department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years all years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions the instructions in notice if you agree with our deletions you do not need to take any further action if you disagree with our proposed deletions you should follow in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 47632s if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil numbers legend b individual m state r company w organization x foreign city y foreign_country z foreign organization x date dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issue do you fail to meet the operational_test of sec_501 yes for the reasons described below facts you were incorporated pursuant to the non-profit corporation law in the state of m on date x your articles indicate you were formed in part to create form and establish a charitable_organization to benefit needy families in foreign_country y to promote further and support selected charitable activities through grants funding and financial assistance to various individuals institutions and organizations dedicated to the aid and assistance of needy families in the foreign_country of y to aid encourage stimulate foster and promote charitable and benevolent activities through grants bequests gifts or otherwise to individuals groups institutions and organizations dedicated to the benefit of needy families in the foreign_country y your bylaws state that you were formed to receive charitable_contributions and distribute them to needy individuals and schools to further jewish education they also state a regular meeting will be held each january t and july as a part of your application_for recognition of exemption you submitted a narrative description of activities which stated you would like to raise money from the directors and from their contacts to help a religious school in the foreign_country y which is also called foreign organization z meet its budgetary needs you further stated you will only dispense funds to that one school in the foreign_country of y you said you are limited to raising funds for the school in the foreign county of y the school in the foreign_country y is located in the city of x the money you raise is used to help the foreign organization cover the scholarships it gives out to those students who cannot afford all or part of the tuition necessary to balance the budget the narrative also indicates your directors frequent foreign county y several times per year and will supervise the use of the funds raised to ensure they will actually be used exclusively for school purposes you said at the present you do not have a written contract with foreign organization z you stated that you will require foreign organization z to submit financial data on a monthly basis your narrative continued by stating your directors have no relationship with foreign organization z other than the headmaster of foreign organization z had asked you to undertake this project you said your contributors are told the funds are going exclusively to foreign organization z but if the school is found to be lacking the funds already collected will then be used for another school located in the foreign_country of y after we contacted you regarding your application_for exemption you submitted a letter stating you would like for us to please disregard the old narrative you then submitted a new narrative the revised narrative stated there is an organization in the foreign_country of y that was formed years ago for the purpose of reprinting and editing the central jewish legal code you stated foreign organization z had handpicked a group of about fifteen rabbis who are experts in jewish law to research old manuscripts of the code in order to correct errors you stated your primary purpose is to provide grants to these rabbis to enable them to do their work you stated all of these activities take place in the foreign_country y and the american branch of this organization was formed for the purpose of helping to raise funds for this worthy project that is revolutionizing the study and practice of jewish law we asked why the purposes changed you said you have always been an organization that raises money to fund the research and publication of ancient jewish legal texts and that the officers relied on their previous accountant to prepare the old narrative and application which erroneously described their activities we asked for copies of the minutes from each of your board meetings you responded by saying the american branch of the organization has only the fundraising function all board meetings and operational decisions are made by the organization in the foreign_country of y we asked nine questions seeking details of your grant making program these questions included in part how you review and approve grant applications how the foreign organization certifies funds will be used for charitable purposes and if contributions to you by individuals are earmarked we also asked for you to explain in detail how you have full control of the donated funds and full discretion over their use you did not directly or specifically answer any of these questions you responded to all of these inquires by saying the u s organization you only gives grants to the foreign organization or directly to the individuals who are doing the research for the organization located in the foreign_country y you further stated all of the individuals that receive funds are located in foreign_country y your initial form_1023 was filed with our office in the last quarter of your second calendar_year of existence the financial data provided with your application showed proposed revenue for the first three years totaling less than dollar_figure upon our request you submitted a list of donors to your organization the list included over dollar_figure in donations from a private_foundation in your first year of existence this was excluded from the financial data you submitted with your form_1023 even though it had already been received by you the year before you submitted the application when we asked why these substantial donations were excluded you said these checks were sent directly to the foreign_country y and did not go through the us bank account we then asked you to submit actual financial data you provided data that showed you received almost dollar_figure in your first three years you submitted a copy of the single form_990 that you had filed the form_990 showed all of your expenditures went straight to foreign organization z further your form_990 also included a statement that the organization raises funds for an org in foreign_country y that is researching and editing the code of jewish law as well as obtaining and publishing never before printed commentaries you submitted copies of your bank statements during the processing of your application_for exemption the bank statements showed payments made to a domestic non-profit organization we asked about these payments and you said the chief editor came from the foreign_country of y to raise funds and the organization was short of funds to cover his expenses you said they borrowed money from domestic organization w and then reimbursed them per your bank statements you reimbursed the domestic organization w not the foreign organization z your bank statements included copies of four cancelled checks these checks were all written on the same day and were also cashed in foreign_country y on the same day they were written however you said that your checkbook is kept in the united_states the four checks totaled almost dollar_figure number that appears to have been stamped by the bank at the upper right hand corner the checks were written to four separate individuals they were each made payable to the first name e and surnames were not legible however the surnames did not appear to be the same each of the checks had the same six digit your bank statements also included many transfers to other accounts we asked you to provide a detailed explanation regarding the nature of these transfers and whether or not you had other bank or investment accounts you responded these transfers are reimbursements for fundraising expenses we asked for specific details regarding a large wire transfer you made including the recipient's name and purpose you responded the wire was sent to the foreign_country y to cover the checks that were returned the money was originally sent to the foreign_country y branch of the organization to fund operations the signatures included on your responses to requests for additional information were not legible we asked who was signing the responses and you said it was individual b you then said he was a volunteer officer and had been serving in that capacity since individual a was not included in the listing of your board members officers and directors on your initial form_1023 you indicated he lives in the united_states and he also writes all of the checks we asked how you ensure control is maintained over funds you send to the foreign_country y and for you to explain your procedures you stated you have online access to their accounts and that you periodically check and monitor the transactions to ensure that all monies sent are received and are properly distributed by the foreign organization z you also said the organization in the foreign_country y was formed over years ago you said they were raising money from us citizens without an official organization and without providing a tax exemption they decided to open an american non-profit in the us and previous donations were entered into the books for record keeping purposes a stamp was used rather than there being a handwritten name in the we requested a representative sample of your cancelled checks in one particular month four checks were made payable to check cashing company r located in the foreign_country y pay to the oder of line of the checks also the checks were all stamped again not handwritten on the same date the four checks totaled approximately dollar_figure you said these checks were a repayment of a loan that the organization in the foreign_country y took out in order to cover operating_expenses you provided no further details or documentation regarding these transactions or the loan during another month several large checks also cleared your account that were made payable to the foreign check cashing company r we asked why you were writing checks to a check cashing company you said when an american check is deposited into a bank in the foreign county y it takes about three weeks to clear and the exchange rate is not favorable you said the bank also charges high foreign check fees you said often times the money is needed immediately to fund the ongoing expenses of the organization you purport that using a money exchange service allows you to get immediate funds at more favorable exchange rates with lower fees law sec_501 of the internal_revenue_code code provides for the recognition of exemption of organizations that are organized and operated exclusively for charitable religious or educational_purposes where no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1 c -1 a of the regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities in not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for any of the purposes specified in sec_501 of the code unless it serves a public rather than a private interest sec_1_501_c_3_-1 of the regulations defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the lessening of the burdens of government revrul_56_304 1956_2_cb_306 states that an organization which otherwise meets the requirements for exemption from federal_income_tax are not precluded from making distributions of their funds to individuals provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized however organizations of this character which make such distributions should maintain adequate_records and case histories to show the name and address of each recipient of aid the amount distributed to each the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor in order that any or all distributions made to individuals can be substantiated upon request by the internal_revenue_service it can be shown that the gift is in fact to or for revrul_63_252 1963_2_cb_101 states that contributions to certain domestic charitable organizations are deductible if the use of the domestic organization and that the domestic organization is not serving as an agent for or channel for a foreign charitable_organization in reaching this conclusion the revenue_ruling states that it seems clear that the requirements of sec_170 of the code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible solely because in the course of transmittal to the foreign organization they came to rest momentarily in a qualifying domestic organization in such cases the domestic organization is only nominally the donee the real donee is the ultimate foreign recipient in each case the question to be decided is whether the amounts paid to the domestic organization are deductible under sec_170 of the code in pursuance of a plan to solicit funds in this country a foreign organization caused a domestic organization to be formed at the time of formation it was proposed that the domestic organization would conduct a fund-raising campaign pay the administrative expenses from the collected fund and remit any balance to the foreign organization certain persons in this country desirous of furthering a foreign organization's work formed a charitable_organization within the united_states the charter of the domestic organization provides that it will receive contributions and send them at convenient intervals to the foreign organization a foreign organization entered into an agreement with a domestic organization which provides that the domestic organization will conduct a fund-raising campaign on behalf of the foreign organization the domestic organization has previously received a ruling that contributions to it are deductible under sec_170 of the code in conducting the campaign the domestic organization represents to prospective contributors that the raised funds will go to the foreign organization a domestic organization conducts a variety of charitable activities in a foreign_country where its purposes can be furthered by granting funds to charitable groups organized in the foreign_country the domestic organization makes such grants for purposes which it has reviewed and approved the grants are paid from its general funds and although the organization solicits from the public no special fund is raised by a solicitation on behalf of particular foreign organizations a domestic organization which does charitable work in a foreign_country formed a subsidiary in that country to facilitate its operations there the foreign organization was formed for purposes of administrative convenience and the domestic organization controls every facet of its operations in the past the domestic organization solicited contributions for the specific purpose of carrying out its charitable activities in the foreign_country and it will continue to do so in the future however following the formation of the foreign_subsidiary the domestic organization will transmit funds it receives for its foreign charitable activities directly to that organization revrul_66_79 1966_1_cb_48 amplifies revrul_63_252 to provide that contributions to a domestic charity that are solicited for a specific project of a foreign charitable_organization are deductible under sec_170 of the code if the domestic charity has reviewed and approved the project as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contributions this conclusion is reached because the contributions received by the domestic charity are regarded as for_the_use_of the domestic organization and not the foreign organization receiving the grant from the domestic organization in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 71_tc_102 the court found that the organization’s officers received amounts of money in the form of grants these grants carried with them no legal_obligation to repay any interest or principal petitioner contended as it had during the administrative_proceeding before the irs that the grants were made in furtherance of a charitable purpose to assist the poor who were in need of food clothing shelter and medical attention however petitioner was unable to furnish any documented criteria which would demonstrate the selection process of a deserving recipient the reason for specific amounts given or the purpose of the grant the only documentation contained in the administrative record was a list of grants made during one of the three years in question which included the name of the recipient the amount of the grant and the reason for the grant which was specified as either unemployment moving_expenses scholarship or medical expense this information was insufficient in determining whether the grants were made in an objective and nondiscriminatory manner and whether the distribution of such grants was made in furtherance of an exempt_purpose disbursements or to keep adequate_records of each recipient can result in abuse accordingly it was found that the organization failed to establish that their disbursements constituted an activity in furtherance of an exempt_purpose the failure to develop criteria for grant in 73_tc_196 the petitioner’s only activities were some individual counseling and distribution of a few grants to needy individuals while its primary activity was investment of funds the directors borrowed money in its name but used some of it for automobiles and to pay off personal loans the petitioner's failure to keep adequate_records and its manner of operation made it impossible to trace the money completely but the court found it clear that money passed back and forth between petitioner and its director and his for-profit businesses the court held that petitioner had not shown it was operated exclusively for exempt purposes or that no part of its earnings inured to the benefit of its officer application of law you are not described in sec_501 of the code because you are not operated exclusively for charitable religious or educational_purposes where no part of your net_earnings inure to the benefit of private shareholders or individuals your articles of incorporation contain the appropriate language to show you meet the organizational_test however you do not meet the requirements of sec_1 c - a of the regulations because you do not meet the operational_test you do not meet the operational_test described in sec_1_501_c_3_-1 because you have not demonstrated that your assets are used exclusively for exempt purposes because of your lack of control and discretion over the funds sent to individuals and organization z in foreign_country y you cannot substantiate that your assets are used exclusively for exempt purposes therefore you do not meet the operational_test as required by revrul_56_304 you do not keep adequate_records to substantiate that the grants and contributions you make further a c purpose the evidence shows you have sent substantial funds in the form of checks made out to a check cashing company in foreign_country y the cash is then distributed to individuals you do not track the distributed cash to individuals you have no records to show who actually received the final distributions or what the funds were used for therefore it is clear that you do not keep adequate_records as required by revrul_56_304 you are similar to the organization described in example of revrul_63_252 you have little or no control_over who receives the cash in the foreign_country y or how much they receive you are according to your own statement a fundraising arm in the united_states whose purpose is to fund individuals editing ancient texts on behalf of the foreign organization z in the foreign_country of y at the time of your formation it was proposed that you would conduct a fundraising campaign pay the administrative expenses from the collected funds and remit any balance to the foreign organization this further shows that you have a lack of discretion and control_over the funds you raise you simply send the funds to organization z who distributes it as they wish in revrul_63_252 like example in contradiction to revrul_66_79 the funds you raise are not used for the purposes of the domestic organization you but rather for the purposes of the foreign organization receiving the grant from the domestic organization you even your name suggests a purpose to assist a specifically named foreign organization on many occasions you said your purpose is to raise funds and send them to foreign organization z in fact you stated the american branch you of this organization was formed for the purpose of helping to raise funds for this worthy project you stated you are the u s fundraising arm and that your only purpose is to collect funds and distribute them to foreign organization z you have not met the requirements described in revrul_66_79 because you have not shown that you review projects and approve them as being in furtherance of your own exempt purposes furthermore you have not shown that you have control and discretion as to the use of the contributions when we asked for board meeting minutes you replied you only conduct fundraising activities and that foreign organization z makes all of the operational decisions although your bylaws provide information regarding your operational methods and mandate two meetings per year you have had no board meetings your bylaws do not appear to be an accurate depiction of your operational functions these facts further show that you do not have proper control and discretion as described in rev ruls and and therefore cannot substantiate that your assets are used exclusively for exempt purposes you have submitted copies of cancelled checks written for substantial amounts that were made payable to a check cashing company you also have written large checks to unidentified individuals in the foreign_country of y cashed these checks or what the cash was then used for you have no follow up procedures or documentation to demonstrate your maintenance or control_over the funds you have failed to compile or retain such records when we asked for financial data you inadvertently sent us data regarding grants received by the foreign organization you appear to have difficulty distinguishing between your records and the records of the foreign organization again these facts suggest that you do not exercise the proper control and discretion of assets to ensure their appropriate use therefore it is unclear who specifically you do not meet the operational_test as required by sec_1_501_c_3_-1 of the regulations because the end beneficiaries of your grants are individuals and you are not involved in the selection process nor have a method of following up you have also not proven that your assets are used exclusively for public and not private purposes as is required by sec_1 c -1 d ii of the regulations you have delegated much of your authority responsibility and operations to the foreign organization z you allow z to make the determination regarding who is eligible for payments as in the above cited case of church in boston v commissioner your failure to develop criteria for grant disbursements or to keep adequate_records for each recipient can result in abuse like the organization in the better business bureau case you have a substantial non- exempt activity that precludes exemption neither is an organization operated exclusively for one or more exempt purposes if its net_earnings inure to the benefit of private shareholders or individuals nor if its activities further private rather than public interests as large checks continue to be written to both check cashing companies and to other unknown individuals in the foreign_country y we are unable to determine that private interests aren’t being served you allow individuals to cash large checks with no substantiating documentation regarding the distributions as in the case of western catholic church v commissioner because of your failure to keep adequate_records and your manner of operation we are not able to conclude that the money you distribute is spent exclusively for exempt purposes and is not inuring to the benefit private individuals applicant’s position you stated that you ensure control is maintained over funds sent overseas because you have online access to their bank accounts you say each rabbi gets paid_by the hour for their work and their payment is based upon qualifications and knowledge you further said checks are written to a check exchange company in foreign_country y because it takes about three weeks for an american check to clear the bank and the exchange rate is not favorable you stated the money is often needed by the foreign organization z immediately to fund their ongoing operations and that writing the check to the foreign check casher allows the foreign organization z to get funds quicker and at a more favorable exchange rate you asserted that after the checks are cashed by an unspecified individual in foreign_country y the funds are then deposited in the foreign organization z's bank account you later submitted a statement saying you no longer cash any checks overseas and all money sent to foreign_country y is being wired into a bank account therefore all money sent is traceable you also said some of the activities are being conducted in the united_states now service’s response to application position although you have access to foreign organization z’s bank account you do not have control and discretion over the funds that you send overseas you send checks to foreign_country y which are stamped not hand-written payable to a foreign check cashing company r these checks are often for large amounts you say the cash is then taken to the bank of the foreign organization z for deposit you do not have any board meeting minutes or reports regarding the usage of these funds you did not indicate who specifically cashes the checks and how you ensure that the funds are all deposited and used for exempt functions also the fact you have direct access to the foreign organization’s bank accounts only accentuates the notion that you and the foreign organization are controlled by the same individuals you have provided no written documentation to substantiate claims that you have changed the way you disburse funds although you now say you wire money to foreign_country y instead of writing checks this fact in and of itself does not correct any of the issues regarding control and discretion of your funds further conducting some activities in the united_states also doesn’t resolve your failure of the operational_test due to the lack of control and discretion of your funds conclusion based on the above facts and law you do not have adequate control and discretion over the use of the funds you distribute without the proper control and discretion you are unable to ensure the funds distributed to individuals in foreign_country y are used exclusively for exempt purposes and do not inure to the benefit of private individuals therefore you do not meet the operational_test accordingly you are not exempt under sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if we do not hear from you within days we will issue a final adverse if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations p o box room cincinnati oh internal_revenue_service eo determinations main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication


internal_revenue_service number release date index number ------------------------------ ---------------------------------------------- -------------------------------------- ---------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-134414-05 date date --------------------------------------- --------------------------------------- --------------------- ------------------------- legend legend company --------------------- -------------------------------------------------- lp -------------------------------------------------- a b c -------------------------------------------------- d -------------------------------------------------- property -------------------------------------------------------------- x -------------------------------------------------- date a b c ------- ------ ---- ---- ---------------------------------------- -------------------------------------------------- ------------------------------------------------------- plr-134414-05 dear --------------------------- this letter responds to a letter dated date and subsequent correspondence requesting on behalf of company and lp a ruling that an undivided fractional interest in property is not an interest in a business_entity under ' a of the procedure and administration regulations for purposes of qualification of the undivided fractional interest as eligible replacement_property under ' a of the internal_revenue_code as requested copies of this letter are being sent to your authorized representatives facts according to the information submitted company and lp co-owners are unrelated business entities that have held title to property as tenants in common and operated property in accordance with a tenants-in-common agreement since year company and lp entered into a contract with c an affiliate of company to manage property for a market-rate fee equal to a of certain gross_receipts from property and with d another affiliate of company to negotiate and modify leases with tenants subject_to co-owners’ approval the agreement with c must be renewed annually by consent of both company and lp the agreement with d is terminable by either party at any time and market-rate lease commissions paid_by tenants are fully passed through to a broker who works closely with d but is not an employee of or related to d moreover company and lp have made only customary repairs to property have not expanded or enlarged property and have not sold any portion of property and reinvested the proceeds property is leased to approximately c lessees one of whom is x an affiliate of lp x leases approximately b of property and conducts a business that is unrelated to management and leasing of property all other lessees are unrelated to company and lp the rent payable under each lease is not dependent on the profits of any lessee the lessees are required to repair maintain and insure their premises and pay all utilities and taxes related to premises c collects rents offsets expenses and distributes the proceeds pro_rata to company and lp negotiates and modifies leases subject_to approval by company and lp company and lp through c perform only customary services as defined in revrul_75_374 1975_2_cb_261 in operating property the tenants-in-common agreement between company and lp and other agreements provide that company and lp each have a right to of all income and an obligation to pay of all expenses under the terms of the agreements each of the co-owners retains the right to approve the hiring of any manager the sale or other plr-134414-05 disposition of the property any leases of all or a portion of property the creation or modification of any blanket lien the hiring of a property manager resolving any claims lawsuits or demands of any type or nature whatsoever potentially affecting property and encumbering or pledging as collateral an interest in property if either co-owner advances funds necessary to pay expenses associated with the property the other co- owner must repay such advance within days of the date the expense obligation or liability was paid each owner has the right to sell an interest in property but if the sale would result in a change in control of property a specified buy-sell procedure must be followed a change in control is deemed to occur if any person or entity other than a or descendants as to company or b or descendants as to lp becomes the owner of securities or of membership interests in a co-owner representing of more of the combined voting power of the co-owner’s then outstanding ownership interests the buy-sell procedure is as follows the co-owner desiring to transfer or sell the initiating co-owner must give the other co-owner the responding co-owner a pre-offer notice that includes an initial due diligence disclosure including but not limited to the most recent physical inspection report of the physical condition of the property prepared by a professional building inspector not affiliated with the initiating co-owner the most recently prepared environment report on the property a current rent roll and a current profit and loss statement for its interest in the property and shall provide written notice of the initiating co-owner’s intent to sell its interest in property a pre-offer notice for a period of days the pre-offer period the parties are to negotiate in good_faith the terms of the sale or transfer and to obtain certain other inspections of the physical condition of the property if the co-owners do not reach agreement during the pre-offer period the initiating co-owner may serve a formal offering notice on responding co- owner at a stated dollar amount the purchase_price shall be the stated dollar amount less that portion corresponding to the seller’s percentage interest in property of the principal balance and accrued interest outstanding on the closing date of any loan secured_by property which is assumed by the purchaser the responding co-owner ha sec_90 days to elect to sell its interest or to purchase the offering co-owner’s interest in property for the purchase_price in the offering notice if the responding co-owner does not exercise either option within the option period then the responding co-owner is conclusively deemed to have elected to sell his interest in the property in accordance with the terms of the offering notice closing will occur days after the date of the offering notice since company and lp own a number of properties together the first time a pre-offer notice is submitted the day period for negotiating is extended to days in addition company and lp have agreed to limit to the number of properties that can be subject_to a pre-offer notice within any day period moreover certain events are stipulated to extend the time periods by a specified period plr-134414-05 the co-owners retain the right to partition the property but agree to invoke the buy-sell procedures described above prior to exercising the right moreover the co- owners agree that the property may be partitioned through arbitration property is subject_to a loan extended by an unrelated lender that is guaranteed by certain affiliates of company and lp including x if any co-owner or affiliate pays more than the co- owner’ sec_50 share of the amount due under the loan agreement pursuant to a guarantee or otherwise that co-owner has a right to be indemnified by the other co- owner for the amount in excess of a share of the expense law analysis sec_301_7701-1 provides that whether an entity is an entity separate from its owners for federal tax purposes is a matter of federal_law and does not depend on whether the entity is recognized as an entity under local law sec_301 a provides that a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom but the mere co- ownership of property that is maintained kept in repair and rented and leased does not constitute a separate_entity for federal tax purposes sec_301_7701-2 provides that a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under ' that is not properly classified as a_trust under ' or otherwise subject_to special treatment under the code a business_entity with two or more members is classified for federal tax purposes as either a corporation or a partnership sec_761 provides that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and that is not a corporation or a_trust or estate sec_1_761-1 of the income_tax regulations provides that the term apartnership means a partnership as determined under and in revrul_75_374 1975_2_cb_261 the service concludes that a two-person co-ownership of an apartment building that was rented to tenants did not constitute a partnership for federal tax purposes in the ruling the co-owners employed an agent to manage the apartments on their behalf the agent collected rents paid property taxes insurance premiums repair and maintenance_expenses and provided the tenants with customary services such as heat air conditioning trash removal unattended parking plr-134414-05 and maintenance of public areas the ruling concludes that the agent s activities in providing customary services to the tenants although imputed to the co-owners were not sufficiently extensive to cause the co-ownership to be characterized as a partnership in addition in revrul_79_77 1979_1_cb_448 the service concluded that the transfer of a commercial office building subject_to a net_lease to a_trust having three individuals as beneficiaries was a_trust for federal tax purposes and not a business_entity in revproc_2002_22 2002_1_cb_733 the service provided certain conditions under which it would consider a request for a ruling that an undivided fractional interest in rental real_property is not an interest in a business_entity for federal tax purposes the conditions relate to tenancy_in_common ownership of the property number of co- owners no treatment of the co-ownership as an entity co-ownership agreements voting by co-owners restrictions on alienation sharing of proceeds and liabilities upon sale of the property proportionate sharing of profits and losses proportionate sharing of debt options no business activities by the co-owners management and brokerage agreements leasing agreements loan agreements and payments to sponsors in addition the revenue_procedure sets forth a list of documents supplementary materials and general information required for a ruling company and lp’s co-ownership arrangement satisfies all of the conditions set forth in revproc_2002_22 specifically regarding voting ' dollar_figure of revproc_2002_22 provides in part that the co-owners must retain the right to approve the hiring of any manager the sale_or_other_disposition of the property any leases of a portion or all of the property or the creation or modification of a blanket lien any sale lease or re- lease of a portion or all of the property any negotiation or renegotiation of indebtedness secured_by a blanket lien the hiring of any manager or the negotiation of any management_contract or any extension or renewal of such contract must be by unanimous approval of the co-owners relating to hiring a manager ' dollar_figure of revproc_2002_22 provides in part that the co-owners may enter into management or brokerage agreements which must be renewable no less frequently than annually with an agent who may be the sponsor or a co-owner or any person related to the sponsor or a co-owner but who may not be a lessee company s co-tenancy agreement provides that any sale lease or re-lease of a portion or all the property any negotiation or renegotiation of indebtedness secured_by a blanket lien and the hiring of a manager requires the approval of both co-owners c is required to seek the approval of both co-owners for any matter outside day-to-day operational activities specifically regarding business activities ' dollar_figure of revproc_2002_22 provides that the co-owners activities must be limited to those customarily performed in plr-134414-05 connection with the maintenance and repair of rental real_property customary activities see revrul_75_374 activities will be treated as customary activities for this purpose if the activities would not prevent an amount received by an organization described in ' a from qualifying as rent under ' b a and the regulations thereunder in determining the co-owners activities all activities of the co-owners their agents and any persons related to the co-owners with respect to the property will be taken into account whether or not those activities are performed by the co-owners in their capacities as co-owners for example if the sponsor or a lessee is a co-owner then all of the activities of the sponsor or lessee or any person related to the sponsor or lessee with respect to the property will be taken into account in determining whether the co-owners activities are customary activities however activities of a co-owner or a related_person with respect to the property other than in the co-owner s capacity as a co-owner will not be taken into account if the co- owner owns an undivided_interest in the property for less than months under these facts the co-owners’ activities with respect to property conducted directly and through c and d are limited to customary activities co-owner must offer the co-ownership interest for sale to the other co-owner s the sponsor or lessee at fair_market_value determined as of the time the partition right is exercised section dollar_figure provides that while each co-owner must have the right to transfer partition and encumber the co-owner’s interest in the property without the agreement or approval of any person restrictions on the right to transfer partition or encumber interests in the property that are required by a lender and that are consistent with customary commercial lending practices are not prohibited in this situation in which there are only two interests in property the restrictions on the co-owners’ right to engage in activities that could diminish significantly the value of the other interest in property such as pledging the interest in the property as collateral or otherwise encumbering the interest without the approval of the other co-owner is consistent with the requirement that each co-owner have the right to approve an arrangement that will create a lien on the property moreover the buy-sell procedure in this situation in which the co-owners are unrelated and are dealing at arms’ length is consistent with establishing a right to acquire of property at fair_market_value section dollar_figure of revproc_2002_22 provides that the co-owners may agree that a conclusion based on the facts submitted and representations made we conclude that an undivided fractional interest in the property will not constitute an interest in a business_entity under ' a for purposes of qualification of the undivided fractional interest as eligible replacement_property under ' a except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion concerning whether an plr-134414-05 undivided fractional interest in the property otherwise qualifies as eligible replacement_property under ' a for federal tax purposes pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to company s authorized representative this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s jeanne m sullivan senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for ' purposes


t c summary opinion united_states tax_court sarah marquez petitioner v commissioner of internal revenue respondent docket no 12917-05s filed date sarah marquez pro_se stephen r doroghazi for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioner is entitled to relief from joint_and_several_liability under sec_6015 for background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when the petition was filed petitioner resided in florida petitioner married neil peiman mr peiman in date the marriage produced one child during their marriage they operated or held interests in several entities 4g trading inc 4g trading a day trading company which was operated by mr peiman and another associate star millennium group inc star millennium a real_estate_holding_company of which petitioner and mr peiman served as officers and directors nls enterprises inc nls a holding_company for investments of which petitioner and mr peiman served as officers and iag a regional internet service provider owned by mr peiman petitioner was also actively involved in 1petitioner’s former husband neil peiman was notified that petitioner was seeking relief from joint_and_several_liability and that he had a right to intervene in the matter he has not exercised his right to intervene the accounting functions of iag nls and star millennium but she was not actively involved in the accounting functions of 4g trading in date mr peiman sold iag for cash and stock of one main petitioner was not an owner of officer of or otherwise involved with one main before or after the takeover of iag the sale proceeds mr peiman received went into an account by the name of bt alex brown petitioner did not have access to nor was she a signatory on the bt alex brown account she did not know how much money mr peiman held in the bt alex brown account whenever petitioner told mr peiman that she needed money he would just write a check out of the bt alex brown account and deposit it into their joint account she used the joint account to pay their household expenses in date petitioner and mr peiman separated they filed a joint form_1040 u s individual_income_tax_return for in date pursuant to extensions a certified_public_accountant c p a prepared the form_1040 they reported petitioner’s wages of dollar_figure interest_income of dollar_figure ordinary dividends of dollar_figure a loss of dollar_figure from their three s_corporations 4g trading nls and star millennium and a capital_gain of dollar_figure the capital_gain consisted of variou sec_2petitioner provided the source information for the s corporations’ returns to their c p a gains and losses from sales of stock including mr peiman’s liquidation of the one main stock he received from the iag takeover as the restrictions came off and dollar_figure in cash proceeds from the takeover of iag that mr peiman received in and reported as income under the installment_method the form_1040 reported a dollar_figure tax_liability and total payments of dollar_figure for a dollar_figure balance due sometime in mr peiman moved to costa rica when petitioner traveled to meet mr peiman in costa rica he greeted her with divorce papers the minute she stepped off the plane although petitioner and mr peiman divorced in date they filed a joint_return for which was prepared by their c p a the c p a also prepared a form 1040x amended u s individual_income_tax_return for that petitioner picked up from the c p a the form 1040x made certain revisions to petitioner and mr peiman’s adjusted_gross_income itemized_deductions taxable_income and their tax_liability on account of a net_operating_loss_carryback for in addition the form 1040x reported a tax_liability of dollar_figure and total payments dollar_figure for a dollar_figure balance due 3the payments consist of withholdings of dollar_figure and an amount_paid with request for extension to file of dollar_figure 4the payments consist of withholdings of dollar_figure an amount_paid with request for extension to file of dollar_figure and an amount of tax paid with original return plus additional tax paid continued in date the internal_revenue_service irs sent petitioner and mr peiman notices of intent to levy but the notices were returned as refused or unclaimed in date petitioner requested relief from joint_and_several_liability under sec_6015 by filing a form_8857 request for innocent spouse relief and separation of liability and equitable relief and a form questionnaire for requesting spouse discussed infra in date she filed a form statement of disagreement in her form she asserts that she did not have income in and the tax_liability derived from the sale of mr peiman’s business she also claims that she did not have access to irs notices and according to petitioner she receives no financial support from mr peiman and is completely penniless and without assets the irs issued a final notice to petitioner in date the irs denied petitioner’s request for relief from joint_and_several_liability the irs determined that she had knowledge of the liability and did not establish a belief that the tax would be paid within a reasonable_time according to the irs continued after it was filed of dollar_figure 5the irs also sent petitioner and mr peiman notices of intent to levy in date but the notices were returned as refused or unclaimed 6the irs’s preliminary determination was not submitted to the court as part of the record petitioner failed to submit her divorce decree or indicate how her bills were being paid thereafter petitioner filed a timely petition with the court in her petition she asserts that she had no income for and did not have access to financial information since she and mr peiman were separated she also claims that she had no knowledge of whether the tax would be paid according to petitioner she receives no financial support from mr peiman and imposing this debt on her would cause her great economic hardship as of date petitioner and mr peiman’s account balance was dollar_figure discussion i joint_and_several_liability and sec_6015 relief sec_6013 provides that if a joint_return is filed the tax is computed on the taxpayers’ aggregate income and liability for the resulting tax is joint_and_several see also sec_1_6013-4 income_tax regs but the irs may relieve a taxpayer from joint_and_several_liability under sec_6015 if taking into account all the facts and circumstances it is inequitable to hold the taxpayer liable for any unpaid tax or deficiency and the taxpayer does not qualify for relief under sec_6015 or c except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof see rule a 119_tc_306 affd 101_fedappx_34 6th cir the commissioner has issued revenue procedures to guide irs employees in determining whether a requesting spouse is entitled to relief from joint_and_several_liability see revproc_2003_61 2003_2_cb_296 modifying and superseding revproc_2000_15 2000_1_cb_447 revproc_2003_61 supra lists the factors that irs employees should consider and the court also uses the factors when reviewing the irs’s denial of relief see 120_tc_137 ii revproc_2003_61 sec_4 seven threshold conditions for relief revproc_2003_61 sec_4 c b pincite begins with a list of seven threshold conditions that a taxpayer must satisfy in order to qualify for equitable relief the court will not recite them respondent concedes that petitioner satisfies the threshold requirements iii revproc_2003_61 sec_4 circumstances ordinarily allowing for relief where the requesting spouse satisfies the threshold conditions of revproc_2003_61 sec_4 then revproc_2003_61 sec_4 c b pincite sets forth the circumstances in which the irs will ordinarily grant relief under sec_6015 for an underpayment of a properly reported liability to qualify for relief under revproc_2003_61 sec_4 the requesting spouse must no longer be married to be legally_separated from or have not been a member of the same household as the nonrequesting spouse at any time during the 12-month_period ending on the date of the request for relief have had no knowledge or reason to know when the return was signed that the nonrequesting spouse would not pay the tax_liability and suffer economic hardship if relief is not granted petitioner was divorced from mr peiman when she requested relief the first requirement is satisfied in the case of a reported but unpaid liability the relevant knowledge is whether the taxpayer knew or had reason to know when the return was signed that the tax would not be paid washington v commissioner supra pincite feldman v commissioner tcmemo_2003_201 affd 152_fedappx_622 9th cir the general_rule for unpaid liabilities is that the requesting spouse must establish that when the requesting spouse signed the return the requesting spouse had no knowledge or reason to know that the tax reported on the return would not be paid and it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the tax shown due morello v commissioner tcmemo_2004_181 ogonoski v commissioner tcmemo_2004_52 collier v commissioner tcmemo_2002_144 in petitioner’s form she asserts that she was not involved in the preparation of the form sec_1040 and sec_1040x because a c p a prepared them and she did not review the form sec_1040 and sec_1040x because they were too complicated she also claims that she did not assist mr peiman with his business and she had only minor business experience she also claims that she knew a balance was due and just assumed the tax would be paid and she did not know how much money mr peiman had in his bt alex brown account or what funds were available to pay the tax she also did not know what efforts she or mr peiman made to pay the tax after the returns were filed she adds that she knew that they were having financial problems at the time the return was filed due to a child custody fight with mr peiman’s ex-spouse according to petitioner she had full access to a joint account from which she wrote checks to pay their household expenses but she did not review the monthly bank statements balance the checkbook or open their household mail finally she claims that mr peiman held a separate_account with respect to the takeover of iag to which she did not have access and from which he transferred funds into their joint account at trial petitioner testified that she did not review the form_1040 and she was not able to look at the taxes and figure out what all of it was she also testified that she went with mr peiman to the post office to mail the form_1040 but she just assumed that mr peiman had enclosed a payment for their tax_liability because he said he did generally it is permissible to consider the complexity of the nonrequesting spouse’s financial or business affairs in determining whether the requesting spouse knew or had reason to know of the underpayment compare 509_f2d_162 5th cir complexity is a permissible consideration with 57_tc_732 lack of knowledge predicated on mere ignorance of the tax consequences is not a defense where the facts are within the requesting spouse’s possession or reasonably within reach and beatty v commissioner tcmemo_2007_167 taxpayer would not have understood the reported information that was attributable to her husband and his business of which she had no knowledge although petitioner only has a high school education she was the president and registered agent of nls and an officer and director of star millennium during in addition mr peiman delegated most of that stuff eg bookkeeping accounting and bank reconciliation of these entities to petitioner their c p a would ask petitioner for information about cash account balances bank reconciliation check coding reconciliation of accounts_receivable balances and etc while he prepared the various income_tax returns and schedules of nls and star millennium she was also employed by iag and was actively involved in its accounting functions the record therefore supports an inference that petitioner was quite sophisticated with respect to the issues pertaining to her and mr peiman’s various tax matters the court therefore does not give much weight to petitioner’s claims that she did not review their form sec_1040 and sec_1040x because they were too complex and that she did not have much business experience the court finds that the complexity of petitioner and mr peiman’s form sec_1040 and sec_1040x and her purported lack of business experience do not excuse petitioner’s failure to exercise her duty_of inquiry petitioner was also actively involved in the household’s finances she had full access to a joint account from which she wrote checks to pay their household expenses and she monitored the account to know what was in there and when money was needed notwithstanding her claims that she did not review their monthly bank statements balance their checkbook or open their household mail arguably mr peiman might have been evasive or deceitful because he told petitioner that he had enclosed a payment for their tax_liability with their form_1040 but did not and he held money in the bt alex brown account the amount of which petitioner had no knowledge compare 118_tc_106 relief unavailable where requesting spouse did not establish that the requesting spouse concealed or deceived her concerning their financial affairs and she had access to financial files affd 353_f3d_1181 10th cir with albin v commissioner tcmemo_2004_230 and cases cited therein but mr peiman was not otherwise evasive or deceitful about their business or personal affairs or about the fact that their form sec_1040 and sec_1040x showed a balance due indeed petitioner was quite aware of these issues yet she would have the court believe that she placed blind faith in and deferred to mr peiman to pay the tax_liability without any inquiry into its payment inquiry by petitioner was essential in view of her admissions that she knew their form sec_1040 and sec_1040x showed a balance due did not know how much money was in the bt alex brown account did not know what money was available to pay their tax_liability and knew they were having financial difficulties on account of mr peiman’s child custody issues see eg stolkin v commissioner tcmemo_2008_211 the court has consistently found that a requesting spouse’s knowledge of their financial difficulties deprives the requesting spouse of reason to believe that the nonrequesting spouse will pay the tax_liability moreover the record supports an inference that petitioner might have been aware that mr peiman had a habit or practice of skirting some of his financial responsibilities indeed at trial she asked their c p a whether he was aware that mr peiman had tax issues in the past mr peiman had a payment plan in the 90’s with the irs nls was created to shield assets from mr peiman’s ex-spouse and mr peiman moved to costa rica to hide or shield assets from mr peiman’s ex-spouse apparently red flags were flying but petitioner failed to heed the warnings and abdicated her duty_of inquiry upon the basis of the foregoing the court finds that petitioner has not proven that she did not know or have reason to know when she signed their form sec_1040 and sec_1040x that the balance shown as due would not be paid petitioner is not entitled to relief under revproc_2003_61 sec_4 and the court need not discuss the third requirement iv revproc_2003_61 sec_4 other factors where the requesting spouse fails to qualify for relief under revproc_2003_61 sec_4 the irs may nevertheless grant relief under revproc_2003_61 sec_4 c b pincite the court’s analysis with respect to the nonexhaustive list of factors contained in revproc_2003_61 sec dollar_figure is described below a marital status the irs will take into consideration whether the requesting spouse is divorced or separated from the nonrequesting spouse revproc_2003_61 sec_4 a i c b pincite petitioner was divorced from mr peiman when she filed her request this factor weighs in favor of relief see mcknight v commissioner tcmemo_2006_155 divorce weighs in favor of relief under rev_proc cf butner v commissioner tcmemo_2007_136 same under rev_proc b economic hardship the irs will take into consideration whether the requesting spouse will suffer economic hardship if relief is not granted revproc_2003_61 sec_4 a ii c b pincite generally economic hardship exists if collection of the tax_liability will cause the taxpayer to be unable to pay reasonable basic living_expenses butner v commissioner supra in determining a reasonable amount for basic living_expenses the court considers among other things the taxpayer’s age employment status and history ability to earn and number of dependents an amount reasonably necessary for food clothing housing medical_expenses transportation current tax_payments and expenses necessary to the taxpayer’s production_of_income the cost of living in the taxpayer’s geographic area the amount of property available to satisfy the taxpayer’s expenses any extraordinary circumstances eg special education expenses a medical catastrophe or a natural disaster and any other factor bearing on economic hardship sec_301_6343-1 proced admin regs the irs has issued guidelines for allowable expenses necessary expenses are those that meet the necessary expense_test ie ‘they must provide for a taxpayer’s and his or her family’s health and welfare and or the production of income’ and they must be reasonable schulman v commissioner tcmemo_2002_129 n there are three types of necessary expenses those based on national standards eg food housekeeping supplies clothing and personal care products and services those based on local standards eg housing utilities and transportation and other expenses which are not based on national or local standards id except as otherwise noted petitioner has not substantiated her basic living_expenses eg by providing receipts or statements accordingly the court will use the following amounts in its analysis of petitioner’s claim of economic hardship 7the guidelines are published on the irs’s web site at http www irs gov individuals article id html last visited date the amount listed as the national or local standard is effective as of date expenditure amount allowed housing utilities auto food housekeeping supplies apparel services personal care products services miscellaneous total 1dollar_figure big_number 1based on the local standard for a two-person family 2petitioner’s actual payment of dollar_figure per month plus the local operating standard of dollar_figure per month for a single_taxpayer with one car although petitioner’s credit report shows that she has another automobile lease payment of dollar_figure per month she has not proven that the second automobile is a necessary expense 3based on the national standard for a two-person family petitioner claims unsubstantiated wages of dollar_figure per month on her form thus it appears that imposing the tax_liability on petitioner would cause her an economic hardship since her allowable monthly expenses exceed her wages by dollar_figure additionally her credit report shows that she is indebted to the extent of dollar_figure but she has not substantiated her wages or proven the value of her assets that could be used to satisfy her liability such as the equity in her condo that she left to her stepdaughter the value of her interests in her corporations if any or the value of any claims she might have against mr peiman for alimony or child_support further she supports only one child is in her midthirties and is gainfully_employed as a branch manager at a bank making dollar_figure per year the court therefore finds that petitioner has not proven that she will suffer economic hardship if relief is not granted see monsour v commissioner tcmemo_2004_190 requesting spouse must prove that the expenses qualify and that they are reasonable this factor weighs against granting relief see banderas v commissioner tcmemo_2007_129 lack of economic hardship weighs against relief under rev_proc cf butner v commissioner supra same under rev_proc c knowledge or reason to know the irs will consider whether the requesting spouse did not know or had no reason to know that the nonrequesting spouse would not pay the liability revproc_2003_61 sec_4 a iii a c b pincite petitioner has failed to establish that she did not know or have reason to know when the form sec_1040 and sec_1040x were filed that the tax_liability would not be paid see supra pp this factor weighs against granting relief see beatty v commissioner tcmemo_2007_167 knowledge or reason to know weighs against relief under rev_proc cf levy v commissioner tcmemo_2005_92 same under rev_proc 8the court also notes that petitioner took her child to china for a vacation in despite her claim that imposing the tax_liability on her would cause her to suffer economic hardship d nonrequesting spouse’s legal_obligation the irs will consider whether the nonrequesting spouse has a legal_obligation to pay the outstanding tax_liability pursuant to a divorce decree or agreement revproc_2003_61 sec_4 a iv c b pincite there is no evidence in the record of a divorce decree or agreement showing that the unpaid tax_liability was the legal_obligation of mr peiman therefore this factor is neutral see magee v commissioner tcmemo_2005_263 applying rev_proc cf butner v commissioner tcmemo_2007_136 applying rev_proc e significant benefit the irs will consider whether the requesting spouse received any significant benefit beyond normal support as a result of the unpaid tax_liability revproc_2003_61 sec_4 a v c b pincite there is nothing indicating that petitioner received any significant benefit from her and mr peiman’s unpaid tax_liability therefore this factor weighs in favor of relief see magee v commissioner supra lack of significant benefit weighs in favor of relief under rev_proc cf butner v commissioner supra lack of significant benefit weighed in favor of relief under former sec_6013 notwithstanding that revproc_2000_15 states that it is neutral f compliance with federal tax laws the irs will take into consideration whether the requesting spouse has made a good_faith effort to comply with the federal_income_tax laws in succeeding years revproc_2003_61 sec_4 a vi c b pincite respondent agrees that petitioner has complied with the federal_income_tax laws this factor weighs in favor of relief see fox v commissioner tcmemo_2006_22 noncompliance weighs against relief under rev_proc cf butner v commissioner supra same under rev_proc g abuse the irs will consider whether the nonrequesting spouse abused the requesting spouse revproc_2003_61 sec_4 b i c b pincite the presence of abuse is a factor favoring relief and a history of abuse may mitigate the requesting spouse’s knowledge or reason to know id in both forms and petitioner claimed that she was not abused by mr peiman but in petitioner’s pretrial memorandum she claimed that she was abused by mr peiman in that when mr peiman saw that he was going to lose her he trapped her she could not leave because she would be alienated from her finances and knowledge of their assets and when she still wanted to leave mr peiman tricked her into traveling to costa rica for the purpose of divorcing her and leaving her with nothing at trial she testified that she was not physically abused but there was abuse in the marriage to the extent that she could not leave because she would be alienated from their finances and knowledge of their assets the court is skeptical that petitioner’s purported abuse falls within the definition of or rises to the level of abuse contemplated by the federal_income_tax laws see nihiser v commissioner tcmemo_2008_135 for an extensive discussion of the abuse factor the court however need not decide the issue because the court accords little weight to petitioner’s subsequent inconsistent statements about her purported abuse see sundel v commissioner tcmemo_1998_78 and cases cited therein affd without published opinion 201_f3d_428 1st cir mcgirl v commissioner tcmemo_1996_313 affd without published opinion 131_f3d_143 8th cir therefore this factor is neutral see magee v commissioner supra lack of abuse is a neutral factor under rev_proc cf butner v commissioner supra same under rev_proc h mental or physical health the irs will take into consideration whether the requesting spouse was in poor mental or physical health on the date she signed the return or at the time relief was requested revproc_2003_61 sec_4 b ii c b pincite there is no evidence in the record that petitioner’s mental or physical health was poor therefore this factor is neutral see id see also magee v commissioner supra conclusion weight of the factors three factors weigh in favor of relief two factors weigh against relief and three factors are neutral although the decision is close the court concludes that the appeals officer did not err in concluding that petitioner is not entitled to relief from joint_and_several_liability under sec_6015 see porter v commissioner t c __ respondent’s determination is therefore sustained to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court restore inc petitioner v commissioner of internal revenue respondent docket no filed date glen a stankee for petitioner sergio garcia-pages for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in petitioner's federal income taxes and accuracy-related_penalties as follows accuracy-related_penalty year deficiency sec_6662 dollar_figure dollar_figure big_number big_number big_number big_number after concessions the issues for decision are whether petitioner may accrue and deduct royalties computed but not yet paid under an agreement with matrix a foreign_corporation which owns percent of petitioner whether petitioner may deduct interest accruals allegedly owed to matrix on the unpaid royalties and whether petitioner is liable for accuracy- related penalties pursuant to sec_6662 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the second stipulation of facts are incorporated herein by this reference petitioner a florida corporation with its principal office in fort lauderdale filed its form_1120 u s_corporation income_tax return on a calendar_year basis petitioner reported its income and kept its books using the accrual_method of accounting for each year in issue petitioner's principal product is named restore an automobile engine additive sold in many stores throughout the united_states canada and the caribbean the essential ingredient in the engine additive is a specially developed metal alloy alloy in powdered form which when mixed 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure with oil and added to the crankcase of an operating engine is supposed to increase engine compression power and efficiency in older cars the alloy is manufactured and added to the oil and transferred to petitioner through a group of related entities with which petitioner is affiliated the formula and process by which the alloy is manufactured was developed by a member of the sultan family mr omar sultan a u s citizen and a member of the sultan family sought to market the alloy in purely by chance mr sultan met mr ramzi toufic fares on a train in germany where the two men discussed the uses of the alloy mr fares had experience in project development investment banking management and raising investment capital as a result of the chance meeting mr sultan and mr fares developed a plan whereby they would form a group of corporations through which they would market the alloy in furtherance of their common goal mr fares and mr sultan caused the formation of matrix metal corp matrix under the laws of the republic of panama on date under its articles of incorporation matrix had authorized capital of dollar_figure million divided into big_number shares with a par_value of dollar_figure per share the first directors of matrix were listed as mr fares mr sultan and dr samir klat and the first officers were mr fares president and treasurer and mr sultan secretary the principal activity of matrix was to act as a holding_company for subsidiary companies involved in the production conditioning and marketing of the alloy on date matrix entered into an agreement known as the heads of agreement with mr edwin j werner mr richard rynkiewicz and mr john c davidson jr who became shareholders in an s_corporation known as wrd inc the heads of agreement contained among other things a provision that required matrix and wrd inc jointly to form a company named restore corporation later known as petitioner petitioner's main purpose was to market matrix's products in north america and the caribbean paragraph of the heads of agreement required that petitioner would be owned percent by matrix and percent by the partners of wrd inc paragraph of the heads of agreement states that restore shall pay matrix a royalty fee equivalent to ten percent of restore's net sales in return for the exclusive rights granted by matrix to restore on date articles of incorporation for petitioner restore incorporated were filed with the state of florida the articles of incorporation listed the following officers and directors of petitioner mr werner president mr rynkiewicz secretary treasurer mr davidson vice 2at the time of the execution of the heads of agreement in messrs werner rynkiewicz and davidson were in the process of forming an s_corporation with mr ronald c dugan and mr joe quinlan known as wrd inc however in the heads of agreement wrd inc was referred to as the corporation wrd inc was organized under the laws of the state of florida president mr fares vice president and mr sultan vice president on date petitioner's first meeting of the board_of directors was held and the following persons were elected as officers mr werner president messrs davidson fares and sultan vice presidents and mr rynkiewicz secretary and treasurer each of the above-listed persons was also elected as a director of petitioner petitioner's shares of common_stock were issued to matrix and wrd inc fourteen shares percent were issued to matrix and six shares percent were issued to wrd inc on date matrix and wrd inc entered into a second agreement which superseded and replaced the heads of agreement and was known as the joint_venture agreement jv agreement the jv agreement contained provisions similar to those contained in the date heads of agreement the jv agreement provided among other things that matrix and wrd inc would jointly form a corporation named restore incorporated petitioner petitioner's primary purpose was to market the products of matrix according to terms and conditions to be set out in an agreement between mmc and restore hereinafter referred to as the marketing agreement again 3under the jv agreement matrix metal corporation is referred to as mmc by date petitioner was already formed as a corporation under the laws of florida petitioner continued the parties agreed that matrix would own percent of petitioner and wrd inc would own percent of petitioner paragraph of the jv agreement states restore shall pay mmc a royalty fee equivalent to ten percent of restore's net sales in return for the exclusive rights to be granted by mmc to restore as set forth in the marketing agreement net sales shall be defined as total gross_sales less returns the jv agreement provided that mr sultan shall be the chairman of the board and mr werner shall be the president and the chief_executive_officer of petitioner the agreement was signed by mr fares as the president of matrix and by mr werner as president of wrd inc on date matrix entered into an agreement with petitioner known as the marketing agreement among other things the marketing agreement provided that petitioner as matrix's exclusive representative in north america and the caribbean would market and sell matrix's product consisting primarily of the alloy in its finished form paragraph of the marketing agreement provided in return for the exclusivity granted by mmc matrix to restore under the provisions of this agreement restore shall pay mmc a royalty fee of ten percent of restore's net sales net sales shall be defined as total billed gross_sales less the value of any products returned by customers and less the trade cash_discount of continued continued to file its federal_income_tax returns as a u s_corporation paragraph of the marketing agreement stated this agreement shall be initially valid for a period of five years from the date of its signing by the last of the two parties unless terminated in accordance with the provision of paragraph nineteen below it shall be automatically renewed thereafter on a year by year basis the marketing agreement was signed by mr fares as president of matrix and by mr werner as president of petitioner at the time the marketing agreement was signed petitioner began incurring expenses building inventory and accruing receivables petitioner also began accruing royalties owed to matrix under the terms of the marketing agreement petitioner however has never paid any of the accrued royalties to matrix prior to matrix's first shareholders' meeting in april of matrix estimated that by august of petitioner would have positive cash-flow also the shareholders of matrix agreed that although matrix expected to accrue over dollar_figure million in royalties from petitioner by date matrix would cause the royalties to be retained by petitioner until petitioner's cash- 4paragraph states this agreement may be terminated by either party at any time during its validity in case of breach of any of its provisions by the other party and failure to correct the breach within thirty days from notification to that effect by the complaining party to the breaching party flow became positive or until its financial performance allowed it to obtain credit at agreeable terms from a u_s_financial_institution on date mr fares and mr werner signed a document entitled addendum no addendum to the marketing agreement the addendum adds to paragraph of the marketing agreement and states in part royalty fees accruing since inception until 31st december will be payable on the 31st january as of 1st january royalty fees will be payable based on the net sales realised sic each quarter and will become due one month after the end of each quarter the first time on 30th april on the basis of the first quarter's sales in consideration of the financial situation and the cash position of restore inc the parties may agree on postponement of payment to a mutually agreeable later date however in such circumstances the amounts due will bear interest from the due_date until the time of payment at the rate of p a two percent per annum over the u s prime rate the applicable_rate will be the rate published on the first banking day of each quarter with validity for the full quarter this addendum forms an integral part of the above marketing agreement the addendum was signed by mr fares as president of matrix and by mr werner as president of petitioner for the tax_year ending date petitioner accrued expensed on its books and deducted for tax purposes interest payable to matrix on the accrued royalties at an interest rate of prime plus two percent petitioner never paid matrix the accrued interest as a result of the accrual of interest payable by petitioner matrix recorded interest receivable from petitioner and a corresponding amount of income beginning in petitioner reported a net_loss on its form_1120 and continued to report losses until the year ending date in the years ending date and petitioner reported positive taxable_income before taking a deduction for net operating losses from prior years in and through petitioner reported net losses petitioner reported no tax due and paid no taxes in all the years through petitioner's accrued royalties and interest due on the accrued royalties to matrix as of date were dollar_figure and dollar_figure respectively throughout this time period petitioner continued to accrue deduct but not pay royalties and interest related to the accrued royalties opinion the first issue we must decide is whether petitioner may accrue and deduct royalties computed but not yet paid under an agreement with matrix respondent argues that petitioner is not entitled to deduct the accrued royalties at issue because petitioner's liability to pay the accrued royalties was subject_to the contingency that profits must first be realized before petitioner was to pay the accruals petitioner's position is that it may deduct the accrued royalties because the liability to pay the accrued royalties was established during each year in which they were accrued and only the time of payment was contingent the standard for determining whether an accrual basis taxpayer has incurred a deductible expense for federal_income_tax purposes is governed by the all_events_test see 481_us_239 476_us_593 601_f2d_734 5th cir affg 66_tc_652 under the regulations the all_events_test has two elements each of which must be satisfied before accrual of an expense is proper first all the events which establish the fact of the liability must have occurred second the amount must be capable of being determined with reasonable accuracy united_states v hughes properties inc supra pincite sec_1_446-1 income_tax regs 5in the deficit_reduction_act_of_1984 congress incorporated the all_events_test into the internal_revenue_code by adding a new sec_461 publaw_98_369 98_stat_598 sec_461 provides that the all_events_test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy sec_461 limits the applicability of the test by providing that it is not met until economic_performance occurs see 481_us_239 n in light of our conclusion infra that petitioner has failed to satisfy the all_events_test we need not consider the applicability of the economic_performance requirement with respect to the first requirement of the all_events_test the accrual of an item of expense is improper where the liability for such item is contingent upon the occurrence of a future event see 321_us_281 291_us_193 except as otherwise specifically provided by statute a liability does not accrue as long as it remains contingent putoma corp v commissioner supra pincite paragraph of the marketing agreement requires petitioner to pay mmc a royalty fee of ten percent of restore's net sales the agreement between petitioner and matrix as written does not reveal any contingency upon which the parties appear to have conditioned petitioner's liability however respondent argues that it was matrix's and petitioner's intention that the payment of the royalties be contingent on reaching an unspecified level of profits on april and the shareholders of matrix had their first annual meeting the report of the shareholder meeting states although until that date date mmc is expected to have earned over u s dollar_figure million from restore inc in royalties we have agreed to retain such royalties within restore as 6respondent does not contend that the accrued royalties could not be determined with reasonable accuracy moreover the amounts accrued are ascertainable by the formula agreed to in the marketing agreement shareholders' subordinated loans until such time when restore's cash_flow will become positive or its market and financial performance will have enabled it to negotiate easier terms from the same or another bank in the u s a emphasis added witnesses presented at trial by both petitioner and respondent confirmed that the parties intended that petitioner never actually pay the royalty to matrix until petitioner's financial performance reached an unspecified level mr werner petitioner's president testified that from the beginning when the agreement was first signed the likelihood of petitioner's making any significant profit was remote and that petitioner would pay the royalties to matrix as soon as the company began developing a profit mr dugan who succeeded mr werner as petitioner's president testified it was his understanding that petitioner would not pay the accrued royalties until it began to show a profit mr fares who along with mr sultan founded petitioner testified that the royalties would only be paid to matrix when petitioner was profitable and that it was envisioned from the beginning that petitioner would not be profitable for a number of years as of the date of trial petitioner had not made any royalty payments to matrix 7although mr sultan a director officer and shareholder of matrix testified there was no specific agreement that petitioner did not have to pay royalties until it achieved certain goals we find that in fact there was such an intention in the marketing agreement it is unclear from the record how many contingencies needed to be satisfied before petitioner was required to pay the accrued royalties to matrix according to the report of the shareholders meeting petitioner had to have either positive cash-flow or financial performance which would enable it to obtain financing from a u s bank before the payments were to be made added to these contingencies is a third and fourth contingency that petitioner be sufficiently profitable and have sufficient working_capital to meet other financial obligations petitioner does not dispute that payment of the royalties was contingent upon achieving goals set for petitioner and obtaining sufficient working_capital and whatever cash reserves it needed to meet other financial obligations we find that the nonpayment of the royalties which have accrued since the testimony of all parties involved and the minutes of matrix's shareholder agreement are determinative of the fact that the royalty payments were contingent from the inception of the marketing agreement in order to find that there is a contingency such that all the events creating the liability have not occurred in the 8respondent in a request for confirmation of answers to questions posed to petitioner in a discovery conference asked petitioner to confirm among other things the following question what criteria would omar sultan use to decide when restore inc should start paying the royalties to matrix petitioner answered by stating the royalties would be paid when the goals of the joint_venture were achieved provided it had sufficient working_capital and whatever cash reserves it would require to meet its obligations taxable_year there must be a contingency as to the fact of the liability itself see united_states v hughes properties inc supra pincite payment not contingent where the fact of the liability was fixed by state law 420_f2d_400 5th cir a contingency related only to the timing of the required_payment will not prevent a taxpayer from satisfying the all_events_test united_states v hughes properties supra pincite therefore we must decide whether the contingencies that had to be met in this case concern whether petitioner would ever be liable to pay the royalties and interest petitioner argues that its obligation to pay the accrued royalties was fixed and definite respondent cites two cases which support the disallowance of accruals where the underlying liability is contingent on the taxpayer's profitability or cash reserves respondent cites putoma corp v commissioner f 2d pincite wherein two corporate accrual taxpayers were not entitled to deductions for accrued bonuses where payment was conditioned under the terms of the agreement on the judgment of the majority of the directors of the company that the company has sufficient cash reserve in order to pay the salary respondent also cites 321_f2d_817 wherein deductions were disallowed for interest accrued under an agreement conditionally obligating the taxpayer to make interest payments from time to time insofar as its cash situation will reasonably permit we agree with respondent and find both cases to be on point we find no meaningful distinction between the contingencies in putoma corp v commissioner supra and burlington-rock island r r v united_states supra and the contingencies that must be satisfied prior to payment of the accrued royalties there is no guarantee that petitioner will ever have sufficient working_capital and cash reserves to meet its obligations there is no guarantee that petitioner's profit goals will be met indeed there is no guarantee that any profit will be made in any particular year or set of years the contingency that a certain profit level or that sufficient working_capital be reached by petitioner has as of the end of not been deemed by petitioner to have been met in any of its operating years as of years after petitioner began accruing royalties owed to matrix petitioner has not paid any of the dollar_figure million or more in royalties it has accrued to matrix we find that it was the intent of the parties to the royalty arrangement that the payment of royalties be conditioned upon a 9we also note that a 30-percent tax is imposed pursuant to sec_881 on income of foreign_corporations not connected with a u s business sec_881 any payment of royalties by petitioner to matrix would appear to be subject_to the 30-percent tax sec_881 see also sec_1442 requiring withholding of the tax the imposition of the 30-percent tax makes it less likely that petitioner under the control of matrix would ever be required to pay the royalties to matrix contingency which may never be met because petitioner under the control of matrix may never be deemed to have met its goals of a certain profit or cash-flow level or may in any given year not be profitable at all petitioner has taken deductions for expenditures which might never occur see united_states v hughes properties inc u s pincite putoma corp v commissioner f 2d pincite mooney aircraft inc v united_states supra pincite burlington-rock island r r v united_states supra pincite we hold that the all_events_test was not satisfied the second issue for determination is whether petitioner may deduct interest accruals allegedly owed to its foreign parent on the accrued but unpaid royalties petitioner has accrued interest on the royalties payable to matrix and we have found that the payment of those royalties is contingent it follows that the accrued interest may not be regarded as an accrued expense until the years in which the contingency is satisfied and the obligation to pay the royalties becomes fixed and absolute burlington-rock island r r v united_states supra pincite citing 195_f2d_475 3d cir revg 16_tc_1020 see also 874_f2d_560 8th cir affg tcmemo_1987_209 putoma corp v commissioner f 2d pincite finally respondent determined that petitioner is liable for accuracy-related_penalties under sec_6662 sec_6662 imposes a penalty in an amount equal to percent of the underpayment_of_tax attributable to one or more of the items set forth in sec_6662 respondent asserts that the entire underpayment in issue was due to petitioner's negligence or disregard of rules or regulations sec_6662 negligence has been defined as the failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 respondent's determinations are presumed correct and petitioner bears the burden of proving otherwise rule a 79_tc_846 however reasonable reliance upon expert opinion asserted in good_faith can shield a taxpayer from penalties for negligence or disregard under sec_6662 glick v commissioner tcmemo_1997_65 see also 469_us_241 857_f2d_1383 9th cir affg dister v commissioner tcmemo_1987_217 the operative facts that control the propriety of petitioner's accruals present a reasonably close case petitioner had certified public accountants prepare its returns for each of the years in issue they advised that the royalty and interest accruals be taken as deductions on the tax returns for the years in issue we find that petitioner reasonably relied upon the opinion of its accountants when claiming the deductions in issue we hold petitioner is not liable for the accuracy-related_penalties decision will be entered under rule