internal_revenue_service number release date index number --------------------------------------------------- ------------------------------------------------- -------------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc ita b02 plr-105720-10 date august ty ------- ty ------- legend taxpayer --------------------------------------------------- parent -------------------------- manager --------------------------------- company ----------------------------------------- a ------------- x -- country b ------------ date ------------------- date --------------------------- date -------------- date -------------------- year ------- year ------- dollar_figureaa ----------------- dollar_figurebb --------------- dollar_figurecc ----------------- dollar_figuredd ----------------- accounting firm ---------------------------------------- dear ----------------- this letter is in response to a ruling_request dated ----------------------- modified by a letter dated ------------------- submitted on behalf of taxpayer requesting an extension of time to make a consent_dividend election under sec_565 of the internal_revenue_code this request is made pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations plr-105720-10 facts taxpayer is a corporation organized and existing under the laws of the state of a taxpayer has elected to be treated as a real_estate_investment_trust for federal_income_tax purposes since date taxpayer’s sole shareholder is parent a country b listed_property trust parent is managed by manager a fully integrated retail property ownership and services organization involved in retail property ownership leasing redevelopment and funds management taxpayer uses the accrual_method of accounting as its overall_method_of_accounting and files its tax returns on a calendar- year basis parent acquired taxpayer mid-year year on date taxpayer timely filed form 1120-reit for year and included form_972 consent of shareholder to include specific amount in gross_income in which parent agreed to include dollar_figureaa in its taxable_income for the tax_year taxpayer’s tax_return was prepared by accounting firm before mid-year year parent did not have a dedicated tax department and staff turnover within parent’s other departments led to communication lapses during the time taxpayer’s year tax returns were being prepared on date taxpayer discovered that it understated real_estate_investment_trust_taxable_income on its year federal_income_tax return by the amount of dollar_figurebb because the information provided to accounting firm to calculate the year interest_expense limitation under sec_163 of the internal_revenue_code was incorrect taxpayer calculated its interest_expense limitation under sec_163 by using a method that took into account fluctuations in accounts_payable and accounts_receivable however because the accounts_payable and accounts_receivable had been included in the purchase_price parent paid for taxpayer subsequent payments and collections on the respective accounts would not be reflected on taxpayer’s income statement as such taxpayer determined that as of the acquisition_date of taxpayer by parent taxpayer should have reset the accounts_receivable and accounts_payable to zero for purposes of calculating the fluctuations instead of using the balances in the accounts as of the acquisition_date on date taxpayer discovered that its real_estate_investment_trust_taxable_income for year was further understated by dollar_figurecc during year taxpayer had received a dividend of property in the amount of dollar_figuredd from company a taxable_reit_subsidiary in which taxpayer invested taxpayer subsequently sold the distributed property to a third party approximately x days later due to communication failures parent’s employees failed to inform accounting firm that the property had been received as a dividend accounting firm was only informed of the sale of the distributed property to the third party plr-105720-10 law and analysis sec_565 of the internal_revenue_code provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a consent_dividend for purposes of sec_561 relating to the deduction for dividends_paid sec_1_565-1 of the income_tax regulations provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 provides that a consent may be filed not later than the due_date of the corporation’s income_tax return for the taxable_year for which the dividends_paid deduction is claimed under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1 b includes the extended due_date of a return filed pursuant to an extension of time to file sec_301_9100-1 provides that the commissioner of internal revenue in exercising his discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i the term regulatory election is defined in sec_301_9100-1 as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government under sec_301_9100-3 except as provided in paragraphs b i through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the service plr-105720-10 paragraphs b i through iii of sec_301_9100-3 provide that a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the due_date for making the election that make the election advantageous to a taxpayer the service will not ordinarily grant relief in such a case the service will grant relief only when the taxpayer provides strong_proof that the taxpayer’s decision to seek relief did not involve hindsight sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment conclusion based upon our analysis of the facts taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met under the facts represented taxpayer’s failure to make a proper consent_dividend election was not due to the intentional disregard of the tax rules but was due to inadvertent errors and communications failures on the part of parent’s employees taxpayer did not affirmatively choose not to file the election taxpayer is not seeking to alter a return position or to use hindsight to request relief finally taxpayer acted promptly in filing its request for relief before the service discovered the failure to make the regulatory election therefore taxpayer did not act unreasonably or in bad faith furthermore granting relief will not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made nor will any closed years be affected therefore the interests of the government will not be prejudiced by granting the request for relief plr-105720-10 because taxpayer acted reasonably and in good_faith and because the interests of the government will not be prejudiced if the request for relief is granted taxpayer is granted an extension of days from the date of this ruling to file its consent_dividend election a copy of this letter should be attached to the amended_return filed reflecting the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further no opinion is expressed or implied whether taxpayer or any entity mentioned in this letter that purports to be a real_estate_investment_trust qualifies as a real_estate_investment_trust under part ii of subchapter_m of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely thomas d moffitt branch chief branch income_tax accounting


internal_revenue_service appeals_division n robinson suite ms oklahoma city ok certified - department of the treasury date nov redaction legend i a number release date uil taxpayer_identification_number person to contact empl mployee id number umber tel fax refer reply to ap la emw in re exempt status tax years and subsequent years last day to file a petition with the united_states tax_court jy dear this is a final adverse determination as to your application_for exempt status under sec_501 as an organization described under sec_501 of the internal_revenue_code our adverse determination was made for the following reason s your organization is not organized or operated exclusively for charitable purposes your organization has failed to establish that it will primarily engage in activities which accomplish one or more of the exempt purposes specified in sec_501 as required by sec_1_501_c_3_-1 your organization appears to have a substantial commercial purpose that serves a private rather than public interests contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above lf you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed before the ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_6104 if you have any questions please contact the person whose namé and telephone number are shown in the heading of this letter sincerely lh fail charles f fisher appeals team manager department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date dec contact person identification_number contact number fax number employer_identification_number vil index legend l the applicant b state name c date of incorporation d date of amendment to articles of incorporation e brokerage company 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 issues does an organization formed to facilitate donations of real_estate qualify for exemption from federal income under sec_501 of the internal_revenue_code_of_1986 facts l was incorporated as a domestic nonprofit corporation pursuant to the statutes of the state of b on c lis organized as a public benefit corporation the second article states the purpose of this organization is to facilitate non-profit donations articles of amendment were filed by your organization on d that restated the second article to say the purpose of this organization is to facilitate non-profit donations said corporation is organized exclusively for charitable religious educational and scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organization under sec_501 of the internal_revenue_code or corresponding section of any future federal tax code article ill sec_3 of your bylaws state that the ‘the corporation is organized as a public benefit corporation for the following purpose or purposes to provide assistance to donor and donee organizations who wish to effect a charitable giving while simultaneously reducing liability concerns for both l was established to work with individuals and organizations that want to donate real_estate for the benefit of specifically named universities colleges or other charitable organizations the donors make their real_estate donations to l who will accept title to this property assume the property maintenance_expenses and liabilities and then resell the property through the listing and sales services of third party real_estate organizations the net_proceeds after expenses will then be given to the school or charitable_organization designated by the original donor the application_for exemption explains that smaller schools especially are reluctant to accept donations other than cash or marketable_securities because of the burdens and lack of expertise in converting such assets to cash they face many unwanted property maintenance_expenses and undesired liabilities as well associated with having the school appear in a chain of title for a property additional information subsequently submitted clarified that l's primary charitable purpose is to connect donors with the university or school of their choice with donations that otherwise would not be currently accepted the founder president of is currently the only officer director other officers and director positions are still to be filled article v of the bylaws states that the affairs of this corporation shall be managed by a board_of directors consisting of not less than three directors or more than nine directors the founder’s qualifications and expertise includes providing real_estate services to individuals as an independent_contractor to the e organization the founder stated that once the applicant qualifies for exemption that all relationships with e will be severed and the founder will join l on a full time basis the compensation of officers and directors of l was clarified as follows the compensation schedule as originally presented assumed a salary for the president of dollar_figure and for the vice president dollar_figure in the second year a cfo was included in the plan at a salary of dollar_figure this salary is not defined as it is yet to be shown what would be needed to attract an individual with the appropriate talents and experience bonus potential of is included in the plan on the assumption that l is moving positively forward and has the cash_flow necessary to cover such an expense a five percent annual raise is projected for all employees l’s business plan or model was submitted in a hard copy form of a power pointpresentation this presentation model also explains how the real_estate donation process works in the following nine steps step the donor contacts the charity with their intentions to make a donation of real_estate the charity will then recommend that the donor consider l step the donor or charity contacts l who arranges for a professional market appraisal and inspection step the donor contributes property to l l arranges for a formal closing and takes title to the property l gives the donor a statement of market_value step sec_4 and sale with a local real_estate agent l arranges for property listing and repair if needed l then lists the property for steps and order to maximize its ultimate resale value l then sells the property to a qualified buyer l arranges for property maintenance and upkeep of its physical appearance in steps and the chosen charity of the original donor l deducts for property expenses and fees l then will donate net_proceeds to l’s presentation model explains that this program provides certain benefits to both the donor and to the charity the donor would receive the following benefits e donor receives immediate full value contribution e donor relinquishes all maintenance responsibilities e donor has no sales process hassles benefits to the charity were listed as e charity averts all risks of ownership e charity never takes title e charity has no property maintenance obligations e charity guarantees receipt of cash donation e charity requires no staff to manage the program these benefits highlighted in the presentation model also reinforce the purposes stated in the bylaws that providing assistance to the donor and donee simultaneously reduces liability concerns to both the presentation model included an illustration that shows the advantage for a charity that utilizes l’s services in that illustrated example the charity would receive of the market_value of a property by utilizing the services of l this is compared to of the market_value if the property was sold by the owner and the funds donated to the charity this illustration assumes in both cases that the property is held for six months although the charity receive sec_5 less the illustration points out that the charity still benefits because for a difference does the charity e want to refuse or lose the donation e want the risks of ownership e want the maintenance obligations e want the insurance tax obligations e want to staff manage the program donors that donate property to l are not anticipated to pay any fees for service the donors are introduced to l by the benefiting charitable institution once the donated property is under ownership control of l steps are taken to dispose_of the property at prevailing market prices as stated earlier in steps and l deducts for property expenses and fees before donating the net_proceeds to the chosen charity of the original donor the fee to cover l’s overhead is anticipated to be of the proceeds the following is a list of expenses related to the costs of property disposition real_estate commissions project manager commissions property appraisal property inspection property survey property management fees closing fees closing attorney fees closing mortgage fees title insurance hazards insurance property taxes l anticipates they will not be solely relying on fees for services as the organization grows funds will also be solicited from the general_public through fundraising and government grants so that the fees charged can be reduced it is anticipated that all donated properties will be physically located in geographic areas remote from l therefore l will facilitate the use of local real_estate agencies and professionals located in the vicinity of the donated property l will have no employees or capabilities to handle the day-to-day needs of the properties that it controls once donated property is accepted l will be obligated to maintain its appearance mowing plowing etc and its physical operation water lights sewer services etc in order to maximize its ultimate resale value any services of this type will be contracted on a local basis to the property most likely on the advice and recommendation of the broker who has been selected to list the property for sale in situations where rental property is donated any rental operations would also be contracted with a local property manager income from rentals would ultimately be distributed to the benefiting public charity less associated expenses for management by third parties law an organization described in sec_501 of the code must among other requirements be organized and operated exclusively for certain purposes sec_1_501_c_3_-1 of the income_tax regulations states in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exciusively 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 states an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations states i an organization may be exempt as an organization described in sec_501 if organized and operated exclusively for one or more of the following purposes it is b charitable ii an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations states an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 in determining the existence or nonexistence of such primary purpose all the circumstances must be considered including the size and extent of the trade_or_business and the size and extent of the activities which are in furtherance of one or more exempt purposes in revrul_64_182 1964_1_cb_186 an organization derived its income principally from the rental of space in a large commercial office building the organization's charitable purposes are carried out by making contributions and grants to other charitable organizations in this revenue_ruling the irs concluded that this organization met the primary purpose test of sec_1_501_c_3_-1 of the regulations because it carried on a charitable program that was commensurate in scope with its financial resources in revrul_85_184 1985_2_cb_84 a public_utility entered into an agreement with a charitable_organization under which the charity designated the utility as its authorized agent to collect contributions to the program on the charity's behalf when the utility's customers pay their bills they are given the opportunity of paying an additional_amount designated as contributions to the charity's financial assistance program for the elderly and handicapped the utility collects these contributions segregates them from its own funds does not exercise any dominion or control_over the contributions and transfers them to the charity weekly the issue in this revenue_ruling was whether the customers who contribute to this program are allowed a charitable_contribution_deduction under sec_170 of the code the service concluded that since the utility was acting as the charity's collection agent in receiving certain funds over which the utility exercised no dominion or control and which the utility earmarked for use by the charity a customer who makes such contribution is entitled to a charitable_contribution_deduction under sec_170 in the year the utility pays the funds to the charity in revrul_2002_67 2002_2_cb_873 o a charitable_organization entered into a written_agreement with x a for-profit entity licensed to sell cars in the same state where they are both located the agreement provides that x acting as o's authorized agent will administer a fund- raising program for o in exchange for a fee x's activities under the agreement are subject_to o's review and approval the agreement provides that x will act on o's behalf to solicit donation of used cars accept process and sell the cars transfer the proceeds of the sales to the charity less x's fee and provide each donor with substantiation of that donor's contribution including the acknowledgement that contains the required information b transferred a used car to x as o's authorized agent in this revenue_ruling the irs concluded that because the charity and x have established a valid agency relationship under the laws of the state x has the authority to act on the charity's behalf according to the terms of their agency agreement thus for purposes of sec_170 of the code b's transfer of the car to x as the charity's authorized agent is treated as a transfer to the charity this revenue_ruling states that the determination of whether an agency relationship exists is based upon the requirements of state law and that not all contractual relationships will result in an agency relationship under state law in 125_f3d_1 cir a state police association that is tax-exempt under sec_501 of the code published a yearbook and derived income from advertisements placed in the yearbook the association contracted with an outside for-profit company to publish the yearbook and recruit telemarketers to solicit advertisements the telemarketers worked out of field offices selected by the outside firm with the association's approval and solicited local and national businesses within geographic areas demarcated by the association they used a canned solicitation format approved by the association which identified themselves as calling on behalf of the association troopers monitored all solicitations the association retained the right to inspect the field offices from which the solicitations took place payments for ads sold were made to the association and paid set percentages of the gross_receipts to the telemarketers and to the outside firm the principal issue in this case was whether the advertising revenues were subject_to the tax on unrelated_business_income one of the subordinate issues was whether the outside firm was an agent of the association in which event their advertising activities would be attributed to the association or simply an independent_contractor in concluding that the outside firm was the association's agent the court_of_appeals stated in the first place an independent_contractor can be an agent if and to the extent that the contractor acts for the benefit of another and under its control in a particular transaction see restatement second of agency sec_2 14n in the second place the label which contracting parties place on their relationship is not decisive of their status vis-a-vis third parties citations omitted f 3d pincite in analyzing the relationship between the association and the outside firm the court stated njo single factor is dispositive citations omitted rather the nature of the relationship between the association and the outside firms depends on a myriad of factors including control_over the manner and means of performing the work the skill required and the method of payment the duration of the relationship and similar factors citations omitted the relevant factors here taken as a whole solidly support the tax court's determination that the outside firms acted as the association's agents ibid in revrul_72_369 1972_2_cb_245 an organization was formed to provide managerial and _ consulting services for sec_501 organizations to improve the administration of their charitable programs the organization enters into agreements with unrelated sec_501 organizations to furnish managerial and consulting services on a cost_basis this revenue_ruling stated that an organization is not exempt merely because its operations are not conducted for the purpose of producing a profit to satisfy the operational_test the organization's resources must be devoted to purposes that qualify as exclusively charitable within the meaning of sec_501 of the code and the applicable regulations providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 of the code furnishing the services at cost lacks the donative_intent element necessary to establish this activity as charitable in 70_tc_352 the tax_court held that an organization did not qualify for exemption under sec_501 of the code because it was primarily engaged in an activity that was characteristic of a trade_or_business and ordinarily carried on by for-profit commercial businesses the tax_court stated we must agree with the commissioner that petitioner's activity constitutes the conduct of a consulting business of the sort which is ordinarily carried on by commercial ventures organized for profit t c pincite in easter house v u s cl_ct aff'd in an unpub opinion 846_f2d_78 fed cir cert den 488_us_907 the organization in exchange for a fee provided adoption services to parents seeking to adopt a child including services to pregnant women who intended to place their newborns for adoption these fees were the organization's sole source_of_income the claims_court concluded that the organization's business_purpose of operating an adoption service not the advancement of educational and charitable activities was its primary goal it competed with other commercial organizations providing similar services thus pjlaintiff's competition provides its activities with a commercial hue cl_ct pincite accordingly the organization did not qualify for exemption under sec_501 of the code in 283_fsupp2d_58 d d c the district_court found that that the organization was formed principally to organize host conduct and sponsor educational and other charitable functions on its facilities the organization's patrons were not limited to tax- exempt entities but included patrons of a private and corporate nature the organization paid significant advertising and promotional expenses and derived substantial income from weddings and special events held at its conference center the court determined that the organization's activities competed with a number of commercial as well as non-commercial entities which strongly evidenced a commercial nature and purpose the court concluded that although the organization carried out a number of charitable and educational activities these were incidental to its primary activity of operating a for-profit conference center the court stated while plaintiff's organizational purpose is exempt and the foundation operates in important respects in an exempt fashion there is a distinctive commercial hue to the way airlie carries out its business f_supp 2d pincite application of law when an individual wishes to donate a real_estate property to a specific charity you and the individual agree that the individual will transfer to you possession and legal_title of the property you agree that you will assume full responsibility and will arrange for making the appropriate services repairs or upgrades needed to make the property more readily marketable you also agree that you will arrange for the property to be sold and that after the sale you will donate the net_proceeds to the designated charity on behalf of the donor as a result of this arrangement with a donor you are performing services for and on behalf of the donor that facilitate the donor's contribution of property to the charity designated by the donor thus you are serving as an agent of the donor see revrul_85_184 supra revrul_2002_67 supra and state police association of massachusetts v commissioner supra by you serving as an agent of each donor you are performing commercial services for these individuals in a manner that is similar to the organization in revrul_72_369 supra arranging for donors for the charitable_contribution of their properties by taking possession and title to the property by arranging with third parties to maintain its appearance its physical operation and all necessary services to be sold by brokers and by paying the net sales proceeds to the charity designated by the donor all constitute common commercial activities rather than activities that further a charitable purpose see b s w inc v commissioner supra easter house v u s supra and airlie foundation v r s supra the fact that your activities consist exclusively of performing services for individuals who wish to donate property to sec_501 organizations does not render your activities as charitable revrul_72_369 supra in addition since all of your activities constitute the operation of a commercial activity you are organized and operated for the primary purpose of carrying on an unrelated_trade_or_business as a result under sec_1_501_c_3_-1 of the regulations you do not meet the requirements of sec_501 of the code unlike the organization described in revrul_64_182 supra you do not carry on a charitable program that is commensurate in scope with your financial resources therefore you do not operate exclusively for charitable purposes as required in sec_501 of the code and the regulations applicant's position the applicant reiterates their position that l’s primary objective is to increase charitable donations to colleges and universities by facilitating the transfer of real_property donations from donors these donations are often turned down because of the type of property involved and the fact that the contribution policies at these organizations often do not include accepting real_property due to the complexities involved many colleges and universities are not accepting donations of property due to their reluctance to hold the title to the property l assists colleges and universities to obtain these donations while increasing the overall level of giving to educational institutions it is important to note that if a college or university accepted a donation of real_property and converted the gift to cash without the aid of l the college or university would not be performing an unrelated activity accepting and maximizing contributions is a key component of an exempt organization’s fundraising activities with these facts think it is clear that the activity of lis fora legitimate charitable purpose and does not constitute a trade_or_business our goal is to assist the general_public with making contributions of real_property to colleges and universities providing them with the necessary financial support to further their individual exempt purposes the actual structure of l is not that of a real_estate agency and they are not acting as a broker the fees collected by l to cover operating_expenses are deducted from the proceeds of the property and are not charged to the university or college which supports l’s mission to perform a charitable service for these organizations the applicant also compared themselves to another organization they believe has a similar or exact business model this organization qualified for exemption under sec_501 although the applicant believes they operate in the same manner as another organization they understand that the comparison cannot be used as legal precedent conclusion l’s primary activity and purpose is to facilitate donations of real_estate on behalf of donors and their chosen charity your business plan explains that after title of the property has been transferred to l the facilitation process is transacted through third party for profit entities this process includes assuming the property maintenance operations expenses and liabilities and then reselling the property the net_proceeds after expenses will then be given to the school or charitable_organization designated by the donor your position is that the main goal is to increase funding to the colleges and universities by assisting their potential donors in converting titled real_property into cash that the university or college will accept the fact that this service simultaneously reduces liability concerns for both the donor and donee does not necessarily increase charitable donations to charities or further an exempt_purpose the facilitation of real_estate transactions through for-profit third party entities for a fee constitutes a trade_or_business ordinarily carried on for profit accordingly it is held that l’s activities are not charitable and therefore does not qualify for exemption from federal_income_tax 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 f 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 you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse 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 quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if 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 you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations rulings agreements


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 b01 plr-105616-16 date june legend x -------------------------------------------------- --------------------------------------------------------------- country d ----------- ------------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was organized under the laws of country on d x represents that it is a foreign_entity eligible to elect to be classified as a disregarded effective d x failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d x represents that it acted reasonably and in good_faith x also represents that granting the relief requested will not prejudice the interests of the government law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity plr-105616-16 can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owner of x filing within days of this letter all required returns including amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign plr-105616-16 partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by laura c fields laura c fields senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------- ------------------------------- ------------------------------------- ---------------------------------------- - department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 - plr-155958-03 date date ------------------------------- taxpayer -------------------------------------------------- partners -------------------------------------------------- -------------------------------------- ------------------- ------------------------- ------------- ------------------------- ------------------ ------------------------- ---------------------------- ----------------------- ----------------------- ------------------------- -------------------------- a ------------------------- ---------------------------------------------------- date date state year ------------------- ------------- --------- ------- plr-155958-03 year dear ------------ this letter responds to a letter dated date requesting relief under sec_301_9100-1 through of the procedure and administration regulations for an extension of time in which to make an election under sec_754 of the internal_revenue_code facts according to the information submitted taxpayer is a general_partnership formed under the laws of state on date a a partner of taxpayer died on date complications in administering a’s estate including complex litigation prevented the administrators of the estate from requesting that an election under sec_754 be made when taxpayer filed its partnership return for year which includes date it is represented that taxpayer acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that taxpayer is not using hindsight in making the election law and analysis sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years a transfer of an interest in a partnership on the death of a partner is eligible for the sec_754 election the value of the partnership_interest reported on the estate_tax_return including discounts is the value used to determine the basis of the partnership_interest and the adjustment to basis of partnership property under sec_743 and sec_754 see generally sec_1_1014-3 sec_1_754-1 of the income_tax regulations provides that an election under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions plr-155958-03 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner conclusion based on the information submitted and the representations made we conclude as a condition of this late election relief any allowable_depreciation deduction for that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result taxpayer is granted an extension of time of sixty days following the date of this letter to make a sec_754 election effective year the election should be made in a written_statement filed with the applicable service_center for association with taxpayer’s partnership tax_return a copy of this letter should be attached to the statement filed a copy of this letter is enclosed for that purpose year on property held by taxpayer is to be computed using a property basis unadjusted under sec_743 because of a’s death any depreciation deduction subsequently allowable beginning in year is to be computed based on remaining useful_life and using property basis as adjusted by the greater of any depreciation deduction allowed_or_allowable in year had the sec_754 election been timely made federal_income_tax consequences of the transactions described above under any other provision of the code specifically we express no opinion as to whether taxpayer is a partnership for federal tax purposes except as specifically set forth above we express no opinion concerning the this ruling is directed only to the taxpayer requesting it sec_6110 of plr-155958-03 the code provides that it may not be used or cited as precedent letter to your two authorized representatives under a power_of_attorney on file with this office we are sending copies of this sincerely yours s heather c maloy associate chief_counsel office of associate chief_counsel passthroughs and special industries enclosures cc copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers ------------------------------ --------------------------------------------------------- -------------------------------- -------------------------- ------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id ------------- telephone number ------------------- refer reply to cc corp plr-113794-10 date date legend parent ---------------------------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------ exchange -------------------------------------------- company ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- company date date date date date date date date ----------------------------------------------------------------------- ------------------------------------------------------------- ----------------------- ---------------------- -------------------------- ---------------------- ------------------ -------------------------- ----------------------- -------------------------- plr-113794-10 date date date year year year year year a b c d e f g h i --------------------------- -------------------------- ------------------ ------- ------- ------- ------- ------- ------------- ----------------- ---- -------------- ---- --------------- -------------- --------------- -- dear -------------------- we respond to your letter dated date in which you requested rulings as to certain federal_income_tax consequences of the transactions discussed below the information submitted in that letter and in later correspondence is summarized below the rulings contained in this ruling letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-113794-10 by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information and other data may be required as part of the audit process summary of the facts parent is the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return the parent group also referred to as the taxpayer parent has authorized a shares of common_stock the common_stock on date parent issued d shares of its series c preferred_stock the preferred c for dollar_figuree a share and received net_proceeds of dollar_figuref the preferred c i is entitled to receive quarterly dividends ii has an initial liquidation preference of dollar_figuree per share subject_to increase for accrued but unpaid dividends the preferred c liquidation preference iii is non-voting except in the event that the preferred dividends are in arrears for six or more quarterly periods and iv is not convertible into or exchangeable for any other_property securities or stock upon redemption the preferred c shareholders are entitled to receive an amount equal to the preferred c liquidation preference the preferred c stock is not redeemable prior to date on or after date parent at its option and upon giving the required notice may redeem the preferred c in whole or in part for cash equal to the preferred c liquidation preference parent has been taxable as a subchapter_c_corporation since date prior to date parent was taxed as a real_estate_investment_trust reit under sec_857 however parent’s reit status terminated retroactively to date at which time it became taxable as a subchapter_c_corporation as a result of its failure to meet the reit distribution requirement for the tax_year ended date the parent group has been a loss group within the meaning of sec_1_1502-91 since date on date parent issued g shares of its series d preferred_stock the preferred d to company and company for dollar_figuree a share receiving net_proceeds of dollar_figureh the preferred d i is entitled to receive daily dividends at a rate of i per annum ii has an initial liquidation preference of dollar_figuree per share subject_to increase for accrued but unpaid dividends the preferred d liquidation preference iii is convertible into the common_stock and iv is entitled to vote as one class with the common_stock on an as-converted basis no conversions have occurred with respect to the preferred d since its issuance the preferred d shareholders are entitled to receive an amount per share equal to the greater of a the preferred d liquidation preference or b the amount entitled to receive upon its conversion to common_stock parent’s only stock-based compensation plan is a year incentive stock plan under which parent can issue options and stock awards to compensate the parent group’s employees and other service providers as of date all options had been plr-113794-10 granted at exercise prices greater than or equal to the estimated fair value of the underlying stock at the date of grant the outstanding options generally vest equally over four years and expire ten years after the date of grant in addition parent has granted restricted_stock in year that vests five years after its issuance parent did not grant restricted_stock in either year or year the common_stock was publicly traded on exchange through date however the common_stock was delisted from exchange on date due to its declining trading price specifically on date parent had b shares of common_stock outstanding with a closing trading price of dollar_figurec per share as a result of the preferred d purchase on date as previously described both company and company became shareholders of parent within the meaning of sec_382 and remain as the only two shareholders parent is contemplating a transaction in which all the outstanding preferred c and preferred d would be exchanged for common_stock the conversion_transaction based on conversion values negotiated at arm’s-length it is the intention of all parties concerned that the conversion_transaction will result in the holders of the preferred c and preferred d stock exchanging their respective shares for common_stock in a value- for-value exchange it is expected that the conversion_transaction will occur on or after date which is at least three years after the issuance of the preferred d on date parent requests a ruling that for purposes of factoring out changes in the proportionate ownership of its stock that are attributable solely to fluctuations in the relative fair_market_value of different classes of stock under sec_382 it be allowed to apply a reasonable method employing the hold constant principle broadly stated under the hold constant principle the value of a share relative to the value of all other stock of the corporation is established on the date that share is acquired by a particular shareholder on subsequent testing dates the percentage interest represented by that share the tested share is then determined by factoring out fluctuations in the relative values of the loss corporation’s share classes that have occurred since the acquisition_date of the tested share thus as applied the hold constant principle is individualized for each acquisition of stock by each shareholder moreover the ownership_interest represented by a tested share is adjusted for the dilutive effects of subsequent issuances and the accretive effects of subsequent redemptions following the tested share’s acquisition_date representations taxpayer has submitted the following representations regarding its request parent group has been a loss group within the meaning of sec_1_1502-91 since date plr-113794-10 there have been no classes of parent stock outstanding that constituted stock within the meaning of sec_382 and sec_1_382-2 at any time from date through the date_of_issuance of this ruling letter other than the following the common_stock and the preferred d the preferred c satisfies all the requirements under sec_1504 and thus has not been treated as stock for purposes of the ownership shift computation of sec_382 other than the shares of the preferred d class issued on date parent did not issue any additional shares of the preferred d class or any rights to acquire shares of the preferred d class parent did not issue nor did any parent group member issue any contingent purchase warrant convertible debt put stock subject_to a risk of forfeiture contract to acquire stock or option with a principal purpose of avoiding or ameliorating the impact of an ownership_change to the best of parent’s knowledge the amount of tax_liability on any of parent’s federal_income_tax returns filed to date would not be affected by whether or not parent takes into account the effect of fluctuations in the relative values of different classes of stock for purposes of determining owner shifts and ownership changes under sec_382 for purposes of identifying its direct shareholders or indirect owners who are shareholders through reliance on the existence or absence of sec filings under temp sec_1_382-2t parent to the best of its knowledge has located all relevant sec filings from date through date the conversion terms in connection with the conversion_transaction have been or will be negotiated in an arm’s-length transaction the conversion_transaction will be undertaken as a value-for-value exchange of the preferred c and preferred d for common_stock rulings based solely on the information submitted and representations made we rule as follows for purposes of factoring out changes in the proportionate ownership of parent’s stock that are attributable solely to fluctuations in the relative fair_market_value of different classes of stock under sec_382 parent may apply a reasonable method employing the hold constant principle to determine the increase in percentage plr-113794-10 ownership of each of it sec_5 shareholders on each of its testing dates since date and to identify which such testing dates are change dates for purposes of sec_382 provided that parent continuously employs such method in the applicable consistency_period as defined in notice_2010_50 in applying the hold constant principle a value-for-value conversion of the preferred d into common_stock shall be disregarded and the exchanging shareholder shall be considered to have acquired such newly issued stock as of the date it acquired the stock exchanged therefore the stock received in the exchange will also retain the same hold-constant characteristics as the surrendered shares see notice caveats except as expressly provided herein no opinion is expressed or implied about the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling letter specifically no opinion is expressed as to whether i any warrants or options should have been treated as exercised under sec_1_382-4 ii parent had a testing_date on any given date and iii any exchange of stock pursuant to the conversion_transaction will represent a value-for- value exchange furthermore no opinion is expressed as to whether the preferred c constitutes stock within the meaning of sec_1504 one or more rulings covered in this ruling letter deal with issues that may be addressed in subsequent published guidance see sec_11 of revproc_2010_1 2010_1_irb_1 regarding the circumstances including published guidance which may result in the revocation or modification of a ruling letter procedural matters this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter plr-113794-10 in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely ______________________________ marie c milnes-vasquez senior technician reviewer branch associate chief_counsel corporate


dlmgrvil peyeme septice may uniform issue list sc t ep pae ts legend taxpayer a ira x ira y bank county l state m dear in a letter dated date you requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested on bank received a notice_of_levy writ of execution on certain bank accounts held by taxpayer a two of these accounts levied were ira accounts owned by taxpayer a ira x and ira y as provided by law the proceeds from these accounts were sent to the county l sheriff to be held until the appropriate court could judge whether these accounts were exempt from the writ of execution bank withheld federal and state_income_tax from these accounts on axpayer a filed a claim of exe ntion with state m county l superior court a court of competent jurisdiction on the court affirmed taxpayer a’s claim of exemption and ordered tne levying officer county l sheriff to release any funds held however these funds could not be transferred to an eligible_retirement_plan within the day period required under sec_408 of the internal_revenue_code based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to the distributions from ira x and ira y because the failure to waive such requirement would be a hardship and against equity or good conscience sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - the entire amount received including money and any other_property is paid into i an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligibie retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 ilr b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by taxpayer a indicates that pursuant to a writ of execution served upon the custodian of his iras x and y distributions were made from said iras upon timely appeal on the part of taxpayer a the iras were found to be exempt from said writ and returned to taxpayer a however by that time the 60-day rollover period of code sec_408 had expired in summary the facts of this case show that distributions from iras x and y were made without the consent of taxpayer a and that taxpayer a's actions to reverse said distributions and return the distributed amounts to other iras were reasonable and timely undertaken therefore pursuant to code sec_408 the service hereby waives the 60-day rollover requirement with respect to the distribution of amounts from ira x and ira y during date pursuant to this ruling letter taxpayer a is granted a period of days measured from the date of the issuance of this letter to make a rollover_contribution of the proceeds from iras x and y to an ra or iras described in code sec_408 provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution will be considered a rollover_contribution within the meaning of code sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent ‘994483024 if you wish to inquire about this ruling please contact at please address all correspondence to vld b sincerely yours g v moa - rances v sloan manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


internal_revenue_service national_office technical_advice_memorandum february third party communication none date of communication not applicable tam-150392-04 cc intl b03 number release date index uil no case-mis no district_director taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ---------------------- -------------------------- -------------------------------------- ---------------- --------------- ------- legend ---------------------- -------------- taxpayer f partnership ---------------------- --------------------- industry l ----- m n ----- issues may a foreign taxpayer’s distributive_share of gross_income from a ------ partnership be reduced by the foreign taxpayer’s sec_174 research_and_experimentation r e expenses under the allocation and apportionment rules of sec_1_861-17 are a taxpayer’s manufacturing and wholesaling activities with respect to a single industry aggregated for purposes of allocating and apportioning r e expenses under sec_1_861-17 conclusions because the sec_861 regulations in general and sec_1_861-17 specifically take an aggregate approach to allocating and apportioning deductions to a tam-150392-04 taxpayer’s distributive_share of partnership income that distributive_share of income may be reduced by the foreign taxpayer’s sec_174 r e expense a taxpayer’s manufacturing and wholesaling activities with respect to a single industry are aggregated for purposes of allocating and apportioning r e expenses under sec_1_861-17 facts taxpayer is a foreign_corporation that-------------------------------------------- researches develops manufactures and markets industry l products taxpayer’s products are sold in many countries taxpayer is an integrated industry l company with activities primarily in standard industrial classification code sic code m the manufacturing category for industry l taxpayer conducts significant industry l r e in its home_country as well as in many other countries around the world------------------------------------- -------- prior to the tax years in issue taxpayer’s u s operations were conducted principally through a wholly-owned u s subsidiary and --------------------------------------------------------- ---------------------- f an unrelated u s industry l company during the tax years in issue taxpayer -------------------------------------------------------------- creating the ---------- partnership --------------------------------------------------------------------------------------------------- ----------------------------------- during the tax years in issue the ---------- partnership performed marketing and wholesaling activities in the united_states with respect to industry l products created and manufactured by taxpayer in its home_country in addition the ---------- partnership owned a manufacturing_facility in the united_states and manufactured industry l products using licensed intangible_property resulting from taxpayer’s worldwide r e---- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ the ----------partnership also purchased certain industry l products from -------------------- -----------f that f manufactured under licenses with taxpayer which had developed and owned the rights to intangible_property resulting from worldwide r e the ---------- partnership also conducted r e on behalf of taxpayer with respect to taxpayer products the nature and extent of which varied from product to product -------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- in summary the ----- ----------partnership’s marketing and wholesaling activities in the united_states involved industry l products it purchased from taxpayer industry l products manufactured by the ----------partnership itself and industry l products it purchased from f collectively the products the ----------partnership’s marketing and wholesaling activities with respect to the products are described in sic code n the wholesaling category for industry l as described in greater detail below the sic_codes are segregated into two principal types tam-150392-04 for the tax years in issue taxpayer allocated its r e expenses to all its income in the aggregated sic_codes m and n taxpayer filed a protective_election with its forms 1120-f to aggregate the product categories for which it conducts r e activities with whatever product categories are determined to be applicable for the ------------- partnership’s income as suggested by sec_1_861-17 within that aggregated product category of gross_income taxpayer apportioned its r e expenses pursuant to the gross_income_method of sec_1_861-17 on audit the irs exam team challenged taxpayer’s allocation of r e expenses to any portion of its effectively_connected_income derived from its distributive_share of partnership income law and analysis sec_882 provides that a foreign_corporation is taxable in the same manner as a u s_corporation on its taxable_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states eci under sec_882 deductions are allowed to reduce the foreign corporation’s eci only if and to the extent that they are connected with income which is effectively connected with the conduct_of_a_trade_or_business within the united_states the proper allocation and apportionment of deductions for this purpose are determined as provided in regulations sec_875 considers a foreign_corporation as engaged_in_a_trade_or_business_within_the_united_states if the partnership of which such corporation is a member is so engaged sec_701 states that a partnership shall not be subject_to the income_tax imposed by chapter persons carrying on business as partners shall be liable for income_tax only in their separate or individual capacities sec_702 provides that the character of any item_of_income gain loss deduction or credit included in a partner’s distributive_share shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership sec_702 states that the gross_income of a partner shall include its distributive_share of the gross_income of the partnership sec_1_882-4 states that a foreign_corporation that is engaged in or receives income treated as effectively connected with a trade_or_business_within_the_united_states is allowed the deductions which are properly allocated and apportioned to the foreign corporation’s gross_income which is effectively connected or treated as effectively connected with its conduct_of_a_trade_or_business within the united_states sec_1_882-4 provides that deductible expenses other than interest are manufacturing and nonmanufacturing thus an integrated business that both manufactures and sells either as a wholesaler or retailer a single product line will have activities that fall into two separate and distinct sic_codes ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------- tam-150392-04 properly allocated and apportioned to effectively connected gross_income in accordance with the rules of sec_1_861-8 sec_1_861-8 lists the operative sections that require the determination of taxable_income of the taxpayer from specific sources or activities and that give rise to statutory groupings to which sec_861 is applicable under sec_1 f iv foreign_corporations engaged_in_a_trade_or_business_within_the_united_states are taxed as provided in sec_882 on taxable_income which is effectively connected with the conduct_of_a_trade_or_business within the united_states pursuant to sec_882 sec_1_861-8 is applicable for purposes of determining the deductions from such gross_income that are to be taken into account in determining effectively_connected_taxable_income sec_1_861-17 provides specific rules for the allocation and apportionment of sec_174 r e expenses sec_1_861-17 states that the methods of allocation and apportionment of r e set forth in the regulations reflect the fact that r e is an inherently speculative activity that findings may contribute unexpected benefits and that the gross_income derived from successful r e must bear the cost of unsuccessful r e expenses for r e that a taxpayer deducts under sec_174 ordinarily shall be considered deductions that are definitely related to all income reasonably connected with the relevant broad product category of the taxpayer and therefore allocable to all items of gross_income as a class including income from sales royalties and dividends related to such broad product category sec_1_861-17 and ii provide that ordinarily a taxpayer's r e expenses may be divided between the relevant product categories which are determined by reference to the three digit classification sic code of the standard industrial classification manual sic manual where r e is conducted with respect to more than one product category the taxpayer may aggregate the categories for purposes of allocation and apportionment however the regulations provide that the taxpayer may not subdivide the categories below a three-digit category where r e is not clearly identified with any product category or categories it is considered conducted with respect to all the taxpayer's product categories sec_1 a iv provides that the sic code category wholesale trade is not applicable with respect to sales by the taxpayer of goods and services from any other of the taxpayer's product categories sec_1_861-17 provides a similar rule for retail trade sec_1_882-4 was promulgated in t d 1981_1_cb_390 when the r e regulations were included in sec_1_861-8 sec_1_861-8 now provides a cross reference to sec_1_861-17 with respect to rules regarding the allocation and apportionment of r e expenses while the analysis under sec_1_861-17 includes consideration of whether any portion of r e expenditures is allocated under the legally mandated rules of sec_1_861-17 or is subject_to the exclusive apportionment rules of sec_1_861-17 this memorandum does not address those provisions footnote added pursuant to sec_301_6110-3 tam-150392-04 the sic system was developed by the office of management and budget part of the executive office of the president to classify establishments by type of activity to facilitate the collection and analysis of data relating to establishments and to promote uniformity and comparability in statistical data collected by various agencies of the u s government state agencies and other organizations sic_codes are segregated into two primary types manufacturing and wholesale for example the manufacturing division is defined in the sic manual as including establishments engaged in the mechanical or chemical transformation of materials or substances into new products these establishments are usually described as plants factories or mills and characteristically use power driven machines and materials handling equipment manufacturing production is usually carried on for the wholesale market for interplant transfer or to order for industrial users rather than for direct sale to the consumer in contrast the wholesale trade division includes establishments or places of business primarily engaged in selling merchandise to retailers to industrial commercial institutional farm construction contractors or professional business users and bringing buyer and seller together the principal types of establishments include merchant wholesalers and sales branches and sales offices but not retail stores maintained by manufacturing refining or mining enterprises apart from their plants or mines for the purpose of marketing their products sec_1_861-17 through provide special rules for partnerships that incur r e expenses if r e expenses are incurred by a partnership in which the taxpayer is a partner the taxpayer's r e expenses shall include the taxpayer's distributive_share of the partnership's r e expenses further in applying the exception for legally mandated expenses under sec_1_861-17 and the exclusive apportionment for the sales_method and the optional gross_income methods under sec_1_861-17 a partner's_distributive_share of r e expenses_incurred by a partnership is to be treated as incurred by the partner for the same purpose and in the same location as incurred by the partnership finally in applying the remaining apportionment for the sales_method under sec_1_861-17 a taxpayer’s sales from a product category shall include the taxpayer’s share of any sales from the product category of any partnership in which the taxpayer is a partner issue may a foreign taxpayer’s distributive_share of gross_income from a ------ partnership be reduced by the foreign taxpayer’s sec_174 r e expenses under the allocation and apportionment rules of sec_1_861-17 executive office of the president office of management and budget standard industrial classification manual id pincite id pincite tam-150392-04 partnership_taxation is a hybrid of provisions that treat the partnership as an aggregate of its members or as a separate_entity under a pure aggregate approach each partner is treated as the owner of an undivided_interest in partnership assets and operations under a pure entity approach the partnership is treated as a separate_entity in which partners have no direct interest in partnership assets and operations in enacting subchapter_k congress indicated that aggregate rather than entity concepts should be applied if the concepts are more appropriate in applying other provisions of the code s rep no 83d cong 2d sess and h_r conf_rep no 83d cong 2d sess see also sec_1_701-2 and revrul_99_57 1999_2_cb_678 the aggregate_theory for example results in the imposition of federal_income_tax on the partners and not on the partnership the entity_theory is employed among other purposes to characterize items of income gain loss deduction or credit the irs exam team asserts that whether a partnership is treated as an aggregate of its partners or as an entity distinct from its partners should be based on the characterization most appropriate for the situation we agree however we do not agree that sec_1_861-17 requires the ----------partnership to be treated as a separate_entity from taxpayer for purposes of allocating and apportioning taxpayer’s r e expenses in this particular instance the more appropriate characterization is to treat the taxpayer as engaged in the activities of the ----------partnership and to apply the allocation and apportionment rules at the partner taxpayer level between gross eci and the residual_grouping of income furthermore sec_875 provides that a foreign_corporation is considered as being engaged_in_a_trade_or_business_within_the_united_states if the partnership of which such corporation is a member is so engaged when sec_875 applies the foreign_partner is taxable on its distributive_share of the partnership’s income that constitutes eci in the hands of the partnership accordingly because the ----------partnership is engaged in the business of developing manufacturing marketing distributing and selling industry l products in the united_states the taxpayer is treated as so engaged for purposes of treating taxpayer as engaged in a u s trade_or_business taxpayer’s items of income and deduction are characterized at the ----------partnership level and are then taken into account by taxpayer for purposes of determining eci subject_to u s tax the sec_861 regulations also provide some guidance with respect to the appropriate treatment of partnership income and deductions sec_1_861-17 although not determinative with respect to this situation is informative in that it clarifies that the party subject_to tax is the partner rather than the partnership a result generally there are however exceptions to this general principle for example whether or not an item_of_income is treated as income from a passive_activity for purposes of the sec_469 passive_activity_loss limitation is generally determined with reference to activities of the partner see sec_469 these exceptions are not relevant to taxpayer’s situation tam-150392-04 consistent with the overall approaches of both the sec_861 regulations in general9 and sec_701 in contrast departures from that general aggregate approach to allocation and apportionment in the partnership context are specifically provided in the sec_861 regulationsdollar_figure there is no such specific provision with respect to r e the irs exam team points out that example of sec_1_861-17 can be read to provide some support for an entity approach to partnership allocation and apportionment by apparently treating the u s parent and its foreign_branch as separate entities we believe the facts of example appear to respect the transfer solely for purposes of attributing a portion of the income to the parent and the branch example does not in any way imply an overarching entity approach to partnership_taxation in the allocation and apportionment rules accordingly the foreign taxpayer’s distributive_share of gross_income from the ------ ----- ----------partnership may be reduced by the foreign taxpayer’s sec_174 r e expenses under the allocation and apportionment rules of sec_1_861-17 issue are a taxpayer’s manufacturing and wholesaling activities with respect to a single industry aggregated for purposes of allocating and apportioning r e expenses under sec_1_861-17 the sec_861 regulations governing the allocation and apportionment of r e expenses recognize that such expense is an inherently speculative activity that findings may contribute unexpected benefits and that the gross_income derived from successful r e must bear the cost of unsuccessful r e accordingly sec_1_861-17 provides that r e expenses described within sec_174 ordinarily shall be considered deductions that are definitely related to and thus allocated to all income reasonably connected with the relevant sic code product category or categories the regulations acknowledge that r e may be conducted with respect to more than one product category and in such cases provide for aggregation of more than one sic code subdivision of sic_codes below the three-digit level on the other hand is explicitly prohibited under the regulations sec_1_861-17 see also 537_us_437 where r e is not clearly identified with any sic code or codes the r e is considered conducted with respect to all of the taxpayer’s sic_codes consistent with the broad approach to allocating r e deductions to all income reasonably connected with sic code categories the wholesale trade rule_of sec_1_861-17 states that the two digit sic code category wholesale trade is not applicable with respect to sales by the taxpayer of goods and services from any other instances in which the regulations confirm that the allocation and apportionment rules are generally applicable on an aggregate basis include temp sec_1_861-9t interest_expense of a partnership and sec_1_861-16 partnership income from leased aircraft see temp sec_1_861-9t temp sec_1_861-9t tam-150392-04 other of the taxpayer's product categories thus with respect to a single product although the sic code manual distinguishes between manufacturing activities on the one hand and wholesaling activities wholesale and retail on the other hand r e expenses associated with manufacturing must be allocated to income from both manufacturing and wholesale trade activities involving those goods in other words if a taxpayer incurs r e expenses with respect to a product and sells that product then the r e should be allocated to all income attributable to that product regardless of whether the income qualifies as manufacturing income or sales income for sic code purposes taxpayer is required to aggregate its wholesaling sic code n income with its manufacturing sic code m income for purposes of allocating its r e the wholesale trade rule_of sec_1_861-17 provides that taxpayers that both manufacture and wholesale products may not separate the manufacturing income from the wholesale income and then allocate their r e solely to the manufacturing income since taxpayer and the ----------partnership both manufacture and sell goods in the product category with respect to which the industry l r e is conducted the wholesale trade rule applies to taxpayer’s income including its share of partnership l income accordingly sec_1_861-17 requires that taxpayer allocate its sec_174 deductible r e expenses associated with the industry l products to all income attributable to both manufacturing and sales of such products including its distributive_share of ----------partnership income caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court gary gaskin and jessie gaskin petitioners v commissioner of internal revenue respondent docket no filed date gary gaskin and jessie gaskin pro sese alicia a mazurek and robert d heitmeyer for respondent memorandum findings_of_fact and opinion buch judge mr gaskin filed fraudulent_returns which he admits he later filed amended returns reporting additional income the commissioner processed those amended returns and determined deficiencies in tax beyond what was shown on those amended returns along with fraud penalties mr gaskin disputes the fraud penalties we find for the commissioner findings_of_fact the facts of this case are undisputed mr gaskin filed fraudulent tax returns for through with the intent to evade tax mr gaskin omitted income from each of those returns the commissioner selected the returns for examination and that examination led to a criminal investigation indictment and plea agreement the criminal investigation began in with the indictment and plea agreement both taking place in in date while under criminal investigation mr gaskin filed form sec_1040x amended u s individual_income_tax_return for through those amended returns reported in aggregate more than dollar_figure of additional adjusted_gross_income and more than dollar_figure of additional tax in the commissioner assessed the tax shown on those amended returns when mr gaskin entered into the plea agreement in he agreed to amounts of adjusted_gross_income and tax that differed from those reported on his previously filed amended returns the commissioner eventually issued a notice_of_deficiency in which he determined deficiencies for and and fraud penalties under sec_6663 for through the underpayment sec_1all section references are to the internal_revenue_code code in effect for the years in issue on which the fraud penalties were calculated were based on the differences between mr gaskin’s tax_liabilities as determined in the notice_of_deficiency and those reported on his original fraudulent_returns while residing in michigan mr gaskin filed a timely petition we held a trial on date in detroit michigan at trial mr gaskin admitted to filing fraudulent_returns he does not contest the deficiencies in tax determined in the notice_of_deficiency he contests only the penalties under sec_6663 opinion mr gaskin does not dispute the deficiencies in tax however he disputes the fraud penalties mr gaskin argues that the comparatively modest tax adjustments shown in the notice_of_deficiency were not attributable to his fraud but to his honest mistakes from his perspective the notice_of_deficiency makes tax adjustments by comparing mr gaskin’s correct_tax liabilities with the amounts reported on his amended nonfraudulent returns he observes what he considers to be an inconsistency in that the fraud penalties are computed by comparing mr gaskin’s correct_tax liabilities with the amounts shown on his original fraudulent_returns because in his view the notice_of_deficiency is predicated on the nonfraudulent returns he reasons that the fraud penalties should not apply sec_6663 imposes a penalty equal to of any portion of an underpayment that is attributable to fraud under sec_6664 an underpayment is defined as the amount by which any_tax imposed by the code exceeds the sum of the amount of tax shown by the taxpayer on his return plus the amounts previously assessed or collected without assessment over the amount of rebates which include abatements credits refunds and other_payments to the taxpayer the regulations clarify the effect of an amended_return on a previously filed fraudulent return for the purposes of determining an underpayment under sec_1_6664-2 income_tax regs the amount shown on an amended_return is not included in the amount shown as the tax by the taxpayer on his return for establishing the amount of the underpayment in determining the fraud_penalty under sec_6663 courts at every level have held that a taxpayer who filed a fraudulent return cannot avoid the fraud_penalty by filing an amended_return in 464_us_386 the u s supreme court held that a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure the fraud was committed and the offense completed when the original return was prepared and filed in badaracco the taxpayer argued that an amended_return restarted the period of limitations for that year while the facts in this case differ the same principle applies in brown v commissioner tcmemo_1996_416 72_tcm_620 we held that a taxpayer was liable for a fraud_penalty even after he filed an amended_return the subsequent filing of an amended_return after an audit had begun did not purge the original fraudulent filing or fraudulent intent in his plea agreement mr gaskin admitted to filing fraudulent_returns he agreed that from to he underpaid his taxes by over dollar_figure and that the underpayment for each year was due to fraud as a result the fraud_penalty applies to each of the fraudulent_returns an amended_return cannot erase the fraud he committed decision will be entered for respondent