t c memo united_states tax_court john j mcgowan petitioner v commissioner of internal revenue respondent docket nos filed date john j mcgowan pro_se michael t sargent for respondent memorandum findings_of_fact and opinion jacobs judge in these consolidated cases respondent determined the following deficiencies and additions to tax with respect to petitioner’s federal income taxes for years 1these cases were consolidated by order dated date year tax sec_6651 sec_6651 sec_6654 additions to tax dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the issues for decision are whether respondent correctly determined petitioner’s income for years the amounts if any of business_expenses automobile mileage expenses and unreimbursed meal expenses petitioner may deduct for years and whether petitioner is liable for additions to tax under sec_6651 and and for years unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference petitioner resided in connecticut at the time the petitions in these consolidated cases were filed petitioner failed to file tax returns for consequently pursuant to the provisions of sec_6020 respondent prepared substitutes for returns for petitioner for each of these years that were based on information provided by third-party payors as follows payor form servco oil servco oil william j loosemore jr 1099-misc w-2 w-2 amount dollar_figure big_number big_number payor form amount servco oil st of conn dept of labor safe-way pilot car service 1099-misc servco oil sec_401 plan 1099-r w-2 1099-g dollar_figure big_number big_number big_number payor form standard oil of conn st of conn dept of labor safe-way pilot car service 1099-misc w-2 1099-g payor standard oil of conn form_w-2 amount dollar_figure big_number big_number amount dollar_figure 1these payments were for unemployment_compensation petitioner worked for servco oil and standard oil of connecticut as a truck driver in addition he worked for william j loosemore jr and safe-way pilot car service safe- way as a pilot vehicle escort for wide and or oversize load trucks in performing this task he used his own automobile the business logs provided by william j loosemore jr show the number of miles petitioner drove his automobile as a pilot vehicle escort to be as follows year miles big_number big_number big_number petitioner received income of dollar_figure in from servco oil he failed to file a return for that year the record does not indicate whether respondent prepared a substitute for return for petitioner for opinion a respondent’s determination of petitioner’s income for years as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving error rule a 290_us_111 the commissioner has the burden of producing evidence appropriate to impose a relevant penalty 2william j loosemore jr was the owner of safe-way pilot car service sec_7491 which shifts the burden_of_proof to respondent does not apply in the instant case because petitioner did not introduce credible_evidence or comply with the substantiation and record keeping requirements of sec_7491 addition_to_tax or additional_amount sec_7491 116_tc_438 the parties stipulated that during years petitioner received payments from servco oil the servco oil sec_401 plan standard oil of connecticut william j loosemore jr safe-way and the state of connecticut department of labor petitioner however denies the accuracy of the amounts set forth on the forms w-2 wage and tax statement 1099-misc miscelleneous income 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc and 1099-g certain government payments provided to respondent sec_6020 provides that when preparing a substitute for return the secretary shall make such return from his own knowledge and from such other information as he can obtain through testimony or otherwise respondent may rely on forms w- 1099-misc 1099-r and 1099-g from third-party payors when determining a taxpayer’s tax_liability see eg 120_tc_163 spurlock v commissioner tcmemo_2003_124 however if in a court_proceeding a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on an information_return filed with the secretary and if the taxpayer has fully cooperated with the secretary the secretary has the burden of producing reasonable and probative information concerning the deficiency in addition to such information_return see sec_6201 petitioner admits that he does not know the amount of income he received from his employers even as he denies the accuracy of the information returns provided to respondent we do not find petitioner’s assertion sufficient to constitute a reasonable dispute as referred to in sec_6201 see white v commissioner tcmemo_1997_459 thus respondent’s income determinations for all years in issue enjoy a presumption of correctness and consequently we sustain respondent’s income determinations b petitioner’s business_expense deductions for petitioner argues that respondent’s deficiency determinations are incorrect because they do not take into account mileage deductions and deductions for unreimbursed meal expenses arising from petitioner’s work as a pilot vehicle escort for safe-way and william j loosemore jr at trial petitioner introduced a document he had prepared in connection with the trial of these cases which indicated petitioner drove big_number miles and worked days in drove big_number miles and worked days in and drove big_number miles and worked days in petitioner asserts that he is entitled to a 4the document states that all numbers are approximate due to the inability of petitioner to verify accuracy deduction equal to the standard milage rate allowed by the internal_revenue_service irs and a deduction equal to the irs’ per_diem_allowance for meals for each day he drove his automobile as a pilot vehicle escort deductions are a matter of legislative grace and are allowable only as specifically provided by statute see 503_us_79 joseph v commissioner tcmemo_2005_169 taxpayers bear the burden of proving that they are entitled to any deductions claimed 292_us_435 singh v commissioner tcmemo_2009_36 because automobiles are listed_property as defined in sec_280f automobile expenses otherwise deductible are not allowed unless the taxpayer meets strict substantiation requirements see sec_274 larson v commissioner tcmemo_2008_187 specifically the taxpayer must substantiate the claimed automobile expenses by adequate_records or other corroborating evidence showing the amount of the expense the time and place of the automobile’s use and the business_purpose of its use see sec_274 50_tc_823 affd per curiam 412_f2d_201 2d cir to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction ‘of the elements of the expenditure or use must have a high degree of probative value to elevate such statement’ to the level of credibility of a contemporaneous record larson v commissioner supra quoting sec_1_274-5t temporary income_tax regs fed reg date in the absence of adequate_records to substantiate each element of an expense a taxpayer may alternatively establish an element by his own statement whether written or oral containing specific information in detail as to such element and by other corroborative evidence sufficient to establish such element sec_1_274-5t temporary income_tax regs fed reg date the court may not approximate a taxpayer’s mileage claim sec_1_274-5t temporary income_tax regs fed reg date states that the substantiation requirements of sec_274 supersede the doctrine founded in 39_f2d_540 2d cir which otherwise permits the court to approximate a taxpayer’s claim to an allowable expense in cases where the evidence indicates a taxpayer incurred deductible travel_expenses but the exact amount could not be determined moreover sec_1_274-5t temporary income_tax regs supra states that sec_274 contemplates that no deduction or credit shall be allowed a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer before trial petitioner did not provide respondent with any documents records or information to substantiate any itemized_deductions and or business-related expenses to which he may be entitled for and at trial petitioner admitted that the document he introduced contained approximate mileage for and was not a contemporaneous log of his safe-way mileage but rather was generated in preparation for trial we found this document lacking in probative value and credibility by way of contrast petitioner’s employer safe-way provided contemporaneous_records relating to petitioner’s employment as a pilot vehicle driver during these records were created and maintained by safe-way in its regular course of business we judge safe-way’s records to be of sufficient probative value to satisfy the substantiation requirements of sec_274 therefore using these records we hold that petitioner is entitled to a deduction for mileage as follows year miles big_number big_number big_number sec_1_274-5 income_tax regs provides that the commissioner may prescribe in pronouncements of general applicability a standard mileage rate that a taxpayer may use to determine a deduction with respect to the business use of a passenger_automobile such rate is set forth in a revenue_procedure published by the irs each year for the rate i sec_36 cents per mile for the rate i sec_36 cents per mile and for the rate i sec_37 cents per mile petitioner also claims entitlement to a deduction for unreimbursed meal expenses_incurred while driving his automobile as a pilot vehicle escort generally in order to claim a deduction under sec_162 a taxpayer must substantiate the amount of the expense claimed see sec_1_162-17 income_tax regs however sec_1_274-5 income_tax regs provides that the commissioner may prescribe in pronouncements of general applicability rules under which standard allowances for certain expenses will if such expenses are in accord with reasonable business practice be regarded as equivalent to substantiation by 5rev proc sec_5 2001_2_cb_530 6rev proc sec_5 2002_2_cb_616 7rev proc sec_5 2003_2_cb_924 adequate_records or other_sufficient_evidence sec_1 g ii income_tax regs fed reg date provides that such an allowance includes per_diem expenses eg meals the commissioner yearly publishes revenue procedures that provide amounts that individuals may use in lieu of actual expenses to compute the amount allowable as a deduction for ordinary and necessary business meal and incidental_expenses paid_or_incurred for travel away from home these amounts are deemed substantiated for purposes of sec_1_274-5t and c temporary income_tax regs fed reg date provided the individual substantiates the elements of time place and business_purpose of the travel expense thus pursuant to relevant revenue procedures petitioner must still substantiate the time place and business_purpose for his claimed away-from-home expenses although petitioner listed the approximate number of days he worked for safe-way on the document he presented at trial he did not provide any information regarding the time place or business_purpose of the meals for which he claims an allowance accordingly petitioner has not 8the revenue procedures in effect for the years at issue are revproc_2001_47 2001_2_cb_332 revproc_2002_63 2002_2_cb_691 revproc_2003_80 2003_2_cb_1037 revproc_2004_60 2004_2_cb_682 substantiated his meal expenses and thus he is not entitled to a deduction for them in sum petitioner may deduct his mileage expenses for as determined supra in all other respects respondent’s income_tax determinations for the years at issue are sustained c additions to tax under sec_6651 and and a respondent determined additions to tax under sec_6651 and and a for sec_6651 imposes an addition_to_tax for failure_to_file an income_tax return by the time prescribed by law unless the taxpayer proves that such failure is due to reasonable_cause and not willful neglect see 469_us_241 petitioner did not file returns for by the time prescribed by law when asked at trial whether he had reasonable_cause for not filing petitioner replied not within the confines of this court no we thus sustain respondent’s imposition of the addition_to_tax under sec_6651 9petitioner stated that just about all of his trips for safe-way were 1-day trips it is well established that in order to qualify for a meal expense deduction one must be away from home for a period normally requiring sleep or rest day trips do not qualify for the sec_162 deduction see 389_us_299 127_tc_124 thus even had petitioner substantiated his meal expenses he would not be entitled to a deduction as away-from-home expenses sec_6651 imposes an addition_to_tax for failure to pay the amount of tax shown on any return unless petitioner proves that the failure is due to reasonable clause and not due to willful neglect sec_6651 applies only in the case of an amount of tax shown on a return burr v commissioner tcmemo_2002_69 affd 56_fedappx_150 4th cir pursuant to sec_6651 a substitute for return prepared under sec_6020 is treated as a return filed by the taxpayer for returns due after date determined without regard to extensions respondent prepared substitutes for returns for petitioner for petitioner did not pay the calculated liabilities by the time prescribed by law and when asked at the trial if he had reasonable_cause for not paying petitioner replied same answer your honor as he gave to the question about his failure_to_file when asked why should he not have to pay the tax and penalties petitioner replied i’m trying to avoid frivolous arguments your honor i’d like to take the fifth_amendment for something like that we thus sustain respondent’s imposition of the addition_to_tax under sec_6651 sec_6654 imposes an addition_to_tax on individual taxpayers who underpay their estimated income_tax respondent asserts that petitioner is liable for the addition_to_tax for a taxpayer has an obligation to pay estimated_tax for a particular year if he has a required_annual_payment for that year sec_6654 a required_annual_payment is generally equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for the year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 127_tc_200 affd 521_f3d_1289 10th cir brennan v commissioner tcmemo_2009_77 to show a required_annual_payment for respondent must show proof of petitioner’s failure_to_file a return for see wheeler v commissioner supra pincite brennan v commissioner supra to satisfy his burden of production under sec_7491 respondent introduced evidence showing that petitioner was required to file federal_income_tax returns for that he failed to file returns and that after taking into account income_tax withheld from petitioner’s salary he did not make any other tax_payments in the years at issue respondent also established that petitioner failed to file a return for we therefore hold that respondent has met his burden of production with regard to the additions to tax under sec_6654 petitioner offered no evidence to refute respondent’s evidence nor has petitioner established a credible defense to respondent’s determination that petitioner is liable for the sec_6654 addition_to_tax consequently respondent’s imposition of the addition_to_tax under sec_6654 for is sustained all of petitioner’s arguments have been considered to the extent not discussed herein we find them to be groundless and or without merit to reflect the foregoing decisions will be entered under rule


department of the treasury internal_revenue_service washington d c l date jan uniform issue list op e to2 contact person contact number legend m n a b dear sir or madam is this in response to previous correspondence from your authorized legal representatives who have requested certain rulings on your behalf dated november and letters and it m is an organization described in sec_501 an organization exempt from federal_income_tax under sec_501 of the m has been internal_revenue_code as m's articles of incorporation provide classified as a private_foundation under sec_509 is organized and operated exclusively for charitable and educational_purposes to that beautify and enrich its geographical area with works_of_art m receives donations to acquire display and exhibit works_of_art and to donate and convey works_of_art consistent with the requirements under sec_501 c m makes gifts of significant pieces of contemporary art to governmental and charitable organizations for public display and appreciation m's governing board consists of a and b their four children and an unrelated_person all of whom are disqualified persons with respect to m under sec_4946 of the code m has expanded its activities by establishing and operating a small art gallery which initially was devoted primarily to the study of art by graduate level students qualified public the gallery's major resources are works_of_art on loan museum groups and individual artists a and b own an from private collectors and the artists who create the pieces on exhibition extensive collection of art which will be loaned to m from time to time for study in the gallery fe ie in order to facilitate the establishment of the gallery a and b purchased a warehouse a and b will donate building which was converted to a condominium consisting of five units a gallery the largest of the condominium units without mortgage lien to m for use as encumbrance or any reversionary_interest plus an undivided_interest in the common areas and an adjoining parking lot a and b will donate sufficient resources to meet the costs of remodeling the largest unit for use as a gallery and to cover the gallery's operating_expenses a_and b will also donate to m another of the condominium units which will be available for commercial leasing to unrelated occupants that will pay rent to m the remaining three condominium units in the aggregate amount to of the total square footage of the condominium these units will be retained by a and b as their personal offices with a permanent secretary who will serve as a receptionist and as m's secretary will not use their offices for business purposes but their without cost to m occasional use will behalf of m and other tax-exempt organizations of which they are officers and trustees a and b's offices are available for use at all times by m and its staff which in fact make use of these offices on a daily basis limited to activities a and 8b their be on the as owners of five condominium units a condominium ownership association that addresses common operational maintenance and repair items common costs will be allocated among the unit owners on an objective basis according to the respective square footage of each owner's unit as owner of the two largest units m will have a majority of the building's square footage and thus voting control of the association a and b and m will participate in financial information provided by m indicates that upon completion of the proposed transaction substantially more than one-half of m's assets will be devoted directly to the operation of the gallery all of the rental income from the commercial condominium unit plus other investment_income will be used to meet the operating_expenses and maintenance_costs a and b of the gallery unit and m's share of the commonly owned condominium expenses will donate to m the anticipated shortfall of amounts needed to defray such expenses in a recent submission m's representatives stated that the gallery has been open to scholars museum groups and the general_public and more than one thousand persons have viewed the works_of_art exhibited therein the gallery has had a joint exhibition with a large museum n which attracted the general_public to important works_of_art that were jointly displayed public exhibitions featuring other noted artists have been scheduled the gallery is open for visits by the general_public for not less than two and usually four days per week and at m employs an administrator who is not related to a and b and who helps to arrange for the exhibitors and greet and direct persons who might be studying or viewing pieces at the gallery because of the increase in frequency of use of the gallery additional staff have been hired to assist visitors all other times by appointment to outside scholars and groups dd m issues press releases for new shows and exhibitions at the gallery to two daily the gallery is listed newspapers weekly newspapers and specialized periodical publications in the local telephone book and callers reach either the receptionist or a menu selection m has an describing current exhibits gallery hours location and transportation directions affiliation with n the large museum mentioned above which has its own key to the building and an open invitation to access the gallery at any time n frequently brings visiting museum groups and other interested persons through the gallery m has registered a domain name and the web site will afford is the public worldwide access to the gallery a hotel art news packet placed in hotel rooms and is described in various magazines handouts describing current pieces on display are available for each visitor and a brochure is under consideration the gallery's parking spaces for the general_public and scheduled groups are marked for visitors in the process of constructing a web site describing the gallery the gallery is listed in sec_501 of the code provides in part for the exemption from federal_income_tax of organizations organized and operated exclusively for educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 c of the income_tax regulations provides the following an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides the following a private not organized or operated exclusively for one or more of an organization is the purposes specified in subdivision i of this subparagraph unless it serves a public rather than is is not organized or operated for the necessary for an organization to establish that it 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 interest thus to meet the requirement of this subdivision it sec_509 of the code states that the term private_foundation means a domestic or foreign organization described in sec_501 other than an organization described in sec_509 a or disqualified_person and a private_foundation sec_4941 of the code imposes an excise_tax on any act of self-dealing between a l p26 sec_4941 of the code lists various acts of self-dealing including any direct or indirect a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person c furnishing of goods services or facilities between a private founda- tion and a disqualified_person and e transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 a of the code provides that the transfer of or personal_property by a disqualified_person to a private_foundation shall be treated as a sale_or_exchange if the property is subject_to a mortgage or similar lien which the foundation assumes or if is subject_to a mortgage or similar lien which a disqualified_person placed on the property within the ten-year period ending on the date of the transfer real it sec_4941 d c of the code provides that the furnishing of goods services or facilities by a disqualified_person to a private_foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods services or facilities so furnished are used exclusively for purposes specified in sec_501 sec_4941 of the code provides that the furnishing of goods services or facilities by a private_foundation to a disqualified_person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods services or facilities are made available to the general_public sec_4942 of the code imposes an excise_tax in the amount of on the undistributed_income of not been distributed before the first day of the second or any succeeding taxable_year following such taxable_year a private_foundation for any taxable_year which has sec_4942 of the code provides that the tax under sec_4942 shall not is apply to the undistributed_income_of_a_private_foundation for any taxable_year for which it an operating_foundation under sec_4942 sec_4942 of the code provides in part that the term operating_foundation means any organization which makes qualifying distributions directly for the active_conduct of the activities constituting the purpose or function for which it is organized or operated equa to a certain specified amount sec_53_4942_b_-1 and -2 of the foundation and similar excise_tax regulations in part provide that an operating_foundation must meet the income test and one of the so-called alternative tests including the assets_test and the endowment_test all of which are described in detail in the regulations sec_4945 of the code imposes a tax of on each taxable_expenditure of a private_foundation sec_4945 provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 by establishing and operating an art gallery in the manner described m will continue to further its exempt educational_purposes within the meaning of sec_501 of the code although initially the gallery's operations were expected to be somewhat limited recently submitted information indicates that students museum groups artists and the general_public have regular access to the gallery a and b's purchase of the warehouse donation of the condominium units to m and donations of resources for payment of remodeling expenses and other expenses enable m to carry out its exempt_function through the operation of the gallery under these circumstances m will continue to be operated exclusively for exempt purposes as required by sec_1_501_c_3_-1 of the regulations any possible benefit derived by a and b from donating property and resources and lending their artworks to m retaining office condominiums and participating in the condominium association is merely incidental to the accomplishment of an exempt_purpose under sec_501 thus the establishment and operation of the gallery will not result in m's furthering the private interests of a and b see sec_1_501_c_3_-1 ii in connection with the operation of the art gallery m will make qualifying distributions in appropriate amounts directly for the active_conduct of activities constituting the purpose or function for which it the financial information presented indicates that m will meet the applicable tests set forth of the regulations and has met such tests since date thus as of that date m's foundation classification has changed from that of private_foundation under sec_509 of the code to that of private_operating_foundation under sec_4942 in sec_53_4942_b_-1 and -2 is organized or operated with regard to the question of self-dealing under sec_4941 of the code as noted previously a and b are disqualified persons under sec_4946 with respect to m because of carefully considered following transactions between the parties must be relationship this the and donations by a and bto m under sec_4941 of the code an act of self-dealing includes the sale_or_exchange or leasing of property between a private_foundation sec_4941 d a a and b's donation of the two condominium units will not be treated as a sale_or_exchange as the property is not subject_to a mortgage or similar lien assumed by m likewise a_and b's donations of resources to defray remodeling expenses and other expenses will not constitute acts of self-dealing under section d accordance disqualified however person with in a_ qa lending of works_of_art by a and b to m under sec_4941 of the code the furnishing of goods services or facilities between a private_foundation and a however in accordance with section disqualified_person is an act of self-dealing d c a and b's lending of works_of_art will not be an act of self-dealing because such lending is without charge and the works_of_art are used exclusively for exempt purposes under sec_501 or use by or for the benefit of participation in the condominium association by a b and m under sec_4941 e of the code self-dealing includes the transfer of a private foundation's income or assets to here although a and b and-m will be owners in the same condominium association their condominium units are legally separate and m clearly has majority voting control of the association based on square footage under these circumstances m's income or assets will not be used by a and b within the meaning of sec_4941 d e thus such of self-dealing under sec_4941 where costs are shared based on square footage the condominium association a disqualified_person not constitute participation will act an in for purposes of sec_4945 of the code a taxable_expenditure includes amounts paid_or_incurred for purposes other than those listed here amounts attributable to m's remodeling of the condominium units operation and maintenance of the gallery taxable_expenditures because they are paid_or_incurred in furtherance of educational_purposes under sec_170 as discussed above m's establishment and operation of the gallery furthers its educational_purposes under sec_501 of maintaining the common areas in sec_170 and payment of share not are its based on the foregoing we rule as follows the proposed expansion of its activities will for recognition of exemption as not jeopardize m's continued section an organization described in qualification c of the code m's proposed activities will result in a change_of its foundation classification from a private that of operating_foundation under sec_4942 effective date a private_foundation under sec_509 of the code to that of the proposed transaction including a and b's donation to m of a the two condominium units b the resources necessary to remodel one of the units into a gallery and the other into commercial space and c the resources necessary to meet the of self-dealing within the meaning of sec_4941 of the code operating_expenses of m's expanded activities constitute acts will not the loan from time to time to m of works_of_art owned by a and b under the the circumstances described above will meaning of sec_4941 of the code of self-dealing within not constitute acts the participation of a and b and m in the condominium association and their sharing of costs of maintenance of the common areas based on square footage will not constitute acts of self-dealing within the meaning of sec_4941 of the code and the proposed transaction and the following expenditures to be made as described above will not constitute taxable_expenditures and will not subject m to the tax on taxable_expenditures the condominium units for use as a gallery b for the operation and maintenance of the gallery and c for m's fair share of maintaining the common areas of the condominium building sec_4945 of remodeling code under the for a except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the transactions described above under any other provision of the code pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to m's authorized representatives we are providing the area manager- pacific coast with a copy of this ruling you should keep a copy of this letter in your permanent records this ruling is directed only to the organization that requested it sec_6110 k of the code provides that it may not be used or cited by others as precedent e if you have any questions please contact the person whose name and telephone number appear in the heading of this letter sincerely signed gesland a srt garland a carter manager exempt_organizations technical group


internal_revenue_service number release date index number ----------------------------------- ---------------- ---------------------------- -------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------- id no ------------ telephone number ------------------ refer reply to cc psi b01 plr-135835-12 date date legend x --------------------- ---------------------------------------------------------- country date date ---------- ------------------ --------------------- dear --------------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x by x’s representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country on date as of date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity however x did not timely file form_8832 entity classification election electing to treat x as a disregarded_entity for federal tax purposes law and analysis plr-135835-12 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that for purposes of sec_301_7701-3 a foreign eligible entity's classification is relevant when its classification affects the liability of any person for federal tax or information purposes the date that the classification of a foreign eligible_entity is relevant is the date an event occurs that creates an obligation to file a federal tax_return information_return or statement for which the classification of the entity must be determined thus the classification of a foreign_entity is relevant for example on the date that an interest in the entity is acquired which will require a u_s_person to file an information_return on form_5471 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion plr-135835-12 based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of x filing within days of this letter all required returns or amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations and ii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------- ----------------------------- ---------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------ telephone number --------------------- refer reply to cc fip b02 plr-105301-10 date date legend taxpayer ------------------------------------------------------------------------------ -------------------------- employer ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------- -------------------------------------------------------------- parent company a company b company c law firm state year year year year year -------------------------------------------------- ------------------------------- ----------------------------- ---------------------------------- --------------------------- ----------- ------- ------- ------- ------- ------- plr-105301-10 year year year dear ------------------ ------- ------- ------- this is in reply to a letter dated date and supplemental correspondence dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file a written representation under sec_1_7872-15 of the income_tax regulations if this written representation under sec_1_7872-15 is considered timely filed and the other requirements under sec_1_7872-15 are satisfied then an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 facts employer and parent employer’s parent_corporation are state non-profit corporations exempt from taxation under sec_501 of the internal_revenue_code as organizations described in sec_501 and are classified as public_charities under sec_509 since year parent has had a split-dollar_life_insurance program for certain of its executive level employees and employees of its subsidiary corporations including employer in year parent hired company a to consult on matters relating to the split- dollar program and to administer the program company a recommended revising the split-dollar plan and in year parent implemented a new split-dollar_life_insurance program company b subsequently acquired company a and became parent’s consultant and administrator of the split-dollar program in year parent implemented a new split-dollar_life_insurance program current sdp upon the recommendation of company b the current sdp was entered into after the treasury department’s issuance of final regulations under sec_1_61-22 and sec_1_7872-15 pertaining to split-dollar_life_insurance arrangements the split-dollar regulations under the current sdp employer pays the premiums on a life_insurance_policy owned by taxpayer the premium payments made by employer are treated as loans pursuant to the split-dollar regulations whereby employer is the lender and the taxpayer is the borrower the parties to the loan taxpayer represents that the loans were to each have a stated_interest rate equal to the applicable_federal_rate so as not to be below-market split-dollar loans under the split-dollar regulations employer made the first loan under the current sdp to taxpayer in year taxpayer represents that a plr-105301-10 reasonable person would expect that all payments under the loans will be made as described in sec_1_7872-15 company b was instrumental in implementing the current sdp for parent employer and employee participants including taxpayer collectively plan participants company b was responsible for advising plan participants regarding the set-up of the current sdp determining the type of life_insurance policies associated with the current sdp and administering the current sdp taxpayer represents that taxpayer lacked knowledge and experience with regards to split-dollar_life_insurance arrangements and the split-dollar regulations and therefore relied on employer’s guidance representations conclusions and information regarding the current sdp employer in turn relied on company b’s guidance in developing implementing and administering the current sdp company b provided employer’s tax_return_preparer with a governing document pertaining to the current sdp but did not provide the preparer with a copy of the plan’s participation_agreement due to some confusing language in the governing document the tax_return_preparer erroneously concluded that the loans involved in the current sdp were recourse loans the tax_return_preparer has provided an affidavit stating that discussions with company b representatives regarding the current sdp confirmed his conclusion that the loans were recourse in nature therefore employer did not execute or file the written representations for nonrecourse split-dollar loans pursuant to sec_1_7872-15 and neither did taxpayer in year company b ceased administering the current sdp and employer hired company c to administer the current sdp due to the decline in the value of common stocks and many bonds from year to early year the cash surrender values of the life_insurance policies under the current sdp declined employer employed counsel from law firm to review the current sdp and advise employer on options to revise or terminate the plan counsel from law firm determined that under applicable state law the loans under the current sdp were not recourse loans but rather nonrecourse loans secured_by the life_insurance policies subsequently employer informed taxpayer that the loans were nonrecourse loans and that a written representation should have been filed by both taxpayer and employer to ensure that payments on the loans were not treated as contingent payments employer further explained that the written representation should have been made in year when the first loan was made to taxpayer under the plan and asked that taxpayer file a request for an extension of time to make the written representations under sec_1 d i and ii taxpayer makes the following representations the granting of relief under sec_301_9100-3 would not result in taxpayer having a lower tax_liability in the aggregate for all years to which the election applies than it would have had if the election had been plr-105301-10 timely made taking into account the time_value_of_money taxpayer did not knowingly choose not to file the election taxpayer did not use hindsight in requesting relief finally taxpayer represents that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 in support of its ruling_request taxpayer has submitted the affidavits of taxpayer employer’s chief_executive_officer employer’s tax_return_preparer and employer’s counsel from law firm regarding the events that led to taxpayer’s failure to make the regulatory election pursuant to sec_1_7872-15 and ii law and analysis sec_1_7872-15 of the regulations provides that except as provided in sec_1_7872-15 if a payment on a split-dollar loan is nonrecourse to the borrower the payment is a contingent payment for purposes of sec_1_7872-15 sec_1_7872-15 provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 if the parties to the split-dollar_life_insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made sec_1_7872-15 describes the time and manner requirements for providing the written representation required by sec_1_7872-15 sec_1 d ii provides in part that the written representation be signed by both the borrower and lender not later than the last day including extensions for filing the federal_income_tax return of the borrower or lender whichever is earlier for the taxable_year in which the lender makes the first split-dollar loan under the split-dollar_life_insurance arrangement sec_301_9100-1 defines election to include an application_for relief in respect of tax a request to adopt change or retain an accounting_method or accounting_period the term does not include an application_for an extension of time for filing a return under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulation or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the plr-105301-10 requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and taxpayer’s representations we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to file the written representation as required under sec_1 d i and ii taxpayer is therefore granted a period of time not to exceed days from the date of this letter to prepare and have both parties to the loan sign the written representation provided that the written representation is timely signed by both parties to the loan as required by this letter and filed with the taxpayer’s tax_return for year plr-105301-10 the written representation will be deemed effective for all years in which the arrangement has been in effect in accordance with sec_1_7872-15 a copy of the written representation should be attached to taxpayer’s tax_return for any subsequent taxable_year in which employer makes a split-dollar loan to taxpayer to which the representation applies except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code this ruling is limited to the timeliness of the filing requirement of the written representation under sec_1_7872-15 and ii no opinion is expressed with regard to whether taxpayer satisfied the other requirements under sec_1_7872-15 and ii the loan treatment requirements under sec_1_7872-15 or whether payments under the loan are otherwise noncontingent payments for purposes of sec_1_7872-15 no opinion is expressed with regard to whether the tax_liability of taxpayer is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions and products


internal_revenue_service number release date index number ------------------------------------------------------ ------------------------------------ ------------------------------------------ -------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ---------- telephone number --------------------- refer reply to cc ita plr-103561-12 date date re request for private letter rulings regarding sec_168 and sec_1250 legend taxpayer taxpayer project developer cde bank fund bank cde affiliate cde htc fund cde affiliate company investors investor sec_2 cde a b c d e f g --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- ----------------------- ----------------------- -------------- ------------------------------------- ---------------------------------------------------------------------------- --------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------- --------------------------------------------- --------------------------------------------- ----------------------- -------------------------------------------------------- -------------------------------------------- ------------------------------------------------- --------------------------------------------------------------- --- ---- -- -------- ------ ------ plr-103561-12 h i j k l m n o p q r s t u v w x y z aa state a date1 date2 date3 date4 date5 date6 date7 -------- ---- ----- ---- -------- -------- -------- ---- ----- -- --------- ----- -- -- ---- -- ----- ---- ------ ------ ----------- ----------------------- ------- ------- ------- ---------------- ---------------- ---------------- dear ------------- this letter responds to a letter dated date1 and subsequent correspondence submitted on behalf of taxpayer and taxpayer requesting a letter_ruling under sec_168 and sec_1250 of the internal_revenue_code regarding a mixed-use development facts taxpayer and taxpayer represent that the facts are as follows developer was formed to develop and renovate project a building located at a into a mixed-use development consisting of hotel rooms and residential rental apartments project was originally built in date2 and renovated in date3 and consists of an east section that is b stories tall and a west section that is c stories tall the plr-103561-12 east and west sections were built to function as one building and are treated as such the floor elevations are identical between the structures except at the bth floor addition in date4 an atrium was carved out at the middle of the building down to floor d project received funds under the federal new_markets_tax_credit nmtc under federal and state a historic tax_credits htc financing structures and from the u s department of housing and urban development hud as a condition to receiving hud mortgage_insurance for the residential portion of the building project was required to enter into a hud regulatory agreement subject_to the requirements under cfr part subpart a the building was divided into two separate condominiums in order to satisfy hud regulatory requirements that the owner of the residential rental portion of project not engage in any business activity that is not in connection with the residential portion of project the two condominiums are comprised of hotel condominium unit and apartment condominium unit collectively the units the units are located on a single tract of land and will be placed_in_service within the same 12-month_period the hotel condominium unit is owned by taxpayer taxpayer is a state a limited_liability_company that is treated as a partnership for federal_income_tax purposes taxpayer is owned e by cde g by investors and f by investor sec_2 k by developer and l by cde in turn cde is owned h by bank fund and i by cde affiliate bank fund is owned j by bank cde is owned h by htc fund and i by cde affiliate htc fund is owned j by company investor sec_2 is owned h by htc fund and i by developer the apartment condominium unit is owned by taxpayer taxpayer is a state a limited_liability_company that is treated as a partnership for federal_income_tax purposes taxpayer is owned k by developer m by cde n by cde and o by investors cde is owned h by htc fund and i by cde affiliate taxpayer and taxpayer represent that they are owned by the same entities such that taxpayer and taxpayer are controlled partnerships under sec_707 the terms of the hud financing preclude the hotel condominium unit lenders from holding a security_interest in the apartment condominium unit hud has a first mortgage lien against the apartment condominium unit which includes the residential component retail component and parking component there is no cross- collateralization between the units however each source of financing has been conditioned on the commitment of the other financing sources to project as a whole with one set of financial projections moreover the flow of funds memorandum dated date7 prepared for the closing of the nmtc htc and hud financing of project reinforces the interdependency of each source of financing with regard to the entire project for instance hud loan proceeds must be released and applied to the plr-103561-12 acquisition of the apartment condominium unit before any further funds will be released by the hotel condominium unit lenders furthermore the investment in project by the members of the units is underwritten on a combined basis and to the extent the required return from the investment in project is not achieved by the investment in taxpayer then the members expect and require that the return from the investment in taxpayer offset the expected underperformance of taxpayer on date5 taxpayer entered into the hud regulatory agreement which provided that the owner may not engage except for natural persons in any other business or activity including the operation of any other rental project or incur any liability or obligation not in connection with the project without the prior written approval of the secretary of hud apartment condominium unit consists of the residential component retail component and the parking component the residential component consists of p apartment units and occupies all floors from floor q and above the retail component consists of approximately r square feet of commercial space and is located on the ground floor the parking component consists of approximately s parking spaces with spaces interspersed for residential tenants on the ground floor the interior portion of floors t and u and the garage the garage is internal to the building with one entrance and exit for use by both residential tenants and hotel guests there are approximately v parking spaces on the ground floor with a few spaces dedicated to the hotel manager and several other hotel personnel the rest of the parking spaces are available for guests of the residential tenants or hotel guests on a non-reserved basis parking on interior floors t and u are reserved exclusively for residential tenants on a reserved parking space basis hotel condominium unit occupies the perimeter of floors t and u all of floors w and d plus a portion of the lobby on the ground floor taxpayer entered into a long- term lease agreement with taxpayer to lease x parking spaces for_the_use_of the hotel guests the parking spaces are located in the garage and comprise about y of the spaces available in the garage the hotel parking spaces are in the center of the garage and are valet only the apartment condominium unit and the hotel condominium unit will have separate fitness centers for the apartment residents and hotel guests respectively however apartment residents could use the hotel condominium unit’s fitness center and hotel guests could use the apartment condominium unit’s fitness center by accessing them through their respective lobbies in the amended and restated master declaration of condominium and by-laws dated date6 the units share numerous common elements including but not limited to exterior envelope including masonry exterior and roofing mechanical plant and distribution plumbing distribution fire protection system and shared freight elevator plr-103561-12 and path of egress the electrical service to the building is fed from the same utility- owned vault to a common electrical room in the basement of the building there are separate meters for each unit’s consumption but each component is fed from the same house meter in addition all sidewalks walkways driveways elevators and stairwells are available for use by both the residential tenants and hotel guests moreover project will be operated as one single integrated building and marketed as a single mixed-use development both units have been designed by the same architect and engineering team and the construction is being completed by the same general contractor and subcontractors the building is designed as an integrated mixed-use development with common points of circulation and common paths of ingress and egress encouraging shared usage of amenities and parking z elevators are for the exclusive use of the hotel condominium unit and provide access to the hotel rooms on floors t through d z separate elevators are for the exclusive use of the apartment condominium unit and grant access to the residential floors and parking areas aa of the apartment condominium unit elevators grant access to the parking areas on floors t and u one freight elevator provides access to all floors in the hotel condominium unit and apartment condominium unit all of each unit is accessible to the other unit without exiting the building via the respective lobbies hotel guests and apartment residents access the other unit through secure points at the lobby level which then provide access to the floors in the other unit for instance apartment residents can access the hotel through a key-card controlled glass door that connects the hotel and apartment lobbies the connecting egress stairwells can access either unit and there are secured doors on floor t and u that provide emergency access from the hotel condominium unit components at the perimeter of these floors to the apartment condominium unit parking component on these floors these egress stairs are intended for emergency or maintenance use only for security purposes only the apartment residents have direct access to the residential floors without going through the lobby thus direct access to the garage is limited to the apartment residents and valet parking attendants a restaurant part of the apartment condominium unit adjoins the hotel lobby and entry to the restaurant is through a glass door that remains open to ensure movement between the units an apartment resident can access the restaurant space by walking across the hotel lobby without having to leave the building moreover apartment residents may purchase maid services and room services from the hotel and rent hotel rooms at favorable pricing the residential tenants may also use the hotel valet service to park their car the garden atrium owned by the apartment condominium unit may be leased at little or no cost by the hotel plr-103561-12 condominium unit these shared services produce additional synergies between the units project will have separate managers for the hotel residential rental and retail components but each manager will report to a project manager an agent of developer the manager of each component is responsible for the leasing of space in their respective component and entering into service contracts that are specific to their component for instance the retail manager will enter into storefront maintenance and cleaning contracts however the project manager is responsible for managing project as a single building for instance the project manager will work with the manager of each component to arrive at leasing targets and operating budgets the project manager is also responsible for entering into certain contracts for the building as a whole such as for security fire alarms building maintenance and elevator maintenance moreover the project manager is also responsible for larger financial issues of the property such as conversion and closing of the construction loan to permanent loan for the apartment condominium unit refinancing the hotel condominium unit debt and consolidating component level reports prepared by the individual managers into a property level projection that includes cash and tax projections also the project manager is responsible for budgeting the entire project for making loan payments and distributions for both units and for managing the security concerns that arise from the interconnected nature of the uses of both units moreover the project manager works with the individual component managers to maximize the synergy of the uses of both units for instance the project manager decides whether and how much of a discount taxpayer should offer taxpayer for maid service room service or valet service to the residential tenants and whether and how much a discount taxpayer should offer taxpayer for access to the atrium in the apartment condominium unit due to hud regulatory requirements apartment condominium unit costs must be separate from other aspects of project for instance apartment condominium unit has a separate construction budget and construction_contract therefore the hotel condominium unit and the apartment condominium unit will maintain separate entities separate sets of books_and_records separate_income statements balance sheets and tax returns however interim accounting reports and operating projections for the units are reviewed internally by developer as one project on a monthly basis in addition the financial statements are prepared for project as a whole financial statements that combine information from both units are vital to analyze the overall return on investment for the owners of both units in order to achieve the required return on investment the partnership agreements permit cross- collateralization of distributable cash_flow of the units for instance if there is a plr-103561-12 shortfall in actual distributable cash_flow from taxpayer to an investor the investor can look to taxpayer to receive their allocable distributable cash_flow rulings requested taxpayer and taxpayer request the internal_revenue_service issue the following rulings apartment condominium unit and hotel condominium unit may be treated as a single building for purposes of determining whether project and its structural_components is residential_rental_property or nonresidential_real_property under sec_168 apartment condominium unit and hotel condominium unit may be treated as a single item of sec_1250 property for purposes of sec_1250 law and analysis sec_168 defines the terms residential_rental_property and nonresidential_real_property for purposes of determining depreciation under sec_168 sec_168 provides that the term residential_rental_property means any building or structure if percent or more of the gross rental income from such building or structure for the taxable_year is rental income from dwelling units for this purpose sec_168 provides that the term dwelling_unit means a house or apartment used to provide living accommodations in a building or structure but does not include a unit in a hotel motel or other establishment more than one-half of the units in which are used_on_a_transient_basis sec_168 provides that the term nonresidential_real_property means sec_1250 property which is not i residential_rental_property or ii property with a class_life of less than years sec_168 provides that the term sec_1250 property has the meaning given such term by sec_1250 sec_1250 provides that the term sec_1250 property means any real_property other than sec_1245 property as defined in sec_1245 that is or has been property of a character subject_to the allowance for depreciation provided in sec_167 see also e of the income_tax regulations sec_1_1250-1 provides that for purposes of applying depreciation_recapture rules of sec_1250 the facts and circumstances of each disposition is considered in determining what is the appropriate item of sec_1250 property in general a building is an item of sec_1250 property but in an appropriate case more than one building may be treated as a single item for example if two or more buildings or structures on a single tract or parcel or contiguous tracts or parcels of land are operated as an integrated unit as evidenced by their actual operation management plr-103561-12 financing and accounting they may be treated as a single item of sec_1250 property sec_168 was amended by b a of the revenue reconciliation act of publaw_101_508 1991_2_cb_484 the 1990_act prior to this amendment sec_168 provided that the term residential_rental_property has the meaning given such term by sec_167 prior to the enactment of the 1990_act sec_167 provided in pertinent part that a building or structure shall be considered to be residential_rental_property for any taxable_year only if percent or more of the gross rental income from such building or structure for such year is rental income from dwelling units within the meaning of former sec_167 former sec_1 j -3 b ii provided that in any case where two or more buildings or structures on a single tract or parcel or contiguous tracts or parcels of land are operated as an integrated unit as evidenced by their actual operation management financing and accounting they may be treated as a single building for purposes of determining whether the building or structure is residential_rental_property thus for purposes of determining if apartment condominium unit and hotel condominium unit are residential_rental_property or nonresidential_real_property under sec_168 these buildings may be treated as a single building when they are on a single tract of land or parcel or contiguous tracts or parcels and they are operated as a single integrated unit for making the latter determination the relevant factors are the actual operation management financing and accounting for the buildings see sec_1_1250-1 see also former sec_1 j -3 b ii in this case taxpayer and taxpayer represent that the units are located on the same single tract of land located at a further the apartment condominium unit and hotel condominium unit are contained in one physical building because of the hud financing taxpayer and taxpayer represent that the hud regulatory requirements are the reason that the ownership of the apartment condominium unit and hotel condominium unit is separated into two partnerships taxpayer and taxpayer taxpayer and taxpayer also represent that they are owned by the same entities and are controlled partnerships under sec_707 these facts support treating taxpayer and taxpayer as being allowed to qualify the units as a single building under sec_168 provided that the apartment condominium unit and the hotel condominium unit are operated as a single integrated unit this determination is made by evaluating the actual operation management financing and accounting for project we recognize however that integration of certain business activities of the units is constrained by the limitations imposed by the hud regulatory requirements plr-103561-12 with regard to the operation of project taxpayer and taxpayer represent that the entire project will be placed_in_service within the same 12-month_period the same engineering and architectural teams are involved in the renovation of both units and both units are being completed by the same general contractor and subcontractors project will operate as a single integrated building with common points of circulation and common paths of ingress and egress encouraging shared usage of amenities and parking all of each unit is accessible to the other without exiting the building via the respective lobbies however for security reasons separate elevators will be used for each unit and only the apartment residents have direct access to the residential floors without going through the lobby moreover one freight elevator provides access to all floors in the hotel condominium unit and apartment condominium unit hotel guests and apartment residents access the other unit through secure points at the lobby level which then provide access to the floors and fitness center in the other unit as well as to the retail and restaurant space on the ground level moreover apartment residents may purchase maid services and room services from the hotel and rent hotel rooms at favorable pricing the apartment residents may also use the hotel valet service to park their car the garden atrium owned by the apartment condominium unit may be leased at little or no cost by the hotel condominium unit with regard to management of project taxpayer and taxpayer represent that a single project manager is responsible for entering into certain contracts on behalf of the whole building for instance the project manager contracts for fire alarm monitoring sprinkler testing and maintenance heating and cooling maintenance building security elevator repair and maintenance and bidding for casualty insurance snow removal and landscaping contracts the individual components are responsible for entering into contracts that are specific to their respective component moreover the project manager coordinates with the manager of each component to arrive at leasing targets and the operating budget for project and makes loan payments and distributions for both units further the project manager works with the individual component managers to maximize the synergy of the uses of both units for instance the project manager decides whether and how much of a discount taxpayer should offer taxpayer for maid service room service or valet service to the residential tenants and whether and how much a discount taxpayer should offer taxpayer for access to the atrium in the apartment condominium unit with regard to financing of project taxpayer and taxpayer represent that separate funding was used for the apartment condominium unit and the hotel condominium unit project is not cross-collateralized because the terms of the hud financing preclude the hotel condominium unit lenders from holding a security_interest plr-103561-12 in the apartment condominium unit however funding for project was otherwise interrelated and interdependent each source of financing for project is conditioned on the commitment of the other financing sources to project as a whole with one set of financial projections also the flow of funds memorandum dated date7 shows the interdependency of each source of financing for the entire project for example hud loan proceeds must be released and applied to the acquisition of the apartment condominium unit before any further funds will be released by the hotel condominium unit lenders further the units are owned directly or indirectly by the same investors and these investors contributed substantial equity to taxpayer and taxpayer to finance the construction of project the investors view project as a single enterprise as such the investment in project is underwritten on a combined basis and to the extent an investor’s required rate of return is not achieved by the investment in taxpayer then the investors expect and have required that the return from the investment in taxpayer offset the expected underperformance of taxpayer finally with regard to the accounting for project taxpayer and taxpayer represent that due to hud regulatory requirements apartment condominium unit must maintain separate cost reports therefore hotel condominium unit and apartment condominium unit will maintain separate sets of books_and_records separate_income statements balance sheets and tax returns however developer will review on a monthly basis interim accounting reports and operating projections that consist of combined financial information from both units in addition the financial statements are prepared for project as a whole the combined financial statements are used by developer and the partners to manage operations and analyze overall return on investment for the partners in both units taxpayer’s and taxpayer 2’s facts and representations about the operation management financing and accounting of project show that the two condominiums hotel condominium unit and the apartment condominium unit composing project are to be operated as a single integrated unit conclusions based solely on the facts and representations submitted and the relevant law and analysis as set forth above we conclude that the apartment condominium unit and hotel condominium unit may be treated as a single building for purposes of determining whether the building and its structural_components is residential_rental_property or nonresidential_real_property under sec_168 plr-103561-12 apartment condominium unit and hotel condominium unit may be treated as a single item of sec_1250 property for purposes of sec_1250 except as specifically set forth above we express no opinion concerning the tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed or implied on i whether the units composing project are nonresidential_real_property or residential_rental_property for any taxable_year under sec_168 ii what components of such buildings are sec_1245 property as defined in sec_1245 iii whether the units composing project qualify for the rehabilitation_credit under sec_47 including whether such buildings may be treated as a single building under sec_47 and iv whether the units qualify for the new_markets_tax_credit under sec_45d this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s and taxpayer 2’s authorized representative we are also sending a copy of this letter to the appropriate industry director lb_i sincerely kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01-plr-128901-00 date date legend x d1 year property property property property a b this responds to a letter dated date together with subsequent correspondence submitted on behalf of x requesting a ruling that the rental income received in the course of its operations does not constitute passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts x is a c_corporation x anticipates making an election to be treated as an s_corporation for its taxable_year beginning di x owns property property and property which are commercial properties as well as property the properties x provides various services to the properties services provided in the last year include leasing managing maintaining and repairing the property providing pest plr-128901-00 control janitorial service window cleaning trash collection and landscaping x handles the usual leasing and administrative functions involved in overseeing the management of real_estate in addition x is responsible for major remodeling projects in year x received or accrued a in rents and paid_or_incurred b in relevant expenses on the properties law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be a subchapter_s_corporation sec_1362 provides that an election under sec_1362 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion after applying the law to the facts submitted and representations made we conclude that the rental income x receives from propertie sec_1 and is not passive_investment_income under sec_1362 except as expressly provided herein no opinion is expressed or implied plr-128901-00 concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding whether x otherwise satisfies the s_corporation eligibility requirements under sec_1361 further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely matthew lay assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes