internal_revenue_service national_office technical_advice_memorandum date number release date third party contact index uil no case mis no district_director taxpayer’s name taxpayer’s identification no years involved date of conference legend tam-110544-99 cc dom it a b2 a b c d g h x y z issue s whether expenses_incurred by x in connection with the use of y should be disallowed because they were items with respect to a facility used in connection with an activity of a type generally considered to constitute entertainment amusement or recreation under sec_274 of the internal_revenue_code if so should sec_274 or sec_274 apply to except these expenses from the application of sec_274 conclusion s the expenses_incurred by x in connection with the use of y should not be disallowed as a deduction under sec_274 because x’s expenses for_the_use_of y are not items with respect to a facility facts the taxpayer x is a family owned corporation engaged in the business of selling and marketing z x through its wholly owned subsidiaries acquired the g franchise for z for areas in three states together a and his son b owned substantial stock interests in x during all years to which this request relates they owned more than of x during a portion of this time period a was president and chief_executive_officer during part of this period b held those positions during the remainder of this period a and b state that due to unusual circumstances the relationship between the employees of x and the employees of its subsidiaries was hostile further the relationship among the subsidiaries themselves was even more strained there were also severe management problems within x and each subsidiary that were different from the disputes among the companies consequently a and b decided that conferences should begin at y as part of a continuing effort to break down the walls of animosity which existed within the entire organization however in an unrelated prior nontax legal matter b also testified that x’s use of y for conferences is primarily for incentive trips for customers and employees further b testified in this lawsuit that the employee trips to use y was for a challenging vacation atmosphere x claims that these statements were taken out of context of the entire testimony y is located on an island located in h and consists of a tract of land that contains resort style guest rooms and amenities for guests y is owned by c c was owned by a b and another family_member d during the years in question during these years y was used at various times by a b d their friends and by x for its meetings and by b in connection with other business interests y was not advertised or marketed to the general_public at various times persons unrelated to x’s business used y while x held meetings at y when x used y there was a full time cook and a helper who assisted with cooking and housekeeping services also two individuals attended to the grounds and the marina the outside facilities contained a marina with fishing boats tennis courts swimming pool hot tub beach cabana and dive shop invitees of x were not permitted to use the outside facilities during times that business meetings were held a and b make the following representations about x’s use of y business meetings were held each day meetings were approximately to hours and typically involved either employee only meetings or meetings between certain strategic employees of x and franchise managers from g or other g franchisees a or b generally attended the employee meetings a and b attended the meetings that included the franchise managers from g the purpose of the meetings would vary depending on the particular group invited in general the objective of the meetings is represented to provide a forum to discuss common problems encountered by employees and to work to develop viable solutions no spouses or other guests of the x employees were invited to y during these meetings when x selected its employees to go to these meetings it became mandatory for them to attend it is stated that this requirement to attend is no different than requiring an employee to go on a business trip at the request of his employer it is represented that x intended to select the most productive and talented employees because they would have the most to contribute to the business meetings by sharing their ideas and approach to problems and to spread their positive attitudes to other participants at the conferences employees from three different locations the three states in which x subsidiaries had a g franchise attended these meetings employee and business_associate trips to y generally did not exceed week after a daily meeting ended the participants in these meetings proceeded on to planned recreational activities for the remainder of the day these activities were typically deep sea fishing and scuba diving x submitted affidavits from several employees stating that these recreational activities were important in building team work c and x did not enter into a written_agreement regarding x’s payment for_the_use_of y in any of the three tax years under audit in x paid for_the_use_of y by paying some of the upkeep and repair expenses of the resort directly instead of paying c directly whether the expenses paid_by x were equal to the fair_market_value that passed from c to x for_the_use_of y is not an issue presented here for technical_advice therefore for purposes of this technical_advice we assumed c received only fair value for x’s use in and x paid for_the_use_of y by paying a directly instead of paying c at a rate on a per_diem basis this payment generally did not include a daily amount for use by stockholders of y who were also stockholders of x the amount of the rate charged is not an issue presented here for technical_advice and again for purposes of this technical_advice we assumed c received only fair value for x’s use upon audit several questions were raised concerning sec_162 sec_274 sec_274 and sec_274 for purposes of this technical_advice taxpayer requested with the concurrence of the appeals_office our consideration of the issue whether sec_274 denies a deduction for the expenses x incurred at y with respect to a facility used in connection with an activity of a type generally considered to constitute entertainment amusement or recreation if sec_274 does deny the deduction we are then asked to consider whether the exceptions of e or apply to except x from sec_274 law and analysis sec_274 as originally enacted provided that no deduction otherwise allowable shall be allowed with respect to a facility used in connection with an activity referred to in subparagraph a unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer’s trade_or_business and that the item was directly related to the active_conduct of such trade_or_business sec_361 of the revenue act of publaw_95_600 vol c b amended sec_274 to delete the language unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer’s trade_or_business and that the item was directly related to the active_conduct of such trade_or_business in senate committee report s rep no 95th cong 2d sess vol c b which accompanied the revenue act of congress recognized that some legitimate business_expenses may be incurred with respect to entertainment facilities but determined that such expenses should be disallowed as business deductions in order to discourage the significant opportunities for abuse presented by entertainment facilities similarly congress stated that the bill would not disallow an otherwise allowable deduction for items relating to bona_fide business_expenses incurred while away_from_home_overnight for example the bill generally would not apply to expenses_incurred by an individual away from home at a bona_fide business trade or professional organization meeting or convention id pincite consequently effective for items paid_or_incurred after date in tax years ending after such date sec_274 provides that no deduction otherwise allowable shall be allowed for any item a with respect to an activity which is of a type generally considered to constitute entertainment amusement or recreation unless the taxpayer establishes that the item was directly related to or in the case of an item directly preceding or following a substantial_and_bona_fide_business_discussion including business meetings at a convention or otherwise that such item was associated with the active_conduct of the taxpayer’s trade_or_business or b with respect to a facility used in connection with an activity referred to in subparagraph a sec_1_274-2 of the income_tax regulations provides that any item of personal or real_property owned rented or used by a taxpayer shall be considered to constitute a facility used in connection with entertainment if it is used during the taxable_year for or in connection with entertainment examples of facilities which might be used for or in connection with entertainment include yachts hunting lodges fishing camps swimming pools tennis courts bowling alleys automobiles airplanes apartments hotel suites and homes in vacation resorts the examples of facilities set forth in the regulations follow the legislative_history in s rep no supra pincite that report gave examples of yachts hunting lodges fishing camps swimming pools tennis courts and bowling alleys facilities also may include airplanes automobiles hotel suites apartments and houses such as beach cottages and ski lodges located in recreational areas however the deduction is not affected unless the property is used in connection with entertainment sec_1_274-2 of the income_tax regulations provides the definition of entertainment in general for purposes of this section the term entertainment means any activity which is of a type generally considered to constitute entertainment amusement or recreation such as entertaining at night clubs cocktail lounges theaters country clubs golf and athletic clubs sporting events and on hunting fishing vacation and similar trips including such activity relating solely to the taxpayer or the taxpayer’s family the term entertainment may include an activity the cost of which is claimed as a business_expense by the taxpayer which satisfies the personal living or family needs of any individual such as providing food and beverages a hotel suite or an automobile to a business customer or his family the term entertainment does not include activities which although satisfying personal living or family needs of an individual are clearly not regarded as constituting entertainment such as a hotel room maintained by an employer for lodging of his employees while in business travel status on the other hand the providing of a hotel room or an automobile by an employer to his employee who is on vacation would constitute entertainment of the employee sec_1_274-2 provides in part that an objective test shall be used to determine whether an activity is of a type generally considered to constitute entertainment thus if an activity is generally considered to be entertainment it will constitute entertainment for purposes of this section and sec_274 regardless of whether the expenditure can also be described otherwise and even though the expenditure relates to the taxpayer alone this objective test precludes arguments such as that entertainment means only entertainment of others or that an expenditure for entertainment should be characterized as an expenditure for advertising or public relations sec_1_274-2 provides that expenses exclusive of operating costs and other such expenses referred to in sec_1_274-2 incurred at the time of an entertainment activity even though in connection with the use of facility for entertainment purposes such as expenses for food and beverages or expenses for catering or expenses for gasoline and fishing bait consumed on a fishing trip shall not be considered to constitute expenditures with respect to a facility used in connection with entertainment the first question we must decide is whether y is a facility and if y is a facility then is it used in connection with an activity of a type generally considered to constitute entertainment amusement or recreation although x does not own y decided cases indicate that use of an item of real_property such as y can still be considered an item with respect to a facility used in connection with entertainment so long as x has exclusive use of the property during the taxable_year for or in connection with entertainment in 88_tc_1562 aff’d 851_f2d_362 11th cir the taxpayer leased hunting rights on a tract of approximately big_number acres for a period of years the lease states that the officers employees and guests of petitioner shall enjoy exclusive hunting rights except with respect to members of the lessor’s family lessor’s family use was restricted to personal_use and may not happen while taxpayer is there nor during the preceding two days taxpayer must provide notice to lessor of planned hunts on the property taxpayer used the lodge and hunting area principally for commercial purposes to develop or maintain business relationships with its suppliers and customers taxpayer used the lodge and hunting area or both on thirty separate occasions during the two years in question generally each use was for to days at which representatives from one and sometimes two companies would attend taxpayer engaged in over dollar_figure worth of business with the companies whose representatives visited taxpayer’s hunting lodge on one occasion taxpayer concluded a verbal agreement with a representative of a customer to which taxpayer sold some products taxpayer’s principal purpose in entertaining its suppliers and customers was to generate good will and to develop and maintain commercial relationships with the individuals involved the parties also stipulated that all activities that took place on the hunting area were hunting or fishing based on the legislative_history of sec_274 the court stated that a material difference between an entertainment activity that includes the use of real or personal_property and an entertainment_facility is whether the property used for the entertainment is occupied exclusively by the taxpayer for or during the recreation or entertainment the court continued that in this case the taxpayer has the exclusive right to use the hunting area for hunting fishing and other recreation the exclusive lease grants to taxpayer on prior notice unfettered access to the hunting area the hunting area is where the recreation takes place during taxpayer’s recreation in the hunting area taxpayer has exclusive occupancy of the hunting area therefore the hunting area is a facility used in connection with entertainment within the meaning of sec_274 in this case petitioner’s payments gave it continuing unfettered access to the property and exclusive occupancy in order to hunt fish and cook out in 89_tc_978 petitioners purchased three acres of beachfront property with three buildings on the property petitioner a stockbroker held various meetings at the property he met with investment advisors current and prospective clients and personnel of the firm he worked for such as salesmen trainees and other partners on occasion the families of the business associates accompanied them petitioners and their family did not take a vacation at the property nor use it as a residence the court concluded that the property is a facility within the meaning of the statute and that the property was used in connection with an activity that under an objective standard would be considered to constitute entertainment because the outings of individuals accompanied by family members appeared to be vacation trips for the family members although the record did not reflect the activities of the family members the court pointed out that this was three acres of beach front property also the meetings typically lasted several days and there were lodging_facilities the court also held that any use of the facility no matter how small in connection with entertainment is fatal to the claimed deduction in on shore quality control specialist v commissioner t c memo petitioner paid rent under an oral lease to hunt on a ranch renewable from hunting season to hunting season the property included a cabin and petitioner invited business customers to go hunting on the property the property was not leased to anyone other than petitioner although some friends and business acquaintances of lessor could also hunt on the ranch before they could hunt however they had to notify petitioner first generally petitioner included them in his hunting plans petitioner argued that the ranch does not constitute a facility because the hunting lease did not grant petitioner the exclusive use of the ranch the court had no difficulty in finding that the rent was an operating expense or item with respect to a facility and that in substance the taxpayer enjoyed the exclusive rights under the lease the exclusivity language refers to the right of the lessee to bar the general_public and not a limited number of persons covered by a lease from participating in the recreation the court concluded that the petitioner dominated the hunting usage of the ranch and that the expenditures_for that usage were made for a facility used in connection with entertainment by reason of its use for hunting which generally constitutes recreation in united title insurance_company v commissioner t c memo petitioner a real_estate title insurance_company sponsored three out-of-state board meetings to resorts at las vegas new orleans and puerto rico the trips included the directors of petitioner real_estate attorneys developers realtors bankers lenders and spouses or friends the number of persons on a trip varied from to the trips were days the first day was for traveling on the morning of the second day a board meeting was held the participants had the remainder of the second day and the third day at their leisure most of the fourth day was for returning home the facts set forth a number of business reasons for having these meetings and the topics discussed based on the record as a whole the court was satisfied that board meetings were held and that substantial corporate business was conducted during each of the trips the court held that the trip expenses attributable to petitioner’s directors officers and real_estate guests were directly related to the active_conduct of petitioner’s business see sec_274 the court did not examine this case in the context of whether the resorts were facilities under sec_274 apparently in part because the large independent resorts involved were not intended to be the kind of property to be included within the meaning of the term facility also payments for hotel accommodations for employees on business travel even if maintained by taxpayer though these were not would not be for use of a facility in mcreavy v commissioner t c memo the taxpayer relied unsuccessfully on sec_274 now sec_274 as an exception to the argument that sec_274 should apply to disallow expenses of a lake cabin because the property was a facility used in connection with entertainment sec_274 applied in mcreavy because use generally by employees was not shown rather the taxpayer who was the sole shareholder of the corporation that owned the lake cabin property essentially used the lake cabin property entirely as if it was his own for recreational purposes applying these principles to the facts here it appears that x arranged face to face meetings among employees that could not be held without employee travel to some location because these employees were located in more than one state employee attendance was mandatory once selected x arranged for these meeting to be held at y although no lease or other documentation covered x’s use of y x appears to have paid c only for overnight lodging for x’s employees and business associates who it believed were at y attending formal business meetings followed by recreational activities the absence of a written lease and the stockholdings of a and b in both x and y make it difficult to determine the precise character of x’s use of y y was used by its stockholders when not used by x it also appears that x did not have exclusive use of y because at various times guests unrelated to x used y simultaneously with x it thus does not appear that the use of y by its stockholders and other guests is part of x’s arrangement for_the_use_of y nor from this record can we conclude that x otherwise dominates the use of y in this regard the use of y by other persons when x conducted meetings there does not resemble the hunting use of the property in on shore that was provided for in the lease and that allowed on shore to dominate the hunting use the form of x’s payments to the extent made only for_the_use_of y on specific occasions in connection with x’s intention to hold formal business meetings is consistent with this view and suggests that x’s payments did not compensate y for any operating_expenses connected with providing continuing or future use by x of y the facts of harrigan v lumber co on shore quality control specialist ireland and mcreavy all differ from this case because they involve ownership or long term leases providing exclusive or dominant use of the facility for example in on shore the taxpayer exercised so much control_over the lessor’s use of the property that the court had no difficulty in treating taxpayer’s dominant use as exclusive use here payment is made for short term nonexclusive use in connection with overnight lodging in a manner more similar to payments made in united title in our view the facts do not demonstrate that x dominated the use of y so we can not consider its use to be like the exclusive use contemplated in sec_274 accordingly sec_274 does not disallow expenses_incurred by x in connection with the use of y because x’s payments for its use of y are not items with respect to a facility as contemplated by that section therefore we do not need to address the questions of whether a facility was used in connection with an activity of a type generally considered to constitute entertainment amusement or recreation or whether an exception under sec_274 applies to the application of sec_274 caveat s no opinion is expressed whether the expenses x paid for_the_use_of y are deductible as ordinary and necessary expenses within the meaning of sec_162 or whether any portion of the expenses is an entertainment expense subject_to disallowance under any other provision in sec_274 a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service number release date index number ------------------------------- ---------------------------------------------------- -------------------------------- ---------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------ telephone number ------------------- refer reply to cc ita b02 plr-154369-04 date december legend legend corporation landlord ---------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------ -------------------------- --- ------- --------------- --- --------------- --------------- investor a b c d e f dear ----------------- authorized representative of the corporation in that letter a ruling was requested that the tenant-stockholders of the corporation are entitled to deduct under sec_216 of the internal_revenue_code their proportionate shares of certain real_estate_taxes paid_or_accrued by the corporation the corporation was formed for the primary purpose of acquiring a leasehold interest in a portion of certain property owned by the landlord and making dwelling units space and facilities located on that property available to shareholders of the corporation for residential purposes the property is currently leased from the landlord by the investor under a a-year lease that commenced in the landlord and the investor have agreed to split this lease into two separate leases the first lease the residential ground lease will pertain to a portion of a pre-existing building the annex building and the underlying land the annex land the second lease will pertain to the remainder of the building and land which will continue in its present use this is in response to a letter dated date that was submitted by the plr-154369-04 as a b leased and operated by the investor after completion of dollar_figurec of improvements to the annex building by an entity wholly owned by the investor the corporation will become the lessee under the residential ground lease the rent under the residential ground lease will be d percent of the rent under the original lease after improvements are completed the annex building will have a useful_life of years an appraisal of the annex building and annex land concludes that the present_value of the lease payments under the residential ground lease is dollar_figuree the appraisal further concludes that the value of the annex land without any improvements or encumbrances is dollar_figuref thus the appraisal concludes that the rent payable under the lease is in no way attributable to the annex building sec_164 of the internal_revenue_code allows a deduction for state local and foreign real_property_taxes in the taxable_year in which such taxes are paid_or_accrued sec_1_164-1 of the income_tax regulations provides that taxes generally are deductible only by the person on whom they are imposed furthermore sec_1_162-11 of the regulations provides that taxes paid_by a tenant on behalf of a landlord for business property are considered additional rent thus the landlord rather than the tenant is allowed a deduction for the payment of the taxes under sec_164 sec_216 allows a tenant-stockholder as defined in sec_216 a deduction for certain amounts paid_or_accrued to a cooperative_housing_corporation within the taxable_year these amounts include the tenant-stockholder’s_proportionate_share of real_estate_taxes which are allowable as a deduction to the corporation under sec_164 and which are paid_or_incurred by the corporation on a the houses or apartment building owned or leased by the corporation and b the land on which such houses or building is situated sec_216 b b in revrul_62_178 1962_2_cb_91 a lessee was allowed a deduction under sec_164 of the code for real_estate_taxes paid on a building but not the underlying land even though legal_title to the building was vested in the lessor of the land the revenue_ruling reasoned that the enjoyment of the entire worth of the building was in the lessee because the lessor received no rental income attributable to the building and the useful_life of the building which was erected by the lessee with its own funds was substantially shorter than the term of the lease thus the lessee was treated as the owner of the building for purposes of sec_164 and the tenant-stockholders of the lessee were allowed a sec_216 deduction for amounts paid to the lessee representing their proportionate shares of the real_estate_taxes paid with respect to the building by contrast in revrul_62_177 1962_2_cb_89 a lessee was not allowed a deduction under sec_164 for real_estate_taxes that the lessee had paid on a building in that case the building was pre-existing and it was not constructed by the lessee although the useful_life of the building was less than the term of the lease the lessor was treated as the owner of the building for purposes of sec_164 because the lessor plr-154369-04 received rental income attributable to the building thus the lessee was not treated as the owner of the building for purposes of sec_164 and the tenant-stockholders of the lessee were not allowed a sec_216 deduction for amounts paid to the lessee representing their proportionate shares of the real_estate_taxes paid with respect to the building the facts in the present case as provided by the taxpayer are substantially_similar to the facts in revrul_62_178 the appraisal obtained by the taxpayer establishes that the landlord will not receive any rent attributable to the building thus under revrul_62_178 the corporation is treated as the owner of the building for purposes of sec_164 and the tenant-stockholders are allowed a sec_216 deduction for their proportionate share of the real_estate_taxes paid_by the corporation but only to the extent that the taxes are attributable to the building rather than the land the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant sincerely thomas d moffitt branch chief branch associate chief_counsel income_tax accounting cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc tege eo2-plr-143280-01 date date legend association ein state a x year dear this is in response to your letter dated date and subsequent correspondence and submissions requesting a ruling on behalf of association that the income of association is excluded from gross_income under sec_115 of the internal_revenue_code and association is not required to file annual information returns on form_990 facts association is a non-profit corporation established pursuant to the nonprofit corporation law of state a it is exempt from federal_income_tax under sec_501 of the code association’s stated purposes in its articles are to develop and disseminate information to special districts in state a cooperate with the congressional delegation of state a on national legislation of common interest to the special districts formulate and promote state legislation of common interest to the special districts provide information and assistance to the special districts in connection with administrative and judicial actions provide information and assistance to standardize and improve comprehensive planning with governmental units provide information and assistance on matters of mutual concern including insurance grants budgets and group purchasing promote understanding with other units of local_government and the public in fulfilling the role of special districts as responsible units of government foster the development of and cooperate with organizations serving special districts and do all other things necessary and proper for the benefit of the special districts of state a association engages in the following activities for the benefit of its members plr-143280-01 operation and maintenance of several self-insured retention pool and group purchase coverage programs for its members including property liability workers compensation and employee_benefits loss prevention programs providing expert legal advice legislative representation and advocacy services research and technical assistance on administrative governance risk management safety and personnel issues training and developmental programs financing services for equipment and other essential governmental property and length of service award programs in year association established a_trust to protect and manage insurance premiums and contributions oversee management and administration of the insurance programs and approve the necessary contracts insurance policies and premiums the bylaws provide that association is governed by a board_of directors which shall consist of one representative from each of the following six classes of regular members fire sanitary water irrigation port parks and recreation five at-large representatives at least three of which must be from regular members other than the above six classes and the immediate past president no more than two directors may be elected from each class of members the bylaws provide that regular membership in association is limited to special districts authorized and regulated under state a statute including such classes of districts as water control port fire hospital parks and recreation and soil and water conservation the bylaws further provide that associate membership in association is limited to any intergovernmental agency department council or like entity created under state a statute or any statewide or regional associations of local_government or any other public entities which qualify as political subdivisions or municipal quasi-municipal or public corporations under state a statute all of the associate members of association are cities or counties in state a finally association has two affiliate members which only may participate in association’s group purchase health benefits program affiliate membership in association requires the advance approval of the board and is limited to public or private entities that regularly provide services or support to special districts of state a or association the bylaws provide that all members shall pay annual membership fees the bylaws also provide that only regular members shall have voting privileges at annual or special meetings of association association has represented that all of association’s members and associate members are and must be a political_subdivision of a state an integral part of a political_subdivision or an entity whose entire income is excludible from gross_income under sec_115 of the code association has represented that its board_of directors will adopt a resolution to terminate participation by the affiliate members in association’s insurance policies amend association’s bylaws and declaration of trust to eliminate the affiliate members from membership in association and expressly restrict all new members in association to entities that are a political_subdivision of a state an integral part of a political_subdivision or an entity whose entire income is excludible from gross_income under sec_115 of the code association’s articles of incorporation provide that no part of association’s net_earnings or other assets shall inure to the benefit of any director or individual association’s plr-143280-01 articles also provide that in the event of dissolution of association the balance of all money received by association for its operations after the payment of all debts and obligations of association shall be distributed to x to be used in the interest of the special districts association has represented that x is an organization all of whose income accrues to a state or political_subdivision in accordance with sec_115 of the code law and analysis sec_115 of the code provides that gross_income does not include income derived from the exercise of any essential_governmental_function and accruing to a state or any political_subdivision thereof revrul_71_589 1971_2_cb_94 provides that the income from property held in trust by a city which was to be used by the city for certain charitable purposes is not subject_to federal_income_tax although revrul_71_589 does not explicitly so state its holding is based on a determination that the income in question was derived from the exercise of an essential_governmental_function and accrued to a political_subdivision within the meaning of sec_115 revrul_71_589 specifically mentions several types of functions that the trust might perform such as support of a hospital schools maintenance of a park or other purposes ordinarily recognized as a municipal function revrul_77_261 1977_2_cb_45 holds that income from a fund established under a written declaration of trust by a state for the temporary investment of positive cash balances of a state and its political subdivisions is excludible from gross_income under sec_115 revrul_77_261 reasons that the investment of positive cash balances by a state or a political_subdivision thereof to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes and raise revenue revrul_77_261 points out that congress did not desire in any way to restrict a state’s participation in enterprises which might be useful in carrying out those projects desirable from the standpoint of the state government which on a broad consideration of the question may be the function of the sovereign to conduct revrul_90_74 1990_2_cb_34 concerns an organization that is formed operated and funded by political subdivisions to pool their casualty risks and other risks arising from their obligations concerning public liability workers’ compensation or employees’ health revrul_90_74 states that the income of the organization is excluded from gross_income under sec_115 of the code if private interests do not participate in the organization or benefit more than incidentally from the organization in revrul_90_74 the benefit to the employees of the political subdivisions was excepted as incidental furthermore upon dissolution the organization will distribute its assets to its members therefore the income of the organization accrues to a political_subdivision with the meaning of sec_115 association engages in activities intended to improve local_government in state a it provides various services that reduce the operating costs for cities and counties in state plr-143280-01 a and special districts created under state a law to perform traditional governmental functions including hospital care fire protection and maintenance of roads ports and parks therefore association’s activities constitute essential governmental functions because association uses its income to provide services to its members association’s income accrues for the benefit of its members provided that association terminates participation by the affiliate members in association’s programs and amends its bylaws and declaration of trust to eliminate the associate members as association represented as of the date such actions become effective under state law all of association’s members will be either a political_subdivision of a state an integral part of a political_subdivision or an entity whose entire income is excludible from gross_income under sec_115 of the code any benefit from association’s insurance programs to the employees of association’s members is incidental see revrul_90_74 finally upon dissolution all of association’s remaining assets must be distributed to x an organization all of whose income accrues to a state or political_subdivision within the meaning of sec_115 therefore all of association’s income accrues to a state or political_subdivision sec_6012 of the code requires every corporation subject_to taxation under subtitle a of the code to file an income_tax return sec_1_6012-2 requires every organization described in sec_511 which is subject_to the tax imposed by sec_511 on its unrelated_business_taxable_income to make a return on form 990-t sec_6033 of the code generally provides that every organization exempt from tax under sec_501 shall file an annual return stating its gross_income receipts and disbursements and such other information as the regulations require sec_1_6033-2 provides that every organization_exempt_from_taxation under sec_501 and required to file a return under sec_6033 shall file its annual return on form_990 sec_6033 provides that the secretary may relieve any organization from filing such return when he determines that such filing is not necessary to the efficient administration of the internal revenue laws revproc_95_48 1995_2_cb_418 specifies that affiliates of governmental units which are exempt from federal_income_tax under sec_501 of the code are not required to file annual information returns on form_990 revproc_95_48 treats an organization as an affiliate of a governmental_unit if it is described in sec_501 of the code and it has a ruling or determination from the service that its income derived from activities constituting the basis for its exemption under sec_501 is excluded from gross_income under sec_115 revproc_95_48 only addresses the filing_requirements under sec_6033 of the code it does not exempt a taxpayer from filing returns with respect to unrelated_business_taxable_income under sec_511 of the code see sec_6012 sec_1_6012-2 association is an organization described in sec_501 and as set forth herein plr-143280-01 will have a ruling from the service that its income is excluded from gross_income under sec_115 accordingly association is an affiliate of a governmental_unit for purposes of revproc_95_48 conclusions based on the information submitted and representations made by association and provided that association terminates the affiliate members’ participation in association’s insurance policies and amends its bylaws and declaration of trust to eliminate the affiliate members as association represented we rule as follows association’s income is excludible from gross_income under sec_115 of the code and pursuant to revproc_95_48 association is not required to file an annual information_return on form_990 because this ruling is contingent upon association taking the necessary actions under state law to eliminate the affiliate members and terminate the affiliate members’ participation in association’s insurance policies this ruling applies only for periods on and after the date on which such actions by association are effective under state law we express no opinion with respect to whether association has or will have unrelated_business_taxable_income under sec_511 of the code and therefore must file a return on form 990-t the rulings contained in this letter are based upon information and representations submitted by association and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings such material is subject_to verification on examination 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 of the code provides that this ruling may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to association sincerely elizabeth purcell chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt government entities plr-143280-01 cc


department of the treasury internal_revenue_service washington d c date number release date uilc-1441 cc intl br2 lhatten-boyd cor-115701-01 dear this is in response to your correspondence to mr john staples dated date you have requested information regarding tax withheld under sec_1441 of the internal_revenue_code on dividends_paid to you by specifically you request information regarding the procedure for requesting a refund of such tax on behalf of your account holders pursuant to the information you submitted a nominee account with on u s source dividends_paid to for payments remitted after from until maintains withheld account holders on behalf of its reduced the withholding rate to new regulations have been issued under sec_1441 effective because should have applied the old rules to the dividends were paid prior to that date determine the proper procedure for withholding on the dividends article of the u s - income_tax treaty provides that the proper rate of withholding on dividends_paid residents i sec_15 to to claim a refund for the amount overwithheld should complete form 1120f specifically section i of that form should be completed to show the amount of dividends_paid the proper rate_of_tax and the amount of tax actually withheld a copy of the form 1042-s that was issued to should be attached to the submission the form 1120f and corresponding instructions can be obtained on the irs website www irs ustreas gov from finally it should be noted that should not use its qi-ein to obtain the does not have an ein other than its qi-ein it will have to apply for refund if one on form ss-4 be sure to state clearly on that form that the reason for the ein cor-115701-01 request is to obtain a treaty benefit otherwise reporting requirements will attach to the number issued and will receive notices in the future for failure to make returns as required by certain foreign entities we hope this information is helpful if you have any further questions regarding this matter please feel free to contact laurie hatten-boyd of my office at sincerely phyllis e marcus branch chief cc intl br office of associate chief_counsel international


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date i am responding your letter of date to commissioner douglas h number release date conex-122436-09 uil --------------------------------------------------------------- ---------------------------------------------- ------------------------------ attn ------------------------------ dear ------------------- schulman about the treatment of costs associated with breast pumps and related equipment you recommend that the service allow the costs of breast pumps and related equipment to be reimbursable under a tax favored health care flexible_spending_account fsa revenue code defines medical_care to include the diagnosis cure mitigation treatment or prevention of disease medical_care includes medicine and drugs but does not include goods or services that are merely beneficial to general health and do not mitigate or treat a disease under current law therefore the cost of purchasing or renting a breast pump and related equipment would not come within the definition of a medical_care expense for fsa purposes even though the mother’s usage of the breast pump may have the health benefits mentioned in your letter breastfeeding equipment as medical_care in contravention of current law a change to the internal_revenue_code must be made by congress in general funds from an fsa are to be used for medical_care the internal it is not within the authority of the internal_revenue_service to classify i hope this information is helpful if you have additional questions please conex-122436-09 contact me or -----------------at --------------------- sincerely christopher f kane branch chief branch income_tax accounting


t c memo united_states tax_court farrokh e pourmirzaie and minoo s pourmirzaie petitioners v commissioner of internal revenue respondent docket no filed date held ps' rental_real_estate_activities were passive activities within the meaning of sec_469 and therefore ps' loss deductions from those activities were limited by sec_469 ps did not establish that p-w was a real_estate_professional because we find that she spent only hours during each audit year in real_property_trade_or_business activities held further sec_6662 accuracy-related_penalties sustained framta saechao and robert l goldstein for petitioners daniel j bryant for respondent memorandum findings_of_fact and opinion halpern judge respondent determined deficiencies in and accuracy- related penalties with respect to petitioners' federal_income_tax for their taxable_year sec_2010 sec_2011 and sec_2012 audit years audit year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number big_number unless otherwise stated all section references are to the internal_revenue_code in effect during the audit years and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar at the trial of this case petitioners conceded all issues other than respondent's adjustments disallowing a portion of their rental real_estate losses for each of the audit years and the penalties respondent made the adjustments on the grounds that petitioners' rental_real_estate_activities during the audit years were passive activities within the meaning of sec_469 and therefore their loss deductions from those activities were limited by sec_469 the parties agree that the issue that we must decide is whether petitioner wife mrs pourmirzaie was a real_estate_professional during the audit years the parties use the term real_estate_professional to describe an individual more than half of whose time spent performing personal services in one or more businesses during a taxable_year is spent performing such services in a real_property business and who during that taxable_year performs more than hours of services in real_property trades_or_businesses in which she materially participates see sec_469 petitioners bear the burden_of_proof see rule a because petitioners have failed to prove that during any of the audit years mrs pourmirzaie performed more than hours of services in a real_property business she was not during any of the audit years a real_estate_professional and we will sustain respondent's adjustments with respect to petitioners' rental real_estate losses we will also sustain the sec_6662 penalties findings_of_fact petitioners resided in california when they filed the petition the parties have stipulated certain facts and the authenticity of certain documents the facts stipulated are so found and documents stipulated are accepted as authentic petitioners' returns for each of the audit years petitioners made a joint_return of income on form_1040 u s individual_income_tax_return collectively audit-year returns on their and form sec_1040 petitioners showed no tax due for however respondent rebated to them dollar_figure on account of a sec_36a making- work-pay credit on their return they showed a tax due of dollar_figure and there was no rebate on each of the audit-year returns petitioners reported a substantial loss from rental real_estate properties dollar_figure dollar_figure and dollar_figure for and respectively for all three years those properties included a four-unit residential property in san jose california san jose property a single-family condominium in san diego california in which petitioners owned a partial interest san diego property a single-family residence in tucson arizona tucson property a single-family condominium in bremerton washington bremerton property and 1unaccountably respondent's notice_of_deficiency shows a rental real_estate loss reported by petitioners for of only dollar_figure we will sustain an adjustment based on that amount a single-family residence in discovery bay california discovery bay property petitioners' reported rental real_estate loss for included a loss from one additional property a marriott timeshare not otherwise identified by petitioners marriott timeshare for all of the audit years petitioners elected pursuant to sec_469 to treat all interests in rental real_estate as a single activity san jose property during the audit years petitioners shared responsibility for management of the san jose property they did not keep an office at the property nor store tools there neither did they keep contemporaneous_records of the time they spent at the property mrs pourmirzaie testified that they spent to hours a week there she could not however for any particular visit recollect when they arrived or when they departed the length of any visit she added depend ed on the work that was there she testified that they were always there on saturdays and sundays and on average they would be there from a m to or p m on saturdays and from noon to or p m on sundays on their visits she continued they took care of necessary maintenance tasks collected rent if necessary and generally ensured that the property was in good order she testified that both she and mr pourmirzaie worked at the property during those visits in fact she added he's a workaholic he loves to work on that property even though he has a full-time job she testified that during the week she visited the property to conduct surveillance because of the poor neighborhood san diego property during the audit years petitioners also shared responsibility for management of the san diego property mrs pourmirzaie could not remember specifically what types of management activities she performed beyond visiting the property to prepare it for and to meet any new tenant she could not recall how many times in she visited the san diego property although when she did visit the property she testified we like san diego so when we go there we stay longer you know i love san diego tucson property petitioners did not directly manage the tucson property instead they hired a property manager with whom mrs pourmirzaie testified that she communicated m aybe one or two hours i n a year a month i don't remember i don't recall bremerton property during the audit years petitioners dealt with the tenants at the bremerton property by telephone although mrs pourmirzaie could not recall how long in she spent on the telephone with a tenant not very long discovery bay property during the audit years she and her husband managed the discovery bay property there was one tenant during those years and she dealt with him principally by telephone she testified that she visited the property during but could not recall how often or how many hours she spent there marriott timeshare petitioners offered no evidence with respect to the marriott timeshare calendars the parties have stipulated two calendars one for calendar and one for calendar the two calendars purport to show time petitioners spent at their rental properties during those two years petitioners prepared the two calendars from memory during the course of respondent's examination of their audit-year returns the calendar has entries for every saturday and sunday in other than sunday october halloween and saturday december christmas day the usual uniform entry for both saturday and sunday is without identifying a location but we assume the san jose property weekly cleaning and repairing from a m to p m on saturday and from a m to p m on sunday there are occasional entries for time spent in san diego there are twice a month entries for midweek security surveillance uniformly from to p m and there are assorted other entries on various dates such as home depot paperwork and bill paying and post office some lacking time entries and some like paperwork and bill paying showing twice monthly time entries usually from to p m the calendar does not specify who as between mr or mrs pourmirzaie performed the listed tasks the calendar is similar although it does show monthly totals of hours for each petitioner totaling for the whole year big_number hours and hours for mr and mrs pourmirzaie respectively the calendar show sec_2 hours of surveillance from to p m on april and hours on paperwork and bill paying from to p m on april monthly statements for petitioners' checking account at wells fargo bank for the months of april and date show check card purchases for food and lodging on april and in london england and at heathrow airport there are no domestic purchases shown for either of those dates the calendar shows both petitioners working at an unspecified property from a m until p m on august the wells fargo bank statement for date shows food purchases in dallas texas on that date the calendar shows one or both petitioners working at unspecified properties for hours on september through the wells fargo bank statement for date shows food and other purchases and a cash withdrawal in philadelphia pennsylvania on those dates the calendar shows mrs pourmirzaie working at an unspecified property on october and the wells fargo bank statement for october shows food and other purchases in new york new york boca raton florida and philadelphia pennsylvania on those dates there is no calendar for penalty approval internal revenue_agent tuan nguyen examined petitioners' audit-year returns and among other things proposed the accuracy-related_penalties here in issue mr nguyen's supervisor was supervisory internal revenue_agent michael j adams who approved in writing mr nguyen's determination of those penalties on the basis of petitioners' underpayment due to a substantial_understatement_of_income_tax for each of the audit years i introduction opinion we must decide whether for any of the audit years mrs pourmirzaie was a real_estate_professional since we decide that she was not we must decide whether petitioners are liable for the sec_6662 accuracy-related_penalties determined by respondent we decide that they are ii sec_469 sec_469 generally disallows a deduction for any passive_activity_loss for an individual a passive_activity_loss is the amount by which aggregate losses from all passive activities during the taxable_year exceed the aggregate income from all passive activities during the year sec_469 a passive_activity is a trade_or_business in which the taxpayer does not materially participate sec_469 rental activities are per se passive even if a taxpayer materially participates in such activities sec_469 an activity is a rental_activity if gross_income attributable to the activity is paid principally for_the_use_of tangible_property see sec_1_469-1t temporary income_tax regs fed reg date an exception to the per se passive rule exists for taxpayers who are real_estate professionals sec_469 a taxpayer is a real_estate_professional if more than one-half of the personal services performed in trades_or_businesses by the taxpayer during the taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and the taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 where taxpayers file a joint_return either spouse must satisfy the above requirements separately id participation in an activity may be established by any reasonable means sec_1_469-5t temporary income_tax regs fed reg date reasonable means include identification of services performed and the approximate number of hours spent performing such services based on appointment books calendars or narrative summaries id contemporaneous logs or similar documents are not required to the extent participation may be established by other reasonable means id and while the regulations permit some flexibility with respect to the evidence required to prove participation we are not required to accept postevent ballpark guesstimates nor are we bound to accept the unverified undocumented testimony of taxpayers see eg lum v commissioner tcmemo_2012_103 wl at petitioners propose that on the basis of daily entries on the and calendars we find that mrs pourmirzaie spent hours and hours during those years respectively at the san jose property doing generally routine cleaning repairs gardening bill paying and surveillance they propose that on the basis of her testimony we find that she spent to hours a week at the san jose property carrying out those tasks they propose that on the basis of entries in the and calendars we find that mrs pourmirzaie spent hours and hours during those years respectively at the san diego property doing generally remodeling repairing and interviewing tenants to rent out the property on the basis of mrs pourmirzaie's testimony petitioners propose that we find that she spent one or two hours per month or year managing the tucson property petitioners propose no finding with respect to the number of hours that mrs pourmirzaie spent during any of the audit years managing either the bremerton or the discovery bay property they propose that we find that in mrs pourmirzaie spent approximately big_number hours on her rental activities and that in she spent approximately big_number hours on her rental activities 2on brief petitioners reverse those hourly estimates proposing that we find that she spent big_number hours and big_number hours on her rental activities during and respectively the calendar does not for numerous dates specify who continued we will make none of the proposed findings_of_fact that petitioners ask us to make we have little confidence that the and calendars accurately reflect the dates and the times that petitioners and in particular mrs pourmirzaie spent at either the san jose or the san diego property the calendars were prepared from memory after the audit years during the course of respondent's examination of the audit-year returns without benefit of any contemporaneous time records the calendars show an exactitude as to the dates and the times petitioners were at the san jose and san diego properties not matched by mrs pourmirzaie's memory at trial where she testified that for any visit to the san jose property she could not recollect the time they went or returned and the length of their visit depended on the amount of work to be done with respect to the san diego property she testified that she could not recall how many times she visited the property in or the types of management activities that she performed on her visits to san diego she added she stayed longer than was necessary because i love san diego further the record contains wells fargo bank statements that seemingly contradict petitioners' calendar entries that show one or the other or both working continued mr or mrs pourmirzaie performed the described tasks we accept the switched hours as a mistake and have corrected the totals at a property on april august september through and october and and doing paperwork and paying bills which we assume they did at home on date when mrs pourmirzaie was asked by respondent's counsel to explain the seeming discrepancy for date she answered as i mentioned we just go through our memory we don't remember exactly but we do put hours in the san jose property i mean it's not like we're working for a company we don't clock in we don't clock out but we do spend a lot of time in that property and i think that time is when we had a--probably wedding i don't remember nor independent of the two calendars can we accept mrs pourmirzaie's testimony of time she worked at the san diego and san jose properties mrs pourmirzaie testified that she and her husband shared responsibility for management of both properties she was clear that on weekends they both visited the san jose property for a total of hours each her husband she testified was a workaholic nevertheless she proposes that we find that she herself spent to hours a week at the san jose property carrying out management tasks if we add to her suggested totals the hours a week that her husband was at the san jose property performing management tasks then we have the couple spending to hours a week managing a four-unit residential apartment building at which they neither kept an office nor stored any tools simply stated we do not believe it nevertheless petitioners have convinced us that they owned the rental real_estate properties in question and that during the audit years mrs pourmirzaie spent considerable time managing the properties including regular visits to the san jose property petitioners' evidence does not support their proposed findings_of_fact that in mrs pourmirzaie spent approximately big_number hours on her rental_real_estate_activities and that in she spent approximately big_number hours on her rental_real_estate_activities taking into account the substantial and on many days equal time spent by mr pourmirzaie on management activities we find that mrs pourmirzaie spent an average of one day a week hours in real_estate trade or businesses activities ie hours during each of the audit years because she does not meet the 750-hour requirement of sec_469 she was not a real_estate_professional for purposes of sec_469 during the audit years therefore we need not address whether mrs pourmirzaie spent more than of her time in real_estate trades_or_businesses under sec_469 iii accuracy-related_penalty sec_6662 and b provides for an accuracy-related_penalty of of the portion of an underpayment_of_tax attributable to a ny substantial_understatement_of_income_tax sec_6662 defines the term understatement as the excess of the tax required to be shown on the return over the amount shown on the return as filed reduced by any rebate in the case of an individual an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is reduced however by the portion attributable to the treatment of an item for which the taxpayer had substantial_authority sec_6662 sec_6664 provides an exception to the imposition of the sec_6662 accuracy-related_penalty if it is shown that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith the commissioner bears the burden of production with respect to penalties see sec_7491 to carry that burden he must produce evidence regarding the appropriateness of imposing the penalty 116_tc_438 in some circumstances that includes evidence that the initial determination of the penalty received written supervisory approval see sec_6751 graev v commissioner t c __ date supplementing t c __ date the taxpayer's concessions may be taken into account in determining whether the commissioner has met his burden oria v commissioner tcmemo_2007_226 wl at once the commissioner carries his burden of production the taxpayer bears the burden of proving that she is entitled to relief because of substantial_authority or under sec_6664 see higbee v commissioner t c pincite the deficiency that respondent determined for each audit year exceeds dollar_figure which is the greater of of the total corrected tax_liability shown on the notice_of_deficiency for each audit year or dollar_figure thus for each of the audit years there was a substantial_understatement_of_income_tax his revenue agent's initial determination of the penalties received written approval by the revenue agent's supervisor respondent has therefore met his burden of production petitioners have shown no substantial_authority for any portion of their understatements of income_tax nor have they proposed that we find any facts that if found would establish that they had reasonable_cause and acted in good_faith with respect to any portion of the tax they underpaid in defense to the sec_6662 penalty they rely only on their proving which they have not that there is no deficiency we will sustain the sec_6662 penalties on the grounds that for each of the audit years petitioners' underpayment was due to a substantial_understatement_of_income_tax decision will be entered for respondent


department of the treasury internal_revenue_service washington d c chief_counsel date number release date conex-108543-18 index number the honorable john j bonacic new york state senator state capitol room albany ny dear mr bonacic thank you for your letter dated date requesting an opinion about a proposal advanced by the governor of the state of new york in his fiscal_year state executive budget in your letter you explained this proposal would allow taxpayers who itemize deductions to claim charitable deductions for contributions to funds established for the benefit of state and local governments also this proposal provides that any taxpayer donating to these funds may claim a state tax_credit equal to percent of the donation amount for the tax_year after the donation is made specifically you asked for our opinion about whether amounts contributed by taxpayers under this proposal would be recognized by the irs as a charitable_contributions deductible under the internal_revenue_code section dollar_figure of revproc_2018_1 2018_1_irb_1 provides that the offices of associate chief_counsel ordinarily do not issue letter rulings on matters involving the federal tax consequences of any proposed federal state local municipal or foreign legislation therefore we are unable to provide an opinion on the governor’s proposal nevertheless we are aware of his and similar proposals and are continuing to study the application of the federal tax laws to these matters conex-108543-18 thank you for providing information on this matter if you have any questions please contact me or -------------- at -------------------- sincerely brinton warren chief branch office of associate chief_counsel income_tax accounting


t c memo united_states tax_court george e and gloria tschetschot petitioners v commissioner of internal revenue respondent docket no filed date r disallowed losses in excess of ps’ winnings from gambling and determined both a deficiency and a penalty for substantial_understatement for after conceding that h’s net gambling_losses were not properly deductible ps argued that as a professional tournament poker player w’s net losses should be treated the same as those of any other professional sport participants held w’s net gambling_losses are not exempt from the limitations of sec_165 i r c held further we leave for the parties to determine as part of their computations under rule tax_court rules_of_practice and procedure whether there was a substantial_understatement for the taxable_year in issue if so ps are liable for the accuracy- related penalty gloria tschetschot pro_se j anthony hoefer for respondent memorandum findings_of_fact and opinion armen special_trial_judge respondent determined a deficiency in petitioners’ federal_income_tax for the taxable_year of dollar_figure as well as an accuracy-related_penalty for a substantial_understatement_of_income_tax of dollar_figure the grounds for the deficiency were the limitations of sec_165 as applied to gloria tschetschot’s mrs tschetschot professional tournament poker playing and george e tschetschot’s mr tschetschot status as a nonprofessional gambler at trial petitioners conceded that mr tschetschot was not a professional gambler but argued that mrs tschetschot’s professional tournament poker playing is not gambling and thus not subject_to the limitations of sec_165 on losses from gambling respondent conceded that mrs tschetschot’s business_expenses related to her professional gambling activity were deductible thus the two issues for decision are whether mrs tschetschot’s tournament poker losses are limited by sec_165 to the amount of her tournament poker winnings and unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure whether a penalty under sec_6662 for a substantial_understatement_of_income_tax is appropriate findings_of_fact at the time the petition was filed petitioners resided in cedar rapids iowa mrs tschetschot is a database project engineer she was also a professional tournament poker player in mr tschetschot is not a professional gambler but occasionally plays slot machines and blackjack while accompanying his wife on her poker tournament trips tournament poker is somewhat different from live-action poker a poker tournament consists of a series of individual events hosted by a casino and it can last anywhere from several days to weeks unlike live-action poker tournament participants cannot exit the game by cashing out partway through the tournament tournaments are played until there is one player left with all of the chips all tournaments have a buy-in or entrance fee that is paid_by the tournament participants to the tournament organizer a portion of this amount is an administrative fee kept by the casino hosting the event and the remainder goes directly into the prize fund pot that will ultimately be paid out to the respondent stipulated this fact for purposes of this case only there are no substantiation issues in this case tournament’s winners no portion of the administration fee is included in the prize fund and the entire prize fund is dispersed to winning participants the buy-in may or may not correlate dollar-for-dollar with the amount of chips received at the start of the tournament and the chips themselves have no intrinsic monetary value although re-buys are sometimes allowed tournament play contemplates that each player has only a fixed number of chips and that each player begins the tournament with the same number of chips when a player runs out of chips he or she is out of the game cash prizes are awarded to a predetermined number of finishing places in the tournament because of the buy-in system the only monetary loss a tournament participant may incur will be the amount of the buy-ins and any re-buys the participant might make no participant will be able to bet--or subsequently lose--any greater amount similar to live-action poker however a player’s tournament success depends on a combination of both luck and skill a player might have a decent hand but as kenny rogers tells us in the gambler he or she would still have to know when to hold ‘em know when to fold ‘em know when to walk away and know when to run to actually be a success a court in england recently had the opportunity to decide whether texas hold ‘em was a game of chance or a game of skill and the jury decided on the former see http news bbc co uk hi england london stm for the taxable_year in issue mrs tschetschot earned approximately dollar_figure in wages she also participated in nine poker tournament series winning in excess of dollar_figure mrs tschetschot claimed a net_loss of dollar_figure from her professional gambler activity in on her schedule c profit or loss from business mr tschetschot claimed a net_loss of dollar_figure from his professional gambler activity in on his schedule c respondent determined a deficiency of dollar_figure based on the view that the deductions claimed by petitioners related to their gambling activities were not appropriately schedule c deductions but rather deductions allowable on schedule a itemized_deductions but only to the extent of petitioners’ winnings respondent also determined an accuracy-related_penalty under sec_6662 of dollar_figure at trial petitioners conceded the issue as to mr tschetschot but disputed the determination as to mrs tschetschot respondent conceded mrs tschetschot’s status as a professional as well as the corresponding treatment of certain expenses related to her professional gambling activity the amount of mrs tschetschot’s stipulated winnings totals dollar_figure whereas she reported only dollar_figure respondent discusses this discrepancy in his posttrial brief by saying that respondent did not adjust this discrepancy because the unreported winnings would have been offset by allowance of losses that were disallowed respondent maintains that sec_165 limits mrs tschetschot’s losses and that petitioners remain liable for an accuracy-related_penalty petitioners contend that mrs tschetschot’s professional tournament poker playing activity is more properly classified as entertainment and professional sports than professional gambling and should bear the resulting tax treatment ie that her net_loss should not be limited by sec_165 restricting losses from wagering activities petitioners also contend that they do not meet the threshold_amount for the imposition of an accuracy-related_penalty based on a substantial_understatement_of_income_tax i tournament poker5 opinion central to petitioners’ contention is the thesis that tournament poker unlike other types of poker is not a wagering activity the term wagering has different meanings depending on the context in which the term is used more often than not and as it is used in the internal_revenue_code the term is synonymous with gambling the issue related to tournament poker is essentially legal in nature accordingly we decide it without regard to the burden_of_proof the legislative_history of sec_23 of the revenue act of ch tit i 48_stat_680 subsequently continued congress has made a policy decision such that while sec_165 generally allows losses to be deducted from gross_income l osses from wagering transactions shall be allowed only to the extent of the gains from such transactions sec_165 see also sec_165 however neither the internal_revenue_code nor the regulations define what constitutes a wagering activity when a term is not defined we must apply the term’s plain obvious and rational meaning 103_tc_285 n affd 65_f3d_329 3d cir see also 762_f2d_1369 9th cir according to the dictionary a wager is defined as something risked or staked on an uncertain event or a bet random house college dictionary similarly to wager is continued redesignated sec_23 by the revenue act of ch 52_stat_461 and then continued as such in the code until enacted as sec_165 in the code uses the terms wagering and gambling interchangeably sec_165 applies to both professional and recreational gamblers see eg 762_f2d_1369 9th cir 16_tc_1214 heidelberg v commissioner tcmemo_1977_133 one of the consequences to professional gamblers is that the loss carryover provisions of sec_172 are unavailable for amounts attributable to wagering activity that is not an issue in this case as mrs tschetschot had other income to absorb her expenses properly deductible as a professional one of the consequences to nonprofessionals is that they may only deduct gambling_losses if they itemize deductions on their tax returns sec_62 see also heidelberg v commissioner supra defined as something risked or staked on an uncertain event bet the act of betting random house college dictionary courts have often had to differentiate between wagering and related activities on the one hand and those activities not falling into that category on the other see eg 976_f2d_975 5th cir tokes paid as tips to casino dealers are not gains from wagering transactions 16_tc_1214 betting on horse races is wagering libutti v commissioner tcmemo_1996_108 gambler’s receipt of complimentary goods from a casino was sufficiently tied to gambling participation that they were gains from wagering transactions whitten v commissioner tcmemo_1995_508 expenses_incurred to be a contestant on wheel of fortune were not wagering expenses heide v commissioner 2_bta_451 playing bridge for stakes is wagering however courts have routinely held that poker is a wagering activity see eg boyd v united_states supra but here petitioners ask us to treat tournament poker differently than other kinds of poker after a careful review of the record it is clear that while there are differences between tournament poker and other types of poker none rise to the level of meaningful substantive the most significant difference is that unlike playing in a live-action poker game when one buys into a tournament game continued differences that would warrant different tax treatment under the current internal_revenue_code a tournament poker as a sporting event petitioners argue that tournament poker is conducted in much the same way as other professional sporting tournaments participants pay an entry fee and compete to win prizes through their good fortune and superior skill but simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different tournament poker play much like live-action poker necessitates the use of the word bet or wager even to describe how the game is played petitioners argue that the usage of the word bet in this context is insignificant the court sees it differently betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way continued each player receives the same fixed amount of chips the game is played and when a player runs out of chips the player is out of the tournament the playing continues until one player has all of the chips it may take a different skill set to play tournament poker because no endless stream of funds is available and endurance is a crucial factor to a participant’s success similarly a casino’s decision to issue a form w2-g certain gambling winnings or a form 1099-misc miscellaneous income does not affect the nature of the winnings for tax purposes when discussing the topic bets are placed on each hand and each round of betting has consequences whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets hoping to win this is true even in a tournament setting petitioners agree that the first poker tournaments held were in fact wagering events for example in those early games each participant put up dollar_figure and received dollar_figure in chips the fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and or entry fees does not change the basic nature of the game as a wagering activity b professional tournament poker as a business petitioners also raise an equal protection argument and argue that there is no valid reason to treat tournament poker differently for tax purposes from tournament golf or tennis petitioners argue that the benefits of being able to offset exaggerated income from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions congress made a policy decision to treat businesses based on wagering activities differently in the absence of congressional action we are not free to correct any perceived unfairness stemming from a rationally based policy choice in valenti v commissioner tcmemo_1994_483 the court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection see also 301_us_548 holding that congress like the states has the freedom to tax businesses differently thus it has been held a classification that differentiates the business of gambling from other business has a rational basis and when subjected to judicial scrutiny it must be presumed to rest on that basis if there is any conceivable state of facts which would support it valenti v commissioner supra quoting 301_us_495 ii substantial_understatement of tax with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see id pincite see also rule a 290_us_111 sec_6662 imposes a penalty equal to percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax sec_6662 an understatement is the amount by which the correct_tax exceeds the tax reported on the return sec_6662 the understatement is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 and ii sec_6664 provides that no penalty shall be imposed if the taxpayer demonstrates that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the facts and circumstances of the situation and includes an honest misunderstanding of fact or law sec_1_6664-4 income_tax regs insofar as mr tschetschot is concerned petitioners have not demonstrated either good_faith or that there was reasonable_cause for their position as to mrs tschetschot petitioners were clearly aware of the mandate of sec_165 their wish that it be inapplicable to tournament poker does not constitute the type of misunderstanding contemplated by the statutes or the regulations an understatement is reduced by the portion of the understatement that is attributable to the tax treatment of an item for which there is substantial_authority or with respect to which there is adequate_disclosure and a reasonable basis see sec_6662 sec_1_6662-4 income_tax regs however no substantial_authority exists to support petitioners’ position as to either the inapplicability of sec_165 to tournament poker or mr tschetschot’s status as a professional gambler substantial_authority exists for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment sec_1_6662-4 income_tax regs types of authority on which a taxpayer may rely include the internal_revenue_code and regulations revenue rulings and procedures technical_advice memoranda and private letter rulings see sec_1_6662-4 income_tax regs additionally whether or not there was adequate_disclosure there is no reasonable basis to support petitioners’ position on tournament poker given the clear mandate of sec_165 and the existing caselaw interpreting it accordingly we are not permitted to make a reduction in the understatement attributable to respondent’s determination on that issue in view of respondent’s concession that mrs tschetschot’s expenses are deductible it is unclear whether there exists a substantial_understatement_of_income_tax we therefore leave for the parties to determine as part of the rule computation whether there was in fact a substantial_understatement for the taxable_year in issue if a substantial_understatement exists for the year in issue petitioners are liable for the accuracy- related penalty iii conclusion the moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago not only has tournament poker become a nationally televised event but casinos or lotteries can be found in many states further the ability for the internal_revenue_service to accurately track money being lost and won has improved and some of the substantiation concerns particularly for professionals no longer exist that said the tax_court is not free to rewrite the internal_revenue_code and regulations we are bound by the law as it currently exists and we are without the ability to speculate on what it should be accordingly we hold that tournament poker is a wagering activity subject_to the limitations of sec_165 to reflect the foregoing decision will be entered under rule


internal_revenue_service number info release date cc psi 1-genin-155252-01 date uilc we are responding to your correspondence requesting relief in order to establish as the effective year for your s_corporation_election the information submitted reflects that you believe your form_2553 was filed via facsimile in date however you have neither proof of timely filing form_2553 nor an acceptance letter although we are unable to respond to your request as submitted please read this letter carefully as it provides useful information about correcting your situation based on the instructions to form_2553 taxpayers are generally notified of acceptance or nonacceptance of their election within three months of date of filing_date mailed if the irs questions whether the election was filed acceptable proof of filing is a certified or registered mail receipt b form_2553 with an accepted stamp c form_2553 with stamped irs received date or e an irs letter stating the election has been accepted announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a ruling are set out in revproc_2001_1 copy enclosed in addition a proper user_fee must be submitted along with your request the fee for a ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million for the last 12-month taxable_period qualify for a reduced user_fee in the amount of dollar_figure if your business qualifies for the reduced fee your request must include a statement certifying gross_income otherwise you will be billed the higher fee please format your ruling_request as shown in appendix b of revproc_2001_1 if you decide to submit a ruling_request please provide documents supporting your intention to be an s_corporation and include the proper user_fee please refer your package to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi b1 room if you have computer web access you may wish to visit www irs gov smallbiz for specialized tax information products and forms relating to small businesses please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2001_1


internal_revenue_service number release date index number --------------------------- ---------------------------------------------------- ------------------------------------------------- ------------------------------------------- ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-144625-11 date date legend x --------------------------------------------------------------- ---------------------------------------------------- country d1 d2 ---------- ----------------------- ---------------------- dear ------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts according to the information submitted x was organized under the laws of country on d1 x failed to timely file form_8832 entity classification election to elect to be treated as a partnership for federal tax purposes effective d2 law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two plr-144625-11 members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with two or more members having limited_liability may elect to be treated as a partnership pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that such an election must be signed by either a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organization documents to make the election and who represents to having such authorization under penalties of perjury sec_301 c ii provides that if an election is to have a retroactive effective date each person who was an owner between the date the election is to be effective and the date the election is filed and who is not an owner at the time the election is filed must also sign the election under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be plr-144625-11 treated as a partnership for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely joy c spies____________________ joy c spies senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc