internal_revenue_service number release date index numbers ----------------------- ------------------------------- ------------------------------------------------- ------------------------------ ------------ ------------ legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-144242-08 date date distributing ----------------------------------------------------------- ---------------------------------- controlled ------------------------------------------------------------------ ---------------------------------------- llc ------------------------- shareholder shareholder shareholder shareholder business a business b business c ----------------------- -------------------- ------------------------- ----------------------- ----------------------------- ------------------------------ -------------------------- group c ---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- group d -------------------------------------------------------------- ----------------------------------------------- plr-144242-08 state a date date date date date date date date date a b c d e f g h i j dollar_figurek ------------- -------------------------- ---------------------- --------------------------- -------------------------- ----------------------------- -------------------------------------- ------------------- ---------------- ---------------------- ------ ---------- ---------- ------- ---------- ---------- ------ --------- --------- ---------- ------------ plr-144242-08 promissory note -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------- --------- stock purchase agreement -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------- ---------------------------- adjusted gross margin ------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------- government agency ----------------------------------------------- -------------------------------------------------------------------------------- agreement a ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------- purchase_price -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ -- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------- transitional contracts arrangement -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- plr-144242-08 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------ dear ------------- this letter responds to your date letter requesting rulings on certain federal_income_tax consequences of a proposed transaction described below the proposed transaction additional information was received in letters dated date date date date and date the information provided in these letters is summarized below the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is a calendar_year corporation that was incorporated under the laws of state a on date and since date has been taxed as a subchapter_s_corporation distributing has no earnings_and_profits from its years as a c_corporation distributing is engaged in business a business b and business c distributing has one class of stock voting common_stock distributing’s stock is owned a by shareholder b by shareholder c by shareholder and d by shareholder the financial information submitted by distributing indicates that business c has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years shareholder and shareholder disagree on a number of fundamental business plr-144242-08 matters and the conflict is having an adverse effect on the operations of distributing accordingly distributing has determined that the separation from the rest of distributing of a portion of the business_assets of business c consisting of the group c assets and related liabilities will enhance the success of the business of distributing and controlled the separation will enable each corporation to resolve the management and other problems that have arisen and allow both distributing and controlled to achieve their potential by enabling the management and staff of each corporation to focus their efforts and energy on the respective requirements of their businesses without internal distractions and tensions distributing will retain the group d assets of business c proposed transaction for what are represented to be valid business purposes distributing has proposed the following transaction pursuant to agreement a the proposed transaction i distributing has transferred the group c business_assets and associated liabilities to its recently-formed and wholly-owned llc a disregarded_entity ii distributing will contribute its llc interest to a newly-formed and wholly-owned corporation controlled in exchange for all the controlled stock with the result that distributing will be treated as contributing the group c business_assets to controlled in exchange for all of the controlled stock and the assumption by controlled of the liabilities associated with the group c business_assets the contribution iii distributing will distribute e of controlled stock to shareholder sec_3 and in exchange for all of their distributing stock and f of controlled stock to shareholder sec_1 and who will retain all of their distributing stock the distribution iv pursuant to the stock purchase agreement shareholder sec_1 and will sell their f of controlled stock to shareholder sec_3 and for a promissory note equal to purchase_price consisting primarily of g of controlled’s adjusted gross margin each month for the period through date the parties have structured this sale as an alternative to the use of a note to equalize the value of the controlled stock with the value of the distributing stock to be surrendered in the distribution by shareholder sec_3 and because of concerns that a note of such amount between controlled and distributing would constitute an affiliation under a non-irs government agency rule after the proposed transaction shareholder sec_1 and will own all of distributing shareholder will own h of controlled and shareholder will own the remaining i plr-144242-08 of controlled controlled will operate as a holding_company with the llc as its sole significant asset distributing will continue as an s_corporation and controlled will become an s_corporation effective from the date of the distribution further the llc held by controlled will issue to shareholder a j profits interest in the llc which will cause the llc’s federal_income_tax status to change from a disregarded_entity to a partnership in connection with the proposed transaction distributing and controlled will enter into transitional agreements for a period not to extend beyond date following the distribution these transitional agreements are as follows a space sublease not to extend beyond date a corporate services agreement not to extend beyond date a trademark license agreement not to extend beyond date a note of only dollar_figurek issued by distributing to controlled having a maturity_date of date and a transitional contracts arrangement not to extend beyond date representations the taxpayers have submitted the following representations in connection with the proposed transaction a the fair_market_value of the controlled stock received by each of shareholder sec_3 and will be approximately equal to the fair_market_value of the distributing stock surrendered by the shareholder in the exchange b no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation c the five years of financial information submitted on behalf of distributing is representative of its present operations and with regard to distributing there have been no substantial operational changes since date the date of the last financial statements submitted d following the transaction distributing and controlled will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of business c conducted by distributing prior to consummation of the transaction e the distribution is carried out for the following corporate business purposes to solve shareholder disputes enable a significant shareholder group to concentrate on a particular business and to provide equity to a key_employee the distribution is motivated in whole or substantial part by one or more of these corporate business purposes plr-144242-08 f the transaction is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both g distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 effective as of the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled h before and immediately after the distribution distributing will have a single class of stock before and immediately after the distribution controlled will have a single class of stock i the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject j the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred k distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction l payments made in connection with all continuing transactions between distributing and controlled or any entity controlled directly or indirectly by controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length m no two parties to the transaction are investment companies as defined in sec_368 and iv n even after taking into account shareholder 4’s post-distribution acquisition of a j profits interest in the llc the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation o shareholder sec_3 and are the sole obligors for any liability created under the stock purchase agreement or the promissory note p after the distribution other than certain contractual rights set forth in the transaction documents which include the note of dollar_figurek the only significant asset of controlled will be its llc membership interest plr-144242-08 q neither distributing nor controlled will have any positive earnings_and_profits from c_corporation years at the time of the distribution r distributing controlled and each of their respective shareholders will pay their own expenses_incurred in connection with the proposed transaction s for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution t for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution u no intercorporate debt will exist between controlled or any entity controlled directly or indirectly by controlled and distributing at the time of or after the distribution of the controlled stock except for the dollar_figurek promissory note and intercompany loans or obligations that have arisen or will arise between the parties under the transitional agreements or in the ordinary course of business v immediately after the transaction as defined in sec_355 either i no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled ii if any person holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the transaction or iii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 w the total fair_market_value of the assets transferred from distributing to controlled will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in the plr-144242-08 contribution the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution x the total adjusted_basis and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of i the total liabilities assumed as determined under sec_357 by controlled and ii the total amount of money and other_property within the meaning of sec_361 received by distributing and transferred by it to its creditors and in connection with the plan_of_reorganization y the indebtedness if any owed by controlled or any entity controlled directly or indirectly by controlled to distributing after the distribution will not constitute stock_or_securities rulings based solely on the information submitted and the representations made we rule as follows the contribution followed by the distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 under sec_361 and sec_357 distributing will recognize no gain_or_loss on the contribution under sec_1032 controlled will recognize no gain_or_loss on the contribution under sec_362 the basis of each asset received by controlled from distributing in the contribution will be the same as the basis of that asset in the hands of distributing immediately prior to the contribution under sec_1223 the holding_period of each asset received by controlled from distributing in the contribution will include the period during which distributing held the asset under sec_361 distributing will recognize no gain_or_loss on the distribution under sec_355 the shareholders will recognize no gain_or_loss and no amount otherwise will be included in their income on the distribution see revrul_98_27 1998_1_cb_1159 date the service will not apply court holding or any formulation of the step_transaction_doctrine to determine whether the distributed plr-144242-08 corporation was a controlled_corporation immediately before the distribution under sec_355 solely because of any postdistribution acquisition or restructuring of the distributed corporation under sec_358 the aggregate basis of the controlled common_stock received by each of shareholder sec_3 and in the distribution will be respectively the same as the aggregate basis of the distributing stock surrendered by each of them in the distribution under sec_1223 the holding_period of the shares of the common_stock of controlled received by shareholder sec_3 and will include the period during which they held the distributing stock surrendered in the distribution provided that each of shareholder sec_3 and held the distributing common_stock as a capital_asset on the distribution date distributing’s momentary ownership of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 if controlled otherwise meets the requirements of a small_business_corporation under sec_1361 controlled will be eligible to elect to be a subchapter_s_corporation under sec_1362 for its first taxable_year caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the proposed transaction is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 in addition no opinion is expressed concerning the application of sec_1374 to either distributing or controlled procedural matters this ruling is directed only to the taxpayer who requested it sec_6110 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 alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling plr-144242-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely mary e goode mary e goode senior counsel branch office of associate chief_counsel corporate


dut ie panu service uniform issue list nov set-ep batu legend taxpayer a amount b amount c ira x company d bank e builder f date g date h dear this is in response to your letter dated dated requirement contained in sec_408 of the internal_revenue_code the code in which you request a waiver of the 60-day rollover supplemented by your letter page the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a maintained ira x with company d on date g taxpayer a requested company d to make an early withdrawal of amount c from ira x with the sole purpose of using the withdrawal to purchase his first home on date g taxpayer received a check for amount b amount b represented the total_distribution due taxpayer a from ira x less federal and state withholding taxpayer a had been on a waiting list to purchase a house from builder f however taxpayer a was not selected to consummate the purchase of a house three weeks later taxpayer a attempted to redeposit amount c into ira x at company d but was told by personnel of company d that if he redeposited amount c he would be taxed an additional 10-percent by the internal_revenue_service on date h taxpayer a opened a savings account at bank e where he deposited amount b amount b is still in the savings account at bank e taxpayer a’s intention always was to have the money available in case an offer was made to him to purchase his first house taxpayer a attempted to redeposit amount c into ira x within days from the date of the distribution but was discouraged by company d personnel to do so based on the above facts and representations you request that the service waive the 60-day rollover requirement under sec_408 of the code with respect to amount c sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or page distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is inciudible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code similar rules apply to distributions taken from qualified trusts or qualified a annuity_plans revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by taxpayer a demonstrates that the delay was caused by bad advice provided by personnel of company d which prevented taxpayer a from redepositing amount c into ira x within days therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to amount c taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount c into an ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contributions this amount will be considered rollover_contributions within the meaning of sec_408 of the code page no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact d at please address all correspondence to sincerely yours den employee_plans technical group manager enclosures deleted copy of ruling letter notice of intention to disclose


t c summary opinion united_states tax_court jerry howard-crowley petitioner v commissioner of internal revenue respondent docket no 8491-03s filed date jerry howard-crowley pro_se carina j campobasso for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency in petitioner's federal_income_tax of dollar_figure an addition_to_tax of dollar_figure under sec_6651 and an accuracy-related_penalty of dollar_figure under sec_6662 the parties agree that petitioner received miscellaneous income of dollar_figure from b d stone property management inc and dollar_figure in interest_income from community guaranty savings the parties further agree that petitioner is entitled to deduct on schedule a itemized_deductions medical_expenses of dollar_figure taxes of dollar_figure and interest of dollar_figure and the parties agree that petitioner is entitled to deduct on schedule c profit or loss from business insurance of dollar_figure taxes and license fees of dollar_figure repairs and maintenance_expenses of dollar_figure and supplies expenses of dollar_figure the issues remaining for decision are whether petitioner is entitled to any deductions in excess of those agreed to by respondent liable for the addition_to_tax under sec_6651 and liable for the accuracy-related_penalty under sec_6662 some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference at the time the petition was filed petitioner resided in plymouth new hampshire background petitioner is self-employed as a carpenter and builder primarily performing renovation work during the year at issue petitioner performed services for b d stone property management inc located in waterville valley new hampshire petitioner is divorced and has two children petitioner's former wife was granted primary physical custody of both children but petitioner in the agreement to amend the decree was granted the right to claim his daughter as a dependent beginning with the tax_year petitioner attempted to file as a tax_return for a form_1040 u s individual_income_tax_return containing zeros on all lines except line where he claimed one exemption line where he claimed the standard_deduction and line where he claimed the amount for a personal_exemption petitioner attached to the form a signed document in which he stated that he is not liable for income taxes nor is he required to file a federal_income_tax return respondent notified petitioner by mail that third-party payors had reported income items that petitioner failed to include on his form_1040 petitioner responded by letter to respondent's communication claiming that federal_income_tax laws are unconstitutional after the notice_of_deficiency was issued the case was assigned to respondent's appeals_office for consideration while appeals was considering the case petitioner submitted a form_1040 for that listed the income determined in the notice_of_deficiency and claimed deductions on schedules a and c the parties agree that petitioner was required to file a federal_income_tax return for discussion at trial petitioner argued that he is entitled to additional deductions for a a dependency_exemption for his daughter b medical_expenses c home_office expenses d computer expenses e business transportation_expenses and f work clothing expenses petitioner failed to meet the requirements of sec_7491 and the court decides this case on the basis of the preponderance_of_the_evidence deductions petitioner claimed deduction for dependency_exemption sec_151 allows a taxpayer to deduct an exemption_amount for each dependent as defined in sec_152 sec_152 defines a dependent to include a son or daughter of the taxpayer over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer in the case of a child of divorced parents sec_152 provides that if a child receives over half of his support from parents who are divorced under a decree of divorce and the child is in the custody of one or both of his parents for more than one-half of the year then the child will be treated as receiving over half of his support from the parent having custody for a greater portion of the calendar_year the term custody is determined by the terms of the most recent decree of divorce sec_1_152-4 income_tax regs because the divorce decree granted petitioner's former wife primary physical custody of the children she is considered their custodial_parent under sec_152 see cafarelli v commissioner tcmemo_1994_ petitioner contends that because he was in compliance with the terms of the divorce decree as modified by the agreement to amend decree he is entitled to the claimed deductions the court however need not discuss the merits of this argument because petitioner as the noncustodial_parent did not abide by the statutory requirements as explained below the requirements of sec_152 must be met regardless of the language of the state court divorce decree see 114_tc_184 affd sub nom 293_f3d_1208 10th cir as the noncustodial_parent petitioner is allowed to claim his children as dependents only if one of the three statutory exceptions in sec_152 is met under these exceptions the noncustodial_parent is treated as providing over half of a child's support if pursuant to sec_152 the custodial_parent signs a written declaration that the custodial_parent will not claim the child as a dependent and the noncustodial_parent attaches the written declaration to the noncustodial parent's return for the taxable_year pursuant to sec_152 there is a multiple-support agreement between the parties as provided in sec_152 or pursuant to sec_152 there is a qualified_pre-1985_instrument providing that the noncustodial_parent shall be entitled to any deduction allowable under sec_151 for the child provided that certain other requisites not pertinent here are met there is no evidence that any of the exceptions applies to this case petitioner's former wife did not release her claim to the exemptions for she did not sign a form_8332 release of claim to exemption for child of divorced or separated parents or any similar statement substantially in the form of a form_8332 to release to petitioner her right to claim deductions for certain dependency_exemptions petitioner did not attach a form_8332 or anything substantially_similar to a federal_income_tax return for see miller v commissioner supra there is no evidence in the record that petitioner complied with the requirements of sec_152 and the court holds that petitioner is not entitled to a dependency_exemption deduction for his daughter for deduction for medical_expenses petitioner argued at trial that he should be allowed medical expense deductions for himself and amounts he spent for medical insurance on his children he alleges that he incurred as a medical expense for himself less than dollar_figure for anger management counseling from a person named dolly powell he testified that he was unable to obtain any information from her and that her telephone number is unpublished a taxpayer generally must keep records sufficient to establish the amounts of the items reported on his federal_income_tax return see sec_6001 sec_1_6001-1 e income_tax regs however in the event that a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the precise amount the court generally may estimate the amount of the deductible expense bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is of his own making see 39_f2d_540 2d cir the court cannot estimate a deductible expense however unless the taxpayer presents evidence sufficient to provide some basis upon which an estimate may be made see 85_tc_731 petitioner has not provided sufficient evidence upon which the court may allow a deduction for amounts he says were paid to dolly powell under sec_213 individuals are allowed to deduct the expenses paid for the medical_care of the taxpayer the taxpayer's spouse or a dependent to the extent the expenses exceed percent of adjusted_gross_income and are not_compensated_for_by_insurance_or_otherwise the court has determined that under sec_152 petitioner's children do not qualify as his dependents during the year and he therefore is not entitled to deduct the cost of insurance for his children that he paid for the year deduction for home_office expense petitioner testified at trial that he used his dining room as an office and his garage as a storage_facility for items he used in his trade_or_business petitioner submitted to appeals a form_1040 for showing a tax_liability that did not reflect an amount for a home_office deduction on the attached schedule c line expenses for business use of your home attach form no amount was listed petitioner did however attach to the form_1040 a form_8829 expenses for business use of your home showing expenses of dollar_figure the form indicates that petitioner claim sec_52 percent of the area of his home was used for business sec_162 generally allows a deduction for ordinary and necessary expenses_incurred in carrying_on_a_trade_or_business under sec_280a however business_expenses relating to use of any portion of a taxpayer's home are not allowable unless the taxpayer establishes that the portion of the taxpayer's home to which the expenses relate was used exclusively and on a regular basis as the principal place of the taxpayer's trade_or_business 94_tc_348 the flush language following sec_280a provides that the term principal_place_of_business includes a place used by the taxpayer for the administrative or management activities of a trade_or_business occasional use however of a portion of a taxpayer's home for business purposes will not satisfy the requirements of sec_280a lafavor v commissioner tcmemo_1998_366 anderson v commissioner tcmemo_1982_576 petitioner testified that his dining room office contained a file cabinet construction magazines a television for watching the learning and discovery channels a computer and a desk petitioner further testified that he was a subcontractor for stone property management during the entire year and had no other sources of income when asked for what purpose the office was used he said it was for writing bills writing proposals and investigating new techniques upon further questioning he stated that there were no proposals written for the year and that the office was used mainly for writing bills and for personal e- mail to send bills rather than to mail them petitioner also testified that he used his garage as a storage_facility for his business items he presented pictures of the interior and exterior of his garage the pictures of the interior show a mixture of items that could be used for petitioner's trade_or_business or for personal purposes the court finds by a preponderance_of_the_evidence that petitioner used his dining room and his garage only occasionally and not exclusively or on a regular basis as the principal_place_of_business for his trade_or_business deductions for business transportation_expenses and computer expenses where a taxpayer has established that he has incurred a trade_or_business expense failure to prove the exact amount of the otherwise deductible item may not be fatal generally unless precluded by sec_274 the court may estimate the amount of such an expense and allow the deduction to that extent see 255_f2d_128 10th cir affg 27_tc_413 cohan v commissioner supra certain business deductions described in sec_274 however are subject_to rules of substantiation that supersede the doctrine in cohan see sec_1_274-5t temporary income_tax regs fed reg date sec_274 provides that no deduction shall be allowed with respect to the use of any listed_property as defined in sec_280f unless the taxpayer substantiates certain elements listed_property includes any property used as a means of transportation and any computer_or_peripheral_equipment sec_280f iv for an expense described in the above category the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer's own testimony the amount of the expenditure or use on the basis of the appropriate measure mileage may be used in the case of automobiles the time and place of the expenditure or use and the business_purpose of the expenditure or use to meet the adequate_records requirements of sec_274 a taxpayer must maintain some form of records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use see sec_1_274-5t temporary income_tax regs supra a contemporaneous log is not required but corroborative evidence to support a taxpayer's reconstruction of the elements of expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1 5t c temporary income_tax regs fed reg date petitioner testified that his remodeling work required him to spend a lot more time driving around getting specific items for a specific job specialty items petitioner also testified that his method of recording his business miles was to write down the mileage for his truck at the beginning of the year and to note the mileage at the end of the year petitioner testified that he bought a computer in that he used for both business and personal purposes in petitioner claims that he is entitled to deduct the part of the cost of the computer that he paid in as a business_expense the court finds that petitioner has failed to meet the adequate_records requirements of sec_274 with respect to his truck and his computer deduction of expenses for work clothing petitioner claims that he is entitled to a deduction for work clothing including winter boots pants underwear and a liner expenses for work clothing may be deductible under sec_162 if the taxpayer can establish that the clothing was required or essential in the taxpayer's employment the clothing was not suitable for general or personal wear and the clothing was not so worn 30_tc_757 kozera v commissioner tcmemo_1986_604 the clothing expenses petitioner incurred were for clothes of a type which can be worn outside of work the articles of clothing seem especially suited for ordinary wear in the state of new hampshire a deduction may not be claimed for the expenses because they are nondeductible personal expenses rather than business_expenses even if the clothing was in fact used exclusively for work sec_262 85_tc_462 the general_rule concerning the deductibility of work_clothes under sec_162 is that they must be of a type specifically required as a condition_of_employment and not adaptable to general usage as ordinary clothing affd without published opinion 807_f2d_177 9th cir petitioner's clothing was suitable for general or personal wear petitioner is not entitled to any deductions in excess of those agreed to by respondent addition_to_tax and penalty addition_to_tax for failure to timely file sec_6651 provides for an addition_to_tax of percent of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed percent the addition_to_tax for failure_to_file a timely return will be imposed if a return is not timely filed unless the taxpayer shows that the delay was due to reasonable_cause and not willful neglect see sec_6651 the commissioner has the burden of production in any court_proceeding with respect to the liability of any individual for any addition_to_tax sec_7491 it is clear from the record here that petitioner did not file a timely tax_return his explanation for his failure_to_file timely was that he filed a zero return because i was led astray and learned that i was doing the wrong thing it just took some time the court holds that petitioner's return for the year was not timely filed and that petitioner has not shown that the delay was due to reasonable_cause and not willful neglect accuracy-related_penalty under sec_6662 the commissioner has the burden of production in any court_proceeding with respect to the liability of any individual for any penalty under sec_6662 sec_7491 116_tc_438 to meet this burden the commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the penalty higbee v commissioner supra pincite once the commissioner meets his burden of production the taxpayer must come forward with evidence sufficient to persuade the court that the commissioner's determination is incorrect id the taxpayer also bears the burden_of_proof with regard to issues of reasonable_cause substantial_authority or similar provisions id pincite sec_6662 imposes a penalty of percent of the portion of the underpayment which is attributable to inter alia negligence or disregard of rules or regulations sec_6662 negligence is the 'lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances ' 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir the term disregard includes any careless reckless or intentional disregard sec_6662 no penalty shall be imposed if it is shown that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith with respect to the underpayment sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs see 296_f3d_607 7th cir affg tcmemo_2000_20 respondent has satisfied his burden of production under sec_7491 by establishing that petitioner received the income items that he failed to report petitioner does not dispute receiving the payments and offered no reasonable_cause for his failure to report the items the court holds that petitioner is liable for the accuracy- related penalty under sec_6662 reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


t c summary opinion united_states tax_court bryan d watson jr and abigail s pfisterer petitioners v commissioner of internal revenue respondent docket no 19299-04s filed date bryan b watson jr and abigail s pfisterer pro sese stephen p baker for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority subsequent section references are to the applicable version of the internal_revenue_code petitioners petitioned the court to redetermine a dollar_figure deficiency in their federal_income_tax following petitioners’ concessions we are left to decide whether their gross_income includes dollar_figure of prejudgment_interest received in a personal injury lawsuit we hold it does background some facts were stipulated we incorporate herein by this reference the parties’ stipulation of facts and the exhibits submitted therewith we find the stipulated facts accordingly petitioners resided in alaska when their petition was filed bryan d watson jr watson was one of three plaintiffs who filed lawsuits in alaska superior court alleging damages from a single accident that occurred in watson alleged in his lawsuit that the defendants had caused him to suffer bodily injury on account of the accident watson and the other two plaintiffs settled the lawsuits for dollar_figure that amount reflected the policy limits of the defendants’ insurance_policy inclusive of its face value dollar_figure attorney’s fees dollar_figure and statutorily required prejudgment_interest dollar_figure the dollar_figure was reduced to dollar_figure to reflect subrogation liens and then split equally among the plaintiffs ie dollar_figure each watson received his dollar_figure in and did not include any of that amount in hi sec_2002 gross_income as reported on petitioners’ joint federal_income_tax return respondent determined that petitioners’ gross_income included the portion of the dollar_figure that was paid as prejudgment_interest ie dollar_figure discussion petitioners argue that the dollar_figure is excudable from their gross_income under sec_104 we disagree a taxpayer’s receipt of prejudgment_interest is not excludable from his or her gross_income under sec_104 see 401_f3d_335 5th cir 154_f3d_1 1st cir affg tcmemo_1997_528 73_f3d_1040 10th cir 105_tc_396 affd 121_f3d_393 8th cir 102_tc_116 affd in part and revd in part on an issue not relevant herein 70_f3d_34 5th cir 100_tc_124 affd per curiam without published opinion 25_f3d_1048 6th cir such is so even if state law characterizes the interest as compensatory see chamberlain v united_states supra see also quantum co trust v commissioner tcmemo_2000_149 prejudgment_interest awarded under alaska law we sustain respondent’s determination decision will be entered for respondent


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 47632s if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number uil legend b individual c individual d individual l date m state n business o product p city r city s homes dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do you meet the operational_test for exemption under sec_501 of the internal_revenue_code facts you were incorporated on l in the state of m exclusively for charitable scientific or letter cg catalog number 47630w educational_purposes and in part to assist in the development testing creation and promotion of s specifically designed to remove sewers and septic systems reduce water intake costs promote smart energy thereby reducing costs and promoting homes that exceed leeds agencies standards promote building of smart homes in areas where they are currently deemed unbuildable promote fundraising to enable new products and services to be incorporated into future builds for beta testing to ensure public safety and to promote the implementation of such builds across the nation in an effort to support our builders to aid support and assist rehabilitations of homes with the intent of rebuilding communities stricken by economic or other factors for the purpose of contributing to section housing or other alternative affordable housing for families your articles of incorporation and bylaws state that you have capital stock your directors are elected by your stockholders and distributions may be made upon the capital stock you have indicated that you may issue stock in the future you anticipate support from grants including grants from governmental units and private contributions however you were not responsive to our requests when asked to provide complete projections of your revenues and expenditures your primary program will consist of performing beta testing on green that is environmentally benign residential housing products you have defined beta testing as field testing of a product for the purpose of working out the defects in it so as to make it ready for market beta-testing involves incorporating the green product in buildings which are actually occupied the product is used by the residents on a day to day basis problems with the product are observed and reported by you to the manufacturer the manufacturer's fix is implemented at the beta-testing site and you assess its efficacy one aspect of the testing program is designed to help the product meet state requirements for certification as posing no safety hazard a major hurdle to getting some products to market the purpose of beta testing is to shorten the time it takes for an environmentally benign product designed for use in residential building projects to reach the market the first product to be tested is the o a kind of dry toilet that dispenses with the need for sewer systems and disposal o is only the first of the environmentally friendly building products that you expect to test beta testing of o will have to be carried out in each state where the product is to be marketed to meet that state’s specific regulatory requirements this will be the case whenever you do beta-testing of a new product there is no relationship between your officers and directors and the manufacturer of o or its owners the costs of the testing are not to be defrayed by the manufacturer or any commercial entity which would benefit if the product reached the market the program of beta testing will be supported by grants and contributions your principal expenses will be in order of importance management fees purchase of the product to be tested and training in its installation and servicing you are the successor to a c-corporation n prior to your incorporation b incorporated n in mas a for profit to build and sell green homes your directors b and d were also directors and officers of n n’s green development projects never got beyond the planning stage and n was dissolved shortly before you were incorporated your application narrative and your website contain various statements that you too would engage in building rehabbing or resale of housing incorporating the products you have tested for example from your about us web page -- we do more than just build homes constructing a home begins with creating a distinctive home design that fits the unique terrain and lifestyle of the community our personal touch method of walking the client through the entire process is what sets us apart from other builders our in-house staff of quality home designers will carefully listen to the client's needs and desires and interpret those concepts into a comprehensive design that is harmonious with the surroundings the client is further treated to a comprehensive evaluation of all financial options to expedite the escrow process reducing any anxiety associated with building their dream home when we present the keys to our clients the relationship does not end there because we expect the most all of the estates come with a full satisfaction guarantee in addition we are a traditional real_estate services multi-state licensed real_estate broker and offer our clients all and we also believe it is just as important to build a solid foundation with our clients communities and cities as it is to construct a solid foundation in every home to master these objectives we have assembled a high caliber team of diverse professionals to not only construct the highest quality home but also exceed the expectations of our clients cities and neighbors when questioned you represented that you will not engage in those activities however the statements on your website indicating that you will develop and sell housing have not been expunged or modified you represented in your response to our first letter that you would train other professionals on the installation and maintenance of green products which you have beta-tested however you subsequently represented that you will not conduct training programs for builders and technicians some of your board members will be trained to install and service the products you have tested but you represent that neither you nor they will engage in the business of installing or servicing the products or training and certifying other builders and technicians to do so your inaugural project the r project will retrofit a house in r with the o system for the beta testing your current president c resides with his spouse b your former director and secretary in this house which is your current address of record you have not paid for the necessary rehabilitation of the house but only the expenses of retrofitting it with qo you explained the choice of the house in terms of its suitability the state of m requires that the system be tested as to its safety to persons undergoing chemotherapy and c as it happens is receiving chemotherapy for cancer the management fees that are your primary expense item will be used to contribute to the mortgage of the home which is owned by c’s uncle law sec_501 of the internal_revenue_code exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for charitable scientific or testing for public safety among other purposes it expressly forbids the inurement of net_earnings to the benefit of a private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization that fails either the organizational_test or the operational_test is not exempt under sec_501 of the code reg c -1 c provide that an organization is operated exclusively for exempt purposes only if it engages primarily in activities which accomplish one or more exempt purposes specified in sec_501 it is not so operated if more than an insubstantial part of its activities do not further those purposes reg c -1 c provides that an organization is not operated exclusively for exempt purposes if its net_earnings inure to the benefit of private individuals reg c -1 d ii states that to be charitable an organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests the private benefit restriction is not limited to benefits provided to insiders rather the restriction applies to benefits provided to any individual whether or not the individual is in a position to control or influence the organization the private benefit restriction operates against all parties who receive a benefit not accorded the public as a whole reg c -1 d defines the term testing for public safety as used in sec_501 as including the testing of consumer products such as electrical products to determine whether they are safe for use by the general_public reg c -1 d i provides that a scientific_organization as with other organizations described in sec_501 must be organized and operated in the public interest this means that organizations that primarily pursue business purposes or that serve substantial private interests are not entitled to exemption under sec_501 hence scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations such as the inspection of products or the designing of equipment reg c -1 d ii revrul_65_61 1965_1_cb_231 held that an organization engaged in establishing safety standards for pleasure boats and testing boats and boating equipment for safety is exempt under sec_501 the organization was incorporated for the purpose of testing for public safety in the field of pleasure boating its charter provides that it shall accept for inspection testing and safety evaluation products intended for use on in or in connection with small boats primarily pleasure boats including hulls and entire boats and shall report and circulate the results of such inspection tests and evaluations to the public and other interested parties by attaching labels or certificates to such products or by other appropriate means the organization's facilities are available for safety testing to all manufacturers of products and accessories used on pleasure craft who wish to have their products evaluated under the organization's standards clinical_testing of drugs for pharmaceutical companies is not is not testing for public safety the organization described in revrul_68_373 1968_2_cb_206 tests drugs before marketing to enable the companies to comply with food and drug administration rules until a drug is approved for marketing by the food and drug administration it is not a ‘consumer product ' available for general use by the public the clinical_testing of a drug for safety and efficacy in order to enable the manufacturer to meet fda requirements for marketing is not ‘testing for public safety’ but is merely a service performed for the manufacturer such testing principally serves the private interest of the manufacturer rather than the public interest furthermore the clinical_testing is an activity ordinarily carried on as an incident to a pharmaceutical company's commercial operations therefore such testing does not constitute scientific research within the meaning of sec_1_501_c_3_-1 of the regulations revrul_78_426 1978_2_cb_175 relates to an organization whose activities include the inspection testing and safety certification of cargo shipping containers the usefulness of containers to manufacturers and shippers in international trade is greatly diminished without the safety certification of this organization as in revrul_68_373 the testing and certification serve the private interests of container and other manufacturers and shippers by facilitating their operations in international commerce and only incidentally serve the public interest in addition the safety and efficiency of shipping containers are closely allied to successful commercial operations since manufacturers and shippers must protect themselves against losses due to spoilage leakage delays in transit and employee injuries the revenue_ruling also noted that the organization is not organized and operated for the purpose of testing for public safety as the products tested are not consumer products utilized by the general_public an organization is not operated exclusively for charitable purposes and thus will not qualify for exemption under sec_501 if it has a single non-charitable purpose that is substantial in nature this is true regardless of the number or importance of the organization's charitable purposes see 326_us_279 which held activities that were in part aimed at promoting the prosperity and standing of the business community were held to serve a substantial non-exempt purpose in the church of the living tree v commissioner t c memo the tax_court upheld the service’s determination that the organization whose secondary purpose was promotion of the hand papermaking industry was not described in sec_501 the organization also provided rent-free facilities to the founder although the founder received no compensation_for his work with the organization the service had determined that promotion of the papermaking industry was a substantial non-exempt purpose and that the organization provided private benefit to the founder the court ruled that the organization had not carried its burden_of_proof to show the service's determination was erroneous application of law your articles of incorporation and bylaws authorize you to issue capital stock and to make distributions to stockholders as a result your net_earnings are set to inure to private individuals the holding of stock by any private individual that entitles that individual to any part of your assets or income constitutes inurement prohibited under sec_501 because your organizing documents are structured in this manner you do not meet the organizational_test also because you are operating for commercial purposes and in furtherance of private rather then public purposes you do not meet the operational_test sec_1 c -1 a and therefore do not qualify for exemption under c you are similar to the organizations described in revenue rulings and your beta-testing of products is testing of a kind incidental to commercial operations it confers a direct benefit on the businesses that manufacture the products by helping them to bring the products to market more quickly and inexpensively any benefit to the public from this activity is indirect in addition by charging the businesses nothing for your services you are in effect providing them with a subsidy because the testing is of a kind that is normally incident to commercial operations you are not operated exclusively in the public interest and consequently are not operated exclusively for scientific purposes regs c -1 d i and ii you do not therefore meet the requirements of reg c -1 d ii because you serve private interests namely the business interests of the manufacturers of the products more than incidentally you also serve the private interests of the businesses that will install and service these products in revrul_78_426 the benefit from the organization’s testing and certification program to the shippers who used the containers was no less an issue than the benefit to the manufacturers your stated purposes in making selected products market ready is to provide a stimulus to the residential construction industry you do not meet the requirements of reg c -1 c because more than an insubstantial amount of your activities are furthering non-exempt purposes your operations benefit private parties namely private businesses that manufacture install and service the green products you test you have acknowledged one of your goals in making selected products market ready is to provide a stimulus to business start-ups such as o and to the residential construction industry you are similar to the organization in better business bureau of washington d c inc v united_states in that you have a substantial purpose to help businesses to become successful and prosperous an activity which is not in furtherance of any exempt_purpose within the meaning of sec_501 you do not meet the requirements of reg c -1 d you are not organized and operated exclusively to test products for public safety or to test consumer products to determine whether they are safe for use by the general_public while you test products that at a later time may be sold to consumers the testing is more in the nature of a field trial than a series of standard tests made in a laboratory setting and is for the purpose of completing their development and satisfying the regulatory requirements in each of the states where they have been tested as necessary preconditions to unrestricted commercial distribution in those venues the testing you do is therefore not exclusively with respect to the safety of the product moreover like the organization described in revrul_68_373 until your course of beta-testing is completed a product may be available for distribution but is nota ‘consumer product ’ available for general use by the public thus you are distinguished from the organization described in revrul_65_61 which established safety standards for pleasure boats and tested boats and boating equipment for safety that organization evaluated all pleasure boat related consumer products submitted to it by the public solely in regard to its safety you on the other hand conduct beta-testing only on products that you have selected as meriting your services and the testing you conduct is not exclusively with regard to the products’ safety for consumer use in accordance with sec_1_501_c_3_-1 of the regulations you are not operated exclusively for exempt purposes because your net_earnings inure to the benefit of private individuals you are paying the mortgage of the house selected as the site of the beta-test owned by c’s uncle and used as their primary residence by b and c the provision of living facilities rent-free to an officer was held to constitute inurement in the church of the living tree v commissioner above your position your activities promote conservation and protection of natural_resources as they promote practices that lessen the adverse impact of residential construction on the natural environment you seek to bring ecologically beneficial products to the end user quicker and at lower prices by helping their manufacturers make them market ready the o product would be especially valuable on p where it was originally to have been tested because of the island’s water issues and would also help conserve water in arid parts of the country service response to your position while it is generally recognized that efforts to preserve and protect the natural environment for the benefit of the public constitute a charitable purpose any benefit to the public from your program would be indirect the direct and primary beneficiaries would be the businesses which would be in a position to manufacture market install and maintain the green products for this reason even though portions of your activities may be serving conservation purposes you are more then insubstantially serving private interests the existence of one non-charitable purpose that is substantial in nature is cause for denial of exemption furthermore an organization will not qualify for exemption if it is operated for a mixture of exempt and non-exempt purposes conclusion you do not qualify for exemption under sec_501 of the code because you serve private rather than public interests more than an insubstantial part of your activities are in furtherance of non-exempt purposes and your net_earnings inure to the benefit of private individuals you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal’ item must be accompanied by the following declaration the statement of facts under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter if sincerely lois lerner director exempt_organizations enclosure publication


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc ita b5 tl-n-398-01 uilc internal_revenue_service national_office field_service_advice memorandum for william a mccarthy lmsb attorney seattle cc lm ctm sea from j charles strickland senior technician reviewer cc ita b5 subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer x y year year period location amount amount tl-n-398-01 amount amount amount issues the issue presented is whether taxpayer’s contract for soil remediation is a long- term contract subject_to sec_460 so that taxpayer is required to use the percentage_of_completion_method pcm to report its income from the contract conclusions because the contract requires the manufacture of an item that is unique and that normally requires more than months to produce the contract is subject_to code sec_460 however costs and income attributable to the performance of soil remediation services must be segregated from other contract costs and income and accounted for under a proper nonlong-term contract method facts in year taxpayer a member of x’s affiliated_group entered into an agreement with y to erect a soil remediation facility at location and to treat contaminated soil there the total_contract_price was approximately amount of that amount approximately amount was allocated by taxpayer to the design manufacture and installation of the facility and approximately amount was allocated to operation of the facility including its demobilization salvage the time required to design manufacture and install the facility was approximately period taxpayer received progress payments while performing the contract for federal_income_tax purposes taxpayer apparently reported contract income as it was received contract costs were capitalized and recovered as contaminated soil was treated 1taxpayer made the foregoing allocation in an estimation of contract costs the total_contract_price was subsequently reduced to approximately amount because of an early termination of the contract in year also in that year taxpayer disposed of the facility at auction for amount tl-n-398-01 law and analysis code sec_460 defines a long-term_contract as any contract for the manufacture building installation or construction_of_property if such contract is not completed within the taxable_year in which such contract is entered into in the case of a manufacturing contract however long-term_contract treatment does not apply unless such contract involves the manufacture of any unique item of a type which is not normally included in the finished goods inventory of the taxpayer or any item which normally requires more than calendar months to complete without regard to the period of the contract sec_460 construction_contract as the statute indicates both construction contracts and manufacturing contracts can be long-term_contracts we do not view the contract as a construction_contract it was entered into prior to the effective date of the recently-promulgated regulations interpreting code sec_460 thus former sec_1 of the income_tax regulations provides the relevant guidance in pertinent part the regulation defines a construction_contract as follows t he term construction_contract means any contract for the building construction or erection of or the installation of any integral component to improvements to real_property for purposes of the preceding sentence construction includes reconstruction and rehabilitation an improvement to real_property includes buildings or other structures intended to be permanently affixed to real_property roadways dams or bridges but does not include such items as vessels or offshore drilling platforms sec_1 b ii emphasis supplied one possibility is that the contract is a construction_contract because it requires the erection of the soil remediation facility but the regulation requires an improvement to real_property and defines an improvement as a structure intended to be permanently affixed to real_property the facility is not intended to be permanent rather it is a machine that is disassembled when the soil remediation is completed another possibility is that the soil remediation itself is construction but as stated the regulation requires a structure although some land treatment such as grading that is preliminary to erecting structures would be considered construction activity there is no suggestion here that the soil remediation is preliminary to construction of some permanent structure manufacturing contract tl-n-398-01 we do however view the contract as a manufacturing contract subject_to code sec_460 the facts indicate a fairly lengthy and expensive process for design of the soil remediation facility these facts support characterizing the facility as unique the facts also support characterizing the facility as an item normally requiring more than calendar months to complete taxpayer contends that the contract is not a manufacturing contract because the facility will not be delivered to the customer but the facts indicate that the facility is being constructed for this one customer and that following performance of the contract the facility has only a relatively small salvage_value notice_89_15 q a4 1989_1_cb_634 indicates that whether a contract is a manufacturing contract depends on whether the taxpayer must manufacture an item in order to fulfill its contract obligations here that is clearly the case however not all contract costs and income should be accounted for under pcm while the contract fairly can be characterized as a manufacturing contract the fact remains that it also requires soil remediation services the former regulation provides as follows the percentage_of_completion_method and the completed_contract_method apply only to the accounting for income and expenses attributable to long-term_contracts the term expenses attributable to long term contracts means all direct_labor_costs and direct_material_costs within the meaning of paragraph d i or i of this section and all indirect_costs except those described in paragraph d iii or in the case of extended period long-term_contracts paragraph d iii other income and expense items such as investment_income expenses not attributable to such contracts and costs incurred with respect to any guarantee warranty maintenance or other service agreement relating to the subject matter of such contracts shall be accounted for under a proper method_of_accounting see sec_446 and sec_1_446-1 sec_1 a emphasis supplied taxpayer’s soil remediation services do not contribute towards the completion of the facility in fact they occur after the facility has become operational under the circumstances an allocation of costs and income should be made so that only those items attributable to the manufacturing activity are accounted for under pcm case development hazards and other considerations tl-n-398-01 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by associate chief_counsel income_tax accounting j charles strickland senior technician reviewer cc ita b5