t c memo united_states tax_court christopher carl close and lisa marie close petitioners v commissioner of internal revenue respondent docket no filed date christopher carl close and lisa marie close pro sese catherine l campbell and danae m rawson for respondent memorandum findings_of_fact and opinion marvel judge respondent determined deficiencies in christopher carl close and lisa marie close’s federal_income_tax and additions to tax under sec_6651 and and as follows unless otherwise indicated all section references are to the internal continued additions to tax_year deficiency sec_6651 sec_6651 sec_6654 mr close dollar_figure big_number dollar_figure big_number tbd dollar_figure tbd mrs close1 dollar_figure big_number dollar_figure big_number tbd dollar_figure tbd respondent attributed some of the income mr close purportedly earned during these years to mrs close because idaho where petitioners then resided is a community_property_state continued revenue code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure monetary amounts have been rounded to the nearest dollar after concessions the issues for decision are whether mr close had unreported income of dollar_figure from logging activities on a 750-acre parcel of real_property with an address on winch avenue rathdrum idaho winch road property in whether mr close had unreported income of dollar_figure from logging activities on a 120-acre parcel of real_property with an address on nelson loop road rathdrum idaho nelson loop road property in and whether petitioners are liable for additions to tax under sec_6651 and and for findings_of_fact some of the facts have been stipulated the stipulations of facts are incorporated herein by this reference when they petitioned this court mr close was incarcerated in a federal prison camp in california and mrs close resided in idaho petitioners concede that mr close received unemployment_compensation of dollar_figure in mrs close received taxable_income of dollar_figure from j d lumber in mrs close received wages of dollar_figure from columbia lighting inc in mrs close received wages of dollar_figure and dollar_figure from o’malley’s sports pub grill in and respectively respondent concedes that petitioners had no taxable gain from the sale of real_property in hayden lake idaho in and are not liable for additions to tax under sec_6651 and and for i background petitioners married in they have four children in mr close started a medical equipment business on a date that is unclear from the record he sold the medical equipment business in the federal government government executed multiple search warrants with respect to mr close’s medical equipment business and the entity that purchased it one of those warrants was executed in date on date the government filed an indictment and on date a superseding indictment against mr close in the u s district_court for the district of idaho on date a jury found mr close guilty of counts of healthcare fraud counts of money laundering count of obstructing a federal audit and count of obstructing a federal healthcare fraud investigation mr close was incarcerated on date on date he was released to a halfway house and on date he was released from custody the last federal_income_tax return that petitioners filed before mr close’s incarceration was their return ii winch road property a option to purchase the winch road property in date mr close and mike leach proposed purchasing the winch road property from jerry and edna tefft and drafted an option to purchase the winch road property dated date original winch road option mr close mr leach and mr and mrs tefft signed the original winch road option under the original winch road option the teffts agreed to grant mr close and mr leach an option to purchase the winch road property for dollar_figure million and mr close and mr leach agreed to pay the teffts dollar_figure as consideration for the option the original winch road option further provided that mr close and mr leach would pay of the proceeds of any timber sales to mr and mrs tefft until mr close and mr leach paid off the balance owed on the property the original winch road option was recorded on date also on date mr close mr leach and mr and mrs tefft recorded an amended winch road option under the amended winch road option mr close and mr leach gave notice that they would exercise their option to purchase the winch road property and agreed to execute a promissory note of dollar_figure million for the purchase of the property of that amount dollar_figure was to be due by date and the remainder was to be due by date mr close and mr leach agreed that of the proceeds of any timber sales would go toward satisfying the balance due on the promissory note the amended winch road option granted mr close and mr leach the right to immediately commence logging operations on the winch road property b hidden valley ranch llc in date mr close and mr leach formed hidden valley ranch llc for the purpose of managing the logging farming and other operations on the winch road property hidden valley ranch llc managed logging and other activities on the winch road property throughout and it also maintained a checking account and on date it filed a form_1065 u s return of partnership income partnership return for clark anderson mcnelis co clark anderson a public accounting firm prepared and mr leach signed hidden valley ranch llc’s partnership return on a date that is unclear from the record and for reasons that are unclear from the record mr leach’s wife donna leach who is an accountant but not a certified_public_accountant c p a began to summarize the income and expenses of the logging activities on the winch road property because she was unable to access the databases on hidden valley ranch llc’s computer she had to reconstruct hidden valley ranch llc’s records for and she prepared balance sheets and profit and loss statements for hidden valley ranch llc and gave these to lynn anderson a c p a at clark anderson to prepare an amended partnership return for hidden valley ranch llc c lost creek trust on date petitioners mr leach and john a dixon purported to form lost creek irrevocable_trust lost creek trust by signing a_trust agreement petitioners and mr leach signed the trust agreement as the grantors and mr dixon signed the trust agreement as the trustee under the lost creek trust agreement the grantors purported to convey their interest in the winch road property to the trustee thereafter on a date that is not in the record mr and mrs tefft conveyed the winch road property to mr dixon as trustee of lost creek trust petitioners’ four children mr leach’s two children and mrs leach’s two children are the beneficiaries of lost creek trust the lost creek trust agreement requires the trustee to pay for the benefit of each beneficiary such sums from principal and interest as the trustee deems reasonable for the maintenance we infer from the terms of the option agreements from the conveyance of title by mr and mrs tefft and from the income respondent is claiming was generated from timber sales that the purchase_price of the winch road property was paid in whole or in part out of the proceeds from timbering activities on that property education support and health of the beneficiaries the agreement also provided that carrie loomis mr close’s sister and kelly scott mr leach’s sister would serve as successor cotrustees to mr dixon if he would no longer be able or willing to serve however on or about date when mr dixon resigned as trustee ms scott became the sole successor trustee d lost creek partnership on date the district_court in mr close’s criminal case issued a postconviction preforfeiture restraining order the restraining order prohibited among other things any harvesting of timber on the winch road property on date the district_court issued a preliminary order of forfeiture preliminarily forfeiting mr close’s interest in among other things the winch road property on date ms scott filed a petition to adjudicate the third-party interest of lost creek trust in the winch road property on date the government filed a motion for the district_court to issue an order to show cause with respect to certain alleged violations by mr leach of the date postconviction preforfeiture restraining order on date the district_court issued the requested order to show cause on a date that is unclear from the record mr and mrs leach met with revenue_agent nicoli ferrell assistant u s attorney anthony hall a federal marshal and mike anderson an attorney at the courthouse in coeur d’alene at the meeting mr and mrs leach were told to disregard lost creek trust and hidden valley ranch llc and to instead file partnership returns for what would be known as lost creek partnership mr and mrs leach were also told that the internal_revenue_service irs would file the partnership returns for them--without including any expenses--if they failed to file the partnership returns themselves on date revenue_agent ferrell sent a letter to mr leach informing him that the irs had determined that lost creek trust is not a valid trust that mr leach should file amended returns for hidden valley ranch llc reporting zero income and that mr leach should instead report all income and expenses from timber_operations on the winch road property on partnership returns for lost creek partnership additionally the letter stated as follows as previously discussed in addition to being required by the circumstances and the law applicable in this case the partnership filing is likely to be the most economically advantageous position for you and should allow the united_states attorney’s office to go forward in its criminal-forfeiture-ancillary-proceeding claims against the defendant mr close and that portion of the property partnership subject_to the preliminary order of forfeiture without involving you in lengthy litigation in that proceeding on date the government filed a notice of status of show-cause proceeding informing the district_court that it was satisfied that all timber harvested on the winch road property had been properly accounted for also on date revenue_agent ferrell sent a letter to mr close informing him that the irs had determined that lost creek trust is not a valid trust and that he should instead file partnership returns for lost creek partnership on a date that is unclear from the record assistant u s attorney hall provided to mrs leach a summary of income earned from timber_operations on the winch road property in the summary was originally prepared by the department of health and human services hhs apparently in connection with mr close’s criminal case laima swanson who was then a c p a at clark anderson used a balance_sheet and a profit and loss statement that mrs leach had prepared for hidden valley ranch llc to prepare various documents and schedules and ultimately to prepare and partnership returns for lost creek partnership the the government’s notice erroneously refers to the nelson loop road property instead of the winch road property this is exhibit 25-r see infra note the copy of the summary that is in the record is dated date it reflects receipts of dollar_figure for timber_operations in it is unclear whether mrs leach used this summary in preparing the profit and loss statement for hidden valley ranch llc balance_sheet and the profit and loss statement are dated date the profit and loss statement and a related timber schedule reflect receipts of dollar_figure for timber_operations in on date mr leach signed and filed lost creek partnership’s partnership returns for and lance woodall who was then a manager at clark anderson signed lost creek partnership’s and partnership returns as the preparer because ms anderson was unavailable to review the return at the time and clark anderson was under pressure from the irs to file the partnership returns promptly the lost creek partnership return reported total assets total income and ordinary_income of dollar_figure dollar_figure and dollar_figure respectively the return also reported on attached schedules k-1 partner’s share of income credits deductions etc that mr leach and mr close each had distributive shares of ordinary_income sec_179 expense and other deductions of dollar_figure dollar_figure and dollar_figure respectively for form_4797 sales of business property of the partnership return reported timber sales of dollar_figure cost or other basis of dollar_figure and ordinary gain of dollar_figure which was included in calculating the partnership’s total and ordinary_income of dollar_figure mr and mrs leach have since entered into a collection agreement with respondent and as of the date of trial they were still paying off their purported tax_liability on date the u s attorney’s office and mr and mrs leach filed a stipulation in the district_court with respect to the custody and management of the winch road property the stipulation states in relevant part as follows the leaches concede that the lost creek irrevocable_trust is inoperative to insulate it from the government’s claim of forfeiture against mr close’s interest in the winch road p roperty the property was in fact operated as a partnership between the leaches and mr close to that end the leaches have cooperated with the government by preparing f ederal income_tax returns for the operations relating to the ranch characterizing the operation as a partnership between the leaches and mr close the leaches have further cooperated with the government by accounting for activities on the winch road p roperty including timber harvesting which has the potential for affecting the value of the winch road p roperty the leaches agree to appear and testify truthfully in all proceedings related to the pending criminal ancillary matter herein and to produce such documents and records as may be required to conclude these proceedings the government and the leaches desire to market and sell the winch road p roperty for the purpose of resolving the government’s forfeiture claim against the interest of mr close in the winch road p roperty and for the purpose of effecting a termination and winding up of the partnership between mr close and the leaches in the winch road p roperty the government and the leaches agree that the leaches shall manage operate and maintain the winch road p roperty in an efficient reasonable and satisfactory manner subject_to this stipulation the relationship between the leaches and the government will be one of trust in which the leaches will comply with all of the obligations of a fiduciary the leaches will take all action necessary to reasonably and efficiently operate the winch road p roperty in consideration of leaches’ services as provided in this stipulation the leaches will be entitled to retain the proceeds from the use of the winch road p roperty to wit the haying operation the government acknowledges that the leaches intend to board their personal livestock on the winch road p roperty and agrees that the leaches may do so the leaches have since operated a ranch on the winch road property and they have earned dollar_figure per annum from haying operations on the property additionally mr leach has sold off or used up many of the assets that were originally reported on hidden valley ranch llc’s partnership return on date mr and mrs leach filed a petition to adjudicate their joint third-party interest in the winch road property as of the date of trial in this case no hearings had been held and no motions had been filed with respect to either ms scott’s petition to adjudicate the interest of lost creek trust in the winch road property or mr and mrs leach’s petition to adjudicate their joint interest in the winch road property iii nelson loop road property a original hidden valley trust agreement on date mr close and norman gissel formed hidden valley trust by signing a_trust agreement original hidden valley trust agreement mr close signed the original hidden valley trust agreement as the grantor and mr gissel signed the original hidden valley trust agreement as the trustee pursuant to the original hidden valley trust agreement mr close transferred dollar_figure to the trust under the original hidden valley trust agreement the trust could be revoked altered amended modified or terminated at the will of mr close and he was the sole beneficiary of the trust b purchase of the nelson loop road property on a date that is unclear from the record mr gissel as trustee of hidden valley trust used the dollar_figure that mr close had transferred to the trust as part of the consideration for the purchase of the nelson loop road property petitioners personally guaranteed the mortgage on the nelson loop road property on date mr gissel resigned as the trustee petitioners operated an unincorporated ranch called triple c ranch on the nelson loop road property at some time in petitioners and their four children moved to the nelson loop road property c amended hidden valley trust agreement on date petitioners and ms loomis amended the original hidden valley trust agreement by signing an amended trust agreement amended hidden valley trust agreement the amended hidden valley trust agreement was prepared by an attorney petitioners signed the amended hidden valley trust agreement as the grantors and ms loomis signed it as the trustee the amended hidden valley trust agreement purports to amend in its entirety the original hidden valley trust agreement the amended hidden valley trust agreement created two trust shares hidden valley trust revocable share revocable share and hidden valley trust irrevocable share irrevocable share petitioners were the beneficiaries of the revocable share and petitioners’ four children were the beneficiaries of the irrevocable share the amended hidden valley trust agreement provided that the revocable share of the trust continued to hold the nelson loop road property and we infer from the amended hidden valley trust agreement that ms loomis became the trustee of hidden valley trust sometime after mr gissel resigned the grantors transferred dollar_figure to the irrevocable share of the trust the amended hidden valley trust agreement further provided that the grantors could transfer a portion of their interest in the revocable share to the irrevocable share and that after a short_period in which the beneficiaries of the irrevocable share would be permitted to demand a distribution of the transferred assets the transferred portion of the revocable share would become an asset of the irrevocable share also on that date petitioners assigned a one-half interest in the revocable share to the irrevocable share on date hidden valley trust filed a_trust registration with kootenai county on date petitioners assigned their remaining one-half interest in the revocable share to the irrevocable share the irrevocable share was thereafter known as hidden valley trust and was to be administered by the trustee for the benefit of petitioners’ children specifically the amended hidden valley trust agreement requires the trustee to pay for the benefit of each beneficiary such sums from principal and interest as the trustee deems reasonable for the maintenance education support and health of each such beneficiary the trustee was specifically instructed not to use trust assets to relieve petitioners of any statutory obligation with respect to minor beneficiaries d logging activities in date after learning that the price of timber had recently increased mr close suggested to ms loomis that hidden valley trust should harvest timber off the nelson loop road property logging activities on the nelson loop road property began in some of the timber proceeds were used to pay down the mortgage on the nelson loop road property and some of the proceeds were used to improve the property hidden valley trust filed a federal_income_tax return for e forfeiture proceedings on date the district_court in mr close’s criminal case issued an order preliminarily forfeiting mr close’s interest in the nelson loop road property in doing so the district_court determined that the nelson loop road property had the requisite nexus with mr close’s criminal activity so as to be subject_to forfeiture on date ms loomis as trustee of hidden valley trust filed a petition to adjudicate the trust’s interest in the nelson loop road property on date the district_court dismissed ms loomis’ petition on the basis of the following uncontested facts the criminal acts that mr close committed began in date hidden valley trust was formed on september the trust was twice modified the trustee was changed and transfers of property were made to hidden valley trust and the petition did not allege facts that demonstrated that hidden valley trust was a bona_fide purchaser for value of the right title or interest in the nelson loop road property accordingly the district_court concluded that hidden valley trust failed to allege a prima facie case and dismissed the petition on date the district_court entered a final order of forfeiture with respect to the nelson loop road property iv notices of deficiency on date respondent issued to petitioners separate notices of deficiency on the form 4549-a income_tax discrepancy adjustments attached to the notice_of_deficiency that respondent issued to mr close respondent indicated that he adjusted mr close’s income to reflect among other items income of dollar_figure and loss of dollar_figure for and respectively reported on schedule e supplemental income and loss partnership income adjustments to allege a prima facie case hidden valley trust was required to show that it either had a vested or superior right title or interest in the property when mr close committed the acts giving rise to the forfeiture or is a bona_fide purchaser for value of the right title or interest in the property and at the time of the purchase was reasonably without cause to believe the property was subject_to forfeiture 476_f3d_642 9th cir and other income of dollar_figure for other income adjustment on an attached form 886-a explanation of items respondent explained the partnership income adjustments and the other income adjustment as follows schedule e--income loss--partnerships s-corporations-- passive non-passive tax period per return per exam adjustment -0- -0- dollar_figure big_number dollar_figure big_number it is determined that the taxpayer received gross_income or net_loss from the flow-through of ordinary_income loss from the partnership hidden valley ranch llc for the tax years as shown above we determined the amounts from schedules k-1 filed with the partnership returns it is further determined that the non-passive income is self employment income subject_to the self employment_tax other income_tax period per return per exam adjustment -0- dollar_figure dollar_figure it is determined that the taxpayer received gross_income from a grantor_trust hidden valley irrevocable_trust and from sales associated with j d lumber the amounts are as follows hidden valley irrevocable_trust dollar_figure big_number j d lumber total big_number opinion respondent contends that mr close had income of dollar_figure from logging activities by lost creek partnership on the winch road property in because lost creek trust is a sham and mr close had income of dollar_figure from logging activities on the nelson loop road property in because hidden valley trust is either a grantor_trust or a sham the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite do not apply to the purported lost creek partnership because it qualifies as a small_partnership under sec_6231 and did not elect pursuant to sec_6231 to have tefra apply see 132_tc_161 n aff’d 408_fedappx_908 6th cir respondent asserts for the first time on brief that lost creek trust is invalid under state law because petitioners and mr leach the purported grantors of lost creek trust had not yet acquired title to the winch road property when they purported to convey it to the trustee mr dixon on date in short respondent contends that lost creek trust is invalid because it lacked a corpus as a general_rule we will not consider issues first asserted on brief see 96_tc_226 this is particularly so in this case because petitioners had no opportunity to address respondent’s contention or to demonstrate the trust’s validity under idaho law see eg peterson v gentillon p 3d idaho discussing resulting trusts under idaho law i preliminary matters a summary documents on date respondent filed a request for admissions petitioners’ response to respondent’s request for admissions was due within days see rule c on date petitioners submitted their response to respondent’s request for admissions however pursuant to rule c respondent’s requested admissions had already been deemed admitted on date we withdrew petitioners’ deemed admissions see rule f trial was held in this case on date at trial respondent introduced several exhibits that are purportedly derived from documents and records that respondent did not share with petitioners before trial these exhibits include all of the evidence supporting respondent’s computations of the income received by the purported lost creek partnership from the logging activities on the winch road property and some of the evidence supporting respondent’s computations of the income received by hidden valley trust from the logging activities on the nelson loop road property we admitted these exhibits solely for the purpose of showing how the revenue_agent determined petitioners’ deficiencies on brief respondent contends that we should admit these exhibits as summaries of voluminous evidence pursuant to rule of the federal rules of evidence we decline to do so the contents of voluminous writings that cannot conveniently be examined in court may be presented in summary form only if the writings are made available for examination or copying or both by other parties at a reasonable_time_and_place see fed r evid respondent admits that the underlying documents were not made available to petitioners before trial respondent contends that this was because we relieved petitioners of their deemed admissions shortly before trial we reject respondent’s suggestion that there was insufficient time to make the underlying documents available to petitioners we relieved petitioners from their deemed admissions more than a month before trial and respondent had more than sufficient time to make the documents available to petitioners because respondent failed to make the underlying documents available to petitioners before trial we reject respondent’s attempt to rely on these exhibits to prove the truth of the matters asserted thereindollar_figure additionally exhibit 25-r which is a document that purports to summarize income earned from logging activity on the winch road property in and exhibit 36-r which is a document that purports to summarize income earned from logging activity on the nelson loop road property in are largely unsupported by any evidence revenue_agent erin lewis testified that both of these documents were prepared by hhs in connection with mr close’s continued b judicial_notice on date respondent filed with the court a motion requesting judicial_notice of certain facts established by several documents that were filed in mr close’s criminal case we granted respondent’s motion we now explain generally under rule b of the federal rules of evidence an adjudicative fact can be judicially noticed only if it is generally known within the trial court’s territorial jurisdiction or capable of accurate and ready determination by sources whose accuracy cannot reasonably be questioned see 87_tc_1016 we may take judicial_notice on our own and we must take judicial_notice if a party requests it and supplies the court with the necessary information see fed r evid c we may take judicial_notice at any stage of the proceeding see id subdiv d as respondent recognizes on brief we may not take judicial_notice of the specific findings_of_fact in another case because s uch findings do not satisfy the two tests of r ule b they are not generally known to the public nor are continued criminal case revenue_agent lewis did not testify regarding how and from what these documents were prepared and respondent did not call any hhs representative to testify concerning the preparation of these documents as presented these exhibits lack a foundation and are inadmissable to prove the truth of the matters asserted therein see fed r evid they so indisputable that their accuracy cannot reasonably be questioned estate of reis v commissioner t c pincite however we may take judicial_notice of the text of judicial opinions and orders and of court filings to determine what issues the other court decided see 442_f3d_741 n 9th cir estate of reis v commissioner t c pincite if we determine that issues of fact or law were litigated in the prior proceeding that are identical to issues of fact or law being litigated in the current proceeding we may apply the principle of collateral_estoppel or res_judicata to bar further litigation of the same issues in the present proceeding estate of reis v commissioner t c pincite ii burden_of_proof a burden_of_proof generally generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper rule a 290_us_111 however if the commissioner raises a new_matter seeks an increase in a deficiency or asserts an affirmative defense the commissioner has the burden_of_proof as to the new_matter or increased deficiency rule a a new_theory that merely clarifies or develops the original determination without being inconsistent or increasing the amount of the deficiency is not a new_matter see 93_tc_500 citing 77_tc_881 61_tc_744 and 50_tc_478 but a new_theory that either alters the original deficiency or requires the presentation of different evidence is a new_matter see id citing 91_tc_793 n and achiro v commissioner t c pincite under sec_7522 a notice_of_deficiency must describe the basis for any_tax deficiency included in the notice consequently we have held that where a notice_of_deficiency fails to describe the basis on which the commissioner relies to support a deficiency determination and that basis requires the presentation of evidence that is different than that which would be necessary to resolve the determinations that were described in the notice_of_deficiency the commissioner bear s the burden_of_proof regarding the new basis 112_tc_183 b presumption of correctness in unreported income cases the u s court_of_appeals for the ninth circuit to which an appeal in this case appears to lie absent a stipulation to the contrary see sec_7482 has held that for the presumption of correctness to attach to the notice_of_deficiency in unreported income cases the commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 or demonstrating that the taxpayer actually received unreported income see 680_f2d_1268 9th cir if the commissioner introduces some evidence that the taxpayer received unreported income the burden shifts to the taxpayer see 181_f3d_1002 9th cir aff’g tcmemo_1997_97 the u s court_of_appeals for the ninth circuit has also held that if the taxpayer succeeds in showing that the unreported income adjustment was arbitrary or erroneous the burden_of_proof shifts back to the commissioner to show that the determination was correct see id pincite citing 116_f3d_1309 9th cir and 713_f2d_496 9th cir aff’g davies v commissioner t c memo see also 293_us_507 the commissioner can rely on evidence that the irs did not have when it issued the notice_of_deficiency see 74_tc_260 aff’d in part rev’d in part 649_f2d_152 2d cir 46_fedclaims_110 ndollar_figure because we conclude that respondent’s theories in this case are new matters and we can resolve the substantive issues in this case on the basis of the allocation of the burden_of_proof we do not address whether respondent has satisfied his burden of production under weimerskirch v commissioner f 2d pincite or whether petitioners have shown that the unreported income adjustments were arbitrary or erroneous under hardy v commissioner f 3d pincite citing palmer f 3d pincite and keogh v commissioner f 2d pincite dollar_figure we note however that the record contains little reliable evidence concerning the amount of income that mr close purportedly earned from the logging activities on the winch road and nelson loop road properties with respect to the winch road property the summary exhibits that respondent introduced--with the possible exception of exhibit 25-r which is for other reasons inadmissible see supra note 12--all relied on mrs leach’s reconstruction of hidden valley ranch llc’s business records however mrs leach who is not a c p a was operating under pressure from the irs and the u s attorney’s office and under the circumstances of this case we do not find her unsupported reconstruction to be reliable or credible with respect to the nelson loop road property respondent introduced a summary exhibit exhibit 36-r of payments made to hidden valley trust in check stubs from riley creek lumber co that show amounts paid to hidden valley trust of dollar_figure dollar_figure and dollar_figure in and information from a form 1099-s proceeds from real_estate transactions from j d lumber inc reporting a payment of dollar_figure to hidden valley trust revenue_agent lewis testified that someone from hhs prepared exhibit 36-r and that it was in the case file that she received from the criminal case when asked whether she verified the amounts listed in the summary revenue_agent lewis testified that some of the items were verified but she did not say by whom we infer from revenue_agent continued c burden_of_proof regarding winch road property income in the notice_of_deficiency issued to mr close respondent explained that the basis for the partnership income adjustment was that mr close had passthrough income from hidden valley ranch llc in respondent alleged for the first time in a pretrial memorandum that mr close had passthrough income from lost creek partnership and alleged for the first time at trial that lost creek trust is a sham respondent concedes that the entity identified in the notice of deficiency-- hidden valley ranch llc--never owned the winch road property nor any timber on that property instead respondent now asserts that mr close had income from logging activities on the winch road property through lost creek partnership because lost creek trust is a sham the new_theory which is inconsistent with the determination in the notice_of_deficiency requires different evidence and it is therefore a new_matter see shea v commissioner t c pincite because we conclude that respondent’s theory that lost creek trust is a continued lewis’ testimony that she did not verify the unsupported amounts listed in exhibit 36-r and that she did not know and was not told who prepared exhibit 36-r why it was prepared or on the basis of what information it was prepared sham is a new_matter respondent bears the burden_of_proof with respect to this theory see rule a shea v commissioner t c pincite d burden_of_proof regarding nelson loop road property income in the notice_of_deficiency issued to mr close respondent explained that the basis for the hidden valley trust adjustment was that hidden valley trust is a grantor_trust respondent first alleged that hidden valley trust is a sham in a pretrial memorandum that was filed on date less than three weeks before trial respondent’s theory that hidden valley trust is a sham is a new_theory that requires evidence different from evidence for the theory that respondent disclosed in the notice_of_deficiency and it is therefore a new_matter see shea v commissioner t c pincite accordingly petitioners normally would bear the burden_of_proof with respect to the grantor_trust theory and respondent bears the although respondent failed to assert in the answer that lost creek trust is a sham see rule b we conclude that the parties tried this issue by implied consent see rule b we conclude below however that respondent does not contend that the irrevocable share of hidden valley trust is a grantor_trust or that the revocable share included any interest in the nelson loop road property after petitioners assigned their interest in the revocable share to the irrevocable share see infra part v a accordingly the allocation of the burden_of_proof with respect to this issue is irrelevant burden_of_proof with respect to the sham trust theory see rule a shea v commissioner t c pincite having assigned the burden_of_proof we turn to an analysis of the applicable law as it relates to the issues presented iii general principles a sham trusts a taxpayer may elect a business form to minimize or altogether avoid the incidence of taxation by any means that the law permits see 293_us_465 however a taxpayer may not structure a paper entity to avoid tax when that entity is without economic_substance 79_tc_714 aff’d 731_f2d_1417 9th cir we have held that a_trust though valid under state law may be treated as a nullity for federal_income_tax purposes if it lacks economic reality see 73_tc_1235 45_tc_360 aff’d 381_f2d_22 5th cir in furman we indicated that it was the extreme case where we would disregard for federal_income_tax purposes the existence of a_trust valid under state although respondent failed to assert in the answer that hidden valley trust is a sham see rule b we conclude that the parties tried this issue by implied consent see rule b law see furman v commissioner t c pincite downing v commissioner tcmemo_2003_347 86_tcm_738 in markosian v commissioner t c pincite4 we looked to the following four factors to determine whether a_trust had economic_substance whether the taxpayer’s relationship to the transferred property differed materially before and after the trust’s creation whether the trust had an independent_trustee whether an economic_interest passed to other trust beneficiaries and whether the taxpayer respected restrictions imposed on the trust’s operation as set forth in the trust documents or by the law of trusts accord 509_f3d_1149 9th cir aff’g tcmemo_2005_136 b grantor trusts for purposes of the grantor_trust provisions see secs a grantor includes any person to the extent that person either creates a_trust or gratuitously transfers property directly or indirectly to a_trust see sec_1_671-2 income_tax regs if one person creates or funds a_trust on behalf of another person both persons are treated as grantors of the trust see id the grantor of the trust is taxed on the income of the trust under the grantor_trust provisions if any of the following conditions are met the grantor possesses a disqualifying reversionary_interest see sec_673 specified powers to control beneficial enjoyment of the corpus or income are vested in the grantor or certain other persons see sec_674 certain administrative_powers are exercisable by the grantor or a nonadverse_party see sec_675 the trust can be revoked by the grantor or a nonadverse_party see sec_676 or trust income can be distributed to the grantor or the grantor’s spouse or be used to pay for insurance on their lives without the consent of an adverse_party see sec_677 iv winch road property income we examine lost creek trust using the four-factor test that we applied in markosian v commissioner t c pincite4 a petitioners and mr leach’s relationship with the winch road property petitioners and mr leach did not own the winch road property before they purported to form lost creek trust we therefore cannot compare their relationship to the winch road property before and after the formation of the trust t he term ‘adverse party’ means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust a person having a general_power_of_appointment over the trust property shall be deemed to have a beneficial_interest in the trust sec_672 t he term ‘nonadverse party’ means any person who is not an adverse_party sec_672 b whether mr dixon was an independent_trustee respondent did not call mr dixon to testify and failed to introduce credible probative evidence showing that mr dixon was not an independent_trustee additionally respondent failed to solicit testimony from mr leach or to produce other credible_evidence with respect to how lost creek trust operated how hidden valley ranch llc operated and how the two entities interacted with each other c whether an economic_interest passed to the trust beneficiaries assuming that lost creek trust was validly formed see supra note the beneficiaries of lost creek trust received an economic_interest in the winch road property which will presumably have some value even after its timber is harvested and the purchase_price is fully paid mr leach testified that he and petitioners originally set up the trust to be a long-term investment for his and petitioners’ children mr leach eventually took the position that the trust is a sham but this was only after he was told to do so by assistant u s attorney hall and revenue_agent ferrell respondent has introduced no credible_evidence showing that petitioners in any significant way disregarded the beneficiaries’ economic_interest in lost creek trust d respect for trust restrictions respondent has introduced no credible_evidence showing that petitioners disregarded any restrictions imposed by the lost creek trust agreement or by the law of trusts in the weight of the evidence generally supports finding that lost creek trust is not a sham we therefore conclude that respondent who carries the burden of persuasion on this issue has failed to prove that this is the extreme case requiring us to disregard an entity valid under state law see furman v commissioner t c pincite downing v commissioner t c m cch pincite v nelson loop road property income a grantor_trust theory in the notice_of_deficiency issued to mr close respondent determined that mr close received gross_income from a grantor_trust hidden valley irrevocable_trust on brief respondent contends that the revocable share of hidden valley trust is a grantor_trust but does not contend that the irrevocable share of hidden valley trust is a grantor_trust or that the revocable share included any interest in the nelson loop road property after petitioners assigned their interest in the revocable share to the irrevocable share we therefore conclude that respondent has abandoned his determination in the notice_of_deficiency and we will not address it instead respondent contends that we should disregard the transfer of petitioners’ interest in the revocable share of hidden valley trust to the irrevocable share of hidden valley trust because petitioners continued to have unfettered access to hidden valley trust’s assets this contention is indistinguishable from respondent’s sham trust theory for which respondent bears the burden_of_proof see supra part ii d and which we address below see infra part v b b sham trust theory respondent contends that the court should on its own motion apply the doctrine_of collateral_estoppel to bar petitioners from contending that hidden valley trust is not a sham and the evidence shows that it is a sham collateral_estoppel respondent did not affirmatively plead collateral_estoppel in the answer as required under rule respondent contends that this is because the district we infer that respondent concedes that the irrevocable share is not a grantor_trust and that the irrevocable share formally held the nelson loop road property after petitioners assigned to it their interest in the revocable share court did not issue the final order regarding the nelson loop road property until nearly five years after he filed the answer but respondent does not explain why he failed to move to amend the answer see rule a instead respondent suggests that we should apply collateral_estoppel even though the issue has not been properly raised in the pleadings under the doctrine_of collateral_estoppel once an issue of fact or law is actually and necessarily determined by a court of competent jurisdiction that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation 440_us_147 collateral_estoppel is a judicially created equitable principle the purposes of which are to protect the parties from unnecessary and redundant litigation to conserve judicial resources and to foster certainty in and reliance on judicial action id pincite before we may apply collateral_estoppel in the context of a factual dispute the following five conditions must be satisfied the issue in the second suit must be identical in all respects with the issue decided in the first suit the issue in the first suit must have been the subject of a final judgment entered by a court of competent jurisdiction the person against whom collateral_estoppel is asserted must have been a party or in privity with a party in the first suit the parties must actually have litigated the issue in the first suit and resolution of the issue must have been essential to the prior decision and the controlling facts and applicable legal principles must remain unchanged from those in the first suit see 130_tc_222 90_tc_162 aff’d 904_f2d_525 9th cir the court may raise the issue of collateral_estoppel on its own motion see 530_us_392 ‘ i f a court is on notice that it has previously decided the issue presented the court may dismiss the action sua sponte even though the defense has not been raised ’ quoting 448_us_371 rehnquist j dissenting 109_tc_235 however w here no judicial resources have been spent on the resolution of a question trial courts must be cautious about raising a preclusion bar sua sponte thereby eroding the principle of party presentation so basic to our system of adjudication arizona v california u s pincite the issue of whether hidden valley trust is a sham was not decided by the district_court rather the district_court dismissed ms loomis’ petition to adjudicate hidden valley trust’s interest in the nelson loop road property because the petition failed to allege a prima facie case accordingly we decline to raise the issue of collateral_estoppel on our own motion because no judicial resources have been spent on the resolution of the question of whether hidden valley trust is a sham see id pincite moreover even were we to raise the issue of collateral_estoppel on our own motion we would conclude that collateral_estoppel does not apply because the district_court never determined in a final order that hidden valley trust is a sham see montana u s pincite the merits we examine hidden valley trust using the four-factor test that we applied in markosian v commissioner t c pincite4 a petitioners’ relationship with the nelson loop road property mr close testified that after petitioners transferred their interest in the revocable share of hidden valley trust to the irrevocable share of the trust triple c ranch made lease payments of dollar_figure per month to hidden valley trust respondent did not introduce any credible_evidence to rebut this testimony or to show that the lease payment was inadequatedollar_figure we also note that neither petitioner was a party to ms loomis’ petition to adjudicate hidden valley trust’s interest in the nelson loop road property the date letter that revenue_agent ferrell sent to mr close see supra p contains vague references to various out-of-court statements of ms continued b whether ms loomis was an independent_trustee respondent did not call ms loomis to testify and failed to introduce any credible_evidence showing that ms loomis was not an independent_trustee c whether an economic_interest passed to the trust beneficiaries the beneficiaries of the irrevocable share of hidden valley trust received an economic_interest in the nelson loop road property because they are the formal beneficiaries of the trust pursuant to the amended hidden valley trust agreement additionally mr close testified that the logging proceeds were used to pay down the mortgage on the nelson loop road property and to improve the property respondent has introduced no credible_evidence showing that petitioners in any significant way disregarded the beneficiaries’ formal economic_interest in the irrevocable share of hidden valley trust d respect for trust restrictions respondent has introduced no evidence showing that petitioners disregarded any restrictions imposed by the amended hidden valley trust agreement or by the law of trusts continued loomis however respondent failed to call revenue_agent ferrell or ms loomis to testify at trial we do not find the matters asserted in that letter to be credible or reliable absent testimony from ms loomis who allegedly made the statements the weight of the evidence generally supports a finding that hidden valley trust is not a sham we therefore conclude that respondent who carries the burden of persuasion on this issue has failed to prove that this is the extreme case requiring us to disregard an entity valid under state law see furman v commissioner t c pincite downing v commissioner t c m cch pincite vi additions to tax a burden_of_proof the commissioner bears the burden of production with respect to a taxpayer’s liability for additions to tax and must produce sufficient evidence indicating that it is appropriate to impose the additions to tax see sec_7491 116_tc_438 once the commissioner carries the burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position see higbee v commissioner t c pincite b additions to tax under sec_6651 sec_6651 authorizes the imposition of an addition_to_tax for failure to timely file a return unless it is shown that such failure is due to reasonable cause and not due to willful neglect see 469_us_241 38_f3d_440 9th cir a failure to timely file a federal_income_tax return is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time see sec_301_6651-1 proced admin regs circumstances that are considered to constitute reasonable_cause for failure to timely file a return are typically those outside of the taxpayer’s control including for example unavoidable postal delays the timely filing of a return with the wrong office the death or serious illness of the taxpayer or a member of the taxpayer’s immediate_family a taxpayer’s unavoidable absence from the united_states destruction by casualty of a taxpayer’s records or place of business and reliance on the erroneous advice of an irs officer_or_employee 114_f3d_366 2d cir aff’g tcmemo_1995_547 the parties agree that petitioners failed to timely file a federal_income_tax return for accordingly if the rule_155_computations show that petitioners were obligated to file a return for that year see sec_6012 respondent has carried the burden of producing evidence showing that the additions to tax under sec_6651 for are appropriate mr close testified that petitioners failed to timely file their federal_income_tax return because of difficulties they faced in preparing the return after the government executed multiple search warrants with respect to mr close’s medical equipment business and the entity that purchased it in mr close further testified that petitioners did not timely file their federal_income_tax return because he thought that they first had to file returns for the earlier years however mr close had no reasonable basis for this belief we find that petitioners have not shown that they exercised ordinary business care and prudence with respect to their failure to timely file a return accordingly if the rule_155_computations show that petitioners were obligated to file a return for petitioners are liable for the additions to tax under sec_6651 for c additions to tax under sec_6651 sec_6651 imposes an addition_to_tax for failure to pay the amount of tax shown on a taxpayer’s federal_income_tax return on or before the payment due_date unless such failure is due to reasonable_cause and not due to willful neglect the sec_6651 addition_to_tax applies only when an amount of the amount of the addition_to_tax under sec_6651 reduces the amount of the addition_to_tax under sec_6651 for any month for which an continued tax is shown on a return filed by the taxpayer or a sec_6020 substitute for return prepared by the secretary sec_6651 g 120_tc_163 where the taxpayer did not file a return the commissioner must introduce evidence that a substitute for return satisfying the requirements of sec_6020 was made see 127_tc_200 aff’d 521_f3d_1289 10th cir a failure to timely pay the amount due on a federal_income_tax return is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence in providing for the timely payment of his or her tax_liability but nevertheless was either unable to pay the tax or would suffer an undue_hardship if he or she paid on the due_date see sec_301_6651-1 proced admin regs respondent introduced certified forms certificate of assessments payments and other specified matters for each of petitioners’ individual income_tax accounts for that purport to show that respondent filed substitutes for returns for mr close and mrs close on date and date respectively for however respondent failed to introduce copies of any of the substitutes for returns because respondent has failed to show that petitioners continued addition_to_tax applies under both paragraphs sec_6651 failed to pay the tax shown on a validly executed return or sec_6020 substitute for return that meets the requirements of sec_6020 respondent has failed to satisfy the burden of proving that the additions to tax under sec_6651 for are appropriate see sec_7491 wheeler v commissioner t c pincite accordingly petitioners are not liable for the additions to tax under sec_6651 for d additions to tax under sec_6654 sec_6654 imposes an addition_to_tax on an individual who underpays his or her estimated_tax the addition_to_tax is calculated with reference to four required_installment payments of the individual’s estimated_tax liability see sec_6654 and d each required_installment of estimated_tax is equal to of the required_annual_payment sec_6654 the required_annual_payment is equal to the lesser_of of the tax shown on the individual’s return for that year or if no return is filed of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year of the tax shown on that return sec_6654 b and c an individual has an obligation to pay estimated_tax only if he or she has a required_annual_payment wheeler v commissioner t c pincite see also 121_tc_308 there are two relevant exceptions to the applicability of the sec_6654 addition_to_tax first the addition_to_tax is inapplicable if the tax shown on the individual’s return for the year in question or if no return is filed the individual’s tax for that year reduced by any allowable credit for wage withholding is less than dollar_figure see sec_6654 second the addition_to_tax is inapplicable if the individual’s tax_liability for the preceding_taxable_year was zero subject_to certain conditions see sec_6654 respondent introduced certified records showing that petitioners did not file federal_income_tax returns for and and made no estimated_tax payments for however respondent also introduced certified forms for each of petitioners’ individual income_tax accounts for that each show no tax assessed no payments made and an account balance of zero the forms further show that respondent filed a substitute for return for mr close but did not file a substitute for return for mrs close for the forms do not show that respondent issued a notice_of_deficiency to either petitioner for we therefore conclude on the preponderance_of_the_evidence that the section the preceding_taxable_year must have been a taxable_year of months and the taxpayer must have been a u s citizen or resident throughout the preceding_taxable_year see sec_6654 e exception applies accordingly petitioners are not liable for the additions to tax under sec_6654 for vii conclusion this case would have benefited from a more fully developed record regarding the creation funding and administration of lost creek trust and hidden valley trust the conduct of logging operations on both the winch road and nelson loop road properties the use and amount of the income generated by the logging activities and the acquisition of and payment for the two properties this case would also have benefited from the earlier assertion and development of respondent’s sham trust theories unfortunately respondent chose to rely on actions taken in connection with mr close’s criminal case and particularly the government’s misguided attempt to position itself for an easy forfeiture of the trusts’ assets the resulting product was poorly developed and unconvincing we have considered the parties’ remaining arguments and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the parties’ concessions and the foregoing decision will be entered under rule


id office uilc cca_2009040111483726 -------------- number release date from ---------------------------- sent wednesday april am to --------------- cc ----------------------------------------------------------- subject re 6707a question --------- ----- asked that i address the question you posed below example of sec_301_6707a-1t c addresses the situation described below where the taxpayer participates in a non-listed transaction in the example the taxpayer did not file a disclosure with his timely return but filed a disclosure with an amended_return as stated in the example our position is that the amended_return with the attached disclosure statement does not cure an earlier failure satisfying the disclosure requirements of sec_6011 the example goes on however to state that the filing of the disclosure statement with an amended_return is a factor that will weigh heavily in favor of rescission of the penalty should the taxpayer make a request for rescission under revproc_2007_21 note however if the transaction is a listed_transaction rescission is not available sec_301_6707a-1t d sec_301_6707a-1t d addresses the secretary's rescission authority and sets out factors that will be considered one of the factors sec_301_6707a-1t d i is whether the taxpayer upon learning of the disclosure obligation filed form_8886 this untimely disclosure will weigh heavily in favor of rescission provided that the taxpayer disclosed the transaction before the date the irs first contacts the taxpayer concerning an examination of the tax period to which the transaction relates and the taxpayer did not unnecessarily delay in reporting the transaction until the irs had taken steps to identify the taxpayer's participation in the reportable_transaction in question please let me know if you have any further questions ------------ ----------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------- --------------------- ----------------------------


tax_exempt_and_government_entities_division number release date date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number employer_identification_number form required to be filed tax years uil dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil sec_501 date state founder founder director name of agency legend d e e g p dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below issues e does your activity of purchasing the mortgages on foreclosed properties from lenders restructuring and holding those mortgages as mortgagee and receiving interest constitute a periodic_payments from the borrowers of principal and commercial business and therefore cause you to fail the operational_test yes for the reason explained below e does you activity of making loans to debtors and the negotiating of loans on behalf of debtors cause you to be in contravention of sec_501 and therefore cause you to fail to qualify for exemption under sec_501 of the code yes for the reason described below facts your formation was the brainchild of co-founders f and g who have been real_estate investors since f and g became aware of the foreclosure problem while serving as building on the financial counselors and establishing their own real_estate business foundation of their knowledge and experience in real_estate investing f and g began to pursue their vision of helping people affected by foreclosure reduce the amount of foreclosures you were incorporated on d in e your articles of incorporation state that your purpose is allowing to homeowners to maintain ownership of their home with the help of creative intervention services you amended your articles later to include an appropriate purpose clause that meets the requirements of sec_501 of the internal_revenue_code nationally locally both and by attain your bylaws independence through home ownership by providing access to financial literacy training and intervention support services for the prevention of foreclosure your purpose is opportunities for families create state to to they run and oversee your day-to-day operation you currently have three board members you were founded by f and g who are related both founders co-own by marriage several real_estate investing and management companies f currently works full time for you to make your vision a reality and you will employ him as the full-time executive g is on your board with two other directors one of those two directors is also in director the real_estate business g intends to work approximately twenty hours per week for you her duties will include providing accounting services fundraising negotiating for the purchase of defaulted mortgages from lenders conducting individual meetings and group workshops for debtor education and providing mortgage workout assistance to debtors two other directors will provide services for you on an as-needed basis your statement of revenues and expenses shows that your officers directors and trustees received later you indicated that board members will not be compensated as an compensation employee president counselor or a board member you purchase mortgages from lending institutions which are in default and heading into a foreclosure discounted price the distributions made to mortgage lenders to purchase the defaulted mortgages will allow you to intervene in the foreclosure process and negotiate mortgage workouts with the debtors you will have written contracts with mortgage lenders for the when possible you purchase such defaulted mortgages in blocks at purchase of mortgages you will use cold calls and direct mailings to mortgage lenders to determine which lenders have mortgages in foreclosure and wish to sell such mortgages you will then negotiate with particular lenders regarding the terms of the sale of such mortgages to you you will target homeowners who are facing foreclosure or already in default of their loans across the country income levels of the homeowners will vary based on the geographic lending institutions that locations of their homes the initial point_of_contact will be the will serve as your source for adopting a homeowner defaulted notes will be purchased by you from lending institutions and then restructured to enable homeowners to make affordable mortgage payments to you you do not put any price limit or other conditions on the home mortgages you purchase after you have purchased the mortgage you as a lender and mortgage holder determine whether the homeowner's full intention is to stay in the home and maintain ownership or if the homeowner intends to stay in the home you will provide proceed with foreclosure homeownership counseling and work with the homeowner to establish a payment that you will either reduce the interest rate extend the term of the loan they can afford reduce the principal balance or use any combination of these in order to help them keep terms will be established on a case-by-case basis according to what the their home family can afford for example if the arm interest rate on a mortgage has been adjusted upward and has therefore become unaffordable you will adjust the rate back to the lower arm rate in cases where the home value has dropped below what is owed on the mortgage you would reduce the mortgage amount to the current value of the house your mortgage buying process requires an inspection of defaulted mortgage notes that a lending institution is holding on their books once a list of the notes is inspected each note is evaluated then you will make discounted offers in the form of letter of intent to purchase for the lending institution to review the lending institutions will act on all or a at that time the lending institution portion of the notes that they are interested in selling will provide to you a packet of documents and agreements each lending institution will have their own set of documents and agreements for you to review and sign once this packet is information and agreements are signed the lending institution will draft an approval of sale letter stating that they wish to proceed with the sale if required you will sign and notarize the approval letter and return it to the lending institution returned to institution required lending and the the all some of the other steps in the process that occur after the signed agreements are completed are the search for the original note or a filing of an affidavit lost note if only copies of the note exist an allonge document attached to the note identifies the promisor and the new owner as you in this instance the final step is a transfer of lien or an assignment of deed_of_trust and assignments of rent that is recorded at the courthouse a release of lien will also be recorded to release the previous deed_of_trust on the property in the event that you have to foreclose on a home or the homeowner chooses not to own the home you will foreclose the home and sell it to the public at the current market_value such situations include the homeowner abandons the property and is unreachable the homeowner moves to another town or state or the homeowner chooses not to make mortgage payments you will then give the home buying opportunities to someone who has already lost their home to foreclosure or to a low to moderate-income family your budget shows that you will spend approximately dollar_figure million million and million in almost all of your expenses the first three years of operation for mortgage purchases -98 are for mortgage purchases your exempt_purpose is carried out by providing foreclosure defaulting homeowners with prevention strategies and mortgage workout resolution strategies education budgeting financial you provided various sample notes forms and agreements that are used for your mortgage purchase foreclosure and reposition activities the samples include transfer of lien release of lien allonge and real_estate lien note affidavit of lost note and letter of intent to purchase indemnification mortgage payment history certification instructions note authorization for reserve_account loan servicing - buyer and seller information escrow collection of purchase approval receipt letter and part of providing the new mortgage to the homeowner you plan to help the as a homeowners whose mortgage you purchase with homeownership counseling and referrals and educational_services the homeownership counseling consists of intake and action plan budget counseling credit counseling and debt reduction counseling you state that this financial and housing counseling occupies a substantial portion of your time employment information counseling childcare mental health on you will host group workshops for small groups of homeowners who have defaulted on their mortgages and or are threatened with foreclosure on their homes you will conduct such workshops on weeknights and saturdays at available conference rooms or in your offices the homeowners will be taught basic financial literacy including financial and credit terms budgeting strategies the importance of taking and maintaining a positive credit rating the foreclosure process and various methods and procedure of foreclosure prevention you state that this activity will consist of about ten percent of your time libraries other local you will also assist the debtors in communicating with the debtors' mortgage lenders you would use approximately ten percent of your time for this activity which entails initiating later workout negotiations and negotiating plans to allow debtors to keep their homes you dropped this activity by stating that you are not going to work out payment solutions that you will only acquire the for your clients with lending institutions and clarified defaulted notes from the lending institutions and begin any financial counseling after the note is purchased and a restructure process has begun you will hire p an independent title insurance agency to perform your account servicing under a service agreement p will receive payments take care of impound accounts forms and late notices etc law sec_501 of the code provides that an organization described in sec_501 shall be exempt from taxation sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_501 of the code provides that organizations which provide credit_counseling_services as a substantial purpose shall not be exempt from taxation under sec_501 unless they are described in sec_501 or sec_501 and they are organized and operated in accordance with the following requirements a the organization-- i provides credit_counseling_services tailored to the specific needs and circumstances of consumers ii makes no loans to debtors other than loans with no fees or interest and does not negotiate the making of loans on behalf of debtors iii provides services for the purpose of improving a consumer's credit record credit history or credit rating only to the extent that such services are incidental to providing credit_counseling_services and iv does not charge any separately_stated fee for services for the purpose of improving any consumer's credit record credit history or credit rating d at all times the organization has a board_of directors or other governing body i which is controlled by persons who represent the broad interests of the public such as public officials acting in their capacities as such persons having special knowledge or expertise in credit or financial education and community leaders ii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors' fees or the repayment of the organization or who will consumer debt to creditors other than the credit_counseling_organization or its affiliates and iii not more than percent of the voting power of which is vested in persons who are employed by benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees or who will organization the sec_501 defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial a combination of the activities problems by providing them with counseling or described iii c -1 c of the regulations provides that be section it engages regarded as operated exclusively for one or more exempt purposes only if primarily in activities that accomplish one or more such exempt purposes specified in an organization will not be so regarded if more than an sec_501 of the code insubstantial part of its activities is not in furtherance of an exempt_purpose an organization will sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection 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 provides that the term charitable is used its generally accepted legal sense and includes the relief of the in sec_501 in poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to in revrul_69_441 1969_2_cb_115 the service found that a non-profit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was the community exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit with films speakers and publications it aided low- income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization holding the funds in a_trust account and disbursing the funds on a partial payment basis to the creditors the organization neither charged fees for counseling services nor prorated their services the finally the organization did not make loans to debtors or negotiate loans on their behalf organization relied upon contributions primarily from the creditors participating in the organization's budget plans for its support creditors were not required though to make such contributions as a condition of participation the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single non- exempt_purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in 302_f2d_934 ct_cl the court considered an organization that provided analyses of securities and industries and of the economic climate in general it sold subscriptions to various periodicals and services providing advice for purchases of individual securities the court noted that education is a broad concept and assumed arguendo that the organization however the totality of the organization's activities which had an educational purpose included the sale of many publications as well a fee to individuals was indicative of a business therefore the court held that the organization had the educational purpose and was not entitled to be regarded as exempt significant non-exempt commercial purpose that was not as the sale of advice for incidental to a in 70_tc_352 the tax_court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations the rejected organization's in easter house v u s cl_ct affid 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the claims_court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a non-exempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court merely complemented the health related_services to unwed mothers and their children rather the court found that the health-related services were merely incident to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiffs adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house cl_ct pincite argument adoption services that the in 950_f2d_365 the court_of_appeals upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church did not qualify for exemption under sec_501 of the code because the organization was operated for a substantial non-exempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses in 283_fsupp2d_58 d d c the district_court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include among other things whether the organization uses commercial promotional methods eg organization receives charitable donations advertising and the extent to which the and operated exclusively in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not described in sec_501 because it was not and organized impermissibly served private interests the organization was formed by an individual with experience selling debt management plans dmps the founder and his spouse were the only members of the organization’s board_of directors the organization did not have any meaningful educational program or materials to provide to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization’s overall activities educational charitable purposes for or application of law operational_test c of the code and to satisfy the operational_test under sec_501 of the code an organization must engage primarily in activities that accomplish one or more of such exempt purposes as the section in specified under the operational_test the purpose towards which an organization's regulations activities are directed and not the nature of the activities themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization as in b s w group inc v commissioner your activities are not directed toward one or primarily further the substantial non-exempt more exempt purposes your activities thus you are not purpose of operating a mortgage loan and home sale business operated exclusively for one or more exempt purposes c -1 c section of you are not operated exclusively for charitable or educational_purposes your primary purpose of purchasing mortgages in default and working with the debtors subsequent to such purchasing to assist them with foreclosure intervention is not a charitable purpose as described in sec_1_501_c_3_-1 of the regulations the fact that you do consultations with the debtors whose mortgages you have purchased either through phone calls or face to face interviews is also not educational since the purpose of these interviews are to determine if these debtors will eventually become your clients conducting a mortgage lending business to the general_public does not serve a charitable purpose of your time and resources are devoted to conducting a mortgage loan almost all business and providing subsequent financial counseling as part of the loan business to thus you are any individual who is facing foreclosure or already in default on his loan unlike the organization described in revrul_69_441 you are not educational as described in sec_1_501_c_3_-1 of the regulations any educational activity you offer is only incidental to your primary activity of operating a mortgage loan business you are similar to the organization described in solution plus inc v commissioner of internal revenue above in that your activities are the conduct of a mortgage loan business any educational activity you conduct is incidental to your mortgage loan business you have a substantial non-exempt purpose application the your form organization in 326_us_279 above you operate for the substantial non-exempt purpose of operating commercial mortgage loan business responses strongly demonstrate that like and your mortgage loan business is no different from that of a commercial lending business you set the mortgage payments in the manner that commercial lenders would do for homes that face foreclosure you foreclose on homes when the homeowners do not make payments and you sell foreclosed homes to the general_public at market price your mortgage lending business directly competes with commercial lending entities you are similar v commissioner above easter house v organizations living faith u s and inc the to in as in airlie foundation v commissioner above your commercial lending business is a classic case involving the commerciality doctrine similar to the organization in american institute for economic research v united_states above your commercial activity of selling mortgage products and homes serves a significant non-exempt purpose and any educational purpose is incidental thereto therefore you are not entitled to exemption under sec_501 of the code inurement private benefit you operate for the private benefit of your founder and his spouse by using funds raised to support their mortgage loan business you use funds raised by you to purchase mortgages and operate a commercial lending business f and g your founders operate the business_day to day your organizational structure and manner of operation result in inurement to f and g funds raised by you will be used to operate a mortgage lending business which will be operated on a day to day basis by f and g _ in accordance with sec_1_501_c_3_-1 of the regulations you have not established that you are not operated for your founders' private interests you are described in sec_501 and sec_501 of the code as an organization that provides credit_counseling_services however you are in compliance with the sec_501 of the code not provision of sec_501 of the code since you make loans to debtors at specified rates of interest and negotiate the making of loans on behalf of debtors g f g are founders and are in charge of your operations and another member of your board is also in the real_estate business therefore your governing body does not comply with the requirements of sec_501 g's presence on the board that is comprised of board members gives g of the voting power and since of the three board members have relationships with other real_estate related businesses you also do not meet the requirements of q d iii since more than of voting power is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities f works full time for you conclusion based on the facts and information provided you are not operated exclusively for exempt purposes because your activity of purchasing the mortgages on foreclosed properties and therefore holding and servicing those mortgages constitutes a commercial business in addition the making and you are not described in sec_501 of the code negotiating of loans on behalf of debtors causes you to fail to meet the requirements of sec_501 file letter a protest if you believe this determination is incorrect to you have the right 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 we will consider your statement and decide if the information affects our this our to basis determination you can find more determination we will forward your case to our appeals_office information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues your statement does reconsider provide not if a types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal these items include n o r a o the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury may be done by adding to the appeal the following signed declaration this under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct representative prepared appeal stating that the the 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 not be issued in any provides in proceeding unless the tax_court the united_states court of federal claims or the district of columbia determines that the district_court of the united_states for the organization involved has exhausted all it within the irs that a declaratory_judgment or decree shall of the administrative remedies available to part if you do not intend to protest this determination you do not need to take any further final adverse action determination_letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a 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 if you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax lf you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication