date department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l number release date cc fip tl-n- uilc internal_revenue_service national_office field_service_advice memorandum for from lon b smith acting associate chief_counsel cc fip subject investment_unit rules this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice tl-n- legend taxpayer holdings limited_partnership partners i parent investment bankers accounting firm brokerage firm ltd holdings i bank affiliate holdings ii state state year a year c year d year e date date date date date date date date date date date e f g h i j k l m n o tl-n- p q r s t v w x y z aa bb issue the sole issue set forth in your field_service_advice fsa request is whether the taxpayer is entitled to a deduction for original_issue_discount oid in the amount claimed dollar_figurep in its taxable_year c conclusion we agree that the taxpayer has provided inconsistent and confusing information concerning the transactions in issue and that additional factual development is required therefore it is impossible to provide conclusive advice as to whether the taxpayer is entitled to an oid deduction in the amount claimed as with other deductions oid deductions are a matter of legislative grace see eg 503_us_79 ‘an income_tax deduction is a matter of legislative grace and the burden of clearly showing the right to the claimed deduction is on the taxpayer ’ in this case we agree that the taxpayer has failed to clearly show its right to the claimed oid deduction unless the taxpayer provides additional information to substantiate its claimed deduction based on the facts submitted with the fsa request we concur with your conclusion and that of the revenue_agent that the deduction should be disallowed facts the facts as set forth in your fsa request and the materials submitted therewith are as follows taxpayer is engaged in the investment banking business the proposed_adjustment in issue is based upon the revenue agent’s disallowance of a deduction for oid in the amount of dollar_figurep claimed on taxpayer’s year c consolidated federal_income_tax return the claimed oid deduction arises out of the below-described transactions involving a subordinated note in the principal tl-n- amount of dollar_figurew issued by holdings on date in connection with an agreement dated date hereinafter the agreement the proposed_adjustment is based upon the revenue agent’s determination that there was no oid with respect to the note the revenue agent’s conclusion is based on the facts set forth in taxpayer’s response to irs form and information contained in the related documents pursuant to the agreement the partners of limited_partnership partner sec_1 parent and taxpayer agreed to acquire the investment banking firm formerly known as investment bankers limited_partnership is a state limited_partnership parent is a u k company and taxpayer is a state corporation and a j subsidiary of parent the acquisition was accomplished as follows i partner sec_1 and taxpayer formed holdings ii holdings acquired from partner sec_1 the business and assets of investment bankers in exchange for l shares of preferred_stock of holdings m shares of class b common_stock of holdings and cash in the amount of dollar_figureaa and iii taxpayer contributed cash in the amount of dollar_figurez in exchange for l shares of preferred_stock of holdings m shares of class a common_stock of holdings and dollar_figurew principal_amount of subordinated notes due year e the note thus the capital structure of holdings consisted of m outstanding shares of class a common_stock m outstanding shares of class b common_stock n outstanding shares of preferred_stock v principal_amount of senior notes due year d the senior the principal of the note was payable in equal annual installments from date through date with interest payable in cash assuming sufficient earnings or if not as an increase in principal payable at_f per annum through date and at g per annum thereafter the note is not publicly traded on date holdings issued to the holder of the note an additional subordinated promissory note due year e the additional note in the principal_amount of dollar_figureo representing the amount of accrued interest with respect to the note which had not been paid because holdings’ earnings had been insufficient to permit the payment of interest due and payable under the note according to the agreement the par_value of the preferred_stock was dollar_figurek per share the par_value of class a common_stock voting class b common_stock and the non-voting class b common_stock was dollar_figuree per share holdings’ consolidated financial statements reflect the issuance of the note in the amount of dollar_figurew and dollar_figurer of stock and are therefore consistent with these transactions tl-n- notes and the note partner sec_1 and taxpayer each obtained an i interest in holdings collectively these transactions were intended to qualify as a tax free exchange under sec_351 the agreement further provided that partner sec_1 and taxpayer agreed i that for federal_income_tax purposes the note issued by holdings would have oid as defined in sec_1273 in an amount determined by accounting firm based on advice from brokerage firm and another entity at closing and ii that holdings would report appropriately such amounts as oid on the tax returns and tax reports of holdings accounting firm determined that the amount of oid on the note was dollar_figures based on the brokerage firm’s determination that the fair_market_value of the note was dollar_figuret the agreement also specified that at the closing the note was to be issued directly to taxpayer in spite of this provision however at the closing and at taxpayer’s request the note instead was issued directly to ltd a wholly owned subsidiary of parent the reason the note was issued to ltd instead of taxpayer at the closing is unclear according to taxpayer the note was issued directly to ltd because ltd agreed to purchase the note from taxpayer immediately upon the issuance of the note pursuant to the agreement for the fair_market_value of the note at that time-- dollar_figuret taxpayer maintains that solely as a matter of administrative convenience taxpayer directed holdings to issue the note directly to ltd rather than having the note issued to it and then immediately assigning it to ltd taxpayer acknowledges it was legally obligated to purchase the note from holdings under the agreement and it in fact did just that taxpayer also acknowledges that ltd never entered into any agreement with holdings regarding the note taxpayer relies on the accounts of ltd the equivalent of its financial statements as support for its position that ltd purchased the note from taxpayer for dollar_figuret at the time of these transactions holdings issued the senior notes to unrelated institutional investors the senior notes had an interest rate of h a maturity_date of date and an aggregate principal_amount of dollar_figurev these notes are not at issue here ltd ’s accounts indicate that ltd took a loan from parent in the amount of dollar_figuret and the proceeds were used to obtain the note taxpayer’s representations contained in its response to irs form_5701 and its exhibits b and c attached thereto indicate that both taxpayer a u s entity and ltd a tl-n- taxpayer also states that the note was issued to ltd at taxpayer’s direction to holdings because taxpayer had agreed to transfer the note to ltd as evidenced by the cross receipt issued in connection with taxpayer’s transfer of cash to holdings in exchange for the stock and note the cross receipt indicates that in exchange for taxpayer’s dollar_figurez in cash taxpayer received from holdings dollar_figurel shares of preferred_stock m shares of common_stock and the note issued to ltd the transferee of taxpayer although the cross receipt suggests taxpayer may have assigned the note to ltd since taxpayer‘s analysis and corresponding diagrams indicate that taxpayer sold the note to ltd you have assumed for purposes of your analysis that the note was sold to ltd and not simply transferred to ltd as an assignee ltd acquired the note in year a in year c ltd sold the note and the additional note to holdings ii a state corporation and a wholly owned subsidiary of taxpayer for an amount equal to their fair_market_value at that time dollar_figurebb plus accrued interest the sale occurred in date thereafter in date taxpayer acquired partners i's interest in holdings which had since been renamed consequently holdings claimed deductions for accrued oid with respect to note in the aggregate amount of dollar_figureq holdings’s oid deductions were not disallowed in the years the deductions were claimed in date holdings ii sold the note and the additional note together with the right to all accrued but unpaid interest thereon to bank affiliate an unrelated third party for an amount equal to their face value and all accrued but unpaid interest thereon dollar_figurex in date holdings repaid the note and the additional note by remitting to bank affiliate a cash payment in the amount of y representing the principal_amount of the note and the additional note and all accrued but unpaid interest thereon u k entity are wholly owned subsidiaries of parent contrary to these representations you note that the notes to the consolidated financial statements of holdings as of date and the following year indicate that ltd not parent is taxpayer’s parent similarly ltd ’s accounts as of date indicate that taxpayer is a subsidiary of ltd for the purposes of this memorandum you have assumed that taxpayer’s representations that ltd is a u k entity and a wholly owned subsidiary of parent and that taxpayer is a wholly owned subsidiary of parent as set forth in taxpayer’s response and as so indicated in its diagrams you also noted that whether taxpayer’s parent is parent or ltd appears to have no effect on the analysis of the tax consequences of the note you note that if the transaction is treated as an assignment the tax consequences would be remarkably different tl-n- on its year c consolidated federal_income_tax return taxpayer claimed a deduction in the amount of dollar_figurep representing the remaining oid with respect to the note which had not been deducted in periods prior to its repayment as of date the revenue_agent proposes to disallow this deduction law and analysis the proper tax treatment of investment units under the original_issue_discount oid provisions sec_163 and is set forth in sec_1273 sec_1273 provides that in the case of any debt_instrument and an option security or other_property issued together as an investment unit-- a the issue_price for such unit shall be determined in accordance with the rules of sec_1273 and sec_1273 as if it were a debt_instrument b the issue_price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair_market_value of such element to the fair_market_value of all elements in such unit and c the issue_price of any debt_instrument included in such unit shall be the portion of the issue_price of the unit allocated to the debt_instrument under subparagraph b since sec_1273 was enacted in various versions of proposed_regulations have been issued under the oid provisions final regulations were promulgated in and except as otherwise provided they apply to debt instruments issued on or after date see generally sec_1_1271-0 thus these regulations do not apply to the note in this case because it was issued in year a a year before but after an investment_unit is often issued as part of a lending transaction and is comprised of a debt_instrument for example the note evidencing the loan and an option security or other_property right your fsa request contained a general overview of the oid provisions inasmuch as it was sufficiently comprehensive for purposes of the investment_unit issue presented in this case we have not repeated the discussion here for a general discussion of the investment_unit rules see david c garlock federal income_taxation of debt instruments aspen law business third edition tl-n- under sec_1273 the issue_price of an investment_unit is determined as if the investment_unit were a debt_instrument if a nonpublicly offered debt_instrument is issued for money the issue_price of the debt_instrument generally is the amount_paid for the instrument see sec_1273 therefore if an investment_unit is issued for money in a lending transaction the issue_price of the investment_unit generally is the amount_loaned under sec_1273 the issue_price of an investment_unit is allocated between the debt and property components as of the issue_date of the investment_unit see sec_1275 for the definition of issue_date the allocation is made based on the relative fair market values of the debt and property components as of the issue_date this allocation must be made even if the components do not have readily ascertainable fair market values as of the issue_date see eg custom chrome v commissioner tcmemo_1998_317 aff’d in part and rev’d in part 217_f3d_1117 9th cir in year a there were no final regulations in effect under sec_1273 however the regulations under former sec_1232 which contained rules similar to those in sec_1273 provide detailed rules for allocating the issue_price of an investment_unit if the fair_market_value of the property component is not readily ascertainable as of the issue_date sec_1_1232-3 although this case concerns stock rather than warrants there is analogous authority to consider see 634_f2d_484 10th cir and revrul_77_250 1977_2_cb_309 for applications of the sec_1232 regulations in situations in which there was not a readily_ascertainable_fair_market_value of the non-debt component of the investment_unit as of the issue_date although not controlling proposed_regulations under sec_1273 were published in the federal_register on date that would have provided guidance on how to determine the issue_price of a debt_instrument issued after including an investment_unit treated as a debt_instrument fr under prop sec_1_1273-2 of the proposed_regulations rules similar to those under sec_1_1232-2 would have applied to allocate an investment unit’s issue_price to its components as of the issue_date the proposed_regulations were withdrawn in when a new set of proposed_regulations were published in the federal_register fr the proposed_regulations were finalized in as noted above under both supplement chapter pages thought see also kevin m keyes federal taxation of financial instruments and transactions warren gorham lamont edition supplement part paragraph b page tl-n- the proposed_regulations and the final regulations however no specific rules are provided to determine the fair market values of the components of an investment_unit for purposes of making the allocation it is clear that the statute and the regulations under both sec_1273 and former sec_1232 require that value be allocated to the property component of an investment_unit as of the time the investment_unit is issued thereby closing the transaction even if the fair_market_value of the property component is not readily ascertainable this allocation must be done in order to determine the portion of the issue_price allocable to the debt component and thus to determine the amount of oid on the debt component in general the debt component of an investment_unit has oid if the debt’s stated_redemption_price_at_maturity exceeds its issue_price sec_1273 under sec_163 and sec_1272 oid is deductible by the issuer and includible by the holder as interest over the term of the debt component case development hazards and other considerations tl-n- we would be pleased to provide ongoing assistance as this case develops please call if you have any further questions lon b smith acting associate chief_counsel by william e blanchard senior technician reviewer associate chief_counsel financial institutions and products


gym s07 -00 department of the treasury internal_revenue_service washington d c contact person idetiuicauon mwumber telepr tune wumber tec y tax_exempt_and_government_entities_division date rl oy s a employer_identification_number legend dear sir or madam this is in response to a letter dated date which requested certain rulings with respect to a proposed transfer of all of the assets of btoc b and c are exempt under sec_501 c of the internal_revenue_code and are classified as private_foundations under sec_509 will continue to carry out the charitable purposes previously conducted by b effectively controlled by the same board_of directors b represents that the merger of its assets to c will be without consideration b will cease its separate legal existence upon completion of the merger b represents that it does not have any outstanding grants with respect to which it is required to exercise expenditure_responsibility under sec_4945 of the code b and c are once the merger has been completed b will notify the service of its intent to terminate its private_foundation_status pursuant to sec_507 of the code at that time b will not have assets b has never notified the service in the past that it intends to terminate its private_foundation_status nor has b ever received notification that its status as a private_foundation has been terminated furthermore b has not committed willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_507 of the code and the regulations to sec_507 sets forth rules applicable to terminating foundations the internal_revenue_service in revrul_2002_28 2002_20_irb_941 copy attached has issued guidance on the filing obligations and tax issues that arise when a private_foundation transfers all of its assets to one or more other private_foundations under sec_507 of the code the rev_rul presents three situations in which a private_foundation transfers all of its assets to one or more other private_foundations in situation one the foundation under a plan of dissolution distributes all of its remaining assets in equal shares to three other private_foundations in situation two the trustees of a private_foundation trust create a not-for-profit corporation to carry on the trust’s charitable activities which the trustees have determined can be more effectively accomplished by operating in corporate form all of the trust’s assets and liabilities are transferred to the not-for-profit corporation in situation three two private_foundations transfer all of their assets and liabilities to a newly formed private_foundation in the rev_rul the service has ruled that a private_foundation that transfers all of its assets to one or more private_foundations in a transfer described in sec_507 is not required to notify the manager exempt_organizations determinations tax exempt government entities that it plans to terminate its private_foundation_status under sec_507 the ruling further states that if the private_foundation does not provide notice and does not terminate it is not subject_to termination_tax under sec_507 if the private_foundation provides notice and terminates then it is subject_to the tax however if the private_foundation has no assets on the day it provides notice the sec_507 tax will be zero the rev_rul gives detailed information as to the applicability of the excise_taxes imposed by sections of the code the ruling further provides that a private_foundation that has disposed of all its assets and terminates its private_foundation_status must file a form pf for the tax_year of the disposition and must comply with any expenditure_responsibility reporting obligations on the return a private_foundation that has disposed of all its assets and does not terminate its private_foundation_status must file a form_990-pf for the tax_year of the disposition and must comply with any expenditure_responsibility reporting obligations on the return but does not need to file returns in the following tax years if it has no assets and does not engage in any activities activities in later years it must resume filing form_990-pf for those years if the private_foundation receives additional assets or resumes our evaluation of the facts and circumstances in your ruling_request indicates that the transfer of b’s assets to c would be similar to the facts and circumstances described in situation three of the rev_rul under the facts described the foundations would not be subject_to tax under sec_507 and sections of the code accordingly based on the information furnished and the code and regulations as interpreted in revrul_2002_28 we rule as follows b’s transfer of all its assets to c pursuant to the merger will be a transfer pursuant to sec_507 of the code and will not cause imposition of the termination_tax under sec_507 of the code b's transfer of all of its assets to c pursuant to the merger will be treated as a transfer of all of b’s assets to a private_foundation which is effectively controlled by the same persons which effectively contro b thus pursuant to sec_1_507-3 of the regulations cc will be treated as though c were b for purposes of chapter of the code further c will succeed to the aggregate tax benefits of b including b’s sec_4942 excess distributions carry forwards b and c will not be subject_to tax under chapter as a result of the merger because the merger will not be an act of self-dealing under sec_4941 will not result in excess_business_holdings of a private_foundation under sec_4943 will not be a jeopardy investment under sec_4944 will not be a taxable_expenditure under sec_4945 and will not generate any gain_or_loss for purposes of computing net_investment_income under sec_4940 of the code c’s distributable_amount under sec_4942 for its taxable_year in which the proposed transfer occurs will be increased by b’s distributable_amount for its taxable_year in which the proposed transfer occurs as if c had held the assets of b for c's entire tax_year all qualifying distributions made by c during the entire year and all qualifying distributions made by b during its tax_year in which the proposed transfer occurs will be treated as if made by c thus b’s distribution_requirements under sec_4942 of the code in the tax_year of the proposed transfer may be fulfilled by c the merger described above will not affect the status of b or c under sec_501 or sec_509 of the code - after the proposed merger and transfer of assets and once b files a notice of its termination with the service b will no longer be required to file annual information returns for future years we are informing the your organization’s permanent records te_ge office of this action please keep a copy of this ruling in 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 if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely gerald v sack manager exempt_organizations technical group


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-149749-02 date nov legend x d1 dear this responds to your letter dated date in which you requested relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 the shareholders of x intended it to be treated as an s_corporation effective on d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 allows a small_business_corporation to elect to be treated as an s_corporation sec_1362 provides the rules as to when such an election will become effective sec_1362 states in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 b provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that year x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of the letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 this ruling is directed only to the taxpayer requesting it 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 your authorized representative sincerely s dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court bradley m and monica pixley petitioners v commissioner of internal revenue respondent docket no 7093-02l filed date h is an ordained baptist minister in this proceeding to collect ps’ unpaid and tax_liabilities by levy ps submitted to r’s appeals_office an offer_in_compromise claiming a tithe to church as part of their necessary living_expenses in evaluating ps’ ability to pay their outstanding tax_liabilities the appeals officer declined to take these alleged tithing expenses into account held under relevant provisions of the internal_revenue_manual tithes that a minister is required to pay as a condition_of_employment are allowable in determining ability to pay outstanding tax_liabilities held further because ps failed to substantiate that h was employed as a baptist minister after r initiated the collection proceedings the appeals officer did not abuse his discretion by declining to take into account ps’ alleged tithing expenses held further the disallowance of ps’ alleged tithing expenses for this purpose did not violate h’s first amendment rights to free exercise of religion tommy e swate for petitioners daniel n price for respondent opinion thornton judge pursuant to sec_6330 petitioners filed a petition for review of an appeals_office determination sustaining a proposed levy the primary issue for decision is whether in evaluating petitioners’ offer_in_compromise the appeals officer should have considered petitioners’ alleged tithing expenses in determining whether they had the ability to pay their outstanding tax_liabilities we must also decide whether respondent’s disallowance of tithing expenses for this purpose violates mr pixley’s first amendment right to free exercise of religion background the parties submitted this case fully stipulated pursuant to rule we incorporate herein the stipulated facts when unless otherwise indicated all section references are to the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure a tithe is a tenth part of something paid as a voluntary contribution or as a tax especially for the support of a religious establishment merriam webster’s collegiate dictionary 10th ed petitioners filed their petition they resided in newhall california mr pixley is a licensed and ordained baptist minister from date through date he served as pastor of grace community bible church in tomball texas thereafter petitioners moved to california and mr pixley was employed as an echocardiographer at children’s hospital in los angeles respondent mailed to petitioners a letter final notice-notice of intent to levy and notice of your right to a hearing notice_of_intent_to_levy dated date proposing a levy with respect to petitioners’ unpaid tax_liabilities totaling dollar_figure for and dollar_figure for in response to this notice petitioners submitted a timely form request for a collection_due_process_hearing dated date raising an offer_in_compromise as an alternative to levy shortly after requesting their appeals hearing petitioners submitted to respondent a form_656 offer_in_compromise offer_in_compromise signed date petitioners also submitted a form 433-a collection information statement for individuals listing a dollar_figure tithe to church as a monthly necessary living expense until early mr pixley was also employed by cardiology associates of houston texas in the appeals hearing the appeals officer requested on numerous occasions that petitioners submit evidence that the claimed tithe was a condition of mr pixley’s employment petitioners failed to respond to these requests the appeals_office issued to petitioners a notice_of_determination concerning collection action s under sec_6320 and or dated date in the notice_of_determination the appeals_office rejected petitioners’ offer_in_compromise and concluded that petitioners had the ability to fully pay their and tax_liabilities the notice_of_determination stated that petitioners failed to establish that tithes were a condition of mr pixley’s employment and that for purposes of evaluating petitioners’ offer_in_compromise tithing expenses were disallowed in determining petitioners’ ability to pay after the notice_of_determination was issued the appeals officer reconsidered petitioners’ offer_in_compromise and gave them additional opportunities to submit evidence that the claimed tithe was a condition of mr pixley’s employment petitioners failed to submit this information and the appeals officer ultimately sustained his rejection of petitioners’ offer discussion in this case we are called upon to address for the first time in the context of an offer_in_compromise the treatment of a minister’s tithing expenses for purposes of determining ability to pay outstanding tax_liabilities i petitioners’ contentions petitioners claim that tithing expenses are incurred as a condition of mr pixley’s employment as a baptist minister and should be taken into account in determining petitioners’ ability to pay their taxes petitioners argue that the appeals officer’s disallowance of the tithing expenses for this purpose violates mr pixley’s first amendment right to free exercise of religion ii standard of review because petitioners’ underlying tax_liability was not properly at issue in the appeals_office hearing we review the appeals_office determination for abuse_of_discretion see 121_tc_8 117_tc_183 iii offers in compromise a in general sec_7122 authorizes the commissioner to compromise a taxpayer’s outstanding tax_liabilities 122_tc_133 sec_7122 provides that the secretary shall prescribe guidelines for officers and employees of the internal_revenue_service to determine whether an offer_in_compromise is adequate and should be accepted to resolve a dispute the regulations state three different grounds for compromising tax_liabilities doubt as to liability doubt as to collectibility and promotion of effective tax_administration sec_301_7122-1t b temporary proced admin regs fed reg date the parties’ arguments focus exclusively on the ground of doubt as to collectibility doubt as to collectibility arises if the taxpayer’s assets and income are less than the full amount of the assessed liability id in determining whether there is doubt as to collectibility the commissioner must determine the taxpayer’s ability to pay the outstanding tax_liabilities that are to be compromised sec_301_7122-1t b ii temporary proced admin regs supra b determining a taxpayer’s ability to pay in determining a taxpayer’s ability to pay outstanding tax_liabilities the commissioner takes into account the funds the taxpayer needs to pay basic living_expenses id the taxpayer’s basic living_expenses are determined by evaluating the taxpayer’s facts and circumstances id in evaluating a taxpayer’s ability to pay the commissioner considers two types of allowable expenses necessary expenses and conditional expenses internal_revenue_manual final regulations under sec_7122 were promulgated effective for offers in compromise pending on or submitted on or after date sec_301_7122-1 proced admin regs irm sec_5 and date for this purpose a necessary expense is one that is used for a taxpayer’s and his family’s health and welfare or production_of_income irm sec_5 date the expense must be reasonable taking into account family size geographic location and any unique individual circumstances irm sec_5 and date expenses that do not qualify as necessary may nevertheless be allowable in certain limited circumstances as so-called conditional expenses irm sec_5 date for purposes of determining a taxpayer’s ability to pay charitable_contributions are necessary expenses if they provide for a taxpayer’s or his family’s health and welfare or are a condition of the taxpayer’s employment irm sec_5 and exh date the irm specifically addresses tithes to religious organizations as follows question if as a condition_of_employment a minister is to tithe a business executive is required to contribute to a charity will these expenses be allowed answer yes the only thing to consider is whether the amount being contributed equals the on date we ordered the parties to file additional supplemental stipulations of fact including stipulations as to the portions of the internal_revenue_manual irm as in effect for the relevant time periods that the parties discussed on brief the parties made appropriate stipulations and included as exhibits copies of the relevant portions of the irm all references to the irm are to these stipulated exhibits amount actually required and does not include a voluntary portion irm exhibit date on brief respondent contends that petitioners’ alleged tithing expenses should be disallowed pursuant to irm sec_5 date which states that charitable_contributions are not allowed this irm subsection however relates expressly to conditional expenses not necessary expenses and does not purport to override the provisions of irm exhibit date as set out above iv whether the appeals officer abused his discretion in the appeals hearing petitioners were given the opportunity to substantiate that mr pixley was employed as a baptist minister they failed to do so in fact there is no evidence that mr pixley was employed as a minister when the notice_of_determination was issued to petitioners in date or that he has been employed as a minister at any time since consequently even if we were to assume arguendo as petitioners assert that the southern baptist convention has a doctrine that on brief petitioners allege that after mr pixley left grace community church in date petitioners moved to california so that mr pixley could prepare to attend a seminary that he continued his ministry in an unpaid position as a baptist minister and that he continued to tithe to keep this position there is no evidence in the record however to substantiate these allegations and there is no indication that petitioners presented any such evidence to the appeals officer even if we were to assume arguendo that these allegations are true they do not establish that tithes were paid as a condition_of_employment its members should tithe ten percent of their income to the church we are unpersuaded that tithing was a requirement of mr pixley’s employment we hold that the appeals officer did not abuse his discretion in disallowing petitioners’ claimed tithing expenses v petitioners’ first amendment challenge the first amendment of the united_states constitution provides that congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof petitioners contend that respondent’s disallowance of mr pixley’s tithing expenses for purposes of evaluating their offer_in_compromise violates the free exercise clause of the first amendment the gist of petitioners’ argument as we understand it is that by declining to make allowance for tithing expenses in evaluating petitioners’ ability to pay their taxes respondent is effectively reducing the funds that petitioners have available to support their religion and diverting those funds to the u s treasury it may well be true that paying their taxes will leave petitioners less funds to support their religion but this is a burden common to all taxpayers on their pocketbooks rather than a recognizable burden on the free exercise of their religious beliefs constitutional protection of fundamental freedoms does not confer an entitlement to such funds as may be necessary to realize all the advantages of that freedom 448_us_297 see 461_us_540 in any event even if petitioners could demonstrate a recognizable burden on the free exercise of their religious beliefs the burden would be justified by the government’s compelling interest in collecting taxes and administering a uniform mandatory and sound tax system see eg 490_us_680 quoting 455_us_252 stating that the government has a ‘broad public interest in maintaining a sound tax system ’ free of ‘myriad exceptions flowing from a wide variety of religious beliefs’ united_states v lee supra pincite because the broad public interest in maintaining a sound tax system is of such a high order religious belief in conflict with the payment of taxes affords no basis for resisting the tax 114_tc_511 110_tc_137 affd 170_f3d_173 3d cir this compelling government interest underpins the commissioner’s authority to compromise tax_liabilities under sec_7122 and to prescribe guidelines for officers and employees of the internal_revenue_service to determine whether an offer_in_compromise is adequate and should be accepted to resolve a tax dispute see sec_7122 we hold that the appeals officer’s disallowance of tithing expenses in evaluating petitioners’ ability to pay their taxes did not violate mr pixley’s first amendment rights to free exercise of religion vi conclusion we sustain respondent’s determination in the notice_of_determination that for purposes of petitioners’ offer_in_compromise mr pixley’s tithing expenses are not allowable in determining petitioners’ ability to pay their outstanding tax_liabilities petitioners raise no additional arguments against respondent’s proposed collection action consequently we sustain respondent’s determination to proceed with collection of petitioners’ tax_liabilities by levy decision will be entered for respondent the commissioner states that the objectives of the offer_in_compromise program are to effect collection of what can reasonably be collected at the earliest possible time and at the least cost to the government achieve a resolution that is in the best interest of both the individual taxpayer and the government provide the taxpayer a fresh_start toward future voluntary compliance with all filing and payment requirements and secure collection of revenue that may not be collected through any other means irm sec_5 date these objectives are in furtherance of the government’s greater interest in collecting taxes and maintaining a uniform mandatory and sound tax system


t c memo united_states tax_court victoria stennett-bailey petitioner and casmas bailey commissioner of internal revenue respondent intervenor v docket no filed date victoria stennett-bailey pro_se casmas bailey pro_se marissa j savit for respondent memorandum opinion halpern judge this case arises from a request by petitioner of the internal_revenue_service irs for equitable relief from joint_and_several_liability for federal_income_tax for petitioner’s taxable calendar_year the irs denied the request and petitioner brought this action protesting that denial we have jurisdiction to determine the appropriate relief if any available to petitioner see sec_6015 pullins v commissioner t c __ __ slip op pincite both the scope and standard of our review are de novo pullins v commissioner supra at __ slip op pincite petitioner bears the burden_of_proof see rule a pullins v commissioner supra at __ slip op pincite intervenor petitioner’s husband mr bailey objects to the relief sought by petitioner but since he neither executed the stipulation of facts that respondent prepared for his signature appeared at trial although he appeared earlier at calendar call nor filed a brief in this case we assume he has declined to prosecute his objection we shall dismiss this case with respect to him for failure to prosecute see rule b 127_tc_214 for the reasons that follow we determine that petitioner is not entitled to equitable relief from joint_and_several_liability for 1unless otherwise noted section references are to the internal_revenue_code as currently in effect and rule references are to the tax_court rules_of_practice and procedure background some facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference at the time the petition was filed petitioner resided in new york state in date petitioner and mr bailey made a joint_return of federal_income_tax return for they signed the return on date the return shows total_tax of dollar_figure a withholding credit of dollar_figure a credit for federal telephone_excise_tax of dollar_figure an estimated_tax penalty of dollar_figure and an amount owed of dollar_figure unpaid tax no payment accompanied the return petitioner applied to the irs for equitable relief from joint_and_several_liability for by submitting to it a form_8857 request for innocent spouse relief dated date request in response to the request the irs made a preliminary determination to deny the request on the ground that petitioner had not shown that it would be unfair to hold her responsible for the unpaid tax the irs stated you did not prove sic that at the time you signed the return you had reason to believe the tax would be paid also the documentation you provided does not prove economic hardship petitioner disagreed with the irs’ preliminary determination but thereafter the irs finalized its determination stating the information we have available does not show you meet the requirements for relief you did not show it would be unfair to hold you responsible during and throughout the administrative_proceeding in this case petitioner and mr bailey were married we conducted a trial in this case at the conclusion of the trial we set a schedule for both opening and answering briefs we instructed petitioner as to the importance of submitting briefs to assist us in considering the evidence in this case since among other things the stipulated exhibits comprise hundreds if not more than a thousand pages we directed her to rule e which addresses the form and content of briefs and we emphasized the importance of complying with the rule rule e provides that an opening brief shall contain proposed findings_of_fact in the form of numbered concise statements of essential facts and not a recital of testimony nor a discussion or argument relating to the evidence or the law supported by references to the pages of the transcript or the exhibits or other sources relied upon to support the statement while petitioner’s opening brief does consist in part of numbered relatively concise statements of fact it fails to provide the required references to the trial transcript the exhibits or the stipulation in his answering brief respondent objects to many of petitioner’s proposed findings_of_fact as not being supported by evidence in the record respondent asks us to strike those portions of petitioner’s opening brief that do not comply with the rules we shall not do so but to the extent that we cannot easily verify petitioner’s proposed findings_of_fact aided in part by respondent’s answering brief we disregard them moreover in her answering brief petitioner fails to comply with the requirement of rule e that she identify by number the statements of proposed findings_of_fact made by respondent in his opening brief to which she objects setting forth her reasons for objecting she merely makes statements of general rebuttal to many of respondent’s proposed findings eg with respect to respondent’s proposed findings relevant to whether she knew or should have known about the underpayment_of_tax i signed the return with knowledge of the tax_liability however this does not prove that i knew that the tax_liability would not be paid_by the sic mr bailey who had enough liquid_assets to meet his tax obligation accordingly we conclude that respondent’s proposed findings_of_fact are correct except to the extent that petitioner objects to a particular proposed finding and identifies evidence or we can identify evidence supporting the objection see eg 118_tc_106 n affd 353_f3d_1181 10th cir discussion i introduction as a general_rule spouses making a joint federal_income_tax return are jointly and severally liable for all taxes shown on the return or found to be owing sec_6013 in certain situations however a joint_return filer can avoid such joint_and_several_liability by qualifying for relief therefrom under sec_6015 there are three types of relief available under sec_6015 full or apportioned relief under sec_6015 proportionate tax relief for divorced or separated taxpayers under sec_6015 and equitable relief under sec_6015 when relief is unavailable under either sec_6015 or c petitioner’s only claim is that she is entitled to equitable relief under sec_6015 sec_6015 provides sec_6015 equitable relief --under procedures prescribed by the secretary if-- taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either and relief is not available to such individual under subsection b or c the secretary may relieve such individual of such liability the parties agree that petitioner is eligible to be considered for equitable relief under sec_6015 because relief is not available to petitioner under sec_6015 or c they disagree however as to whether she has shown her entitlement to that relief ii revenue_procedure rev_proc a introduction in accord with the statutory provision that relief is to be granted under sec_6015 following procedures prescribed by the secretary the commissioner has issued revenue procedures to guide its employees in determining whether a taxpayer is entitled to relief from joint_and_several_liability see revproc_2003_ 2003_2_cb_296 modifying and superseding revproc_2000_ 2000_1_cb_447 revproc_2003_61 supra lists the factors that irs employees should consider and the court consults those same factors when reviewing the irs’ denial of relief pullins v commissioner supra at __ slip op pincite revproc_2003_61 supra provides a three-step analysis for irs employees to follow in evaluating requests for relief revproc_2003_61 sec_4 c b pincite sec_4 lists seven threshold conditions that must be met before the irs will grant any relief revproc_2003_61 sec_4 c b pincite sec_4 lists circumstances in which the irs will ordinarily grant relief as to liabilities that were reported on a return the unpaid tax at issue in this case and revproc_2003_61 sec_4 c b pincite sec_4 sets out eight nonexclusive factors that the irs will consider in determining whether equitable relief should be granted see revproc_2003_61 sec_4 c b pincite in addition revproc_2003_61 sec_4 c b pincite states no single factor will be determinative of whether equitable relief will or will not be granted in any particular case rather the service will consider and weigh all relevant factors regardless of whether the factor is listed in sec_4 b sec_4 threshold conditions respondent concedes that petitioner meets the threshold conditions set forth in sec_4 c sec_4 circumstances ordinarily allowing relief introduction section dollar_figure provides three conditions that if satisfied will ordinarily qualify a requesting spouse for relief by the irs from liability for an underpayment of a properly reported liability the conditions are a on the date of the request for relief the requesting spouse is no longer married to or is legally_separated from the nonrequesting spouse or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month_period ending on the date of the request for relief b on the date the requesting spouse signed the joint_return the requesting spouse had no knowledge or reason to know that the nonrequesting spouse would not pay the income_tax_liability the requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported income_tax_liability c the requesting spouse will suffer economic hardship if the service does not grant relief revproc_2003_61 sec_4 c b pincite divorced separated or living apart petitioner concedes that she is still married to mr bailey and she makes no argument that they are legally_separated she testified that mr bailey moved out of their marital residence which she owns in date respondent concedes that when the request was made mr bailey had been absent from that residence for more than months nevertheless respondent argues that absence was temporary and thus does not qualify as an absence for determining whether petitioner and mr bailey were not members of the same household see sec_1_6015-3 income_tax regs revproc_2003_61 sec_4 a i indeed petitioner testified at trial u ntil today i always thought mr bailey was going to move back in the home he was picking up groceries he was doing things he said he needed time away from the home and i believed him on brief petitioner contradicts her testimony as to the duration of her belief claiming without any support from the record that her belief that he would return to the marital home was brief and fleeting nevertheless given mr bailey’s approximately 2-year absence from their marital home when petitioner made the request in date we think it not unreasonable to value experience over hope and find that it was reasonable then to believe that he would not return we conclude that his absence was thus not temporary and he had not been a member of her household for at least months when she made the request petitioner satisfies the first condition knowledge or reason to know petitioner and mr bailey signed the return on date and she concedes that she signed it with knowledge of the resulting tax_liability she claims that that does not prove that she knew or had reason to know that mr bailey would not pay the reported tax_liability that is so but respondent proposes that we find as facts that on date mr bailey did not have an individually owned bank account petitioner and mr bailey jointly owned both an hsbc checking and an hsbc money market account both of which on that date were empty or nearly so and when she signed the return she knew that mr bailey had no liquid_assets to draw upon to pay the reported liability because petitioner has not contradicted those proposed findings we find accordingly while on date petitioner may not have known that mr bailey would not pay the reported liability she has failed to prove that she had no reason to know that mr bailey would not pay that liability indeed the findings we have just made suggest the contrary petitioner fails to satisfy the second condition economic hardship economic hardship is defined as an inability to meet reasonable basic living_expenses sec_301_6343-1 proced admin regs in her opening brief petitioner claims with no citation of the record that she will suffer extraordinary financial hardship within the meaning of the internal_revenue_code if she is required to pay this tax she echoes that claim in her answering brief supported by exhibits attached to that brief which we detached and returned to her as ex_parte statements prohibited in a brief see rule c respondent emphasizes what petitioner failed to show to establish economic hardship to wit she did not introduce into evidence account statements showing the current balances in her bank accounts evidence of the current values of her equities in the various properties she concedes she owns or evidence of her current income and personal expenses respondent looks at the income and expenses information petitioner reported in the request which shows equal monthly income and expenses of dollar_figure and he claims that pursuant to his collection standards the allowable living_expenses for a four-person household are approximately dollar_figure and that petitioner’s stated income exceeds the allowable_amount he also points out that petitioner admits that she drives a lexus automobile claims school expenses of dollar_figure a month for sending her children to private school and owns a vacation home in the poconos which petitioner testified had no value the parties have stipulated that petitioner currently owns and operates at least three companies involved in the rental real_estate business and directly or through those companies owns at least seven properties again petitioner has failed to carry her burden of proving that she will suffer economic hardship if we do not grant her relief and respondent’s arguments and the stipulations suggest the contrary petitioner fails to satisfy the third condition conclusion having satisfied only the first of the three conditions set forth in sec_4 petitioner is not entitled to relief under the circumstantial test set forth in sec_4 d sec_4 mitigating factor sec_1 introduction section dollar_figure applies to requesting spouses who filed a joint_return request relief under sec_6015 and satisfy the threshold conditions of sec_4 but do not qualify for relief under sec_4 it lists eight nonexclusive factors to be considered in determining whether taking into account all the facts and circumstances it is equitable to grant the requesting spouse full or partial equitable relief under sec_6015 the eight factors are marital status knowledge or reason to know economic hardship nonrequesting spouse’s legal_obligation to pay the tax pursuant to a divorce decree or agreement significant benefit good-faith effort to comply with tax laws spousal abuse and mental or physical health the last two factors if present will weigh in favor of equitable relief but if not present will not weigh against equitable relief we have already addressed the first three factors and the first weighs in petitioner’s favor while the second two do not legal_obligation this factor is neutral since petitioner and mr bailey are not divorced significant benefit the test here is whether petitioner received significant benefit beyond normal support from the unpaid income_tax_liability see revproc_2003_61 sec_4 a v c b pincite the unpaid tax is in substantial part due to mr bailey’s gain on his sale of real_property located on sheffield avenue in brooklyn new york mr bailey deposited dollar_figure of his proceeds from the sale in petitioner and mr bailey’s jointly owned hsbc money market account which had a dollar_figure balance before the deposit on date petitioner withdrew dollar_figure from that account virtually emptying the account and deposited that sum into her individual savings account at least dollar_figure of the dollar_figure she withdrew came from the proceeds deposited by mr bailey petitioner used the withdrawn funds to pay the mortgage on her residence to pay expenses of her poconos vacation home to pay her children’s private school tuition and to pay for food utilities and living_expenses respondent suggests that petitioner’s withdrawal prevented mr bailey from paying the unpaid tax from the sale proceeds he had received and deposited in their joint account deciding instead to use a portion of those proceeds for her own benefit there is no evidence that she reserved anything for taxes although she knew her withdrawal emptied the account and she had no assurance that mr bailey had reserved anything for taxes petitioner has failed to carry her burden of showing that she did not receive significant benefit beyond normal support from the unpaid tax indeed the evidence suggests the contrary compliance with the tax laws the test here is whether petitioner has made a good-faith effort to comply with the income_tax laws following the year here in issue see revproc_2003_61 sec_4 a vi petitioner does not address this factor on brief beyond claiming that she is in full compliance the parties have stipulated that petitioner did not file her federal_income_tax return until date there is no evidence that petitioner obtained an extension of time to file that return petitioner has failed to carry her burden of proving a good-faith effort to comply with the tax laws indeed the evidence suggests the contrary spousal abuse petitioner makes no claim of spousal abuse and this factor is of no account mental or physical health the test here is whether petitioner was in poor mental or physical health on the date she signed the return or at the time of the request see revproc_2003_61 sec_4 b ii in the request petitioner stated that she had no physical or mental health problems either then or when she signed the return in her answering brief she claims that when she signed the return she was suffering from a host of medical ailments including severe headaches and mental stress we give credence to petitioner’s contemporaneous statement in the request petitioner has failed to carry her burden of proving poor mental or physical health on the date she signed the return or at the time of the request this factor is of no account weighing the facts and circumstances the only factor weighing in favor of relieving petitioner from liability is her marital status with respect to the factor of knowledge or reason to know that mr bailey would not pay the reported liability our findings suggest that petitioner did have reason to know this factor weighs in favor of her retaining liability likewise with respect to economic hardship since our findings suggest that petitioner would not suffer economic hardship if she were to retain liability and similarly with respect to the factors of significant benefit and compliance with the tax laws accordingly after considering and weighing all the factors we find that it would not be inequitable to hold petitioner liable for the unpaid tax iii conclusion to reflect the foregoing an appropriate order of dismissal and decision will be entered


internal_revenue_service number release date index number ------------------------------------- ----------------------------------- ------------------------------------------------------------ department of the treasury washington dc person to contact ----------------------------- id no ------------------ telephone number ---------------------- refer reply to cc tege eoeg eo3 plr-134456-15 date date foundation ------------------------------------- year state decedent date x y ------- ------------------------- --------------------- ----------------------- ------------------------- ------------------------------------------- dear ------------------------------------- this letter responds to a letter from your authorized representative dated date and subsequent correspondence requesting rulings under sec_512 sec_4941 sec_4943 and sec_4944 of the internal_revenue_code facts foundation was established in year pursuant to the laws of the state foundation is a tax-exempt_organization described in sec_501 and classified as a private_foundation under sec_509 foundation’s exempt_purpose is to receive funds administer investments and distribute funds to sec_501 organizations foundation’s funding has come solely from decedent historically foundation has invested in cash and publicly traded bonds and securities decedent died on date leaving a will providing that foundation receives among other things commercial real_estate properties the executor intends to distribute these real_estate properties to foundation as single member limited_liability companies plr-134456-15 any debt encumbering the properties will be paid in full by the estate prior to or simultaneously with the transfer of the properties to foundation the real_estate properties are primarily office rental properties the rent received is at least for_the_use_of real_property and any remainder of the rent is attributable to personal_property leased with the real_property that is an incidental amount of the total rents that are received or accrued under various leases no part of the rent paid depends in whole or in part on the income or profits derived by any person from the property leased at least in the near term foundation intends to continue to hold the properties as part of a diversified investment portfolio that will also contain cash and publicly_traded_securities the decision to retain or sell any of the real_estate properties will be made by foundation’s board_of directors based on the relevant facts and circumstances and in accordance with their fiduciary duty to prudently manage foundation’s investments the real_estate properties will be held as income producing properties and not as inventory used in a trade_or_business the decision to sell or keep any one of the individual real_estate properties will be made on a property-by-property basis taking into consideration foundation’s overall investment portfolio investment strategy and capital appreciation foundation may decide to make capital improvements to the real_estate properties as needed but the real_estate properties will not be held for the primary purpose of improving the properties for immediate resale foundation anticipates that any sales of the real_estate properties will be sporadic and occasional at this time foundation does not anticipate acquiring additional real_property in its investment portfolio any such acquisitions will be made by the board_of directors based on the relevant facts and circumstances and in accordance with the board’s fiduciary duty to prudently manage foundation’s diversified investment portfolio foundation intends to form a new limited_liability_company x of which foundation will be the sole member and which will be treated as a disregarded_entity for federal income and excise_tax purposes to manage the properties foundation received by bequest specifically x will provide any of the following services with respect to the management of the real_estate properties held for investment by foundation contract negotiations cash management debt management including budgeting negotiation of financing review of loan agreements and expenditures plr-134456-15 accounting supervision of property operations and inspections advertising leasing and lease negotiations goodwill relations with tenants and communities interface with municipalities and compliance with new ordinances collection of rents supervision of personnel and human resources supervision and administration of legal and tax services and other incidental and ancillary activities associated with the ownership of passive rental real_property and supervision and administration of a risk management program to frequently review foundation’s real_estate investments including identification and analysis of potential real_estate acquisitions and services relating to the disposition of property x may hire and supervise third party vendors who are not disqualified persons to provide landscaping perform capital improvement projects and provide certain in- house maintenance services all of which will be limited to common areas such as public entrances exits stairways and lobbies x itself will not perform these services x will not provide or arrange for cleaning or janitorial services for the lessees y a management company owned partially by decedent and partially by decedent’s family managed the properties during decedent’s lifetime decedent’s interest in y will be redeemed upon approval by the surrogate court and will not pass to foundation y will share certain employees including manager a disqualified_person with x to assist x with the enumerated property management services x will enter into a separate contractual arrangement with each shared employee based on a reasonable determination of the value of that employee’s services to x to provide reasonable_compensation to that employee for services provided to x the shared employees will only be compensated by x for work they perform for x as confirmed by detailed time records which will require the shared employees to log the time spent for x and y on a daily basis other than manager the shared employees will not be disqualified persons plr-134456-15 foundation will have sole authority to appoint the managers of x foundation expects to appoint one or more disqualified persons to act as the manager or managers of x and thereby manage foundation’s properties the manager or managers will receive reasonable_compensation for providing the property management services to foundation through x at least one such manager will be shared with y any such manager will only be compensated by x for work done for x as confirmed by detailed time records which will require the manager to log the time spent for x and y on a daily basis x and y will maintain separate employee_benefits including retirement plans as well as health dental and disability insurance foundation represents that the property management services the manager or managers provide will be reasonable and necessary to carrying out foundation’s exempt purposes and the compensation provided to manager or managers for services provided to x will not be excessive rulings requested rental income received from the commercial real_estate properties will be excluded from unrelated_business_taxable_income income received as a result of the sale of these commercial real_estate properties will be excluded from unrelated_business_taxable_income contracting with x managed by one or more disqualified persons to provide certain real_property investment management services will not constitute an act of self-dealing under sec_4941 x and the limited_liability companies constituting commercial real_estate properties will not constitute excess_business_holdings under sec_4943 the properties will not be considered jeopardizing investments described in sec_4944 the sharing of employees including managers between x and y will not constitute an act of self-dealing under sec_4941 provided that the compensation paid_by x to each such employee respectively is not excessive in relation to the services provided to x there is no indication in the facts you provided that the manager or managers of x will provide any services in managing x that are separate from managing the real_estate properties held for investment plr-134456-15 law and analysis issue - whether rental income will be excluded from unrelated_business_taxable_income sec_511 imposes a tax for each taxable_year on the unrelated_business_taxable_income of every organization described in sec_501 including those described in sec_501 sec_512 provides that the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the deductions allowed by chapter which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in subsection b sec_512 contains modifications to the unrelated_business_taxable_income rules of sec_512 sec_512 provides that in the case of rents all rents_from_real_property and all rents from personal_property leased with such real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease and all deductions directly connected with such rents are excluded from sec_512 sec_512 ii provides that if the determination of the amount of such rent depends in whole or in part on the income or profits derived by any person from the property leased other than an amount based on a fixed percentage or percentages of receipts or sales then the rent is not so excluded sec_1_512_b_-1 provides that rents which are excluded from unrelated_business_income under sec_512 include all rents from personal_property leased with real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease determined at the time that the personal_property is first placed_in_service by the lessee for purposes of the preceding sentence rents attributable to personal_property generally are not an incidental amount of the total rents if such rents exceed percent of the total rents from all the property leased sec_1_512_b_-1 defines real_property as all real_property including any property described in sec_1245 and sec_1250 and the regulations thereunder sec_1_512_b_-1 states that payments for the use or occupancy of space where services are also rendered to the occupant does not constitute rent from real_property plr-134456-15 foundation’s commercial real_estate properties are defined as real_property under sec_1_512_b_-1 the rental income is from rents of the real_property or from personal_property leased with the real_property that will be an incidental amount of the total rents received or accrued under the lease no part of the rent paid depends in whole or in part on the income or profits derived by any person from the property leased foundation will not provide services to the lessees thus the income from the commercial real_estate properties foundation received by bequest consists of rent that is excluded from unrelated_business_taxable_income by sec_512 and the regulations thereunder provided no income results from debt-financed_property issue - whether income received as a result of the sale of these commercial real_estate properties will be excluded from unrelated_business_taxable_income sec_512 provides that there shall be excluded from the computation of unrelated_business_taxable_income all gains or losses from the sale exchange or other_disposition of property other than from stock_in_trade or other_property of a kind which would properly be includible in inventory if on hand at the close of the taxable_year or property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business in 383_us_569 the supreme court defined the standard to be applied in determining whether property is held primarily_for_sale_to_customers in the ordinary course of business the court interpreted the word primarily to mean of first importance or principally by this standard ordinary_income would not result unless a sales purpose is dominant sec_1_512_b_-1 provides that whether a particular item_of_income falls within any of the modifications provided in sec_512 shall be determined by all the facts and circumstances of each case foundation intends to hold the real_estate properties as part of a diversified investment portfolio that will also contain cash and publicly_traded_securities and intends to continue to hold the properties at least in the near term foundation anticipates that any sales of the real_estate properties will be sporadic and occasional the decision to retain or sell any of the real_estate properties will be made by foundation’s board_of directors based on the relevant facts and circumstances and in accordance with their fiduciary duty to prudently manage foundation’s investments any such decision will be made on a property-by-property basis taking into consideration the overall investment portfolio investment strategy and capital appreciation foundation may decide to make capital improvements to the real_estate properties as needed but the real_estate properties will not be held for the primary purpose of improving the properties for immediate resale the real_estate properties will be held as income producing properties and not as inventory used in a trade_or_business see malat v riddell supra accordingly any plr-134456-15 income from the sale exchange or other_disposition of the commercial real_estate properties you received by bequest will be excluded from the computation of unrelated_business_taxable_income by sec_512 provided no income results from debt-financed_property issue - whether paying disqualified persons to provide certain property management services will constitute self-dealing under sec_4941 sec_4941 imposes taxes on each act of self-dealing between a disqualified_person and a private_foundation taxes are imposed on both the self-dealers involved in an act of self-dealing and on any foundation managers who knowingly participate in an act of self-dealing even though sec_4941 does not impose a tax on a private_foundation when an act of self-dealing occurs a foundation with respect to which there has been an act of self-dealing is required to report it to the irs on its annual information_return which is the form_990-pf in this case sec_4946 provides that the term disqualified_person means with respect to a private_foundation a person who is a a substantial_contributor to the foundation b a foundation_manager c an owner of more than percent of i the total combined voting power of a corporation ii the profits interest of a partnership or iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation d a member_of_the_family of any individual described in a b or c e a corporation of which persons described in a b c or d own more than percent of the total combined voting power f a partnership in which persons described in a b c or d own more than percent of the profits interest and g a_trust or estate in which persons described in a b c or d hold more than percent of the beneficial_interest sec_4941 defines self-dealing as any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 provides that the term self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 and sec_53_4941_d_-3 provide that the payment of compensation and the payment or reimbursement of expenses by a private_foundation to a disqualified_person for personal services which are reasonable and necessary to carrying out the exempt_purpose of the private_foundation shall not be an act of self- dealing if the compensation or payment or reimbursement is not excessive plr-134456-15 sec_53_4941_d_-3 provides examples of personal services for purposes of sec_53_4941_d_-3 these include legal services investment counseling services and general banking services in madden v commissioner t c memo the tax_court ruled that maintenance janitorial and security services provided by a disqualified_person to a private_foundation are not personal services for purposes of the exception to self- dealing citing sec_4941’s legislative_history the court noted that one of congress’s stated goals in enacting sec_4941 was to minimize the need for an arm’s length standard by generally prohibiting self-dealing transactions between private_foundations and disqualified persons and that any exceptions to the self-dealing transactions rules should be construed narrowly the court stated that the regulations under sec_4941 contemplate only personal services that are professional and managerial in nature and concluded that maintenance janitorial and custodial services do not meet the definition of personal services allowed under sec_4941 foundation will contract with x managed by one or more of foundation’s disqualified persons to manage foundation’s real_estate properties while the disqualified_person manager or managers will be compensated by x because x is a disregarded_entity for purposes of the analysis under sec_4941 foundation will be providing compensation to a manager or managers who are disqualified persons payment of compensation by a private_foundation to a disqualified_person is an act of self-dealing under sec_4941 however sec_4941 provides an exception to self-dealing for the payment of compensation by a private_foundation to a disqualified_person for personal services which are reasonable and necessary to carrying out the exempt_purpose of the private_foundation foundation received the real_estate properties by bequest and as such they became part of foundation’s investment portfolio foundation does not intend to actively pursue other real_estate investments which historically have not been part of foundation’s investments sec_53_4941_d_-3 provides examples of allowable personal services that consist of legal services investment counseling services and general banking services additionally madden v commissioner supra indicates that services that are professional and managerial in nature are the types of personal services that are allowed under sec_4941 the property management services provided to foundation by one or more disqualified persons through x as a disregarded_entity are professional and managerial_services that under the current facts are reasonable and necessary to administering foundation’s investments and thus in carrying out foundation’s exempt purposes thus the payment of compensation_for these personal services to a manager who is a disqualified_person will not be an act of self-dealing as long as the compensation is not excessive plr-134456-15 issue - whether x and the limited_liability companies constituting commercial real_estate properties will constitute excess_business_holdings under sec_4943 sec_4943 imposes a tax annually on the value of a private foundation's excess holdings in a business_enterprise excess_business_holdings are generally determined with reference to a foundation's own holdings and the holdings of all of its disqualified persons as defined in sec_4946 sec_4943 provides that the term business_enterprise does not include a trade_or_business at least of the gross_income of which is derived from passive sources gross_income from passive sources includes among other things items excluded from unrelated_business_taxable_income by sec_512 foundation’s gross_income from the commercial real_estate properties owned and managed by limited_liability companies that are disregarded entities will be at least passive rental income that is excluded from unrelated_business_taxable_income by sec_512 thus under these facts the limited_liability companies including x which are disregarded entities will not constitute business enterprises that could trigger excess_business_holdings under sec_4943 issue - whether the limited_liability companies constituting commercial real_estate properties will be considered jeopardizing investments described in sec_4944 sec_4944 imposes a tax on private_foundations that invest any amount in such manner as to jeopardize the carrying out of any of its exempt purposes sec_53_4944-1 provides that sec_4944 shall not apply to an investment made by any person which is later gratuitously transferred to a private_foundation because foundation received the commercial real_estate properties by bequest they will not be jeopardizing investments described in sec_4944 issue - whether the sharing of employees including managers between x and y will constitute an act of self-dealing under sec_4941 sec_4941 imposes taxes on each act of self-dealing between a disqualified_person and a private_foundation taxes are imposed on both the self-dealers involved in an act of self-dealing and on any foundation managers who knowingly participate in an act of self-dealing sec_4946 provides that the term disqualified_person means with respect to a private_foundation a person who is a a substantial_contributor to the foundation b a plr-134456-15 foundation_manager c an owner of more than percent of i the total combined voting power of a corporation ii the profits interest of a partnership or iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation d a member_of_the_family of any individual described in a b or c e a corporation of which persons described in a b c or d own more than percent of the total combined voting power f a partnership in which persons described in a b c or d own more than percent of the profits interest and g a_trust or estate in which persons described in a b c or d hold more than percent of the beneficial_interest sec_4941 defines self-dealing as any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 provides that the term self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation y’s employees are not disqualified persons but y is a disqualified_person because it is owned by decedent’s family x’s time-sharing arrangements with y for these employees to assist x with property management services which are treated as foundation’s time-sharing arrangements since x is a disregarded_entity will provide each shared employee with compensation that is not excessive based on a reasonable determination of the value of that employee’s services to x confirmed by detailed time records logging the time spent for x and y on a daily basis and accompanied by separate benefit arrangements accordingly the time-sharing arrangements and the compensation provided by x to the employees will not constitute self-dealing to y under sec_4941 because there will be no indirect benefit to y the same is true of any managers of x that are shared with y even if the managers are disqualified persons with respect to foundation since the time-sharing arrangement with y provides the manager or managers will only be compensated by x for work done for x as confirmed by detailed time records which will require the manager to log the time spent for x and y on a daily basis and accompanied by separate benefit arrangements the time-sharing arrangements and the compensation provided by x to any such manager will not constitute self-dealing to y under sec_4941 because there will be no indirect benefit to y the time-sharing arrangements and the compensation provided by x to any such manager will also not constitute self-dealing to the managers who are disqualified persons as long as the compensation is not excessive for the reasons discussed above under issue plr-134456-15 conclusion based solely on the facts and representations submitted by the trust we conclude that rental income received from the commercial real_estate properties will be excluded from unrelated_business_taxable_income income received as a result of the sale of these commercial real_estate properties will be excluded from unrelated_business_taxable_income contracting with x managed by one or more disqualified persons to provide professional and managerial real_property investment management services will not constitute an act of self-dealing under sec_4941 provided that any compensation paid to a disqualified_person for these personal services is not excessive x and the limited_liability companies constituting commercial real_estate properties will not constitute excess_business_holdings under sec_4943 the properties will not be considered jeopardizing investments described in sec_4944 the sharing of employees including managers between x and y will not constitute an act of self-dealing under sec_4941 provided that the compensation paid_by x to each such employee respectively is not excessive in relation to the services provided to x the rulings contained in this letter are based upon information and representations submitted by or on behalf of foundation accompanied by a penalty of perjury statement executed by an individual with authority to bind foundation and upon the understanding that there will be no material changes in the facts this office has not verified any of the material submitted in support of the request for rulings and such material is subject_to verification on examination no ruling is granted as to whether foundation qualifies as an organization described in sec_501 or sec_509 this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections specifically described and except as expressly provided in this letter no opinion is expressed or implied concerning the federal_income_tax consequences of any aspects of any transaction or item_of_income set forth above plr-134456-15 because it could help resolve questions concerning federal_income_tax status this ruling should be kept in foundation's permanent records a copy of this letter must be attached to any_tax return to which it is relevant alternatively if foundation files its return electronically this requirement may be satisfied by attaching a statement to the return that provides the date and control number of this letter this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see the enclosed notice notice of intention to disclose a copy of this ruling showing the deletions that we intend to make on the version that will be made available to the public is attached to the notice if foundation disagrees with our proposed deletions it should follow the instructions in the notice in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to foundation's authorized representatives this letter is directed only to foundation sec_6110 provides that it may not be used or cited as precedent by any other taxpayer including disqualified persons limited_liability companies and corporations if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely virginia g richardson senior tax law specialist tax exempt government entities encl notice notice of intention to disclose redacted copy of this letter cc


t c summary opinion united_states tax_court noel colstock petitioner v commissioner of internal revenue respondent docket no 22258-03s filed date noel colstock pro_se miriam c dillard for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed unless otherwise indicated subsequent 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 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined for a deficiency in petitioner’s federal_income_tax of dollar_figure the issues for decision are whether petitioner is entitled to a dependency_exemption deduction the earned_income_credit head_of_household filing_status and the child_tax_credit background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference at the time the petition was filed petitioner resided in miami florida although he was married petitioner filed as head_of_household and reported income of dollar_figure on hi sec_2002 federal_income_tax return petitioner has a child with ms linda white johnson ms johnson who is not his wife he claimed a dependency_exemption deduction for this daughter lj he also claimed a child_tax_credit of dollar_figure an earned_income_credit of dollar_figure and an additional_child_tax_credit of dollar_figure respondent issued a notice_of_deficiency determining that petitioner is not entitled to head_of_household filing_status the claimed dependency_exemption deduction or any of the credits applicable to the child for because he failed to 1the court only uses the minor child’s initials substantiate his claims discussion deductions are a matter of legislative grace and taxpayers must maintain adequate_records to substantiate the amounts of any deductions or credits claimed sec_6001 503_us_79 sec_1_6001-1 income_tax regs taxpayers generally bear the burden of proving that the commissioner’s determinations are incorrect rule a 290_us_111 sec_7491 does not apply because petitioner has failed to substantiate his deductions and provide credible_evidence dependency_exemption deductions sec_151 allows a taxpayer to deduct an exemption_amount for each dependent as defined in sec_152 as relevant here sec_152 defines a dependent to include a son or daughter of the taxpayer over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer to qualify for a dependency_exemption deduction a taxpayer must establish the total support cost expended on behalf of a claimed dependent from all sources for the year and demonstrate that he provided over half of this amount see 73_tc_963 56_tc_512 sec_1_152-1 income_tax regs the term support includes food shelter clothing medical and dental care education and the like sec_1_152-1 income_tax regs the total amount of support for each claimed dependent furnished by all sources during the year in issue must be established by competent evidence blanco v commissioner supra pincite sec_1_152-1 income_tax regs the amount of support that the claimed dependent received from the taxpayer is compared to the total amount of support the claimed dependent received from all sources sec_1_152-1 income_tax regs petitioner claims that lj lived with him for the entire year petitioner also claims that he provided for lj by giving money to her mother ms johnson petitioner has provided no evidence at all regarding any amounts he may have expended to care for lj the court sustains respondent’s determination that petitioner is not entitled to a dependency_exemption deduction for lj for earned_income_credit sec_32 allows an eligible_individual an earned_income_credit against the individual’s income_tax_liability the credit is calculated as a percentage of the individual’s earned_income sec_32 sec_32 and b limit the credit allowed based on whether the eligible_individual has no qualifying children one qualifying_child or two or more qualifying children sec_32 in pertinent part defines an eligible_individual as any individual who has a qualifying_child for the taxable_year a qualifying_child includes a son or daughter of the taxpayer who has the same principal_place_of_abode as the taxpayer for more than one-half of such taxable_year sec_32 and b i i ms johnson testified that lj lived with her during and that they did not live with petitioner petitioner has failed to prove that lj lived with him therefore the court finds that lj is not a qualifying_child under sec_32 a taxpayer with no qualifying children may be eligible for the earned_income_credit subject_to among other things the phaseout limitations of sec_32 merriweather v commissioner tcmemo_2002_226 briggsdaniels v commissioner tcmemo_2001_321 for the earned_income_credit is completely phased out under sec_32 for a taxpayer with no qualifying children if the taxpayer's earned_income and adjusted_gross_income is more than dollar_figure or dollar_figure for married individuals filing jointly see sec_32 and b petitioner's earned_income for was dollar_figure finally sec_32 requires that a married individual must file a joint_return with the individual's spouse for the year for which the credit is claimed sec_32 sec_1_32-2 income_tax regs for purposes of sec_32 a taxpayer's marital status is determined under sec_7703 sec_7703 provides in pertinent part that a married_person whose spouse did not live with him for the last months of the taxable_year is not considered as married sec_7703 petitioner testified that during he was married to a woman other than ms johnson but that his wife was not living with him he failed however to present any other evidence other than his oral testimony that his wife did not live with him during the last months of the year the court therefore concludes that petitioner was married during since petitioner and his wife did not file a joint_return and petitioner’s earned_income exceeds the phaseout amount the court concludes that he is not entitled to claim an earned_income_credit for head_of_household filing_status sec_1 imposes a special tax_rate on individuals filing as head_of_household as relevant herein sec_2 defines a head_of_household as an unmarried individual who maintains as his home a household that for more than one-half of the taxable_year constitutes the principal_place_of_abode of an unmarried daughter sec_2 as a married individual petitioner is not entitled to claim head_of_household filing_status for respondent’s determination is sustained child_tax_credit for the taxable_year taxpayers are allowed to claim a tax_credit of dollar_figure for each qualifying_child sec_24 the plain language of sec_24 establishes a three-pronged test to determine whether a taxpayer has a qualifying_child if one of the qualifications is not met the claimed child_tax_credit must be disallowed the first element of the three-pronged test requires that a taxpayer must have been allowed a deduction for that child under sec_151 sec_24 as stated supra p the court has sustained respondent’s determination that petitioner is not entitled to a dependency_exemption deduction for lj thus petitioner fails the first prong of the test of sec_24 the court sustains respondent’s determination regarding the sec_24 child tax_credits reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent