040 are consistent with taxpayers a and b being ineligible to transfer their iras c and d to roth iras x and y respectively based on the foregoing facts and representations you have requested the following ruling subsequently in date taxpayer a and taxpayer b first became aware through the trustees of their roth iras of the deadlines for completing the rollover s of their roth iras back to traditional iras in order to effectuate the recharacterizations’ of their respective roth iras as of the date of this ruling_request the converted funds remain in roth_ira x and roth_ira y as of the date of this request to the best of taxpayer a’s and taxpayer b’s knowledge the service has not discovered taxpayer a's and taxpayer b’s failure to complete the rollovers or transfers necessary to effectuate their election s to recharacterize their roth_ira x and roth_ira y to traditional_ira s that pursuant to sec_301_9100-1 and sec_301_9100-3 of the regulations taxpayer a and taxpayer b are granted a period not to exceed days from the date of this ruling letter to make an election under sec_1_408a-5 of the federal_income_tax regulations i t regulations to recharacterize taxpayer a's roth_ira x and taxpayer b’s roth_ira y to traditional_ira s with respect to your request for relief under sec_301_9100-3 of the regulations code sec_408a and sec_1_408a-5 of the t regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira in a recharacterization the ira contribution is treated as having been made to the transferee ira and not the transferor ira under sec_1 page 408a d and sec_1_408a-5 this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax return for the year of contributions sec_1_408a-5 q a-6 of the i t regulations describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer's intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different from the transferor trustee with specified information that is sufficient to effect - the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with adjusted_gross_income in excess of dollar_figure big_number for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual_retirement_plan other than a roth_ira during that taxable_year sec_1_408a-4 q a-2 of the i t regulations provides in summary that an individual with modified_adjusted_gross_income in excess of dollar_figure big_number for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year sec_1_408a-4 q a-2 further provides in summary that an individual and his spouse must file a joint federal tax_return to convert a traditional_ira to a roth_ira and that the modified_adjusted_gross_income subject_to the dollar_figure big_number limit for a taxable_year is the modified agi derived from the joint_return using the couple's combined income sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the regulations in general provide guidance concerning requests for relief submitted to the service on or after date section - c provides that the commissioner of internal revenue in his discretion may granta reasonable extension of the time fixed by a regulation a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code sec_301_9100-3 of the regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-2 of the regulations lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if its request for sec_301_9100-1 relief is filed before the failure to make a timely election is discovered by the service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section page announcement provided that a taxpayer who timely filed his or her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth jra announcement provided that a taxpayer who timely filed his or her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth jra in this case taxpayer a and taxpayer b were ineligible to convert their ira c and ira d to roth_ira x and roth_ira y respectively since their modified_adjusted_gross_income with respect to exceeded the dollar_figure limit specified in sec_408a of the code taxpayers a and b filed this request for sec_301 relief after timely filing their federal_income_tax return and after amending their federal form sec_1040 for calendar years through therefore it is necessary to determine if taxpayers a and b are eligible for relief under sec_301_9100-3 of the regulations prior to taxpayer a and taxpayer b filing their amended federal form sec_1040 for through the service had neither discovered taxpayer a's ineligibility to convert ira c to roth_ira x nor - taxpayer b’s ineligibility to convert ira d to roth_ira y taxpayers a and b were not made aware that their conversions did not comply with the requirements of sec_408a of the code and regulations promulgated thereunder until when they discovered income generated from their country foreign accounts was subject_to u s federal taxation in date in attempting to roll over the amounts originally transferred to roth_ira x and roth_ira y back into traditional iras pursuant to the advice of their cpa which rollovers or transfers would have effectuated the recharacterizations and would have been consistent with the assertion shown on their amended federal form sec_1040 that they were ineligible to convert iras c and d to roth iras x and 'y taxpayer a and taxpayer b discovered that they could not roll over or transfer - their respective roth_ira converted amounts back to traditional iras at that point the time period prescribed by code sec_408a had expired furthermore the extensions of time granted by announcements 99-57and had also expired based on the information submitted and the representations contained herein including but not limited to taxpayers a and b’s having filed amended through federal form sec_1040 consistent herewith the service concludes that the requirements of sec_301_9100-3 of the regulations have been met and that you have acted reasonably and in good_faith with respect to making the election to recharacterize your roth_ira x and roth_ira y as traditional iras and that the granting of such relief will not prejudice the interest of the federal government this letter_ruling is based on our finding that you have met the requirements of clauses i and iii of sec_301_9100-3 of the regulations therefore you are granted a period of days from the date of the issuance of this letter_ruling to recharacterize your roth_ira x and roth_ira y as traditional iras no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is based on the assumption that ira c and ira d either meet or have met the requirements in code sec_408 and roth_ira x and roth_ira y either meet or have met the requirements in code sec_408a where applicable respectively at all relevant times this ruling is directed only to the taxpayer who requested it code sec_6110 provides that it may not be used or cited by others as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative oe page should you have any questions concerning this letter_ruling please contact at either or sincerely yours frances v sloan employee plafs technical group manager enclosures deleted copy of this letter notice of intention to disclose notice


t c memo united_states tax_court lucila novoa petitioner v commissioner of internal revenue respondent docket no filed date thomas f dilullo for petitioner robert a fee for respondent memorandum findings_of_fact and opinion beghe judge for the taxable_year respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax and an accuracy-related_penalty of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure after concessions by the parties the issues remaining for decision are whether petitioner had unreported income from her trucking business of dollar_figure as determined by respondent or some lesser amount whether respondent properly increased petitioner's net rent income by dollar_figure whether petitioner had gain of dollar_figure or some lesser amount from the sale of a truck held for use in her trucking business and whether petitioner is liable for the accuracy-related_penalty pursuant to sec_6662 we hold that petitioner had dollar_figure of unreported income reflecting a reduction of dollar_figure that petitioner received from nontaxable sources we hold that petitioner had additional net rent income of dollar_figure and gain of dollar_figure on the sale of her truck finally we hold that petitioner is liable for the accuracy-related_penalty petitioner claimed a dollar_figure income_tax_credit for the purchase of a diesel-powered vehicle and for the purchase of gasoline and diesel_fuel pursuant to sec_34 respondent disallowed the credit in the statutory_notice_of_deficiency on brief petitioner conceded that she is not entitled to the fuel tax_credit under sec_34 petitioner also claimed the earned_income_credit whether petitioner is eligible for the earned_income_credit taking into account the increase to petitioner's income resulting from this decision is to be determined in the rule computation respondent's concessions relate to the reconstruction of petitioner's income and are explained below all dollar figures are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and are incorporated herein by this reference petitioner resided in north bergen new jersey at the time the petition was filed a trucking business during the taxable years and petitioner owned and operated her own trucking business as a sole_proprietor at the beginning of petitioner owned two mack trucks petitioner drove at least one of the trucks herself to transport cargo containers for cappy's transport inc cappy's on behalf of goya foods inc from goya's processing plant in secaucus new jersey to port newark for shipment overseas petitioner worked as an independent_contractor and was paid according to the number of containers delivered petitioner controlled the conditions of her employment working as little or as much as she pleased petitioner failed to maintain adequate books_and_records of the gross_income and expenses of her trucking business on schedule c of her income_tax return petitioner reported gross_receipts of dollar_figure and net business income of dollar_figure from her trucking business the record does not disclose how or whether the other truck was being used while petitioner was making deliveries for cappy's or whether the rate at which the one truck was being driven by petitioner left time for someone else to drive it during the taxable_year on her income_tax return petitioner claimed the standard_deduction and reported gross_receipts and expenses of her trucking business on schedule c in the following amounts gross_receipts expenses dollar_figure tolls depreciation insurance repairs maintenance supplies taxes registration wages other expenses fuel tires parking road tax big_number total expenses big_number big_number big_number big_number big_number big_number big_number big_number net business income at an unspecified time in petitioner sold one of her trucks for dollar_figure in date petitioner had purchased the truck for dollar_figure and had paid dollar_figure for a truck warranty petitioner had claimed depreciation_deductions on the truck of dollar_figure and dollar_figure for the and taxable years respectively petitioner did not report the sale of the truck on her tax_return b rental_activity during petitioner purchased a two-family house in north bergen new jersey and on date she moved into the house petitioner paid the purchase_price of dollar_figure for the house in the following manner initial deposit on purchase payment at closing of title mortgage loan proceeds purchase_price dollar_figure big_number big_number big_number on date petitioner wrote a check for dollar_figure to her attorney william e powers which was applied to the initial deposit on the house the check cleared on date on date the purchase of the house closed and petitioner paid dollar_figure at the closing of this amount dollar_figure was a further downpayment on the house and dollar_figure represented closing costs paid to the mortgage_lender which included dollar_figure as a prepayment of interest referred to as points on the mortgage during petitioner spent dollar_figure on property improvements to the house beginning in date petitioner rented one-half of the house to a tenant petitioner reported rent income and expenses on the schedule e of her return as follows rents received expenses dollar_figure insurance mortgage interest big_number repairs big_number supplies big_number taxes big_number other water sewer gas big_number big_number depreciation expense total expenses big_number big_number income loss percent correction only ½ of residence rented big_number petitioner reported expenses paid for the entire house even though she only rented one-half of it to a tenant to the record does not disclose the source of the additional dollar_figure paid as an initial deposit correct the overstatement of expenses of the rental portion she divided the loss by one-half and reported a loss of dollar_figure instead of dollar_figure petitioner has acknowledged in the stipulation of facts that her procedure of dividing the loss in half results in a computational error that overstates her loss by dollar_figure because it also has the effect of improperly reducing her gross rental income by one-half in adjusting petitioner's schedule e rent income respondent disallowed some expenses while allowing others in excess of the amounts stated on the return respondent adjusted petitioner's rent income as follows expense item expense per return allowed insurance repairs supplies taxes gas depreciation dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number total disallowed expense sec_50 percent business allocation big_number x dollar_figure schedule e expense disallowance big_number schedule e computational error big_number schedule e adjustment in the notice_of_deficiency big_number c petitioner's daughters petitioner has two daughters emelina and jennifer who in were and years old respectively emelina and jennifer lived with petitioner in her rented apartment in west new york new jersey from january through date jennifer and petitioner then moved into the recently purchased house in north bergen new jersey emelina continued to live in petitioner's apartment through the end of after petitioner moved out of her apartment she kept her lease on the apartment and continued to make rental payments of dollar_figure a month to the landlord while emelina occupied the apartment through the end of she reimbursed petitioner for the monthly rental payments during jennifer was a high school student and also worked part time at the drug festival inc in union city new jersey jennifer would cash her weekly paycheck keep dollar_figure for herself and give the remainder to petitioner jennifer earned dollar_figure of gross wages for the calendar_year a total of dollar_figure was withheld from her wages for federal state and payroll_taxes petitioner used jennifer's wages to pay household expenses and buy clothing for jennifer d reconstruction_of_income in date internal_revenue_service tax_auditor geneva dickerson ms dickerson began an audit of petitioner's income_tax return after petitioner failed to provide adequate books_and_records of her trucking business ms dickerson reconstructed petitioner's income for the calendar_year using the bank deposit and cash expenditure method and determined that petitioner had unreported income in the amount of dollar_figure on date respondent issued a statutory_notice_of_deficiency ms dickerson's report reconstructing petitioner's income was attached the notice_of_deficiency listed the following adjustments to petitioner's income dollar_figure increase in schedule c net profit resulting from the dollar_figure of unreported income determined by ms dickerson's reconstruction of petitioner's income and the disallowance for lack of substantiation of dollar_figure in deductions for schedule c business_expenses dollar_figure increase of other income representing petitioner's gain on the truck sale and dollar_figure increase in rent income resulting from petitioner's dollar_figure computational error plus dollar_figure of expenses disallowed for lack of substantiation following pretrial discovery respondent made several adjustments to ms dickerson's reconstruction of petitioner's income and recomputed petitioner's unreported income respondent determined that petitioner had unreported income of dollar_figure dollar_figure less than the unreported income originally determined by ms dickerson and set forth in the statutory_notice_of_deficiency the following table sets forth ms dickerson's initial reconstruction of petitioner's unreported schedule c income and respondent's reconstruction and revised computation ms dickerson's reconstruction respondent's revised reconstruction bank deposit portion bank deposit portion total deposits dollar_figure total deposits dollar_figure nontaxable deposits nontaxable deposits proceeds of truck sale big_number proceeds of truck sale big_number interbank transfers big_number net taxable deposits big_number net taxable deposits big_number cash expenditure portion cash expenditure portion total expenditures big_number total expenditures big_number check disbursements big_number and savings account withdrawals check disbursements big_number and savings account withdrawals less disallowed big_number schedule e expenses cash outlay sec_1 big_number cash outlays big_number recomputed income big_number recomputed income big_number reported income big_number reported income big_number unreported income big_number unreported income big_number ms dickerson erroneously concluded that petitioner had dollar_figure of cash outlays when dollar_figure was the excess of total checks written over expenditures respondent's recomputation of petitioner's unreported schedule c income primarily differed from ms dickerson's initial computation in two ways first respondent subtracted interbank transfers between petitioner's accounts totaling dollar_figure representing transfers from her savings account to her checking account in order to make payments at the closing of her house the dollar_figure was then subtracted from the total checks disbursed amount that was used to calculate petitioner's cash expenditures thereby not altering the amount of petitioner's unreported income second respondent allowed schedule c deductions of dollar_figure claimed by petitioner for business_expenses in their entirety unlike ms dickerson's report which allowed only dollar_figure of the claimed schedule c deductions the allowance of the additional schedule c deductions of dollar_figure first reduced respondent's schedule c net_income adjustment from dollar_figure to dollar_figure the amount of petitioner's unreported schedule c gross_income the allowance of the remaining schedule c deductions also led respondent to add dollar_figure of paid business_expenses to petitioner's cash expenditures_for purposes of computing her unreported income thereby increasing her unreported income in a corresponding amount respondent's subtraction of dollar_figure of bank_deposits led to a corresponding dollar_figure increase in cash expenditures insofar as the amount of total checks disbursed was reduced by dollar_figure and petitioner's cash expenditures were calculated by subtracting the amount of total checks disbursed from total expenditures the schedule c included a dollar_figure depreciation deduction a noncash expenditure which explains why only dollar_figure of the dollar_figure was included in petitioner's cash expenditures the following is an abbreviated explanation of how respondent's determination of petitioner's unreported income was revised from the amount contained in the statutory notice continued in date petitioner's friend vilma reye lent her dollar_figure in date petitioner repaid the loan in its entirety a respondent's reconstruction_of_income opinion sec_6001 requires all taxpayers to maintain adequate books_and_records of taxable_income in the absence of adequate books_and_records the commissioner is authorized to reconstruct the taxpayer's income by any reasonable method that clearly reflects the taxpayer's income sec_446 holland v united continued initial unreported income in the statutory notice dollar_figure cash expenditure increase for additional big_number schedule c deductions allowed decrease in bank_deposits for interbank transfers increase in cash expenditures resulting from decrease in total checks disbursed -big_number big_number decrease in cash expenditures resulting -big_number from decrease in total expenditures relating to overstatement of payment at closing of the house in the statutory notice decrease in cash expenditures relating to schedule e expenses disallowed -big_number adjustment for dollar_figure error in ms dickerson's report instead of being a cash outlay such amount represents an excess of total checks disbursed over total expenditures -big_number revised unreported income big_number states 348_us_121 94_tc_654 one of these methods whose propriety is well established is the bank_deposits and cash expenditure method parks v commissioner supra 70_tc_1057 under this method respondent estimates the taxpayer's cash expenditures and determines the amount of bank_deposits for the taxable years at issue in order to arrive at petitioner's income which is then compared with petitioner's reported income to determine the amount of petitioner's unreported income see 801_f2d_1020 8th cir the method is premised on the assumption that the taxpayer has disposed of unreported income by depositing part of it into bank accounts and by making cash expenditures of the other part in the present case petitioner did not keep adequate books_and_records petitioner did not retain a bookkeeper or accountant and did not keep formal books of account recording the day-to-day receipt of income and payment of expenses of her trucking business respondent therefore properly used the petitioner testified that she provided her return preparer a handwritten list of the business_expenses of her trucking business petitioner also proffered into evidence copies of receipts for the cash purchase of diesel_fuel totaling dollar_figure and copies of truck repair and maintenance expense receipts totaling dollar_figure respondent has conceded the deductibility of all trucking business_expenses claimed by petitioner but treated continued bank_deposits and cash expenditure method to reconstruct petitioner's income and to determine that petitioner had unreported income for the taxable_year the reconstruction is especially reliable in the present case because petitioner either stipulated or verified through her testimony the amount of deposits made to her bank accounts and the amount of cash that she expended during the calendar_year generally respondent's determination in a statutory_notice_of_deficiency is entitled to a presumption of correctness 290_us_111 the fact that respondent's revised reconstruction reduces the amount of petitioner's unreported income does not affect the presumption of correctness attached to respondent's original determination of petitioner's tax_deficiency to the extent not reduced by respondent's revision 18_tc_1159 affd per curiam 217_f2d_952 9th cir petitioner does not argue that respondent's determination is not entitled to a presumption of correctnessdollar_figure instead continued all such expenses except depreciation as cash expenditures_for purposes of reconstructing petitioner's income respondent's reconstruction_of_income is a revised version of the tax auditor's reconstruction that was attached to the statutory_notice_of_deficiency respondent's revised reconstruction determines petitioner to have less unreported income than the original reconstruction see supra pp in cases of unreported income the court_of_appeals for continued petitioner argues that she effectively rebutted the presumption of correctness by presenting competent and relevant evidence showing that the determination is erroneous we do not completely agree at trial petitioner proffered into evidence a copy of a form 1099-misc form_1099 listing cappy's as the payor and petitioner as the recipient of dollar_figure of nonemployee continued the third circuit the circuit to which this case is appealable recognizes an exception to the general_rule that respondent's determination is entitled to a presumption of correctness 794_f2d_884 3d cir vacating tcmemo_1985_101 in cases of unreported income whether derived from legal or illegal sources the commissioner must provide some predicate evidence connecting the taxpayer to an income-producing activity in order to prevent the determination from being a naked assessment without any factual foundation id respondent's proper reconstruction of a taxpayer's income can also provide the factual foundation necessary to entitle respondent's determination to a presumption of correctness see 932_f2d_1128 5th cir before we will give the commissioner the benefit of the presumption of correctness he must engage in one final foray for truth such as by showing the taxpayer's net_worth bank_deposits cash expenditures affg in part and revg in part tcmemo_1990_68 citing 596_f2d_358 9th cir revg 67_tc_672 see also 298_f2d_784 3d cir respondent's reconstruction_of_income was evidence of petitioner's unreported income entitling respondent's determination to a presumption of correctness affg in part tcmemo_1960_160 87_tc_74 where respondent determined that petitioner had unreported income using the bank_deposits method respondent was not required to produce evidence linking petitioner's income to an income producing activity alvarez v commissioner tcmemo_1995_414 distinguishing cases that required linking unreported income to an income-producing activity where respondent reconstructed petitioner's income compensationdollar_figure the total_payment reported on the form_1099 is identical to the amount of gross_receipts reported by petitioner on her schedule c for her trucking business petitioner also testified that cappy's paid her by check that cappy's was her only client and that she had no other earnings from the operation of her trucking business during petitioner's presentation of the form_1099 together with her testimony does not effectively rebut the presumption of correctness attached to respondent's reconstruction_of_income first the form_1099 in and of itself does not prove that petitioner did not have other customers in her trucking business and does not prove that she did not have any other income from the use and ownership of the two trucks second although petitioner's testimony that she did not perform services for clients other than cappy's and that she had reported all her earnings from her trucking business in on her return seems credible nevertheless her testimony does not rebut respondent's determination insofar as she might have had unreported rental respondent objected to the admission into evidence of the form_1099 and the parties did argue the question of its admissibility in their initial briefs although at trial petitioner did pull out of her purse a copy of the form_1099 introduced into evidence at trial as exhibit a copy of the same form_1099 was attached to exhibit 2-b a copy of petitioner's income_tax return that was part of the stipulation of facts which states that all evidentiary objections to stipulated exhibits are waived unless specifically expressed therein respondent did not raise any evidentiary objections to exhibit 2-b in the stipulation of facts therefore the form_1099 was properly admitted into evidence income from her ownership of the trucks and their use by other persons we believe petitioner's testimony--in response to the questions she was asked at trial--literally to be true but it does not cover all possible sources of income from the use of her truck or trucks during the taxable_year petitioner did not explain how two mack trucks were used in her trucking business during a portion of petitioner's testimony does not exclude the possibility that she drove one truck herself to provide transportation services for cappy's and allowed someone else either to use her truck when she was not driving it or to use the other truck to provide transportation services for others giving rise to rent income rather than earned incomedollar_figure in this way petitioner's testimony that she had no other clients and that she reported all her earnings would literally be true and still fail to rebut the presumption of correctness of respondent's determination that petitioner had unreported income from another source whose likely existence is disclosed by the record we note that for the immediately preceding year petitioner reported gross_receipts of dollar_figure from her trucking business approximately dollar_figure more than she reported for the taxable_year in issue petitioner's failure to report the sale of the second mack truck raises from another angle the question of whether her failure to report income was connected to income generated by other use or rental of the truck that was sold insofar as petitioner's testimony implied and was intended to convey the impression that she reported all her income on her return we find her testimony improbable and questionable in light of respondent's reconstruction evidencing the receipt of income exceeding the amounts petitioner received from cappy's see 551_f2d_929 3d cir this court is not bound to accept taxpayer's testimony if it finds it to be either improbable unreasonable or questionable revg tcmemo_1975_278 sundel v commissioner tcmemo_1998_78 petitioner further argues that respondent overlooked several nontaxable sources of income for the year in issue petitioner contends that the inclusion of such amounts overstated respondent's determination of her unreported income specifically petitioner testified that after she moved out of her apartment her daughter emelina continued to live in the apartment from april through date petitioner continued to pay the rent on the apartment for those months we find that emelina reimbursed petitioner for the rent on the apartment for those months in the amount of dollar_figure per month totaling dollar_figure for the year petitioner also testified that her daughter jennifer who lived with her and worked part time at the drug festival inc would cash her paycheck keep dollar_figure and give the remainder to her mother jennifer testified at trial about her practice of turning over to her mother the bulk of the proceeds from cashing her pay checks petitioner submitted a form_w-2 reflecting wages paid_by drug festival inc to jennifer in the gross amount of dollar_figure after federal state and payroll_taxes were withheld jennifer's net wages amounted to dollar_figure subtracting dollar_figure approximately the amount she kept for herself during the year we find that jennifer gave petitioner dollar_figure in finally petitioner testified that in date her friend vilma reye lent her dollar_figure in order to help her pay her bills and that in date petitioner repaid the dollar_figure loan we find the testimony of petitioner and her daughter to be credible with respect to these items we therefore find that petitioner has carried her burden of proving that the foregoing amounts were received from nontaxable sources and were erroneously included in respondent's determination thereby overstating petitioner's unreported income by dollar_figure we therefore sustain respondent's revised determination of unreported income only to the extent of dollar_figure b rental expenses reported on schedule e respondent's determination added dollar_figure to petitioner's rent income the adjustment consisted of a dollar_figure computational error relating to the way petitioner allocated her schedule e expenses to the rental portion of the two-family residence petitioner has conceded the computational error portion of the adjustment the remaining portion of the adjustment is attributable to a dollar_figure net disallowance of deductions for rental expenses claimed on petitioner's schedule e petitioner has failed to substantiate the rental expenses specifically those relating to the payment of insurance repairs supplies and gas which respondent disallowed petitioner argues that in determining the amount of petitioner's cash expenditures_for purposes of reconstructing her income the parties stipulated that petitioner spent dollar_figure on property improvements to the house and that therefore petitioner is entitled to an additional_depreciation deduction under sec_168 we do not agree with petitioner respondent allowed petitioner a depreciation deduction for the house that is dollar_figure greater than what she claimed on schedule e although the record does not disclose how this increase was computed in its entirety we do have in evidence ms dickerson's worksheet describing and itemizing the expenditures_for the total improvements of dollar_figure it appears that ms dickerson allocated these expenditures between the rental and personal_use portions of the house and allowed an additional_depreciation deduction for the portion of the year that petitioner owned the house petitioner has not shown that she is entitled to any additional_depreciation deduction for the house petitioner next argues that she is entitled to claim a deduction under sec_163 of dollar_figure for prepaid_interest points that she paid in connection with the purchase of her house and that she is entitled to amortize and deduct a portion of the remaining dollar_figure payment of points as a rental expense on schedule e respondent argues that petitioner is not entitled to claim any deductions for the dollar_figure payment of points in order to deduct points paid in the connection with debt acquired for the purchase of a principal_residence petitioner must elect to itemize her deductions sec_63 sec_163 and petitioner claimed the standard_deduction and did not itemize therefore she is not entitled to deduct dollar_figure of the points paid in connection with the debt acquired to purchase her principal_residence neither is petitioner entitled to deduct the full amount of the dollar_figure of points paid in connection with her purchase of residential_rental_property sec_461 provides that in the case of a cash_basis taxpayer the prepayment of interest is not deductible in the year of payment but must be capitalized and deducted ratably over the term of the loan to the extent that the interest_paid represents the cost of using the borrowed funds during each tax_year in the term petitioner has not presented any evidence as to the term of or rate of interest on the dollar_figure mortgage loan because petitioner has shown that she is entitled to a pro_rata amortization deduction for her payment of points but has not shown the amount of such deduction we are permitted to estimate the amount under the rule_of cohan v commissioner supra the court in cohan directed the board_of_tax_appeals to estimate expenses bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making we therefore conservatively estimate that the term of petitioner's mortgage loan i sec_30 years and allow her a deduction for the amortization of her payment of points attributable to the rental portion of the house in the amount of dollar_figure respondent's adjustment to petitioner's rent income is sustained to the extent of dollar_figure an amount equal to respondent's original adjustment of dollar_figure less the dollar_figure deduction allowed for the amortization of the payment of points c gain recognized on sale of truck sec_1001 provides that gain from the sale of property equals the excess of the amount_realized from the sale over the adjusted_basis in the property sold generally the adjusted_basis of property equals its original cost increased by expenditures properly chargeable to capital_account and the amount of the deduction is computed by dividing dollar_figure by then multiplying such product by because petitioner purchased the home and acquired the related indebtedness on date decreased by the greater of amounts allowed_or_allowable as depreciation_deductions sec_1011 sec_1012 sec_1016 and on date petitioner purchased a mack truck for dollar_figure and paid an additional dollar_figure for a warranty at some undisclosed time in petitioner sold the mack truck for dollar_figure petitioner computed her depreciation_deductions on the truck using a basis of dollar_figure the original cost of the truck increased by the dollar_figure warranty expenditure petitioner applied the straight-line method_of_depreciation over a 5-year recovery_period to the dollar_figure basis in order to claim depreciation_deductions of dollar_figure and dollar_figure for tax years and respectively respondent argues that for the taxable_year petitioner had gain of dollar_figure on the sale of her truck respondent calculated the gain by subtracting petitioner's adjusted_basis calculated to be dollar_figure dollar_figure original cost - dollar_figure of depreciation_deductions from the truck sale proceeds of dollar_figure petitioner claimed depreciation_deductions using a dollar_figure adjusted_basis rather than a dollar_figure adjusted_basis which yielded petitioner larger depreciation_deductions however in calculating her adjusted_basis for purposes of determining gain on the disposition of the property the full amounts of depreciation_deductions previously claimed by petitioner decrease her basis in the truck even though she was not entitled to deduct the full amounts see sec_1016 sec_1_1016-3 b income_tax regs petitioner argues only that her adjusted_basis in the truck should be increased by dollar_figure to reflect petitioner's payment for the truck warranty petitioner argues that petitioner's dollar_figure expenditure in resulted in the creation of an asset having a useful_life beyond the end of the taxable_year we understand petitioner to argue that the warranty expenditure is therefore properly chargeable to capital_account thereby increasing petitioner's adjusted_basis by dollar_figure thereby reducing the gain on the sale of the truck from dollar_figure to dollar_figure although this court has recognized that warranty expenditures that prolong the life or enhance the value of an asset are capital in nature see spritzer v commissioner tcmemo_1988_347 citing 403_us_345 and 73_tc_671 affd without published opinion 665_f2d_1053 9th cir petitioner has neither entered a copy of the warranty into evidence nor testified as to the term and conditions of the warranty under these circumstances petitioner has failed to prove that the warranty she purchased created an asset with a useful_life that is properly chargeable to capital_account accordingly we reject petitioner's argument that her adjusted_basis be increased by the dollar_figure warranty expenditure and sustain respondent's determination that petitioner recognized gain of dollar_figure on the sale of her truckdollar_figure d accuracy-related_penalty sec_6662 and b imposes a penalty equal to percent of the portion of an underpayment_of_tax that is attributable to negligence or disregard of rules or regulations negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws sec_6662 the regulations further define negligence to include failure by the taxpayer to exercise ordinary and reasonable care in the preparation of a tax_return the penalty does not apply to any portion of an underpayment for which the taxpayer had reasonable_cause and acted in good_faith sec_6664 in determining whether a taxpayer has acted with reasonable_cause and in good_faith all pertinent facts and circumstances are taken into account sec_1_6664-4 income_tax regs the burden of proving that the accuracy-related_penalty should not be imposed rests with the taxpayer rule a 503_us_79 we find that petitioner did not make a reasonable attempt to comply with the provisions of the internal revenue laws and that she did not act with reasonable_cause and good_faith petitioner the entire dollar_figure of recognized gain is subject_to the recapture provision of sec_1245 and is therefore treated as ordinary_income failed to report a substantial amount of her income on her return including income from her trucking business and income from the sale of her truck petitioner overstated her schedule e losses by adjusting her rental expenses in an unacceptable manner and failed to substantiate expenses that she deducted on her schedule edollar_figure petitioner's arguments against the imposition of the accuracy-related_penalty relate only to the portion of the underpayment attributable to her unreported schedule c income petitioner argues that she provided her tax preparer with receipts of her business_expenses and with the form_1099 received from cappy's she maintains that she was not negligent insofar as she maintained adequate books_and_records to substantiate all of her business_expenses properly we need not address whether petitioner maintained adequate books_and_records for purposes of the accuracy-related_penalty in light of petitioner's failure to report substantial amounts of her income grounds for sustaining respondent's determination that she is liable for the accuracy-related_penalty exist independently of finding negligence based on the lack of maintaining adequate books_and_records accordingly petitioner the accuracy-related_penalty was also imposed on the portion of the underpayment attributed to the disallowance of the fuel tax_credit under sec_34 claimed by petitioner petitioner has conceded that she is not entitled to the sec_34 credit is liable for the accuracy-related_penalty under sec_6662 on all portions of her underpayment_of_tax to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si plr-107338-99 date date legend company state date1 date2 date3 date4 a b c x dear this letter responds to a letter dated april submitted on behalf of company requesting relief under sec_1362 of the internal_revenue_code according to the information submitted company was incorporated on date1 in state at the time of incorporation a was company’s sole shareholder company filed an election to be treated as an s_corporation for its x taxable_year plr-107338-99 on date2 a transferred company stock to b an individual_retirement_account ira of c on date3 company’s accountants advised a that an ira is an ineligible s_corporation shareholder thus the transfer of stock to b terminated company’s s election on approximately date4 b distributed the company stock to c in a specific asset distribution company and each of its shareholders who were shareholders during the period of invalidity agree to make any adjustments consistent with the treatment of company as an s_corporation sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual revrul_92_73 1992_2_cb_224 holds that a_trust qualified as an individual_retirement_account under sec_408 is not a permitted shareholder of an s_corporation under sec_1361 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary after applying the relevant law to the facts submitted and the representations made we conclude that company’s s_corporation_election terminated on date2 when plr-107338-99 b an ineligible s_corporation shareholder acquired company stock we also conclude that the termination was inadvertent within the meaning of sec_1362 under the provisions of sec_1362 company will be treated as continuing to be an s_corporation during the period from date2 to date4 and thereafter provided that company’s s_corporation_election was not otherwise invalid and provided that the election was not otherwise terminated under sec_1362 additionally during the period from date2 to date4 c will be treated as the owner of the company stock held by b accordingly c must include his pro_rata share of the separately and nonseparately computed items of company as provided in sec_1366 if company or any of its shareholders fail to treat company as described above this ruling shall be null and void except as specifically set forth above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code specifically no opinion is expressed concerning whether company is otherwise qualified to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent under the power_of_attorney on file with this office this letter is being sent to company’s authorized representative a copy of this letter is being sent to company sincerely yours jeff erickson assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes