internal_revenue_service number release date index no department of the treasury p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi -- plr-149998-02 date date legend taxpayer corp corp generator power marketer agency state a state b city a city b project a b c plr-149998-02 f g h i j k m n o p r s t u v x z aa gg dear this letter responds to your letter dated date submitted on behalf of taxpayer requesting a letter_ruling concerning whether the transfer of an intertie from generator to taxpayer is a nonshareholder contribution_to_capital excludable from income under sec_118 of the internal_revenue_code plr-149998-02 facts taxpayer represents that the facts are as follows generator is a state b limited_liability_company that was formed in a to develop build and own the project generator is an indirect-wholly owned subsidiary of corp for federal_income_tax purposes generator is treated as a disregarded_entity and is considered a division of corp a first-tier subsidiary of corp corp is a state b corporation that is both an operating company and a holding_company that produces a wide range of industrial products corp files a consolidated federal_income_tax return for all companies in the affiliated_group of which corp is the common parent taxpayer is a state a public_utility that generates purchases transmits distributes and sells electricity and natural_gas services in state a generator signed two contracts with taxpayer in f governing the interconnection of the project to the grid the project is a b megawatt natural-gas fired simple-cycle power plant that went into commercial operation in c one of the contracts the interconnection agreement is the legal document that permits generator to connect to the grid the other agreement the expedited interconnection facilities agreement describes the intertie needed to connect the project to the grid allocates responsibility for constructing it and makes generator responsible for its cost interconnection involved construction of a new radial line from the project to an existing substation of taxpayer modification of the substation to accommodate the new line installation of disconnect switches circuit breakers protective and control systems meters and a step-up transformer construction of foundations and rewiring and related tasks taxpayer has submitted an exhibit showing the boundary where taxpayer starts to own the intertie each party built the portion of the intertie on its side of the interconnection point and generator reimbursed taxpayer for its costs the interconnection agreement will remain in effect until one party gives r days’ written notice that it wants to terminate the agreement generator can give such notice for any reason taxpayer can only terminate after a premature termination of the expedited interconnection facilities agreement or if the project has permanently ceased operating either party can terminate if the other has defaulted on its obligations or if an uncontrollable force occurs and the parties are unable to identify a means of overcoming it within g months after notice by one party to the other of the event the interconnection agreement requires taxpayer to accommodate up to b megawatts of electricity from generator on the grid the agreement does not require taxpayer to transmit or distribute the electricity generator is required to operate its power plant in a manner that maintains the integrity of the grid plr-149998-02 the expedited interconnection facilities agreement commits taxpayer to design the intertie and divides up responsibility for constructing it taxpayer did the work on the part of the intertie that it owns generator built the intertie from the project up to taxpayer’s property line and reimbursed taxpayer for its costs generator had already advanced taxpayer dollar_figureh for the estimated cost of the work that the utility had to do by the time the expedited interconnection facilities agreement was signed in f the actual cost of taxpayer’s work was dollar_figurei taxpayer refunded dollar_figurej to generator in t the amount generator paid during s to reimburse taxpayer for its anticipated costs is referred to as the interconnection payment taxpayer will be responsible for maintaining its portion of the intertie generator must pay an ongoing monthly maintenance charge approximately r percent of the capacity of the project has been committed to agency under an amended power purchase agreement that was signed in m power purchase agreement under the power purchase agreement agency has first claim on the project for an amount of electricity equivalent to o hours of output at the rated capacity during peak periods and for electricity equivalent to p hours at the rated capacity during other periods the power purchase agreement has a term of n years from aa when the project commenced commercial operation under the power purchase agreement agency makes monthly payments of approximately dollar_figurev per megawatt year for keeping the project on standby agency may also purchase electricity from the project up to the amount of capacity it has reserved by calling on the project to produce it must pay dollar_figurex per megawatt hour of electricity delivered and reimburse the project for its fuel costs to generate the electricity agency has the option of supplying the fuel in lieu of paying fuel charges the delivery point for electricity under the power purchase agreement is at the interconnection point shown in a diagram submitted with the ruling_request generator entered into gg other contracts with power marketer dated as of y power marketer supplies fuel and helps market the electricity from the project these contracts run through z and remain in effect year to year thereafter unless terminated by either party an electricity sales scheduling and marketing agreement appoints power marketer as the scheduling agent for the project and also provides that power marketer will recommend marketing strategies and financial and other risk management products for disposing of the remaining output if generator accepts the suggestions power marketer will implement them and receive compensation in addition to a scheduling fee a natural_gas supply and marketing agreement makes power marketer responsible for procuring gas for the project to the extent not supplied by agency a cross-commodity netting agreement provides that any amounts power marketer owes the project for electricity sales will be netted against the amounts it is owed for gas the delivery point is the same delivery point for the sales to agency plr-149998-02 taxpayer represents that generator will recover its basis using the straight-line method over years taxpayer also represents that the intertie is equipped to carry backup power to generator however the parties expect that the amount of power flowing back over the intertie to generator will be less than percent of the projected power flows in both directions over the intertie during taxpayer’s first tax years after the intertie is placed_in_service taxpayer will not put the intertie into its rate base law and analysis sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 as amended by a of the tax_reform_act_of_1986 the act and a of the small_business job protection act of provides that for purposes of subsection a except as provided in subsection c the term contribution to the capital of taxpayer does not include any ciac or any other contribution as a customer or potential customer sec_1_118-1 of the income_tax regulations provides in part that sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to sec_118 indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also indicates that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83d cong 2d sess notice_88_129 1988_2_cb_541 as modified and amended by notice_90_60 1990_2_cb_345 and notice_2001_82 2001_52_irb_619 provides specific guidance with respect to the treatment of transfers of property to regulated public_utilities by qualifying small power producers and qualifying cogenerators collectively qualifying facilities as defined in sec_3 of the federal power act as amended by section of purpa plr-149998-02 the amendment of sec_118 by the act was intended to require utilities to include in income the value of any ciacs made to encourage the provision of services by a utility to a customer see h_r rep no 99th cong 2d sess in a ciac transaction the purpose of the contribution of property to the utility is to facilitate the sale of power by the utility to a customer in contrast the purpose of the contribution by a qualifying_facility to a utility is to permit the sale of power by the qualifying_facility to the utility accordingly the fact that the amendments to sec_118 render ciac transactions taxable to the utility does not require a similar conclusion with respect to transfers from qualifying facilities to utilities notice_88_129 provides in part that with respect to transfers made by a qualifying_facility to a utility exclusively in connection with the sale of electricity by the qualifying_facility to the utility a utility will not realize income upon transfer of interconnection equipment intertie by a qualifying_facility the possibility that an intertie may be used to transmit power to a utility that will in turn transmit the power across its transmission network for sale by the qualifying_facility to another utility wheeling will not cause the contribution to be treated as a ciac further the notice provides in part that a transfer from a qualifying_facility to a utility will not be treated as a qualifying_facility transfer qf transfer under this notice to the extent the intertie is included in the utility’s rate base moreover a transfer of an intertie to a utility will not be treated as a qf transfer under this notice if the term of the power purchase contract is less than ten years the notice also provides in part that a utility that constructs an intertie in exchange for a cash payment from a qualifying_facility pursuant to a purpa contract will be deemed to construct the property under contract and will recognize income from the construction in the same manner as any other taxpayer constructing similar_property under contract subsequent to the construction of the property the qualifying_facility will be deemed to transfer the property to the utility in a qf transfer that will be treated in exactly the same manner as an in-kind qf transfer notice_2001_82 amplifies and modifies notice_88_129 notice_2001_82 extends the safe_harbor provisions of notice_88_129 to include transfers of interties from non- qualifying facilities and transfers of interties used exclusively or in part to transmit power over the utility’s transmission grid for sale to consumers or intermediaries wheeling the notice requires that ownership of the electricity wheeled passes to the purchaser prior to its transmission on the utility’s transmission grid this ownership requirement is deemed satisfied if title passes at the busbar on the generator’s end of the intertie further notice_2001_82 provides that a long-term interconnection agreement in lieu of a long-term power purchase contract may be used to satisfy the safe_harbor provisions of notice_88_129 in wheeling transactions finally notice_2001_82 requires that the generator must capitalize the cost of the property transferred as an intangible asset and recovered using the straight-line method over a useful_life of years plr-149998-02 in the instant case the transfer of the intertie is subject_to the guidance set forth in notice_88_129 notice_90_60 and notice_2001_82 for the following reasons the project is a stand-alone generator as contemplated under notice_2001_82 generator and taxpayer have entered into a long-term interconnection agreement the intertie will be used in connection with the transmission of electricity for sale to third parties the cost of the intertie will not be included in taxpayer’s rate base the amount of power flowing back over the intertie to generator will be less than percent of the projected power flows in both directions over the intertie during taxpayer’s first tax years after the intertie is placed_in_service ownership of the electricity wheeled will not be with generator prior to its transmission on the grid and the cost of the intertie will be capitalized by generator as an intangible asset and recovered using the straight-line method over a useful_life of years thus we conclude that the transfer of the intertie by generator to taxpayer meets the safe_harbor requirements of notice_88_129 as amended and modified by notice_90_60 and notice_2001_82 next we must decide whether the contribution qualifies as a contribution_to_capital under sec_118 the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the treating the contribution as a payment for future services s rep no 83d cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility’s facilities to their homes were part of the price of service rather than contributions to capital the concerned customers’ payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company’s capital later in 339_us_583 1950_1_cb_38 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that plr-149998-02 when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy railroad co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital the court in chicago burlington quincy railroad co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee’s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect based on the facts presented we conclude that the transfer of the intertie by generator to taxpayer possesses the characteristics of a nonshareholder contribution_to_capital as described in chicago burlington quincy railroad co therefore the transfer of the intertie by generator to taxpayer will be a contribution_to_capital under sec_118 accordingly based solely on the foregoing analysis and the representations made by taxpayer and generator we rule that the transfer of the intertie by generator to taxpayer will not constitute a ciac under sec_118 and will be excludable from the gross_income of taxpayer as a nonshareholder contribution_to_capital under sec_118 except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically no opinion is expressed or implied on whether the agreement between generator and power marketer is a sales contract or a service agreement we are also not ruling as to whether your plr-149998-02 representation that less than percent of the total projected power flows over the duel- use intertie from taxpayer to generator is a reasonable projection for purposes of the percent test in notice_88_129 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely walter h woo senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy


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 corp b06 plr-117401-09 date date ty -------------------------- ty -------------------------- legend parent seller purchaser --------------------------------------------------------------------------------- -------------------------------------------- ------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------- target ----------------------------------------------------------------------- ------------------------------------------------------------- target --------------------------------------------------------------- ----------------------------------------------------------------- business a business b --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------- company official --------------------------------------------------------------------------------- ------------------------------------------------- company official --------------------------------------------------------------------------------- ------- plr-117401-09 tax professional --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- - tax professional ------------------------------------------------------- tax professional ------------------------------------------------------------------------------- date a date b date c dear ---------------- ------------------- -------------------- ------------------ this letter responds to a letter dated date submitted by parent as common parent of the consolidated_group of which purchaser is a member requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election parent is requesting an extension to file a sec_338 election under sec_338 with respect to purchaser's acquisition of the stock of target and target the election on date b additional information was received in letters dated date and date the material information is summarized below on date a purchaser and seller entered into a purchase agreement for purchaser to acquire substantially_all of the assets of business a and business b and all of the stock of target and target which were controlled_foreign_corporations within the meaning of sec_957 from seller target and target were purchaser’s only stock purchases under the purchase agreement on date b purchaser acquired all of the stock of target and target from seller pursuant to the purchase agreement it is represented that purchaser’s acquisition of the stock of target and target qualifies as a qualified_stock_purchase as defined in sec_338 neither target nor target was a passive_foreign_investment_company or a foreign_personal_holding_company at any time during the portion of its taxable_year that ends on the acquisition_date as defined in sec_338 the election was due on date c but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has plr-117401-09 not expired for parent’s consolidated group’s or targets' taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official company official tax professional tax professional and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that the parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent to file the election with respect to the acquisition of the stock of target and target as described above plr-117401-09 within days of the date on this letter parent must file the election on form_8023 in accordance with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to form_8023 and to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year a copy of this letter and a copy of form_8883 must be attached to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling because target and target were controlled_foreign_corporations parent must also deliver written notice of the election and a copy of form sec_8023 and their attachments and instructions to u s persons selling or holding stock in target or target see sec_1_338-2 the above extension of time is conditioned on parent’s consolidated group’s and targets’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to parent’s consolidated group’s and targets’ tax_liability if any for the years involved a determination thereof will be made by the applicable director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the parent’s consolidated group’s tax_liability is lower sec_301_9100-3 we express no opinion as to whether the acquisitions of the stock of target and target qualify as qualified_stock purchases under sec_338 or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination the director should verify all essential facts in addition notwithstanding that an extension is granted under plr-117401-09 sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


department of the treasury internal_revenue_service washington d c 20l440 q26 tax_exempt_and_government_entities_division jul u i l xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxx legend taxpayer a ira x bank c amount d dear xxxxxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx this letter is in response to your request dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution on may from ira x totaling amount d taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the anxiety and emotional stress caused by hurricane sandy taxpayer a further represents that amount d has not been used for any other purpose and remains in his savings account with bank c taxpayer a represents that in the fall of hurricane sandy destroyed the main floor of his family home from date through date taxpayer a and his family lived with friends and in hotels on date a new heating system was installed and taxpayer a and his family moved back into the upstairs part of their home taxpayer a depleted all his savings to pay for the new heating system demolition and mold remediation during date taxpayer a received a settlement from his homeowner's insurance_company for structure damage and content losses on date taxpayer a took a distribution of amount d from ira x in anticipation of needing such distribution to pay for additional construction bills however taxpayer a delayed the construction as much as possible as he did not want to spend his retirement savings on date taxpayer a deposited amount d into his savings account with bank c based on the foregoing facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to amount d sec_408 d of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of th code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60t day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of suchreceipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 i r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a does not demonstrate that taxpayer a failed to accomplish a rollover of amount d due to any of the factors cited in revproc_2003_16 taxpayer a has not submitted any evidence to show his inability to rollover arr ount d within the 60-day period of the distribution taxpayer a has not described any situation that prevented him from rolling over amount d into a rollover ira during the 60-day rollover period therefore pursuant to sec_408 of the code the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount d no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions concerning this letter please contact xxxxxxxxx at xxxxxxxxx all correspondence should be addressed to se t ep ra t3 sinc ours w laura b warshawsky manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose cc xxxxxxxxxxxxxxxxx


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 fip b02 plr-135684-14 date date legend taxpayer --------------------------------------------------------------------------------------- state -------------- x y ---- ---- dear --------------- this responds to your letter dated date submitted on behalf of taxpayer taxpayer requests a ruling that income from certain original and counteracting hedging_transactions described below will not constitute gross_income for purposes of the real_estate_investment_trust reit income tests under sec_856 and of the internal_revenue_code_of_1986 the code facts taxpayer a state corporation is a residential mortgage reit taxpayer invests primarily in instruments classified as mortgages on real_property within the meaning of sec_856 mortgages including mortgage-backed_securities issued by united_states government agencies or government-sponsored entities taxpayer’s mortgages generally are long-term debt instruments that pay a fixed rate of interest taxpayer typically finances its mortgages with short-term borrowings including repurchase agreements repos that are treated as short-term secured borrowings for federal_income_tax purposes under a repo taxpayer nominally sells certain of its plr-135684-14 mortgages to a counterparty and at the same time agrees to repurchase those mortgages at a fixed date in the future for a fixed price a repo typically has a term of between x and y days and requires taxpayer to pay an interest rate based on libor or a similar interest rate index at the time the repo is entered into at maturity taxpayer must either repay the repo with cash on hand or enter into a new repo the proceeds of which are used to repay the old repo because taxpayer may hold a financed mortgage for a long period of time and may want to maintain a constant level of short-term financing on that mortgage taxpayer upon maturity of one repo may replace the maturing repo with a new short- term repo because the interest rate charged by the lender will be newly determined every time one such repo matures and is repaid with the proceeds of a new repo a series of back-to-back short-term repos resembles in economic_substance a long-term_loan bearing a variable or floating interest rate adjusting every x to y days in addition to repos taxpayer may use other types of financing that actually or effectively bear a floating interest rate such as private loans under credit agreements bonds or other debt instruments issued to the public or in private placements and other transactions treated as borrowings for tax purposes under which taxpayer would pay a floating rate of interest collectively with repos the borrowings for the purposes of this ruling_request the term borrowings refers to those borrowings incurred or to be incurred to finance taxpayer’s mortgages including future short-term borrowings the proceeds of which are anticipated to repay other borrowings upon maturity as described previously because taxpayer finances its acquisition and ownership of mortgages with floating rate borrowings or short-term current borrowings that are anticipated to be repaid using the proceeds of short-term future borrowings taxpayer effectively must pay a floating interest rate on its indebtedness as such taxpayer is subject_to the risk of changing interest rates with respect to debt incurred or to be incurred to acquire or carry such real_estate_assets to hedge the risk of such interest rate changes on its borrowings for the period during which it intends to finance its mortgages taxpayer enters into various hedging_transactions including interest rate swaps under which taxpayer pays a fixed rate of interest and receives payments based on a floating rate of interest pay-fixed swaps in addition to pay-fixed swaps taxpayer also hedges its interest rate exposure on the borrowings by entering into pay-fixed swaptions which are options entitling taxpayer to enter into a pay-fixed swap together the pay-fixed swaps and pay-fixed swaptions manage taxpayer’s risk of interest rate changes with respect to the borrowings these transactions along with others that similarly function to hedge taxpayer’s exposure to risk resulting from plr-135684-14 interest rate fluctuations such as interest rate caps are referred to collectively as original hedges taxpayer represents that on the date into which each original hedge to be covered by the requested ruling is entered such original hedge will be a hedging_transaction within the meaning of sec_1221 of the code and sec_1 b of the regulations taxpayer further represents that the identification requirements described in sec_1221 sec_1_1221-2 and sec_856 will be satisfied with respect to such original hedge taxpayer further represents that the original hedges are used to hedge the interest rate risks of the borrowings which are used to finance the mortgages based on its business goals market conditions and other factors taxpayer will have a desired hedging ratio-that is a ratio of i the notional_principal_amount of its outstanding hedges to ii the principal_amount of its borrowings taxpayer may decide to decrease the notional amount of its original hedges due to a change in its desired hedging ratio or a decrease in the amount of its borrowings rather than terminating certain of its original hedges to achieve the desired level of hedging exposure taxpayer may find it commercially or economically desirable to enter into one or more additional hedges that have the effect of counteracting or offsetting all or part of such original hedges for all or part of the remaining term of such original hedges each a counteracting hedge taxpayer represents that counteracting hedges are commercially preferable to actual termination of an original hedge and thus are commonly used by market participants to achieve the economic_effect of terminating an original hedge the counteracting hedges may take the form of swaps requiring taxpayer to pay a floating rate of interest and receive a fixed rate of interest receive-fixed swaps or options to enter into such swaps receive-fixed swaptions depending on prevailing commercial or economic conditions it is possible that the cash flows of a counteracting hedge may not offset on a dollar-for-dollar basis the cash flows of a related original hedge however taxpayer represents that even in such instances the counteracting hedge will serve the purposes of achieving a desirable level of hedging exposure such that together the original hedges and counteracting hedges will constitute a degree of hedging of taxpayer’s borrowings at a level and on financial terms that taxpayer deems appropriate in its business judgment taxpayer represents that on the date into which each counteracting hedge to be covered by the requested ruling is entered such counteracting hedge will be a hedging_transaction within the meaning of sec_1221 and sec_1_1221-2 taxpayer further represents that the identification requirements described in sec_1221 sec_1_1221-2 and sec_856 will be satisfied with respect to such counteracting hedge plr-135684-14 rulings requested taxpayer seeks the following rulings pursuant to the provisions of sec_856 of the code taxpayer’s gross_income from the original hedges will not constitute gross_income for purposes of sec_856 and pursuant to the provisions of sec_856 taxpayer’s gross_income from the counteracting hedges will not constitute gross_income for purposes of sec_856 and law sec_856 of the code provides that a corporation shall not be considered a reit unless it derives at least percent of its gross_income excluding gross_income from prohibited_transactions from dividends interest rents_from_real_property and certain other items listed in sec_856 sec_856 provides that a corporation shall not be considered a reit unless it derives at least percent of its gross_income excluding gross_income from prohibited_transactions from rents_from_real_property and certain other items listed in sec_856 sec_856 provides that income from a hedging_transaction as defined in clause ii or iii of sec_1221 including gain from the sale or disposition of such a transaction shall not constitute gross_income for purposes of the percent or percent gross_income tests to the extent that the transaction hedges any indebtedness incurred or to be incurred by the reit to acquire or carry real_estate_assets provided that such hedging_transaction is properly identified pursuant to sec_1221 sec_856 was amended by the american_jobs_creation_act_of_2004 to provide for the exclusion_from_gross_income of income from hedging_transactions including income from the sale or disposition of such a transaction for purposes of the percent gross_income_test publaw_108_357 date prior_law had provided that such income was treated as qualifying_income as opposed to being excluded for purposes of this test the accompanying legislative_history explains that the rules governing the tax treatment of arrangements engaged in by a reit to reduce certain interest rate risks are prospectively generally conformed to the rules included in sec_1221 h_r rep no pincite sec_1221 requires that for a hedging_transaction to be excluded as a capital_asset a hedging_transaction must be clearly identified as such before the close plr-135684-14 of the day on which it was acquired originated or entered into or such other time as the secretary may by regulations prescribe sec_1221 defines a hedging_transaction as any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade_or_business primarily i to manage risk of price changes or currency fluctuations with respect to ordinary_property which is held or to be held by the taxpayer ii to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made or ordinary obligations incurred or to be incurred by the taxpayer or iii to manage such other risks as the secretary may prescribe in regulations sec_1_1221-2 of the income_tax regulations provides that if a transaction is entered into primarily to offset all or any part of the risk management effected by one or more hedging_transactions the transaction is a hedging_transaction sec_856 of the code provides that to the extent necessary to carry out the purposes of this part the secretary is authorized to determine solely for purposes of this part whether any item_of_income or gain which i does not otherwise qualify under sec_856 or c may be considered as not constituting gross_income for purposes of sec_856 or c analysis taxpayer represents that income from the original hedges entered into by taxpayer qualify for the exclusion_from_gross_income provided under sec_856 the requirements of this section are satisfied where as here represented a hedging_transaction entered into by a reit is properly identified under sec_1221 meets the definitional requirements of a hedging_transaction under sec_1221 and in the case of an interest rate hedge is a hedge of indebtedness incurred or to be incurred to acquire or carry real_estate_assets the legislative_history accompanying the amendments to sec_856 makes clear the intent of congress that the reit hedging rules are generally to be conformed to the rules set forth in sec_1221 if properly identified under sec_1221 as represented the counteracting hedges entered into by taxpayer also qualify as hedging_transactions under sec_1_1221-2 of the regulations because as represented by taxpayer they are entered into to offset all or part of the risk management effected by the original hedges pursuant to the provisions of sec_856 of the code income from a counteracting hedge that qualifies as a hedging_transaction under sec_1221 may be excluded from gross_income for purposes of sec_856 or c under the facts of this case excluding the income from these hedging_transactions from gross plr-135684-14 income for purposes of sec_856 and c does not interfere with congressional policy objectives in enacting the income tests under those provisions conclusion based on the information submitted and the representations made we rule that pursuant to sec_856 taxpayer’s gross_income from the original hedges will not constitute gross_income for purposes of sec_856 and c we further rule that pursuant to sec_856 taxpayer’s gross_income from the counteracting hedges will not constitute gross_income for purposes of sec_856 and c except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed or implied concerning whether the original hedges or counteracting hedges are hedging_transactions within the meaning of sec_1221 and sec_1_1221-2 we also express no opinion whether the identification requirements described in sec_1221 sec_1 and sec_856 have been or will be satisfied with respect to the original hedges or the counteracting hedges additionally no opinion is expressed with regard to whether taxpayer qualifies as a reit under subchapter_m of the code this ruling is directed only to the taxpayer requesting it its application is limited to the facts representations code sections and regulations cited herein sec_6110 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 each of your authorized representatives sincerely andrea m hoffenson andrea m hoffenson branch chief branch office of associate chief_counsel financial institutions products


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b01 qphuynh preno-142246-09 uilc date date to lois lerner director exempt_organizations from m grace fleeman senior technical reviewer branch international third party communication none date of communication not applicable subject notice of withdrawal of private_letter_ruling request in accordance with section of revproc_2009_1 2009_1_irb_1 we are providing you with notification of a private_foundation withdrawal of a private_letter_ruling request on date the private foundation’s representative withdrew the above-referenced request for a private_letter_ruling after this office advised such private_foundation and its representative of its tentative conclusion following is a brief discussion of the issue facts applicable law and the reason for this office’s tentative conclusion a copy of the private foundation’s request is attached this memorandum is not binding on examination or appeals and is not a final case determination this document may not be used or cited as precedent legend private_foundation ---------------------------------------------- act ------------------------------------------------------------------------ ------- year date - ------- ----------------------- preno-142246-09 issue whether the u s -u k income_tax treaty the treaty exempts private_foundation from the federal excise_tax imposed on u s source dividend income under sec_4948 of the code conclusion based solely on the facts submitted and the representations made we tentatively conclude that the treaty does not exempt_private_foundation from the federal excise_tax imposed on u s source dividend income under sec_4948 further the sec_1443 withholding_tax applies to income of a foreign organization subject_to tax imposed by sec_4948 facts private_foundation was established as a charitable_trust in the united kingdom in year to foster and promote certain types of research and is governed by the act private_foundation is recognized as a charity for u k tax purposes by the u k tax authorities on date private_foundation received a written_determination letter from the internal_revenue_service that it is an organization described in sec_501 of the internal_revenue_code code as a sec_501 organization private_foundation is generally exempt from federal_income_tax under sec_501 of the code further the written_determination letter stated that private_foundation is a private_foundation within the meaning of sec_509 of the code as a foreign private_foundation private_foundation is subject_to sec_4948 of the code which generally imposes a four percent annual excise_tax on a foreign private foundation’s gross_investment_income derived from sources within the united_states gross_investment_income for purposes of sec_4948 includes the portion of private foundation’s operating income from u s source dividends therefore absent an applicable treaty exemption private_foundation is subject_to the four percent excise_tax on its u s source dividend income pursuant to sec_4948 of the code the united_states has an income_tax treaty in force with the united kingdom law and analysis article a ii of the treaty provides that federal excise_taxes imposed with respect to private_foundations are included as existing taxes to which the treaty applies the treasury_department technical explanation to article of the treaty clarifies that the federal excise_taxes imposed with respect to private_foundations are those taxes imposed under sec_4940 through sec_4948 imposes a four percent annual excise_tax on a foreign private foundation’s gross_investment_income derived preno-142246-09 from sources within the united_states gross_investment_income includes among other items of income u s source dividends for purposes of sec_4948 sec_1443 imposes a withholding_tax on items of income paid to a foreign organization that are subject_to the excise_tax under sec_4948 the withholding_tax is equal to the four percent tax imposed under sec_4948 article b of the treaty provides in relevant part that dividends may also be taxed in the contracting state of which the company paying the dividends is a resident and according to the laws of that state but if the beneficial_owner of the dividends is a resident of the other contracting state the tax so charged shall not exceed percent of the gross amount of the dividends in all other cases generally when a tax is listed as a covered tax under article the contracting state that normally may impose such tax will agree to limit its right to impose the tax unless such right has been retained within the treaty even though the excise_tax under sec_4948 is a covered tax within the meaning of article of the treaty the united_states has retained its right to impose the tax pursuant to article b of the treaty under article b of the treaty the united_states has retained its right to impose a tax not to exceed fifteen percent of the gross amount of u s source dividends article b of the treaty is not limited to income taxes but may also include excise_taxes so long as the aggregate amount of the tax does not exceed fifteen percent thus nothing in the treaty exempts private_foundation from the four percent excise_tax imposed under sec_4948 further sec_1443 applies a four percent withholding_tax to items of income of a foreign organization subject_to excise_taxes imposed under sec_4948 case developments hazards and other consideration this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call -------------------at --------------------- if you have any further questions


t c memo united_states tax_court jeffrey a roye petitioner v commissioner of internal revenue respondent docket no filed date p failed to file tax returns for and r prepared substitutes for returns under sec_6020 for those years and issued a notice_of_deficiency determining deficiencies in income_tax and additions to tax under sec_6651 and a and in his answer to amended petition r asserted as an alternative to additions to tax under sec_6651 additions to tax under sec_6651 held p is liable for the deficiencies in income_tax and additions to tax under sec_6651 and a and for and held further p is liable for an sec_6673 penalty of dollar_figure jeffrey a roye pro_se duy p tran kathryn f patterson and george edward gasper for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency notice respondent determined deficiencies in and additions to tax with respect to petitioner's federal_income_tax as follows additions to tax_year deficiency sec_6651 sec_6651 sec_6654 dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure by answer to amended petition respondent supported by specific averments his determination of additions to tax under sec_6651 and as an alternative to those additions to tax claimed additions to tax pursuant to sec_6651 the issues for decision for and years in issue are whether petitioner underreported his income is liable for additions to tax for 1unless otherwise stated 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 we round all amounts to the nearest dollar failures to a pay tax timely and b pay estimated income_tax and is liable for an addition_to_tax for fraudulent_failure_to_file or alternatively for nonfraudulent failure_to_file we must also decide whether to make absolute this court's order dated date directing petitioner to show cause why a penalty should not be imposed upon him under sec_6673 sanctioning taxpayers who among other things bring proceedings for the purpose of delay or advance a frivolous or groundless position findings_of_fact background at the time he filed the petition and amended petition petitioner lived in texas from at least to petitioner operated a pool-cleaning business he did not file federal_income_tax returns for taxable years he filed federal_income_tax returns for taxable years engaging a tax_return_preparer to prepare those returns 2there are also certain computational adjustments that follow from the adjustments at issue but they are not in controversy and we need not discuss them 3we assume on the basis of his returns that petitioner was a cash_basis taxpayer for internal_revenue_service irs examination respondent assigned revenue_agent mark tae to examine petitioner's liability for the years in issue by letter dated date revenue_agent tae informed petitioner that the irs had not received his tax returns for the years in issue and that he had scheduled a date meeting to discuss the matter in response petitioner sent a letter dated date stating that he would not attend that meeting and denying that he is liable for the so-called income_tax or any other internal revenue tax and a taxpayer under the internal_revenue_code he also stated that he had filed returns in past years out of total ignorance of the tax laws petitioner subsequently sent to revenue_agent tae a document claiming sovereign immunity from among other things any administrative action civil or criminal brought by the irs petitioner did not provide to revenue_agent tae records or other information concerning his taxable_income for the years in issue therefore to determine petitioner's income for those years revenue_agent tae inquired of a credit bureau and on the basis of the received information he had summonses served on five financial institutions one of those summoned financial institutions jpmorgan chase co jpmorgan chase informed him that in the years in issue petitioner had not maintained an account in his name but he may have had signature_authority with respect to the bank account of freedom church of revelation restoration ministries bank account revenue_agent tae had summonses served on jpmorgan chase requesting information concerning that account upon receiving the requested records revenue_agent tae examined the deposits made to the bank account over which petitioner indeed held sole signature_authority and copies of canceled checks noticing that memo lines of several deposited checks referenced pool services he sent third-party contact letters to issuers of those checks requesting additional information he received several responses all of which confirmed that petitioner had serviced their swimming pools during the years in issue and either that they remitted to him checks made out to fcr or petitioner's company name was fcr revenue_agent tae then reconstructed petitioner's income for the years in issue under the so-called bank_deposits method to reconstruct petitioner's income for each year in issue he prepared a schedule of the net deposit and individual item amount of checks that was sic received by petitioner and deposited to a bank account under the name of freedom church of revelation the source of each deposit ie interest payment name of issuer of check the check number and the memo text ie revenue_agent tae's notation of an interest payment memo line of deposited checks to the sum of those deposits he added undeposited items from third parties customers and he subtracted interest credited to the account and identifiable nontaxable deposits he believed that for each year in issue the resulting sum represented the year's unreported gross_income from petitioner's pool-cleaning business adjustment revenue_agent tae determined that during total deposits of dollar_figure were made to the bank account from which he subtracted dollar_figure representing interest the difference being unreported net deposits from pool cleaning he further concluded that petitioner also received from customers dollar_figure for pool cleaning services rendered none of which was deposited into the bank account he determined the net deposits plus undeposited items from customers totaling dollar_figure to be petitioner's unreported gross_income from his pool-cleaning business 4undeposited items from third parties represent amounts identified by revenue_agent tae through third-party contact letters paid to petitioner by customers of his pool-cleaning business which were not deposited into the bank account adjustment revenue_agent tae determined that during total deposits of dollar_figure were made to the bank account from which he subtracted dollar_figure and dollar_figure representing interest and gifts respectively the difference being unreported net deposits from pool cleaning he further concluded that petitioner also received from customers dollar_figure for pool cleaning services rendered none of which was deposited into the bank account he determined the net deposits plus undeposited items from customers totaling dollar_figure to be petitioner's unreported gross_income from his pool-cleaning business all years revenue_agent tae could not identify for either year in issue any business_expenses paid from the bank account substitutes for returns under sec_6020 respondent prepared substitutes for returns under sec_6020 for petitioner's years in issue sec_6020 returns the sec_6020 return showed dollar_figure and dollar_figure of interest_income and schedule c gross_receipts respectively totaling dollar_figure the sec_6020 return showed dollar_figure and dollar_figure of interest_income and schedule c gross_receipts respectively totaling dollar_figure the interest amounts and schedule c gross_receipts are the same as those determined in revenue_agent tae's bank_deposits analysis the sec_6020 returns showed resulting deficiencies of dollar_figure and dollar_figure for the years in issue in response to a letter ie a 30-day_letter proposing changes to petitioner's tax for those years petitioner disagreed with the proposed changes reiterated his denial of taxpayer status under the internal_revenue_code and stated that he did not file tax returns for tax years ending and there is no code section in the internal_revenue_code that authorizes the irs to 'change' returns even if he had filed a return petitioner did not make any income_tax payments or any estimated_tax payments for or notice respondent issued the notice on date from his small_business and self-employed office dallas texas it was signed on his behalf by janet a miller technical services gulf states area in an attachment to the notice respondent explained that for each year in issue his determination_of_a_deficiency in tax was principally due to his adjustments increasing petitioner's gross_receipts from his pool-cleaning business plus unreported interest_income respondent also explained his determination of additions to tax under sec_6651 and a and for each year in issue petitioner's discovery petitioner used the court's informal_discovery procedures to among other things request of respondent the following please provide a copy of the documentation which request states the badge number and or employee identification_number job description position and gs level with the irs of janet a miller along with a printed copy of the person's name who signed the notice_of_deficiency which was issued by respondent in the instant case docket no request please provide a copy of janet a miller's person who signed the notice_of_deficiency which was issued by respondent in the instant case docket no constitutional oath of office as required by article vi clause u s constitution and u s c sec please provide a copy of janet a miller's person request who signed the notice_of_deficiency which was issued by respondent in the instant case docket no affidavit declaring that she did not pay for or otherwise make a promise to secure the office as required by usc sec provide evidence that the form sec_1040 for years request and that petitioner did not file complied with the requirements of u s c sec_3506 c b a and paperwork reduction act the united_states supreme court ruled in 494_us_26 that the paperwork reduction act applies to internal_revenue_service tax forms request and that petitioner did not file complied with the provide evidence that the form sec_1040 for years requirements that the office of management budget omb mandates pursuant to regulations pincite cfr b and request specific liability for taxes imposed by subtitle a of the internal_revenue_code that apply to petitioner please provide a copy of all statutes creating a petitioner moved for permission to orally examine revenue_agent tae and ms miller respondent objected and we denied the motion in our order doing so we stated respondent represents and we agree that petitioner's allegations of error in the petition raise meritless legal theories and the scope of the proposed depositions is to further advance his meritless arguments which are not relevant to the subject of this case we shall deny the motion to take depositions we also advise petitioner to consult sec_6673 of the internal_revenue_code which allows us to impose a penalty not in excess of dollar_figure for among other things a proceeding in which the taxpayer's position is frivolous or groundless petitioner further attempted to use the court's formal discovery procedures-- his motion to compel production of documents--to make requests similar to those he made using informal_discovery respondent objected and we denied the motion in our order so doing we stated in the objection respondent lists petitioner's assignments of error and objects that all of petitioner's theories are meritless we agree petitioner's request for production of documents is not reasonably calculated to lead to the discovery of admissible evidence and is unduly burdensome and otherwise inappropriate we advised petitioner to read the authorities cited by respondent in his response to the motion and again advised him to examine sec_6673 we added the purpose of sec_6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate 119_tc_285 trial of the case petitioner failed to appear for trial of the case respondent proceeded and the trial was concluded without petitioner's participation posttrial petitioner disobeyed the court's order at the conclusion of the trial to file a brief petitioner did file a motion to dismiss for lack of subject matter jurisdiction stating as grounds among others the following that declarant's occupation in life is operating a swimming pool cleaning and handyman service these activities are not taxable revenue activities that the free exercise and enjoyment of the god-given and constitutionally secured right to lawfully acquire property and or compensation in federal reserve notes by lawfully contracting my own labor in innocent and harmless activities cannot be and therefore has not been taxed for revenue purposes i deny being subject_to any internal revenue tax including the so-called income_tax he summarized his argument as follows for the reasons stated herein declarant denies being a taxpayer as that term is very narrowly defined in the internal_revenue_code at sec_1313 and sec_7701 respondent has not any cited any statute in its notice_of_deficiency dated date that makes declarant liable for the alleged for calendar years and therefore said notice is not a valid notice could not possibly apply to declarant and therefor does not confer jurisdiction on this court we denied the motion we issued an order directing petitioner to show cause why the court should not impose upon him a penalty under sec_6673 opinion i unreported income respondent contends that petitioner had unreported gross_receipts of dollar_figure and dollar_figure for the years in issue from his pool-cleaning business he also contends that petitioner received and failed to report for the years in issue interest_income of dollar_figure and dollar_figure which was credited to a bank account held in the name of freedom church of revelation restoration ministries over which petitioner held signature_authority respondent arrives at his conclusions on the basis of the bank_deposits analysis prepared by revenue_agent tae taking into account computational adjustments respondent determined deficiencies in tax of dollar_figure and dollar_figure for the years in issue petitioner bears the burden_of_proof see rule a where a taxpayer fails to maintain adequate_records the commissioner may reconstruct his income by using the bank_deposits method sec_446 102_tc_632 bank_deposits are prima facie evidence of income 87_tc_74 the bank_deposits method of proof assumes that all deposits made to a taxpayer's bank account are taxable_income unless the taxpayer can show that the deposits are not taxable clayton v commissioner t c pincite the commissioner need not show a likely source of the income but he must take into account any nontaxable items or deductible expenses of which he has knowledge id 5the u s court_of_appeals for the fifth circuit to which an appeal would lie absent a stipulation to the contrary see sec_7482 has held that for the presumption of correctness to attach in an unreported income case the commissioner must present some predicate evidence supporting its determination 932_f2d_1128 5th cir aff'g in part rev'g in part tcmemo_1990_68 respondent has done so by submitting for each year in issue a record of bank_deposits made to and interest credited to the bank account over which petitioner held sole signature_authority and testimony of individuals that they remitted checks to petitioner for pool cleaning services rendered during the years in issue in addition petitioner makes no argument that pursuant to sec_7491 the burden shifts to respondent in any event the record establishes that petitioner does not satisfy the preconditions found in sec_7491 to reconstruct petitioner's income for the years in issue under the bank_deposits method revenue_agent tae had summonses served on several financial institutions through which he identified a bank account held in the name of freedom church of revelation restoration ministries over which petitioner held signature_authority he also sent third-party contact letters from which he confirmed the existence of petitioner's pool-cleaning business and the deposit in the years in issue of its business receipts to that bank account revenue_agent tae received no information from petitioner therefore in preparing the bank_deposits analysis he analyzed the summoned records and contact letters to identify nontaxable deposits and deductible expenses to calculate net deposits he reduced the total deposits for each examined year by nontaxable deposits and interest credited to the bank account he determined that the net deposits for each year in issue plus undeposited items from third parties ie net receipts constituted unreported gross_income from petitioner's pool-cleaning business petitioner does not challenge the facts on which respondent's determinations are based his methodology in reconstructing petitioner's income or his calculation of tax he does not claim that for the years in issue his proceeds from pool cleaning and the interest he earned are any less than respondent determined or that proceeds from providing services and interest are not items of gross_income they are sec_61 and in the amended petition petitioner advances only meritless arguments to the effect that the notice was signed and issued by an individual lacking delegated authority to do so the notice does not plainly and clearly lay any income_tax_liability on petitioner respondent lacks the authority under sec_6020 to file substitutes for returns for petitioner and the notice placed a substantial burden upon petitioner's religious exercise in contravention of the religious freedom restoration act of as evidence of the arguments' lack of merit see eg 127_tc_200 holding that a notice of deficiency's failure to include a statutory citation for each adjustment does not invalidate the notice aff'd 521_f3d_1289 10th cir 110_tc_137 holding that the religious freedom restoration act of did not exempt the taxpayer from federal_income_tax because requiring his participation in the federal_income_tax system is the only means of furthering the government's compelling interest in establishing uniform mandatory participation in that system irrespective of religious belief aff'd 170_f3d_173 3d cir and green v commissioner tcmemo_2007_262 wl at holding it to be well settled that the secretary or_his_delegate may issue notices of deficiency we shall not painstakingly further address his assertions with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir petitioner received dollar_figure and dollar_figure in unreported gross_income for the years in issue resulting in deficiencies in tax for those years of dollar_figure and dollar_figure respectively ii additions to tax and penalties a additions to tax under sec_6651 and sec_6654 in general the commissioner bears the burden of producing evidence that it 6while in his motion to compel production of documents petitioner requests copies of all delegation orders applying to the job description position and gs level of ms miller who signed the notice he concedes he is not challenging the authority of janet a miller to sign the notice he states his purpose for the request as follows the information responsive to this request is necessary because it is petitioner's responsibility to make sure that the agent acting for the government in this case janet a miller stays within the bounds of her authority when challenged those posing as government officers and agents are required to affirmatively prove whatever authority they claim petitioner's request manifests a frivolous purpose see eg kaye v commissioner tcmemo_2003_74 wl at is appropriate to impose the relevant addition_to_tax sec_7491 however if a taxpayer fails to assign error to an addition_to_tax he is deemed under rule b to have conceded that issue and the commissioner need not produce evidence that that addition_to_tax is appropriate 123_tc_213 118_tc_358 devries v commissioner tcmemo_2011_185 wl at in the notice respondent determined that petitioner is liable for each year in issue for additions to tax under sec_6651 for failure to pay the amount of tax shown on a return and under sec_6654 for failure to pay estimated_tax sec_6651 imposes an addition_to_tax where the taxpayer fails to pay the amount shown on a return by the prescribed date unless the taxpayer shows that such failure is due to reasonable_cause and not due to willful neglect the amount of the addition_to_tax is of the amount of the tax for each month or fraction thereof during which the tax remains unpaid up to a maximum addition of the addition_to_tax applies only when an amount of tax is shown on a return 120_tc_163 a substitute for return prepared by the irs acting for the secretary under sec_6020 is treated as the taxpayer's return for purposes of sec_6651 sec_6651 wheeler v commissioner t c pincite sec_6654 and b provides for an addition_to_tax in the case of a taxpayer's underpayment of a required_installment of estimated_tax each required_installment of estimated_tax is equal to of the required_annual_payment which in turn is equal to the lesser_of percent of the tax_shown_on_the_return for the taxable_year or if no return is filed percent of the tax for such year or if the individual filed a return_for_the_preceding_taxable_year of the tax shown on that return sec_6654 and b in neither the petition nor the amended petition does petitioner for either year in issue assign error to or contest in any way the additions to tax under sec_6651 or sec_6654 accordingly he is deemed to have conceded those issues and we need not consider whether respondent met his burden of production as to the propriety of those additions to tax we shall sustain the additions b addition_to_tax under sec_6651 we next address whether petitioner is liable for the addition_to_tax under sec_6651 for each year in issue sec_6651 imposes an addition_to_tax of up to of the amount of tax required to be shown on the return where the failure_to_file a federal tax_return is due to fraudulent conduct in determining whether a taxpayer's failure_to_file is fraudulent we consider the same elements considered in imposing the sec_6663 civil_fraud penalty clayton v commissioner t c pincite but focus on the taxpayer's decision to not file his return when due enayat v commissioner tcmemo_2009_257 wl at the commissioner bears the burden_of_proof see sec_7454 rule b to establish fraud the commissioner must show by clear_and_convincing evidence both that the taxpayer underpaid his income_tax for each year in issue and at least some portion of each such underpayment was due to fraud see 96_tc_858 aff'd 959_f2d_16 2d cir thus in establishing the underpayment the commissioner may not rely on the taxpayer's failure to meet his burden of proving error in the commissioner's determination as to the deficiencies id the commissioner need not prove the precise amount of the underpayment resulting from fraud but only that some part of the underpayment_of_tax for each year in issue is attributable to fraud 92_tc_661 we must determine whether petitioner's failure_to_file his tax returns for the years in issue was fraudulent underpayment_of_tax where allegations of fraud are intertwined with unreported and indirectly reconstructed income eg under the bank_deposits method it is properly part of the commissioner's case to investigate and negative reasonable explanations of nontaxable sources advanced by the taxpayer scott v commissioner tcmemo_2012_65 wl at see 348_us_121 where as in this case the taxpayer has not appeared at trial and has not filed any briefs in opposition to the commissioner's position he has not advanced specific nontaxable sources and the commissioner's proof of a likely taxable source of deposits is sufficient to meet his burden of establishing unreported income scott v commissioner wl at see 355_us_595 the commissioner must not only show that the taxpayer had unreported income for each year in issue but that he underpaid his tax scott v commissioner wl at respondent has established by clear_and_convincing evidence that petitioner underpaid his tax for each year in issue as detailed in our analysis above respondent's bank_deposits analysis shows by clear_and_convincing evidence that petitioner underreported his income by dollar_figure and dollar_figure for the years in issue by failing to report income from his pool-cleaning business and interest credited to the bank account petitioner makes no argument as to nontaxable sources or that he has unclaimed deductions or credits that reduce the tax burden attributable each year to his unreported income id at on each of the sec_6020 returns for the years in issue respondent accorded petitioner a standard_deduction and one personal_exemption and correctly calculated a tax_liability of dollar_figure and dollar_figure respectively which corresponds to the tax_tables in effect for the years in issue petitioner's underreporting of income resulted each year in his underpaying his tax respondent has thus shown by clear_and_convincing evidence that petitioner underreported his gross_income and consequently underpaid his tax for each year in issue fraudulent intent the second prong of the fraud test requires the commissioner to prove that for each year the taxpayer's failure_to_file an income_tax return was due to fraud fraud for that purpose is defined as intentional wrongdoing designed to evade tax believed to be owing dileo v commissioner t c pincite in other words the commissioner must prove that the taxpayer intended to conceal mislead or otherwise prevent the collection_of_taxes by not filing his return when due zhadanov v commissioner tcmemo_2002_104 wl at a fraudulent state of mind may be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available dileo v commissioner t c pincite over the years courts have developed a nonexclusive list of factors that demonstrate fraudulent intent those badges_of_fraud include understatement of income maintenance of inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of income or assets failure to cooperate with tax authorities engaging in illegal activities an intent to mislead which may be inferred from a pattern of conduct lack of credibility of the taxpayer's testimony filing false documents and dealing in cash e g browning v commissioner tcmemo_2011_261 wl at and cases cited thereat although no single factor is necessarily sufficient to establish fraud a combination of factors is more likely to constitute persuasive evidence id a cts committed subsequent to the due_date of a return may be relevant evidence of a taxpayer's intent in failing to file that return sherrer v commissioner tcmemo_1999_122 wl at aff'd 5_fedappx_719 9th cir the following factors indicate petitioner's fraudulent intent during each year in issue a understatement of income a pattern of consistent underreporting of income especially when accompanied by other circumstances showing an intent to conceal justifies the inference of fraud 94_tc_654 in failing to file his tax returns for the years in issue petitioner underreported his income by more than dollar_figure over that two-year period in the context of the factual circumstances discussed below we consider that two-year pattern of consistent underreporting of income an indicium of fraud see eg delvecchio v commissioner tcmemo_2001_130 wl at two years of substantial_understatement may support a finding of fraud aff'd 37_fedappx_979 11th cir b concealment of assets concealing assets coupled with a failure_to_file tax returns is a strong indication of fraud freidus v commissioner tcmemo_1999_195 wl at petitioner took affirmative steps to conceal income derived from his pool-cleaning business petitioner maintained no bank accounts in his name and deposited business receipts into an account held in the name of freedom church of revelation restoration ministries effectively hiding that income because that account was held under the freedom church of revelation restoration ministries' identification_number the record shows no evidence of the account's use for church purposes only bank transactions related to petitioner's pool business we cannot conceive of a purpose for depositing pool business receipts into that bank account other than to conceal their existence from respondent and avoid tax_liability further petitioner failed to deposit numerous receipts from customers during the years in issue making it difficult for respondent to identify those receipts and charge that income to petitioner petitioner's use of the freedom church of revelation restoration ministries' bank account as a repository for his business income coupled with his failure to deposit numerous business receipts is clear_and_convincing evidence of his attempt to conceal income for the years in issue c implausible or inconsistent explanations of behavior petitioner's inconsistent explanations to revenue_agent tae for his failure_to_file tax returns also furnishes clear_and_convincing evidence of his attempt to conceal his pool-cleaning business income by failing to file returns in response to revenue_agent tae's inquiry concerning his tax returns for the years in issue petitioner sent a letter dated date in which he disputed his obligation to pay income_tax and denied his status as a taxpayer under the internal_revenue_code however as of that date date petitioner had engaged a tax_return preparer to prepare his and tax returns and as far as we can determine timely filed those returns moreover while disputing throughout the examination his obligation to file returns for the years in issue petitioner engaged a tax_return_preparer to prepare his tax_return and again we assume timely filed that return he later filed a tax_return for petitioner has not attempted to explain why he believed that he was not a taxpayer in and thus not required to file returns for the years in issue but achieved that status in in his date letter petitioner informed revenue_agent tae that he had filed returns in past years out of total ignorance of the tax laws even if that was true at the time of that letter petitioner had already prepared if not filed his return his explanation for failing to file tax returns could have no other purpose than concealment of his income from the pool-cleaning business and avoidance of paying tax believed to be owed d failure to cooperate with tax authorities petitioner did not cooperate with revenue_agent tae's requests for petitioner's tax returns for the years in issue or his requests for records and information concerning petitioner's tax_liability for those years petitioner refused to meet with revenue_agent tae to discuss petitioner's missing tax returns instead denying his liability for the so-called income_tax and claiming sovereign immunity from administrative actions brought by the irs petitioner thus misled revenue_agent tae as to the existence of the bank account and the taxable_income held therein revenue_agent tae was forced to issue third-party inquiries and summonses to eventually uncover the bank account's existence its connection with petitioner's pool-cleaning business and ultimately the taxable business receipts for the years in issue we conclude that petitioner's failure to cooperate with respondent's agent is indicative of a fraudulent_failure_to_file conclusion respondent has proven by clear_and_convincing evidence that petitioner's failure_to_file his tax returns for the years in issue was fraudulent petitioner has not proven that his failure to do so was due to reasonable_cause and not due to willful neglect see sec_6651 accordingly we conclude that petitioner is liable for the addition_to_tax under sec_6651 for each year in issue because we find petitioner so liable we do not address respondent's alternative argument of the applicability of the addition_to_tax for failure_to_file timely under sec_6651 c sec_6673 penalty on date we ordered petitioner to show cause why the court should not impose a penalty upon him under sec_6673 petitioner failed to obey the order under sec_6673 and b this court may require a taxpayer to pay a penalty not in excess of dollar_figure if the taxpayer has instituted or maintained a proceeding primarily for delay or the taxpayer's position in such proceeding is frivolous or groundless a taxpayer's position is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 135_tc_231 we may consider sua sponte whether to impose upon a taxpayer a sec_6673 penalty e g hyde v commissioner tcmemo_2011_104 wl at aff'd 471_fedappx_537 8th cir as stated supra petitioner advanced only meritless arguments as to why he is not required to pay tax on the schedule c business gross_receipts and interest_income at issue herein we warned petitioner on several occasions that we would consider imposing on him a sec_6673 penalty moreover petitioner refused to heed our instruction to appear for trial did not comply with the briefing schedule we set and disobeyed our order to show cause we can see no reason for that defiance other than to delay respondent's collection of federal_income_tax due and owing for the years in issue which is a separate basis for imposing a sec_6673 penalty we likewise see no reason other than delay for petitioner's unwarranted discovery requests which we have set out in some detail and which further justify a penalty cf powell v commissioner tcmemo_2009_174 wl at effecting delay and unnecessary responses through abuse of the discovery process is an appropriate basis for an award under sec_6673 aff'd sub nom 408_fedappx_381 d c cir petitioner has wasted both the court's and respondent's time and deserves a substantial penalty accordingly we shall make our order to show cause absolute and impose upon petitioner a penalty under sec_6673 of dollar_figure iii conclusion petitioner is liable for the deficiencies penalties and additions to tax as determined herein an appropriate order will be issued and decision will be entered for respondent


'aterrial revenue service p o box cincinnati oh release number release date date date department of the treasury employer_identification_number contact person - 1d number contact telephone number legend uil t program u geagraphical area v city w name b dollars amount c number d number e number f number dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures will not be taxable description of your request your letter indicates that you will operate a program called t the purpose of t grants for fellowships for scholarly research and promote the history and culture of u each grant will result in a tangible report you can use in furthering your exempt_function is to provide you own and preserve w consisting of materials and historical buildings concerning the history and culture of u and make this material available for research w will play a central role in the fellow’s research agenda fellows will also be encouraged to explore other research and educational facilities in the greater v area t is open to doctoral candidates academic and museum professionals and independent scholars you expect to receive in the range of d applications annually and plan to award f grants the fellowships will be about b dollars per month for a maximum of c months per project provided that the fellow is making satisfactory progress toward completion of the project t will be publicized on your website and in your quarterly magazine additionally t will be advertised to relevant academic and professional audiences through professional networks via the media through which they communicate with their memberships the broadest geographic area that these publicity efforts are directed towards is the english-speaking world the majority of the target audience is located within the united_states but the media utilized is mostly accessible worldwide and the audience is not defined by geography the selection committee is comprised of e members none of whom are members of your board_of directors your selection committee will draw from a wide cross-section of your staff and many different areas of expertise will be solicited the committee will benefit from members’ deep expertise in the diverse areas of your holdings and the subject areas to which they relate members of the selection committee will not be in a position to receive private benefit directly or indirectly if certain potential grantees are selected over others candidates are required to submit a detailed application including detailed biographical information a detailed description of the proposed research project and how the candidate will use w in the proposed project soon after the application deadline complete copies of all received applications will be distributed to committee members who will carefully read and evaluate them based on criteria that include but are not limited to extent to which your holdings can be utilized in support of the project ability of the applicant to interpret and present the research material as discerned from his her past research and writing experience and from the narrative provided in the application itself project’s potential for raising awareness of you and your holdings project's potential for future utilization in your events or programs project’s perceived importance or originality in the applicant’s field of study ie will it materially add to the literature on its subject overall quality of the application including style clarity and correctness of expression strength of letters of recommendation and enthusiasm of applicant for his her project your committee will then convene to compare candidate rankings and select a group of finalists whose projects merit further consideration next working independently committee members will carefully review the finalists’ applications taking into account arguments presented at the first committee meeting each committee member will rank his or her top choices and will advocate for them in the second and final meeting upon reconvening the committee will again debate and negotiate a consensus on its top choice s for the fellowship a recipient cannot be related to a member of the committee or to any disqualified persons related to you each grant will be awarded on an objective and nondiscriminatory basis progress reports will be obtained and verified by you on a monthly basis upon completion of the fellow’s study a final report will be collected from the fellow if no report is filed by the fellow or if reports indicate that the funds are not being used in furtherance of the fellowship purpose a member of the board_of directors will investigate the grant while conducting this investigation you will withhold further payments from the fellow and will take reasonable steps to recover grant funds until it has determined that the funds are being used for their intended exempt_purpose you will retain all records submitted by the fellows you will obtain and maintain in your files evidence that recipients are not related to you or to any members of the selection committee basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or aprize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53 c requires that a private_foundation show e e the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination e e e this determination covers only the grant program described above this approval will apply to succeeding grant loan programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you may report any significant changes to your program by completing form_8940 and sending it to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant loan distributions with the irs if necessary please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations