a cap sor tax_exempt_and_government_entities_division department of the treasury internal_revenue_service te_ge eo examination commerce ms dal dallas texas number release date uil date date employer_identification_number person to contact id number contact numbers voice fax last date for filing a petition with the tax_court certified mail - return receipt requested dear a final_determination regarding your foundation classification this modifies our this is letter dated june 19xx in which we determined that you were an organization exempt from federal_income_tax under section as described in sec_509 of the internal an revenue code irc we have modified organization described in sec_509 as a private non-operating foundation effective for tax years beginning january 20xx your foundation status that of to your tax-exempt status under sec_501 of the internal_revenue_code is not affected grantors and contributors may rely on this determination unless the internal_revenue_service publishes a notice to the contrary because this letter could help resolve any questions about your private_foundation_status please keep it with your permanent records a of you report provided the proposed we previously modification of your tax-exempt status at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on october 20xx you signed form_6018 consent to proposed action - section in which you agreed to the modification of your foundation classification to a organization this is a final_determination fetter with regards to your federal tax-exempt status under sec_501 a examination explaining you are required to file form_990 pf return of private_foundation form_990 pf must be filed by the day of the fifth month after the end of your annual accounting periods a penalty of dollar_figure a day is charged when a return is filed late unless there is a reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less in addition organizations with gross_receipts exceeding dollar_figure for any year will be charged a penalty of dollar_figure a day when a return is filed late however the maximum penalty charged cannot exceed dollar_figure these penalties may also be charged if a return is not complete so be sure your return is complete before you file it if you are subject_to the tax on unrelated_business_income under sec_511 of the code you must also file an income_tax return on form 990-t exempt_organization business income_tax return if you decide to contest this determination in court you must initiate a suit for a declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the ' day after the date this final_determination letter was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the following address united_states tax_court second street washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your rights we can offer you help if your tax problem is causing a if hardship or you’ve tried but haven’t been able to resolve your problem with the irs you qualify for our assistance which is always free we will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please cail the contact person at the telephone number shown in the heading of this letter thank you for your cooperation sincerely maria hooke director exempt_organizations examinations department of the treasury intetnal revenus tax exempt and government entities irs exempt_organizations examinations rvic date date a taxpayer_identification_number form tax_year s ended person to contact employee id telephone fax manager's contact information employee id telephone response due_date certified mail - return receipt requested dear why you’re receiving this letter we enclosed a copy of our audit report form 886-a explanation of items explaining that we propose to modify your organization’s foundation status under internal_revenue_code irc sec_509 your exempt status under sec_501 is still in effect if you agree if you haven't already please sign the enclosed form_6018 consent to proposed action and return it to the contact person shown at the top of this letter we'll issue a final letter modifying your foundation status if you disagree request a meeting or telephone conference with the manager shown at the top of this letter send any information you want us to consider f you request a meeting with the manager or file a protest with the irs appeals_office send additional information as stated in and above you'll still be able to file a protest with irs appeals_office after the meeting or after we consider the information the irs appeals_office is independent of the exempt_organizations division and resolves most disputes informally if you file a protest the auditing agent may ask you to letter rev catalog number 34811r - sign a consent to extend the period of limitations for assessing tax this is to allow the for your protest to be valid it irs appeals_office enough time to consider your case must contain certain specific information including a statement of the facts applicable for specific information needed for a law and arguments in support of your position valid protest refer to publication how to appeal an irs determination on tax- exempt status fast track mediation ftm referred to in publication the examination process generally doesn’t apply now that we've issued this letter request technical_advice from the office of associate chief_counsel tax exempt government entities if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the irs if you’re considering requesting technical_advice contact the person shown at the top of if you disagree with the technical_advice decision you will be able to appeal this letter to the irs appeals_office as explained above a decision made in a technical_advice_memorandum however generally is final and binding on appeals if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final letter modifying your foundation status effect of modification of your foundation status if you receive a final modification letter making you a private_foundation or a private_operating_foundation you'll be required to file annual returns on form_990-pf return of private_foundation or sec_4947 trust treated as private_foundation contacting the taxpayer_advocate office is a taxpayer right the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you additional information you can get any of the forms and publications mentioned in this letter by visiting our website at www irs gov forms-pubs or by calling 800-tax-form if you have questions you can contact the person shown at the top of this letter enclosures form 886-a form_6018 sincerely hear foun fe maria hooke director exempt_organizations examinations letter rev catalog number 34811r schedule number or exhibit form886-a date explanations of items name of taxpayer year period ended 20xx 20xx tax identification_number last four digits issues foundation fail the public support_test and gross investment does income test and should therefore be reclassified as a private_foundation under internal_revenue_code irc section a of the code if foundation is reclassified as a private_foundation is investment_income for tax years ending december 20xx and december 20xx it liable for taxes under sec_4940 on net if foundation is reclassified as a private_foundation is it liable for taxes under sec_4942 for undistributed_income for the tax years ending december 20xx december 20xx facts on may 19xx on may 19xx foundation filed its foundation incorporated in the state of amended articles of incorporation the amendment added specific language that limited its purposes and activities to those allowed for exemption from tax under sec_501 the specific purpose is to disseminate materials and information on stress-free living and to engage in any legal activities to cover costs for the corporation the amendment also included a provision if the foundation dissolved the assets upon dissolution will be distributed for one or more exempt purposes within the meaning of sec_501 or distributed to the federal government or to a state_or_local_government for a public purpose foundation received a favorable determination that it was exempt from tax under sec_501 in august 19xx with an effective date for exemption as the day after the date of incorporation june 19xx foundation was further classified as not a private_foundation because it qualified as a publicly_supported_organization under sec_509 of the code the organization's forms for tax years 20xx and 20xx reflect the following form_990 - revenue expenses contributions all other gifts program service revenue special events classes investment_income gross rents less rental expenses gross_sales of inventory less cost_of_goods_sold total revenue fees legal fees accounting advertising promotion 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure form 886-a rev catalog number 20810w page - wwwairs gov dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure form886-a may2017 schedule number or exhibit explanations of items name of taxpayer tax identification_number ast four digits year period ended 20kx 20xx office expenses information_technology occupancy travel conferences conventions meetings - insurance other expenses bank charges fees other expenses taxes - non ubit other expenses postage mailing other expenses telephone internet other expenses dues memberships other expenses all other total expenses dollar_figure form_990 - balance_sheet cash non-interest bearing savings temporary cash accounts_receivable inventories for sale or use land buildings equipment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure - net assets total assets total liabilities ‘less accumulated depreciation foundation's filed forms for tax years 20xx - 20xx were used to calculate its public support and gross_investment_income see table below public support contributions all other gifts program service revenue gross_sales of inventory total public support public support investment_income form 886-a rev catalog number 20810w dollar_figure dollar_figure dollar_figure dollar_figure total support dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure www iis g0v dollar_figure dollar_figure 20xx dollar_figure dollar_figure 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx page 2_ schedule number or exhibit form886-a may2017 name of taxpayer explanations of items year period ended 20xx 20xx tax identification_number last four digits dollar_figure dollar_figure dollar_figure dollar_figure gross rents total support dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure public support percentage gross_investment_income percentage foundation's net average noncharitable-use assets for purposes of computing sec_4940 excise_tax for the 20xx and 20xx tax years was calculated taking an average of months for the accounts and an average of months for the accounts 20xx 20xx january ‘1st february 1st march ‘st april 1st - savings - money market - debit - savings - money market - checking checking gics - savings - money market - debit - savings - money market - checking - savings - money market -debit - savings - money market - checking - savings - money market - debit - savings - money market - checking dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure catalog number 20810w page 3_ www iis g0v form 886-a rev schedule number or exhibit form886-a may2017 name of taxpayer explanations of items tax identification_number last four digits year period ended 20kx 20xx may ist june 1st july ist august 1st september 1st october ist - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure catalog number 20810w page 4_ www irs g0v form 886-a rev schedule number or exhibit form886-a _ explanations of items may2017 name of taxpayer year period ended 20xx 20xx tax identification_number las four digits november ‘1st december 1st december 31st - savings - money market -debit - savings - money market - checking - savings - money market - debit - savings - money market - checking - savings - money market - debit - savings - money market - checking checking gics dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure average net assets dollar_figure law - issue dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sec_501 provides in part exemption from federal_income_tax to organizations that are organized and operated exclusively for religious charitable scientific literary or educational_purposes as long as no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_509 states in part the term private_foundation means a domestic or foreign organization described in sec_501 other than a or sec_509 describes an organization which normally receives more than one-third of its support in each taxable_year from any combination of gifts grants contributions or membership fees and gross_receipts from admissions sales of merchandise performance of services or furnishing of facilities in an activity which is not an unrelated_trade_or_business within the meaning of sec_513 not including such receipts from any person or from any bureau or similar agency of a governmental_unit as described in sec_170 in any taxable_year to the extent such receipts exceed the greater of dollar_figure or percent of the organization's support in such taxable_year from persons other than disqualified persons as defined in sec_4946 with respect to the organization from governmental units described in section -170 c or from organizations described in sec_170 other than in clauses vii and viii and normally catalog number 20810w page www irs gov - form 886-a rev schedule number or exhibit form886-a date explanations of items name of taxpayer year period ended 20xx 20xx receives not more than one-third of its support in each taxable_year from the sum of gross_investment_income as defined in subsection e and the excess if any of the amount of the unrelated_business_taxable_income as defined in sec_512 over the amount of the tax imposed by sec_511 tax identification_number last four digits law - issue sec_4940 imposes a on each private_foundation which is exempt from taxation under sec_501 a for the taxable_year with respect to the carrying on of its activities a tax equal to percent of the net_investment_income of such foundation for the taxable_year sec_4940 defines net_investment_income as the amount by which the sum of the gross_investment_income and the capital_gain_net_income exceeds the deductions allowed by sec_4940 sec_4940 defines the term gross_investment_income as the gross amount of income from interest dividends rents payments_with_respect_to_securities_loans and royalties but not including any such income to the extent included in computing tax imposed by sec_511 sec_4940 defines deductions as all ordinary and necessary expenses paid_or_incurred for the production or collection of gross_investment_income or for the management conservation or maintenance of property held for the production of such income sec_4940 states in the case of any private_foundation that meets the requirements of paragraph for any taxable_year sec_4940 shall be applied with respect to such taxable_year by substituting percent for percent sec_4940 states a private_foundation meets the requirements of this paragraph for any taxable_year if- a the amount of the qualifying distributions made by the private_foundation during such taxable_year equals or exceeds the sum of- i an amount equal to the assets of such foundation for such taxable_year multiplied by the average percentage_payout for the base_period plus ii percent of the net_investment_income of such foundation for such taxable_year and b such private_foundation was not liable for tax under sec_4942 of the code with respect to any year in the base_period sec_4942 of the code is the tax on private_foundations for the failure to distribute required minimum amounts of income each taxable_year law - issue sec_4942 imposes a tax on the undistributed_income_of_a_private_foundation for any taxable_year which has not been distributed before the first day of the second taxable_year following such taxable_year a tax equal to percent of the amount of such income remaining undistributed at the beginning of such second taxable_year form 886-a rev catalog number 20810w www irs gov page6_ schedule number or exhibit form886-a may2017 explanations of items tax identification_number ast four digits name of taxpayer year period ended 20xx 20xx sec_4942 imposes an additional tax in any case in which an initial tax is imposed under sec_4942 on the undistributed_income_of_a_private_foundation for any taxable_year if any portion of such income remains undistributed at the close of the taxable_period there is hereby imposed a tax equal to percent of the amount remaining undistributed at such time sec_4942 defines the term undistributed_income as with respect to any private_foundation for any taxable_year as of any time the amount by which the distributable_amount for such taxable_year exceeds the qualifying distributions made before such time out of such distributable_amount sec_4942 excludes any future_interest of a foundation in the income or corpus of any real or personal_property until all intervening interest in and rights to the actual possession or enjoyment of such property has expired sec_4942 defines distributable_amount as with respect to any private_foundation for any taxable_year an amount equal to the sum of the minimum_investment_return plus amounts described in sec_4942 income modifications reduced by the sum of the taxes imposed on such private_foundation for the taxable_year under sec_4940 sec_4942 defines minimum_investment_return for any private_foundation for any taxable_year a sec_5 percent of the excess of the aggregate fair_market_value of all assets of the foundation other than those which are used directly in carrying out the foundation's exempt_purpose over the acquisition_indebtedness with respect to such assets regulation sec_53_4942_a_-2 defines assets used or held for use in carrying out the exempt_purpose as an asset that is actually used by the foundation in the carrying out of the charitable educational or other similar purpose which gives rise to the exempt status of the foundation or if the foundation owns the asset and establishes to the satisfaction of the commissioner that its immediate use ‘for such exempt_purpose is not practical based on the facts and circumstances of the particular case and that definite plans exist to commence such use within a reasonable period of time consequently assets which are held_for_the_production_of_income or for investment for example stocks bonds interest-bearing notes endowment funds or generally leased real_estate are not being used or held for use directly in carrying out the foundation's exempt_purpose even though the income from such assets is used to carry out such exempt_purpose regulation sec_53 a b defines the minimum distribution required during start -up period for private_foundations created before date the start-up period is the four taxable years immediately preceding the taxable_year beginning in calendar_year for private_foundations created after date or for organizations that first become private_foundations after that date the start-up period is the four taxable years following the taxable_year in which the private_foundation was created or otherwise became a private_foundation for purposes of this subparagraph a private_foundation will be considered created in the taxable_year in which the private foundation's distributable_amount as determined under sec_4942 first exceeds dollar_figure ii start-up_period_minimum_amount the amount that a private_foundation must actually distribute in cash or its equivalent during the private foundation's start-up period is not less than the sum of a twenty percent of the private foundation's distributable_amount as determined under sec_4942 for the first taxable_year of the start-up period catalog number 20810w form 886-a rev www rs g0v page7_ schedule number or exhibit form886-a may2017 explanations of items name of taxpayer year period ended 20xx 20xx tax identification_number ast four digits b forty percent of the private foundation's distributable_amount for the second taxable_year of the start-up period c sixty percent of the private foundation's distributable_amount for the third taxable_year of the start-up period and d eighty percent of the private foundation's distributable_amount for the fourth taxable_year of the start-upperiod iii timing of distributions the requirement that a private_foundation distribute the start-up_period_minimum_amount during the start-up period is a requirement that such amount be distributed before the end of the start-up period and is not a requirement that any portion of such amount be distributed in any one taxable_year of the start-up period government's position - issue organizations generally qualify under sec_509 if the main source of their revenue is from exempt_function_income such as fees for services admissions or sales of materials supporting their exempt_function contributions gifts and grants are normally not substantial in nature sec_509 indicates that in order to qualify as a public supported_organization under sec_509 - i more than one-third of the support must normally come from exempt_function_income gifts grants contributions or membership fees and not more than one-third of the support can come from gross_investment_income and the excess of the amount of unrelated_business_taxable_income over the amount of taxes imposed by sec_511 here using foundation's filed forms we calculated foundation's public support for the period including tax years 20xx to 20xx foundation failed the public support_test in 20xx 20xx 20xx and 20xx and gross_investment_income percentage is above in 20xx through 20xx the testing calculation is shown below 20xx dollar_figure dollar_figure dollar_figure dollar_figure public support contributions all other gifts program service revenue gross_sales of inventory total public support 20xx 20xx 20xx 20xx 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx total support public support investment_income gross rents total support public support percentage dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx 20xx 20xx 20xx 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure gross_investment_income percentage form886-a rev catalog number 20810w - www irs gov - page schedule number or exhibit f ormb86-a ay explanations of items tax identification_number ast four digits name of taxpayer year period ended 20xx 20xx therefore since foundation fails the public support_test and the gross_investment_income test it no longer qualifies as a publicly_supported_organization under sec_509 foundation must be reclassified as a private_foundation government's position - issue since foundation failed the public support_test and the gross_investment_income test and must be reclassified as a private_foundation it is liable for the excise_tax under sec_4940 on its net_investment_income this tax calculation for tax years 20xx and 20xx is shown below income_interest income rent income gross_investment_income deductions bank fees property_tax repair maintenance - facility utilities total deduction sec_12 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure net_investment_income multiply by sec_4940 rate - sec_4940 excise_tax dollar_figure 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the foundation does not qualify for the rate reduction for computing the net investment tax under sec_4940 for 20xx as it is the foundation's first modified tax_year under a private_foundation the foundation also does not qualify for the rate reduction in 20xx because the qualifying distributions made by the private_foundation during that tax_year do not exceed the sum of the amount equal to the assets of the foundation multiplied by the average payout for the base_period plu sec_1 percent of the net_investment_income of the foundation government's position - issue since foundation failed the public support_test and gross investment test and must be reclassified as a private_foundation it is required to pay out distributions for exempt purposes distributable_amount in each year in proportion to its minimum_investment_return per sec_4942 if foundation fails to make the minimum required distributions distributable_amount it is liable for excise_taxes under sec_4942 on the undistributed_income catalog number 2081ow page 9_ www 's g0v form 886-a rev schedule number or exhibit f orm886-a may explanations of items name of taxpayer year period ended 20xx 20xx the minimum_investment_return distributable_amount and the undistributed_income are calculated as follows for the tax years ending december 20xx and december 20xx tax identification_number last four digits minimum_investment_return average monthly cash balances multiply by cash deemed for charitable activities avg cash tax years average monthly cash balances less cash deemed for charitable activities net value of assets for investment purposes minimum_investment_return multiply net value of assets for investment purposes by 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure distributable_amount tax years minimum_investment_return less tax on investment_income sec_4940 distributable_amount sec_4942 rate for start-up period sec_53 a b start-up period minimum distributable_amount must distribute this amount by 20xx dollar_figure dollar_figure dollar_figure dollar_figure 20xx 20xx dollar_figure dollar_figure dollar_figure dollar_figure 20xx undistributed_income tax years start-up period minimum distributable_amount less qualifying distributions undistributed_income added to taken from corpus total undistributed_income 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the excise_tax under sec_4942 is calculated as follows excise_tax per sec_4942 undistributed_income tax years 20xx dollar_figure 20xx dollar_figure catalog number 20810w form 886-a rev www irs gov page 10_ schedule number or exhibit fonn886-a may2017 explanations of items name of taxpayer year period ended 20xx 20xx tax identification_number last four digits excise_tax rate - excise_tax per sec_4942 dollar_figure __ dollar_figure foundation's qualifying distributions exceeded the distributable_amount in tax_year ending december 20xx the exceeded amount is to be added into corpus foundation's qualifying distributions did not meet the required_distribution amount in tax_year ending december 20xx therefore foundation is liable for excise_taxes under sec_4942 on the undistributed_income for tax_year ending december 20xx in any case in which an initial tax is imposed under sec_4942 on the undistributed_income_of_a_private_foundation for any taxable_year if any portion of such income remains undistributed at the close of the taxable_period under sec_4942 there is hereby imposed a tax equal to percent of the amount remaining undistributed at such time foundation is not liable for sec_4942 taxes in tax years ending december 20xx because it did not have undistributed_income foundation is not liable for sec_4942 taxes in tax years ending december 20xx because it had direct expenditures exceeding the undistributed amount to accomplish its exempt_purpose in tax_year ending december 20xx taxpayer's position foundation has not provided a written position on any of the issues at this time conclusion issue foundation fails the public support_test and gross_investment_income test qualifies as a publicly_supported_organization under sec_509 foundation should be reclassified as a private_foundation under sec_509 the effective date of this reclassification is january 20xx foundation is required to file annual return form pf return of private_foundation itno longer issue as a private_foundation foundation is liable for excise_taxes on net_investment_income under sec_4940 as follows 20xx - dollar_figure 20xx - dollar_figure total -dollar_figure issue as a private_foundation foundation is not liable for excise_taxes on its undistributed_income under sec_4942 for the tax_year ended december 20xx however foundation is liable for excise_taxes on its undistributed_income under sec_4942 for the tax_year ended december 20xx in the amount of dollar_figure catalog number 20810w form 886-a rev wwww irs g0v page il_


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc ita b05-plr-128964-02 date date ein tye dear this is in response to a request filed on behalf of the above-named taxpayer regarding the late filing of a form_8716 election to have a tax_year other than a required tax_year taxpayer has requested that its late-filed form_8716 be considered timely filed under authority contained in sec_301_9100-3 of the procedure and administration regulations the information submitted indicates that taxpayer was incorporated on date taxpayer was a subchapter_c_corporation from the date of its incorporation until date taxpayer timely filed irs form_2553 electing s_corporation status effective as of date as an s_corporation taxpayer's required tax_year is the calendar_year however taxpayer intended to retain its c_corporation historical tax_year ending september while the form_2553 did indicate that taxpayer intended to use a tax_year ending september the form did not state taxpayer’s intention to make the sec_444 election taxpayer's form_8716 electing to use a taxable_year ending september was due on or before date but it was not filed by that date the information furnished shows that taxpayer intended to make the election and to file form_8716 on a timely basis and had engaged a qualified_tax professional in order to assure a proper filing however due to an error or misunderstanding on the part of the tax professional the form was not timely filed the error was not due to any lack of due diligence or prompt action on the part of the taxpayer sec_1_444-3t of the temporary income_tax regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth plr-128964-02 month following the month that includes the first day of the taxable_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election sec_1_444-3t requires that a corporation electing to be an s_corporation must state on the form_2553 its intention to make a sec_444 election sec_301_9100-1 of the procedure and administration regulations sets forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his or her discretion may grant a reasonable extension of time to make a regulatory election under subtitle a provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 if the provisions of sec_301_9100-2 do not apply to the taxpayer's situation as in the instant case the provisions of sec_301_9100-3 may apply sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interests of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue the information submitted and representations furnished by taxpayer and its tax professionals establish that taxpayer acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interests of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 of the regulations for the granting of relief have been satisfied accordingly under sec_301_9100-3 taxpayer is granted an extension of time to file form_8716 to adopt a taxable_year ending september the taxpayer ha sec_45 days from the date of this letter to file the following items with the service_center form_8716 a copy of this letter_ruling and a return as provided in sec_1_7519-2t of the temporary plr-128964-02 regulations along with any required_payment due for the taxable_year ending date as provided in sec_1_7519-2t this ruling is limited to the filing of form_8716 except to the extent specifically addressed herein no opinion is expressed regarding the tax treatment of the subject transaction under the provisions of any other sections of the code or regulations that may be applicable thereto copies of this letter_ruling are also being sent to the irs operating division and in accordance with the provisions of a power_of_attorney currently on file with this office to the taxpayer’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-119829-99 date date re legend trust grantor church charity city dear community college this is in response to your letter dated date and prior correspondence in which you requested rulings concerning the estate_tax consequences of a reformation to a_trust in grantor established a revocable_trust trust article iii of the trust provides that upon grantor’s death the trust is to be held for the benefit of church and that the net_income from trust shall be paid quarterly to church to be used as follows a twice each year church shall purchase six bouquets of flowers to decorate the graves of grantor and other family members b percent of the balance of the income shall be used by church for the maintenance and operation of church and c the remaining percent of the balance of the income shall be used by church for the student_loan program established by church in plr-119829-99 -2-2 article iv b provides that if the church fails to use at least percent of the income for the student_loan program over a ten year period the income from the percent of the trust so designated shall be paid quarterly to community college for use by college for assistance to students grantor died on date it is represented that the value of assets in grantor’s gross_estate is approximately dollar_figure the assets consist principally of marketable_securities and cash equivalents the substantial majority of the assets comprising the gross_estate after payment of debts expenses and taxes will be disposed under the terms of trust the personal representative of grantor’s estate represents that the use of income to place flowers on the graves of family members raised an issue with respect to the rule_against_perpetuities as it applied to trust under ohio revised code ann no interest in real or personal_property shall be good unless it must vest if at all not later than twenty-one years after a life or lives in being at the creation of the interest in addition any interest in real or personal_property that would violate the rule_against_perpetuities shall be reformed within the limits of the rule to approximate most closely the intention of the creator of the interest generally this rule does not apply to wholly charitable trusts barton v parrott n e 2d ohio com pl see also iva w fratcher scott on trusts 4th ed in this case however the trust in its original form was not a wholly_charitable_trust the personal representative of grantor’s estate maintains that it had a fiduciary duty to resolve issues relating to the rule_against_perpetuities thus the personal representative with the trustee of trust instituted an action in state court for a determination regarding the applicability of the rule_against_perpetuities as it applied to the trust a hearing was held on date the court determined that trust violated the rule_against_perpetuities and therefore was required to be reformed under state law the court construed and reformed the trust instrument by replacing article iii a of the trust with a pre-residuary lump-sum gift_for grave flowers and the continuation of the trust exclusively for charitable purposes specifically the court order provides that the trustee will pay a single lump sum gift of dollar_figure to city as owner of the cemetery in complete satisfaction of the provision under the original trust instrument relating to placing flowers on the graves the trust is required to be administered beginning as of grantor’s death by distributing all of its income for the maintenance and operation of church and for the student_loan program administered by the church the estate requested a ruling that the trust as reformed qualifies for the charitable deduction under sec_2055 of the code plr-119829-99 -3-3 sec_2055 provides that for purposes of the federal estate_tax the value of the taxable_estate shall be determined by deducting from the value of the gross_estate all bequests to or for_the_use_of certain governmental entities certain corporations organized and operated exclusively for religious charitable scientific literary or educational_purposes and certain other fraternal and veterans organizations in this case the personal representative of grantor’s estate had a fiduciary duty to resolve issues relating to the rule_against_perpetuities the court construed and reformed the trust instrument in a manner that resulted in the immediate gift of dollar_figure to city the owner of the cemetery to satisfy the provision in the original trust instrument requiring that flowers be placed on the graves of family members the court also ordered that trust be continued exclusively for charitable purposes and that it be administered beginning as of grantor’s death by distributing all of its income for the maintenance and operation of church and for the student_loan program administered by the church thus the amount passing to trust as reformed qualifies for the charitable deduction under sec_2055 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosure copy for sec_6110 purposes sincerely yours robert g honigman acting assistant to the branch chief branch


t c memo united_states tax_court stephen s gessic petitioner v commissioner of internal revenue respondent docket no filed date stephen s gessic pro_se john m tkacik jr for respondent memorandum findings_of_fact and opinion haines judge respondent determined a deficiency in petitioner’s federal_income_tax for of dollar_figure the issues for decision are whether petitioner is entitled to dependency_exemptions for two dependents totaling dollar_figure for the taxable_year and whether petitioner is entitled to child tax_credits of dollar_figure for the taxable_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts together with the attached exhibits is incorporated herein by this reference at the time he filed his petition petitioner resided in ohio petitioner was married to dana m gessic ms gessic on date during the marriage they had two children one born in and the other in petitioner and ms gessic were granted a divorce by the court of common pleas of cuyahoga county ohio through a judgment entry filed on date attached to the judgment entry was a separation agreement and a shared parenting plan signed by petitioner and ms gessic in compliance with the shared parenting plan ms gessic was the custodial_parent petitioner was granted visitation rights on the weekends for or weeks in the summer and a week near christmas the separation agreement required petitioner to make monthly child_support payments to ms gessic in the separation agreement petitioner and ms gessic further agreed that petitioner would be entitled to the dependency_exemptions for the minor children on condition that his child_support payments were current and ms gessic had not returned to work full time and earned over dollar_figure per year if petitioner fell behind on child_support payments or ms gessic secured full-time employment the agreement stipulated that petitioner would be entitled only to the exemption for the younger child and ms gessic for the older child petitioner credibly testified that in the years since their divorce ms gessic has not held full-time employment and earned over dollar_figure per year he provided documentation that he was current on all child_support payments for the year at issue petitioner further testified that he did not have custody of the minor children during petitioner filed his tax_return for claiming dependency_exemptions for both minor children however ms gessic refused to sign form_8332 release of claim to exemption for child of divorced or separated parents thus petitioner attached to his return a copy of a single page from the separation agreement containing petitioner’s and ms gessic’s initials and the aforementioned conditions under which petitioner could claim exemptions for the children on date respondent issued a notice_of_deficiency to petitioner determining a deficiency in federal_income_tax for the tax_year of dollar_figure the deficiency was wholly attributable to respondent’s disallowance of the dependency_exemptions and child tax_credits claimed by petitioner a burden_of_proof opinion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction or credit claimed rule a 308_us_488 292_us_435 under sec_7491 the burden_of_proof may shift from the taxpayer to the commissioner if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability petitioner does not argue or provide evidence that the conditions of sec_7491 are fully satisfied therefore the burden_of_proof remains on petitioner b dependency_exemptions a taxpayer may claim a dependency_exemption for each individual who is a dependent as defined in sec_152 of the taxpayer for the taxable_year sec_151 c sec_152 defines a dependent to include a qualifying_child a qualifying_child must inter alia share the same principal_place_of_abode as the taxpayer for more than one-half of the year in issue sec_152 the shared parenting plan granted ms 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure gessic custody of the children and gave petitioner visitation rights petitioner testified that he did not have custody of the children during but exercised his visitation rights in the case of divorced or separated parents special rules determine which parent may claim a dependency_exemption for a child see sec_152 as relevant to the present case sec_152 allows the noncustodial_parent to claim a dependency_exemption for a child if the custodial_parent signs a written declaration releasing her claim to the exemption and the noncustodial_parent attaches the declaration to his federal_income_tax return the declaration required by sec_152 must be made on either form_8332 or on a statement conforming to the substance of that form 114_tc_184 see sec_1_152-4t a q a-3 temporary income_tax regs fed reg date form_8332 requires a taxpayer to furnish the name of each child the name and social_security_number of the noncustodial_parent claiming the dependency_exemption the social_security_number of the custodial_parent the signature of the custodial_parent the date of the custodial parent’s signature and the year or years for which the claims were released see miller v commissioner supra pincite the exemption may be released for a single year for a number of specified years for example alternate years or for all future years as specified in the declaration sec_1_152-4t a q a-4 temporary income_tax regs fed reg date petitioner failed to attach form_8332 to his return instead he attached a page from the separation agreement initialed by both himself and ms gessic which stated u ntil the wife returns to work full time which shall be defined as wife earning dollar_figure gross per year the parties agree that the husband shall receive the tax exemption for the minor children so long as his child_support payments are current we must decide whether attaching the page from the separation agreement to petitioner’s tax_return satisfies the requirements of sec_152 and sec_1_152-4t a q a-3 temporary income_tax regs supra in boltinghouse v commissioner tcmemo_2003_134 the taxpayers attached to their return a copy of a separation agreement which was signed by both the custodial and noncustodial parents the separation agreement unconditionally granted the noncustodial_parent the dependency_exemptions the court held that the separation agreement met the requirements of a written declaration under sec_152 because it conformed in substance to form_8332 petitioner contends that the page from the separation agreement which is initialed by petitioner and ms gessic is similar to the separation agreement in boltinghouse and would substitute for form_8332 however simply because the custodial_parent initialed the page of the separation agreement does not end the analysis regarding whether the document conforms in substance to form_8332 even if we accept the initials from petitioner and ms gessic as signatures the attached page from the separation agreement failed to include the date of such signatures the names of the minor children or the names or social_security numbers of the custodial and noncustodial parents furthermore unlike the separation agreement in boltinghouse v commissioner supra the attached page from the separation agreement at issue is conditional namely that as long as his child_support payments were current petitioner would receive the tax exemptions for the minor children until such time as ms gessic returned to work full time and earned over dollar_figure per year these conditions suggest that petitioner’s compliance with his support obligations or ms gessic’s employment status may change from year to year such that petitioner’s entitlement to the dependency_exemptions for his children is potentially subject_to change each year consequently the conditional language creates an ambiguity as to what tax years are applicable by making petitioner’s entitlement to the dependency_exemptions contingent upon the fulfillment of the conditions although petitioner testified that he met the condition in the internal_revenue_service cannot be expected to police divorce decrees and separation agreements or determine taxpayer compliance therewith therefore we find that the attached page of the separation agreement does not constitute a written declaration under sec_152 and does not conform to form_8332 see also brissett v commissioner tcmemo_2003_310 accordingly petitioner is not entitled to dependency_exemptions for the two minor children for c child tax_credits sec_24 provides that a taxpayer may claim a credit for each qualifying_child the term qualifying_child means a qualifying_child of the taxpayer as defined in sec_152 who has not attained the age of sec_24 a taxpayer may also satisfy the qualifying_child requirement if the taxpayer establishes entitlement to the dependency_exemption under the exception of sec_152 see walker v commissioner tcmemo_2008_194 however the minor children are not petitioner’s qualifying children under c because they did not have the same principal_place_of_abode as petitioner for more than one- half of the taxable_year moreover petitioner was unable to establish his eligibility to claim a dependency_exemption under sec_152 thus petitioner is not entitled to a tax_credit with respect to either of the minor children for we have considered all of the arguments made by petitioner and to the extent that we have not specifically addressed them we conclude they are without merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c air j fy nt bed government entities til vi- od we of -0 vtl ig--00 division date apr - employer_identification_number legend contact person identification_number contact number t d t i e z s v v o d x n o n w n a b dear sir or madam we have considered the ruling_request dated date submitted on behalf of m a nonprofit organization which is exempt from federal_income_tax as an organization described in sec_501 of the internal_revenue_code m seeks a ruling on the proper treatment of capital_gain deferral under sec_512 of the code facts m was incorporated on a nonprofit basis in the state of n as stated in its certificate of incorporation m's purposes are to perpetuate the friendships started in the fraternity of o and to acquire land and funds for the erection furnishing and maintenance in a city p of a suitable fraternity house as the home and principal office of m since its inception m has been associated with the q university chapter of the fraternity of r an international fraternity organization in furtherance of its purposes m purchased real_property the fraternity house at an identified street address in p and has maintained the fraternity house for use by the members of the o chapter who were undergraduate students at q university thus m was organized and operated as a sociai club described in sec_501 of the code on account of the need to renovate the fraternity house m borrowed money first from q university and later from r the loan from r was used to repay the earlier loan from q university in connection with the loan from q university m also gave the university a right_of_first_refusal to purchase the fratemity house at ninety percent of its fair_market_value in q university demanded that the local o chapter cease its operations on the q campus in accordance therewith r withdrew its certification of its q university chapter further r notified m that it would foreclose on the fraternity house if m did not repay the loan these events led m to conclude that it could no longer accomplish its purposes by continued ownership of the fraternity house and that it must either sell the fraternity house or lose it in foreclosure proceedings m sold the fraternity house to q university at a price that resulted in a gain of dollar_figurex with tax_return m will elect pursuant to sec_512 of the code to the filing of its defer the recognition of this gain m has provided a copy of its timely filed form_990 return which includes the sec_512 election as a result of the sale of the fraternity house and the decertification of the local o chapter of r m's members decided to consider changing its exempt_function as graduates of q university many of m's members have supported the university financially and by actively participating in various alumni organizations accordingly the members determined that m should change its purposes to educational and charitable purposes in support of q university and its students who need financial assistance m proposes to convert from an organization described in sec_501 of the code to one described in sec_501 as a sec_501 organization m would continue its association with q university by providing financial assistance to the university and making scholarships available to students of q university a proposed restated certificate of incorporation of m which will be filed in the event that the internal_revenue_service approves this request is attached as an exhibit a completed form_1023 exemption application which will also be filed if this request is approved is another exhibit further if this request is approved m will then use the proceeds of the sale to purchase securities within three years of the date of sale of the fraternity house and the income derived will be used to fund educational scholarships no members of m have received or are intended to receive any of the net_proceeds of the sale of the fraternity house also the officers and directors of m serve strictly as volunteers and receive no salaries or other remuneration for acting in such capacities ruling requested m requests that the service rule that the proposed change_of m’s exempt purposes from those of a social_club described in sec_501 of the code to those of an organization described in sec_501 would allow m to recognize capital_gain only to the extent the net sales proceeds from the fraternity house exceed the cost of purchasing the new property pursuant to sec_512 law sec_501 of the code provides for the exemption of clubs organized and operated exclusively for pleasure recreation and other nonprofitable purposes substantially_all the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the income_tax regulations states that the exemption provided to organizations described in sec_501 of the code applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder the regulation also states that in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities sec_1_501_c_7_-1 of the regulations provides that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not tax exempt solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption sec_511 of the code imposes a tax on the unrelated_business_taxable_income defined in sec_512 of organizations exempt from tax under sec_501 including those described in sec_501 sec_512 of the code provides in part that with respect to an organization described in sec_501 the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income both computed with certain modifications provided in sec_512 sec_512 of the code defines exempt_function_income to mean the gross_income from dues fees charges or similar amounts paid_by members of the organization as consideration for providing such members or their dependents or guests goods facilities or services in furtherance of the purposes constituting the basis for the exemption of the organization to which income is paid sec_512 of the code provides in part that if property used directly in the performance of an exempt_function of an organization described in sec_501 is sold by such organization and within a period beginning one year before the date of such sale and ending three years after such date other_property is purchased and used by such organization directly in the performance of its exempt_function gain if any from such sale shall be recognized only to the extent that such organization’s sales_price of the old property exceeds the organization’s cost of purchasing the other_property revrul_58_501 1958_2_cb_262 hoids that where a social_club described in sec_501 c of the code finds it impracticable to continue to conduct its exempt_activities and as such sells its property and liquidates such sale is incidental to its exempt purposes the rev_rul states that the club is still to be considered as operated exclusively for pleasure recreation and similar purposes up through the date of the sale and distribution of the liquidated assets to its active members the rev_rul concludes that profit from the sale by the club of all its property in conjunction with the termination of its activities and liquidation does not deprive the club of the exemption provided by sec_501 analysis the facts surrounding m’s sale of the fraternity house to q university at a price that resulted in a gain of dollar_figurex show that the fraternity house was used to carry out m’s exempt_activities under sec_501 the code however circumstances changed particularly in view of q university’s demand that the local o fraternity chapter cease its operations on the q campus r’s withdrawal of its certification of its q university chapter and the threat of foreclosure proceedings as in the case of the organization described in revrul_58_501 supra which found it impractical to continue with its exempt social activities m’s circumstances have changed and its members decided that it was in m’s best interest to sell the fraternity house and discontinue its operation as a tax exempt social_club described in sec_501 however unlike the organization described in revrul_58_501 m will not be dissolved and its assets will not be distributed to its members the purpose of the sale was not to make a profit for m's members and no net_proceeds have ever been distributed to m’s members nor is this planned for the future instead m states that it will use the proceeds from the sale of the fraternity house to buy securities which in turn will be used to fund educational scholarships for q university students this is an exempt educational purpose under sec_501 and is in accord with m’s intention to restate its certificate of incorporation to reflect sec_501 exempt purposes and to apply for recognition of exemption under this section concerning the unrelated_business_income_tax issue as indicated above the fraternity house was used directly to carry out m’s exempt_function under sec_501 of the code and the proceeds from the sale will be used to buy securities to fund scholarships in furtherance of exempt educational_purposes under sec_501 although no other_property will be purchased by m and used directly in the performance of its exempt_function such proceeds will be permanently dedicated to exempt purposes under sec_501 and used to fund scholarships under these circumstances gain in the amount of dollar_figurex from the sale of the fraternity house need not be recognized in accordance with sec_512 and income from the sale of the fraternity house is not considered unrelated_business_taxable_income pursuant to sec_512 ruling based on the foregoing we rule that the proposed change_of m’s exempt purposes from those of a social_club described in sec_501 of the code to those of an organization described in sec_501 will allow m to recognize capital_gain only to the extent the net sales proceeds from the fraternity house exceed the cost of purchasing the new property based on the provisions of sec_512 this ruling is based on the understanding that there will be no material changes in the facts upon which it is based any changes that may have a bearing upon m’s exempt status should be reported to the service office the mailing address is internal_revenue_service te_ge customer service p o box number ax exempt and government entities te_ge customer e telephone number there is toll free pursuant to a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative we are also sending a copy of this ruling to the te_ge customer service office because this letter could help resolve any questions about m’s tax status it should be kept with m's permanent records if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent thank you for your cooperation sincerely signed marvin friedlandex marvin friedlander acting manager exempt_organizations technical group


internal_revenue_service uil number release date cc dom fi p plr-122660-98 april taxpayer state r manufacturer x manufacturer y manufacturer z a a b c d e f g h k l m n dear this is in reply to your letter dated date requesting a ruling that taxpayer is taxable as an insurance_company and subject_to the provisions of parts ii and iii of subchapter_l of the internal_revenue_code_of_1986 as amended taxpayer is a state r corporation regulated by the state r department of insurance taxpayer is a wholly-owned stock subsidiary of a and joins in filing a consolidated_income_tax_return on the basis of a’s fiscal_year ending september facts taxpayer operates nationwide and is regulated by the insurance departments in states taxpayer originally operated as a conventional automobile club providing towing in the event of mechanical breakdown emergency roadside assistance trip planning and other travel-related services to individual motorists in exchange for annual prepaid membership dues taxpayer has expanded its services to include not only the trip planning and retail program but also private label emergency service wholesale programs taxpayer represents that currently less than l of its contracts provide trip planning routing services and that m of its revenue is derived from roadside assistance and related_services retail program the fee for the retail program is a the wholesale programs represent the majority of contracts the wholesale programs are provided in the names of the automotive manufacturers and are limited to roadside assistance services the manufacturers include manufacturer x manufacturer y and manufacturer z taxpayer sells two types of contracts the most common type is referred to as the risk based contract the contracts with manufacturers x and y are examples of risk based contracts and are described below in further detail in the case of the risk based contract taxpayer is paid a specific amount either directly by the member under the retail programs individual memberships or by the automotive manufacturers under the wholesale programs automotive manufacturer contracts generally taxpayer is responsible for providing the roadside assistance service at its expense regardless of the number of breakdowns any one motorist may have taxpayer is financially at risk with respect to each individual risk based contract as any one vehicle may require emergency assistance numerous times resulting in service_costs exceeding contract fees total contract fees are sufficient to cover the cost of such service based on projected claims and historical experience taxpayer represents that for the year ended date approximately n of its revenue is from risk based contracts the second type of contract is the no risk contract the contract with manufacturer z is an example of a no risk contract as described below the automobile manufacturer is responsible for the cost for any dispatch and emergency roadside service therefore under the no risk contract the risk is retained by the automobile manufacturer taxpayer also maintains a 24-hour toll free number to ensure prompt delivery of emergency roadside assistance services to motorists taxpayer has created a network of towing operators and locksmiths the contractual arrangement between taxpayer and the tow operators and locksmiths is standardized at volume based rates on a fee-for service basis the towing operators and locksmiths who perform the actual roadside assistance are independent contractors not employees of taxpayer manufacturer x contracts approximately k of taxpayer’s revenue for the period ending date is from its contracts with manufacturer x these contracts provide emergency roadside assistance service under extended warranty service contracts and the basic warranty plan to manufacturer x’s customers in taxpayer and manufacturer x entered into a new contract to cover emergency roadside service provided to customers under the basic warranty plan the new contract offers emergency roadside services to drivers of covered vehicles all new motor vehicles designated by manufacturer x as or model_year manufacturer x motor vehicles that are models for delivery in the united_states for a period of three years or thirty six thousand big_number miles whichever occurs first under the terms of the agreements manufacturer x will pay taxpayer b per covered vehicle as the basic fee for providing services to manufacturer x and to customers the basic fee will be taxpayer's total compensation from manufacturer x for providing services regarding a covered vehicle the basic fee is payable monthly to taxpayer however if the cumulative number of dispatches regarding covered vehicles manufactured in a given model_year exceeds the applicable model_year cap c of the covered vehicles manufactured by or for manufacturer x for delivery in the united_states for such model_year manufacturer x will reimburse taxpayer for actual payments made by taxpayer to a service provider for rendering roadside assistance upon each such additional dispatch no additional fee is paid for dispatch as was provided for in the contract in the event the dispatches fall below the applicable model_year cap taxpayer will provide manufacturer x a credit of d per covered vehicle for each one percent of usage that falls below the applicable model_year cap the emergency roadside assistance services provided by taxpayer pursuant to the contracts with manufacturer x are comprised of the following gasoline refill up to two gallons of gasoline locksmith services for automobile lockouts flat tire change battery recharge or a jump start and towing service to the nearest manufacturer x-branded dealership of another manufacturer x-branded dealership no more than twenty- five miles more distant than the nearest manufacturer x branded dealership if requested by customer in addition manufacturer x will pay taxpayer e per call under the contract for each telephone call by a customer to a toll free number that is not related to such customer receiving emergency roadside services manufacturer y taxpayer’s contract with manufacturer y is also a risk based contract manufacturer y pays to taxpayer h annually per vehicle sold or leased by a manufacturer y dealership in return taxpayer agrees to provide emergency roadside services including towing to the nearest manufacturer y dealership in any instance where a covered vehicle is disabled due to a problem covered under the warranty in the event that a manufacturer y dealership is not available to receive the vehicle taxpayer shall arrange for the vehicle to be towed to a place for safekeeping until such dealership may accept the vehicle the responsibility for the expenses for such roadside services are entirely borne by taxpayer in the event that a customer refuses to give the vehicle towed to the nearest manufacturer y dealership such customer shall be responsible for arranging for services manufacturer z taxpayer’s contract with manufacturer z is a no risk contract taxpayer charges a data base fee of f for each manufacturer z vehicle sold costs associated with emergency roadside service are passed on to and paid_by manufacturer z specifically taxpayer charges manufacturer z a g dispatch fee plus the service cost with respect to emergency roadside service law and analysis sec_831 of the internal_revenue_code provides that taxes computed under sec_11 are imposed for each tax_year on the taxable_income of every insurance_company other than a life_insurance_company sec_1_831-3 of the income_tax regulations provides in part that for purposes of sec_831 and sec_832 the term_insurance companies means only those companies which qualify as insurance_companies under former sec_1_801-1 of the regulations now sec_1_801-3 sec_1_801-3 provides that the term_insurance company means a company whose primary and predominant business activity during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies thus though its name charter powers and subjection to state insurance laws are significant in determining the business which a company is authorized and intends to carry on it is the character of the business actually done in the taxable_year which determines whether a company is taxable as an insurance_company under the internal_revenue_code whether an entity is an insurance_company for federal_income_tax purposes depends on the character of the business actually done in the taxable_year if an entity is primarily engaged in the issuance of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies then the entity is subject_to tax as an insurance_company regardless of its classification under state law sec_1_831-3 and sec_1 a of the income_tax regulations revrul_83_172 1983_2_cb_107 revrul_71_404 1971_2_cb_260 see also 285_us_182 neither sec_832 of the code nor the regulations thereunder define the terms insurance or insurance_contract the accepted definition of insurance for federal tax purposes is found in 312_us_531 in which the supreme court states that h istorically and commonly insurance involves risk-shifting and risk-distributing id pincite case law has defined an insurance_contract as a contract whereby for an adequate_consideration one party undertakes to indemnify another against loss arising from certain specified contingencies or perils i t is contractual security against possible anticipated loss 199_f2d_508 7th cir in addition the risk transferred under the contract must involve the assumption of another’s risk of economic loss 66_tc_1068 aff’d 572_f2d_1190 th cir cert_denied 439_us_835 revrul_89_96 1989_2_cb_114 risk shifting occurs when the insured facing the possibility of an economic loss transfers part or all of the financial consequences of the loss to the insurer if the insured has shifted its risk to the insurer then a loss does not affect the insured because the loss is offset by the proceeds of an insurance payment see revrul_88_72 1988_2_cb_31 clarified by revrul_89_61 1989_1_cb_75 risk_distribution incorporates the statistical phenomenon known as the law of large numbers 811_f2d_1297 9th cir the insurer assumes a risk of loss as part of a plan to distribute actual losses among a large group of persons with similar risks when additional statistically independent risk exposures are insured an insurance company’s potential total loss increases as does the uncertainty regarding the amount of that loss as the uncertainty regarding the company’s total loss increases however there is an increase in the predictability of the insurance company’s average loss total loss divided by the number of exposure units that is when the sample number increases the probability density function of the average loss tends to be more concentrated around the mean due to this increase in predictability there is a downward trend in the amount of capital that a company needs per risk unit to remain at a given level of solvency see revrul_89_61 while risk shifting and risk_distribution are essential to the concept of insurance judicial decisions have made it clear that not all business transactions which involve an element of risk to the contracting parties involve insurance more specifically judicial decisions have made it clear that the sale_of_goods or services through the negotiation of a discounted fee does not constitute insurance although the seller of goods or services might sustain a loss from the transaction the seller is presumed to exercise sufficient control_over the events that produce the loss ie the cost of furnishing the goods or services in question so that no loss occurs on account of a fortuitous event in 107_f2d_239 d c app the court discussed the difference between a business risk and an insurance risk in holding that group health’s contracts did not involve the provision of insurance the court noted that insurance primarily involves contractual security against risk of loss whereas a health service_contract is not insurance if it is concerned primarily with getting services rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation f 2d pincite the court further stated that the presence of an incidental element of risk does not in and of itself render a health service_contract one of insurance f 2d pincite thus the elements of risk shifting and risk_distribution must be central to the main purposes of the transaction the contract between taxpayer and manufacturer z is an example of a fee-for-service arrangement which does not involve a shifting of insurance risk under the contract taxpayer agrees to provide dispatch and referral services to consumers of manufacturer z vehicles at a prospectively set rate taxpayer charges manufacturer z a g fee for each dispatch the actual costs of providing emergency roadside assistance services to consumers are passed on to manufacturer z this type of contract is a service_contract the contracts between taxpayer and manufacturers x and y are insurance contracts under the contracts between taxpayer and manufacturers x and y taxpayer for a fixed price is obligated to indemnify a contractholder for the economic loss arising from any emergency roadside assistance during the contract period by accepting a large number of risks taxpayer distributes the risk of loss under the contracts so as to make the average loss on a contract more predictable because issuance of risk based contracts such as those with manufacturers x and y represent taxpayer’s primary and predominant business taxpayer qualifies to be taxed as an insurance_company conclusion accordingly taxpayer is taxable as an insurance_company and subject_to the provisions of parts ii and iii of subchapter_l of the internal_revenue_code_of_1986 as amended no opinion is expressed under other sections of the code and income_tax regulations which may also apply 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 a copy of this letter should be attached to the next federal_income_tax return to be filed by taxpayer sincerely yours assistant chief_counsel financial institutions and products by signed by mark s smith mark s smith chief branch


department of the treasury internal_revenue_service washington d c office_of_chief_counsel number info release date index no attention dear date i apologize for the delay in responding to your date inquiry on behalf of your constituent his inquiry involves two separate tax issues the tax rules relating to fuel used by nonprofit_organizations that provide public transportation the allowable personal automobile mileage rates i will address the fuel tax issue another irs office will respond to you about the mileage rate issue the internal_revenue_code code generally taxes gasoline before the gasoline is bought by the consumer however the code allows a refund of the gasoline tax if gasoline is used in several specified uses sec_6416 and sec_6421 of the code these include use in a bus while furnishing for hire passenger land transportation available to the general_public the bus must be engaged in either scheduled transportation along regular routes or nonscheduled charter operations if the seating capacity of the bus is at least adults not including the driver the exclusive use of a state_or_local_government the exclusive use of a nonprofit_educational_organization our response to specifically allows for a refund of the gasoline tax if the gasoline is sold to a nonprofit inquiry is governed by the statutory provision that educational_organization for its exclusive use for purposes of this refund the term nonprofit_educational_organization means an educational_organization described in sec_170 of the code which is exempt from income_tax under sec_501 an educational_organization is one that normally maintains a regular faculty and curriculum and has a regularly enrolled body of students at the place where its educational activities are carried on sec_170 of the code a nonprofit_educational_organization must have as its primary function the presentation of formal instruction sec_1_170a-9 of the income_tax regulations the irs does not have the statutory authority to allow refunds of tax for gasoline sold to other nonprofit_organizations i hope this information is helpful if you have any questions please contact me at or ruth hoffman of my staff at sincerely paul f kugler associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index numbers ------------------------ -------------------------- -------------------------- --------------------------- legend legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-134572-08 date date x a b ------------------------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------------------------ --------------------------- ------------------------------------------------------------------------------------------------------ --------------------------- state ------------ date ---------------------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted by x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes as well as relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts x was formed on date as a state limited_liability_company x’s members a and b intended that x be treated as an s_corporation for federal tax purposes effective date however x inadvertently failed to timely file a form_2553 election by a small_business_corporation a form_8832 entity classification election also was not filed plr-134572-08 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified plr-134572-08 on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date if x files a completed form_2553 effective date with the appropriate service_center within sixty days from the date of this letter a copy of this letter should be attached to the election except for the specific rulings above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-134572-08 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc