peter l ax and beverly b ax petitioners v commissioner of internal revenue respondent docket no filed date p-h’s llc faced various risks p-h formed sms as a cap- tive insurance_company and in and llc paid sms premiums for coverage of the risks by sms llc deducted the premiums and the deductions were passed through to ps’ tax returns after audit the irs disallowed the deductions and stated in the notice_of_deficiency nod you did not establish that the amount shown was a insurance expense and b paid ps filed a petition in the tax_court disputing the nod and r filed an answer that did not make any affirmative allegations as to the disallowed insurance expense deductions after the case was stricken from a trial calendar and continued generally r moved for leave to amend his answer to assert that a petitioners’ use through solely controlled flow-through entities of a micro-captive insurance arrangement in and lacked economic_substance and b amounts paid as premiums through the micro-captive arrangement were neither ordinary nor necessary and to allege facts in support of those assertions ps oppose the motion for leave citing 562_us_44 and arguing that the administrative_procedure_act and 318_us_80 bar respondent from raising new grounds to support his final united_states tax_court reports agency action beyond those grounds originally stated in the notice of final agency action held chenery may restrict a reviewing court from relying on reasons not considered by an agency in its determinations but only as to matters that con- gress has exclusively entrusted to the administrative agency whereas congress has expressly authorized the tax_court to redetermine tax_liabilities in a deficiency case the enactment of the apa did not disturb the regime for deficiency litigation that congress had previously enacted therefore in a defi- ciency case r may plead grounds not in the nod this allow- ance is not at odds with the uniform approach to judicial review of administrative action that is called for in mayo foundation held further where no trial date has been set and ample time remains for discovery no prejudice results to p from r’s being allowed to add to his answer new_matter in this instance lack of economic_substance held further the answer does not otherwise assert new_matter under rule a david d aughtry and patrick j mccann for petitioners randall g durfee for respondent opinion gustafson judge pursuant to sec_6212 sec_1 the internal_revenue_service irs determined deficiencies in tax and penalties under sec_6662 for petitioners peter l and beverly b ax for and the principal adjustment giving rise to these deficiencies was the irs’s dis- allowance of deductions claimed for insurance expenses mr and mrs ax petitioned this court pursuant to sec_6213 for redetermination of these deficiencies and pen- alties now before us is a motion filed by respondent the commissioner of the irs for leave to file an amendment to his answer in order to affirmatively allege facts in support of two new issues petitioners object to the motion and their principal contentions are that administrative law unless otherwise indicated all section references are to the internal_revenue_code u s c the code as amended and in effect for the years in issue and all rule references are to the tax_court rules of prac- tice and procedure like the commissioner we use the phrase new issues to describe the contentions in the proffered amendment to the answer without indicating thereby whether those new issues constitute new_matter for purposes of rule a we address new_matter in part iii of the discussion below ax v commissioner bars the raising of both these new issues that the raising of the new issues unfairly prejudices petitioners and that one of the new issues is inadequately pleaded we will over- rule petitioners’ objections and will grant the commissioner’s motion for leave to file an amendment to his answer background petitioners’ insurance premium deductions for purposes of respondent’s motion for leave we take the background of this case to be as alleged by petitioners as fol- lows peter owns phoenix capital management llc phoenix which bought kwikmed in since that time kwikmed has devoted substantial resources to developing a comprehensive online access tool to sell a limited class of legend drugs over the internet given the economic threat its innovative business model poses to the deeply-entrenched brick-and-mortar drug store industry peter and his company face the constant threat of litigation and administrative actions in various states unable to procure commercial coverage for much of that risk peter formed sms insurance_company ltd sms to provide some of the needed coverage under sec_831 during and phoenix obtained insurance from sms across a broad range of risks including administrative action computer oper- ations and data reputational damage business income expense and commercial terrorism insurance policies covering phoenix’ internet busi- ness for that coverage phoenix paid dollar_figure in insurance premiums in and dollar_figure for phoenix deducted those premiums and passed the tax consequences through to the joint individual income_tax returns which peter and beverly filed the irs audited those returns and issued a notice_of_deficiency disallowing these deductions the irs’s notice_of_deficiency the irs issued its notice_of_deficiency nod on sep- tember the notice explained the disallowance of phoenix’s insurance deductions by stating we adjusted your return in accordance with the examination results of the s_corporation return phoenix’s form_1120s of which you are a shareholder see the attached forms 4505-a sic for medit marketing inc and phoenix capital management llc the attached form_4605 examination changes-partner- ships fiduciaries small_business corporations and domestic international sales corporations for phoenix united_states tax_court reports reflected the disallowance of insurance expenses of dollar_figure for and dollar_figure for an attached form 886a explanation of items for phoenix further explained since you did not establish that the amount shown was a insurance expense and b paid the amount is not deductible in addition to these phoenix insurance expenses which peti- tioners explicitly address in their opposition the nod also disallowed a deduction of a smaller amount-dollar_figure- for insurance expenses claimed by medit marketing inc medit another entity owned by petitioners the expenses of which flowed through to their return the medit disallow- ance is explained thus on form 886a since you did not establish that a part of the insurance expense claimed on your tax_return was ordinary and necessary to your business we have disallowed the aggregate amount shown further it is determined that the amounts disallowed were not paid to an insurance_company and that they were not paid for insurance tax_court proceedings on date petitioners timely filed their petition in this court echoing the above-quoted language in the form 886a attached to the nod the petition alleges in paragraph h and i that in issuing the nod the commissioner erred as to each of the two years in issue by disallowing the phoenix insurance expense deductions and b y asserting that the amount_paid for insur- ance was not somehow an insurance expense and not paid and therefore not deductible the petition alleges in para- graph n that the irs erred with regard to the disallow- ance as to medit for the commissioner filed his answer on date the answer generally denied the allegations in the petition but it did not make any affirmative allegations as to the dis- allowed insurance expense deductions petitioners’ counsel provided respondent’s counsel with substantial information about the case in may and date on date the commissioner filed a motion for leave to file an amendment to his answer specifically the commissioner moves- ax v commissioner pursuant to tax_court rule a for leave to file an amendment to answer to affirmatively allege facts in support of new issues specifi- cally in the amendment to answer lodged with the court at the same time as the filing of this motion respondent raises the issue of whether petitioners’ use of the micro-captive insurance arrangement lacked eco- nomic substance additionally out of an abundance of caution respondent affirmatively alleges that premiums that funded the micro- captive arrangement were neither ordinary nor necessary expenses even though this issue is implicit in the notice_of_deficiency respondent acknowledges that he will bear the burden_of_proof with respect to the micro-captive arrangement’s lack of economic_substance disallowing the insurance related deductions because such expenses were neither ordinary nor necessary however is implicit in the notice_of_deficiency respondent however makes the related affirmative allega- tions out of an abundance of caution accordingly respondent does not bear the burden of proving that such expenses were ordinary and nec- essary respondent continues to maintain that the micro-captive insurance arrangement does not constitute insurance for federal_income_tax pur- poses see 312_us_531 as stated in the notice_of_deficiency the general allegations that the commissioner asks leave to plead are that- a petitioners’ use through solely controlled flow-through entities of a micro-captive insurance arrangement in and lacked eco- nomic substance and b amounts paid as premiums through the micro-captive arrangement were neither ordinary nor necessary and in support of those general allegations the amendment to the answer include sec_35 paragraphs identified as a through ii that allege among other things that the mar- keting of the micro-insurance arrangement was for the sole purpose of reducing petitioners’ taxable_income that risks purportedly covered included reputational damage damage from a competitor entering the market costs related to tax audits climate change and loss of key customers that some of the risks involved were non-insurable that the payments of terrorism insurance premiums by phoenix to third par- ties and by third parties to sms were reciprocal that the premiums were grossly in excess of the fair_market_value of comparable coverage that t he payment of premiums by phoenix to sms in and had no economic united_states tax_court reports effect other than reducing petitioners’ income_tax_liability and that p etitioners did not intend for premiums_paid to have any economic_effect other than generating income_tax deductions petitioners oppose the commissioner’s motion for leave and they summarize their contentions as follows petitioners object to the granting of leave essentially on three grounds first the administrative_procedure_act apa bars an agency’s attempt to bolster a final agency action on a post hoc basis second respondent’s reply effectively admits he has no cause for the delay in leveling the vague factual allegations which perpetuate the prejudice by failing to provide meaningful notice third both the economic sub- stance and ordinary and necessary grounds would constitute new matters under tax_court rule a which invoke the tax_court rule b heightened pleading standards the amendment fails to meet we now address these three contentions discussion i in a deficiency case under sec_6213 administrative law does not bar the commissioner from asserting grounds not stated in the agency’s notice_of_deficiency petitioners summarize their administrative law contention by stating since the supreme court in 562_us_44 rejected the concept of tax exceptionalism the administrative_procedure_act and 318_us_80 bar respondent from raising new grounds to support his final agency action beyond those grounds originally stated in the notice of final agency action this argument distorts mayo foundation chenery i and the apa petitioners characterize 318_us_80 and 332_us_194 as the foundational apa opinions since chenery i predates the apa we understand this statement to mean that chenery i is part of the adminis- trative law foundation of the apa ax v commissioner a the chenery i principle does not apply to deficiency cases the actual holding in chenery i chenery i which pre-dates the apa does restrict the government’s ability to defend agency action on the basis of grounds not actually cited by the agency but its holding is narrower than petitioners’ argument presumes petitioners accurately quote chenery i when they argue chenery mandates the orderly functioning of the process of review requires that the grounds upon which the administrative agency acted be clearly disclosed and adequately sustained ‘ the administrative process will best be vindicated by clarity in its exercise ’ chenery corp u s pincite quoting 313_us_177 also t he grounds upon which an administrative order must be judged are those upon which the record discloses that its action was based id pincite therefore respondent cannot add post-hoc grounds to support the final agency action in the notice_of_deficiency however petitioners’ therefore does not at all follow because they have erred in selectively extracting statements from chenery i that case does not apply to all agency action that is subject_to judicial review instead the opinion plainly states if an order is valid only as a determination of policy or judgment which the agency alone is authorized to make and which it has not made a judicial judgment cannot be made to do service for an administrative judgment for purposes of affirming no less than reversing its orders an appellate court cannot intrude upon the domain which congress has exclusively entrusted to an administrative agency id pincite emphasis added that is where congress has committed an action solely to agency discretion a reviewing court can only review the decision that the agency made a court cannot perform a pseudo-review of a hypothetical decision that was not made by the agency but that the court might have made if it were the agency chenery i says nothing about circumstances in which congress has authorized a court to make its own see also chenery ii u s pincite a reviewing court in dealing with a determination or judgment which an administrative agency alone is authorized to make must judge the propriety of such action solely by the grounds invoked by the agency emphasis added united_states tax_court reports determinations-which is precisely the circumstance of the tax court’s jurisdiction over deficiency cases as we now show the statutes governing deficiency litigation the irs is authorized to determine a deficiency in a taxpayer’s income_tax and to send the taxpayer notice of that deficiency sec_6212 the taxpayer is then entitled to file a petition with the tax_court for a redetermination of the deficiency sec_6213 emphasis added that is the irs determines and the tax_court does not merely review but redetermin es moreover the scope of a deficiency case may be expanded beyond the notice_of_deficiency in the irs’s favor pursuant to sec_6214 t he tax_court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency_notice of which has been mailed to the taxpayer and to determine whether any additional_amount or any addition to the tax should be assessed if claim therefor is asserted by the secretary at or before the hearing or a rehearing emphasis added by the same token the scope of a deficiency case may also be expanded beyond the notice_of_deficiency in the tax- payer’s favor pursuant to sec_6512 sec_6512 overpayment determined by tax_court - jurisdiction to determine - i f the tax_court finds that there is no deficiency and further finds that the taxpayer has made an overpayment of income_tax for the same taxable_year in respect of which the secretary determined the deficiency or finds that there is a deficiency but that the taxpayer has made an overpay- ment of such tax the tax_court shall have jurisdiction to determine the amount of such overpayment emphasis added thus the statutes plainly provide that tax_court deficiency litigation may extend beyond issues raised in the notice_of_deficiency also at odds with petitioners’ attempted application of chenery i to tax_court review of an nod is sec_7522 the jurisdiction to determine a deficiency greater than in the notice has existed since and jurisdiction to determine overpayments has ex- isted since see 122_tc_32 va- cated 439_f3d_1009 9th cir -ie since long before congress en- acted the apa discussed in part i b below in ax v commissioner that section requires that an nod shall describe the basis for the tax due but the consequence when the basis is not describe d does not bear out petitioners’ position rather a n inadequate description under the preceding sentence shall not invalidate such notice id furthermore sec_7491 entitled burden shifts where taxpayer produces credible_evidence implies that the taxpayer generally has the burden_of_proof and explicitly provides that the burden sometimes shifts -ie that the irs shall have the burden_of_proof in certain cir- cumstances sec_7491 sec_7491 imposes on the irs the burden of production in any court_proceeding with respect to the liability of any individual for any penalty the internal_revenue_code thus reflects congress’s intention that the tax_court will decide deficiency cases not by reviewing the agency’s determinations for abuses of discre- tion but by deciding issues according to the evidence con- sequently the chenery i principle simply has no application to this deficiency case b the apa does not support petitioners’ argument deficiency litigation pre-dated and survived the apa the administrative_procedure_act created norms for judicial review of agency action see u s c secs entitled judicial review but in enacting the apa in congress did not write on an entirely blank slate rather for more than years irs notices of deficiency had been reviewed by this court’s predecessors under the stat- utes from which the current sec_6213 was derived and a significant body of jurisprudence as to deficiency case juris- diction had developed nonetheless petitioners cite the apa to argue as follows the apa separately imposes upon the reviewing court in mandatory terms the obligation to hold unlawful and set_aside any agency action finding s and conclusion s found to be unwarranted by the facts to the extent the facts are subject_to trial de novo by the reviewing court u s c sec_706 here too the petition contends that the findings and conclusions in the notice are unwarranted by the facts the agency action finding and conclusion are disputed-not some post-hoc rationalization thus petitioners acknowledge that deficiency cases are sub- ject to trial de novo see u s c sec_706 but they united_states tax_court reports contend that in that de novo trial the tax_court must address only the agency action findings and conclusions see id ie as reflected in the nod even if they otherwise reasonably construe u s c sec_706 petitioners overlook a more basic apa provision that contradicts their position title u s c sec_703 form and venue of proceeding provides the form of proceeding for judicial review is the special statutory review proceeding relevant to the subject matter in a court specified by statute or in the absence or inadequacy thereof any applicable form of legal action including actions for declaratory judgments or writs of prohibitory or mandatory injunction or habeas corpus in a court of com- petent jurisdiction if no special statutory review proceeding is applicable the action for judicial review may be brought against the united_states the agency by its official title or the appropriate officer except to the extent that prior adequate and exclusive opportunity for judicial review is provided by law agency action is subject_to judicial review in civil or criminal proceedings for judicial enforcement emphasis added a deficiency case is one such special statutory review pro- ceeding and the tax_court is the court specified by statute before the apa prior adequate and exclusive opportunity for judicial review of a notice_of_deficiency was provided in the predecessor statutes to sec_6213 a -ie in sec_272 of the internal_revenue_code_of_1939 as in effect when the apa was enacted in by its terms then u s c sec_704 thus left undisturbed the deficiency case regime described above in part i a see 122_tc_32 thornton j concurring vacated 439_f3d_1009 9th cir when the internal_revenue_code was revised and reenacted in see also u s c sec_704 agency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court are subject_to judicial review sec_6213 is the statute that makes an nod reviewable and there is therefore an adequate remedy for errors in agency action reflected in an nod see also u s c sec_702 nothing herein affects the power or duty_of the court to deny relief on any other appropriate legal or equitable ground thus nothing in the apa affects the power of the tax_court to deny a taxpayer in a deficiency case relief on other appropriate legal ground s including those outside the nod that are raised pursuant to sec_6214 by the commissioner or by sec_6512 by the taxpayer ax v commissioner the deficiency case regime remained ie in sec_6213 the numbering that has remained to the present as the u s supreme court stated in 487_us_879 when congress enacted the apa to provide a general authorization for review of agency action in the district courts it did not intend that general grant of jurisdiction to duplicate the previously established special statutory procedures relating to specific agencies to the same effect the u s court_of_appeals for the fourth cir- cuit had previously held in a deficiency case that the tax_court is not subject_to the administrative_procedure_act o’dwyer v commissi266_f2d_575 4th cir aff ’g 28_tc_698 deficiency litigation has always included new_matter petitioners’ proposal-that a deficiency case be confined to issues in the nod-would be a radical innovation that not only is at odds with the statutes discussed above but that also would change longstanding practice under rule a t he burden_of_proof shall be upon the petitioner except as otherwise provided by statute or determined by the court and except that in respect of any new_matter pleaded in the answer it shall be upon the respondent emphasis added the rules have so provided as to new_matter since soon after deficiency litigation first began to be held in this court’s predecessor the board_of_tax_appeals bta this provision as to the burden_of_proof on new_matter persisted when the bta became the tax_court of the united_states in 9-and it was therefore in effect when congress enacted the apa the new_matter provision per- sisted in after the court was reconstituted as an article i court to be known as the united_states tax_court when see 2_bta_1359 rule the burden_of_proof shall be upon the petitioner except that in respect of any new_matter of fact pleaded in his answer it shall be upon the respondent see 7_tc_1002 rule provides ‘the burden_of_proof shall be upon the petitioner except as otherwise pro- vided by statute and except that in respect of any new_matter pleaded in his answer it shall be upon the respondent ’ see rule a 60_tc_1057 the burden_of_proof shall be upon the petitioner except as otherwise provided by statute or determined by the court and except that in respect of any new_matter pleaded continued united_states tax_court reports congress in addressed tax litigation procedure by enacting sec_7491 entitled burden_of_proof to shift the burden_of_proof in some circumstances the tax_court rules then provided as they had for decades and still do that bur- den of proof on new_matter was on the respondent of course congress has the power to override the tax court’s rules and to provide however radically that new_matter could not be litigated in a deficiency case but the question that petitioners’ argument poses is whether con- gress actually did so in enacting the apa nothing in the statute requires or even suggests that intention c mayo foundation does not support petitioners’ argu- ment as petitioners point out the supreme court did state in mayo foundation u s pincite that- we are not inclined to carve out an approach to administrative review good for tax law only to the contrary we have expressly r ecogniz ed the importance of maintaining a uniform approach to judicial review of administrative action 527_us_150 but the preceding discussion in parts i a and i b shows that in looking beyond the nod in a deficiency case the tax_court does not violate administrative law principles or conventional standards of judicial review mayo foundation says little that is pertinent to the pending motion that case involved a dispute about the def- erence that a court should accord to agency regulations when construing an ambiguous statute and the case resolved a longstanding dispute about whether tax regulations should be given the deference articulated by the supreme court for agency regulations generally in 467_us_837 or should instead be reviewed under the less deferential standard previously employed by the supreme court in its review of tax regula- tions in nat’l muffler dealers ass’n inc v united_states 440_us_472 the court held in mayo foundation u s pincite that t he principles underlying our decision in chevron apply with full force in the tax context so that a in his answer it shall be upon the respondent emphasis added see rule a 109_tc_507 ax v commissioner court should accord chevron_deference to regulations in the tax context just as it would in any other agency context the issue now before us however does not involve any dis- pute about the deference to be accorded to agency regula- tions so mayo foundation has no direct relevance here even if mayo foundation can fairly be cited as a swat at tax exceptionalism a phrase not used in mayo foundation and if mayo foundation is construed not merely as a holding on deference to regulations but also as support for the broader proposition that judicial review of irs action is subject_to general administrative law principles that broader propo- sition is insufficient to achieve here the result that peti- tioners seek the supreme court did not by the language in mayo foundation quoted above impose a single one-size-fits-all paradigm for standard and scope of review for all types of cases involving disputes with agencies rather the distinc- tions explicit in u s c sec_704 between circumstances in which no special statutory review proceeding is applicable and circumstances such as the present deficiency case in which there is a special statutory review proceeding rel- evant to the subject matter in a court specified by statute plainly survive mayo foundation likewise the distinctions explicitly articulated in chenery i between matters com- mitted uniquely to agency discretion and matters that a court may determine itself survive mayo foundation consequently the tax_court when it considers in a defi- ciency case issues and arguments not stated in the irs’s nod is not proceeding at odds with the authorities that petitioners have cited ii petitioners do not show that unfair prejudice would result from the commissioner’s amendment of his answer in the alternative petitioners contend that even if the commissioner is otherwise permitted to plead in an answer contentions that were not in a notice_of_deficiency the commissioner should not be permitted to so plead in this instance in an amendment to the answer because of unfair prejudice that would result united_states tax_court reports a amendment of pleadings and prejudice the commissioner raises his two new issues economic_substance and ordinary and necessary not in his original answer filed date nor by an amendment of right made days thereafter see rule a second sentence but instead by an amendment to answer submitted under a motion for leave to amend that was filed on date about seven months after the original answer amendment of pleadings is addressed in rule a which as relevant here provides a party may amend a pleading only by leave of court and leave shall be given freely when justice so requires it is within our discretion to allow respondent to amend his answer 110_tc_172 but petitioners maintain we should not exercise our discretion to allow the amendment requested here because they say granting the motion would prejudice them central to petitioners’ opposition to the motion for leave to amend is their argument that the two issues in the nod ie whether the amount shown was a insurance expense and b paid are very simple issues in contrast to two very complicated new issues now proposed to be added ie whether the arrangement lacked economic_substance and whether the amounts paid were neither ordinary nor nec- essary petitioners now repeatedly characterize the nod- which disputes only a insurance expense and b paid - as raising only a straightforward expense substantiation dispute on which petitioners could easily prevail with the mere proof of an insurance expense payment such proof they say could be decisively made with available documents the checks invoices and policies substantiate that insur- ance payment in petitioners’ view ‘business purpose’ evi- dence would not be needed or relevant to substan- tiation of an insurance payment the addition of the issues of economic_substance and ordinary and necessary peti- tioners contend would prejudice them b analysis it is true that prejudice to the non-moving party is one of the reasons to disallow an amendment to the movant’s ax v commissioner pleadings but we reject petitioners’ contention of prejudice here for two reasons the relation of the new issues to the existing issues first but less important we are not at all persuaded that the nod is as simple as petitioners assert the question whether an arrangement is insurance can be highly com- plex and the question whether a deduction has been substantiated often depends on much more than proving the existence of a document that purports to impose a liability and proving the fact that money changed hands this is espe- cially true in the case of payments allegedly made to a related_person or entity the quintessence of insurance is the reasons not to allow amendment of a pleading include undue delay bad faith or dilatory motive on the part of the movant repeated failure to cure deficiencies by amendments previously allowed undue prejudice to the opposing party by virtue of allowance of the amendment futility of amendment etc 371_us_178 quoted in es- tate of strangi v commissioner 293_f3d_279 5th cir aff ’g in part rev’g in part 115_tc_478 see also 110_tc_172 petitioners do complain of the com- missioner’s supposed seven-month delay in pleading the new issues in early date but the commissioner shows that petitioners’ provi- sion of information about their contentions in may and date was a reasonable occasion for the commissioner in date to clarify his contentions in the absence of actual prejudice to petitioners the timing of the commissioner’s motion for leave does not reflect culpable delay that would warrant denying his motion as we recently explained in r v i guar co ltd subs v commis- sioner 145_tc_209 the meaning of insurance for federal_income_tax purposes has thus been developed chiefly through a process of common-law adjudica- tion in the seminal case addressing this subject the united_states su- preme court noted that h istorically and commonly insurance involves risk-shifting and risk-distributing 312_us_531 in addition to requiring risk_transfer and risk_distribution the courts have considered whether the transaction constitutes insur- ance in its commonly accepted sense and whether the risk transferred is an insurance risk e g 101_tc_173 aff ’d 73_f3d_799 8th cir these factors estab- lish a framework for determining the existence of insurance for federal tax purposes 96_tc_18 aff ’d 979_f2d_162 9th cir united_states tax_court reports shifting of risk and where an alleged insurance premium is paid to a captive entity owned by the very person who wants the coverage and makes the payment the question naturally arises whether risk has actually been shifted-a question not really answered just by showing an insurance_policy and since a payment to one’s own entity can some- times be the mere moving of money from one pocket to another the question whether a premium has really been paid to a captive insurer is not really answered just by showing a canceled check thus if an nod denies a deduc- tion for premiums_paid to a captive insurer because the irs says you did not establish that the amount shown was a insurance expense and b paid then that notice has raised much more than a straightforward expense substantiation dispute unfair timing second and more important prejudice for this purpose does not mean mere disadvantage see eg bhattacharyya v commissioner tcmemo_2007_19 93_tcm_711 allowing an amendment to the answer that increased the deficiency by a half-million dollars if it did then the commissioner’s interests would be prejudiced by the filing of every petition and a taxpayer’s interests would be prejudiced by the filing of even the original answer since he would have preferred a confession of judgment or a default and an answer that resists the petition would be prejudicial but it is not so the question of prejudice under rule a is not simply whether an amended pleading that includes the proposed new issues would make the case harder or more expensive for the other party than a pleading that lacks those issues rather the question is whether the addition of those new issues by a later amendment rather than by inclusion in the initial pleading works an unfair disadvantage to the other party where an amendment is requested on the eve of trial so that the other party is deprived of fair notice and an opportunity to prepare prejudice may be obvious in such an instance one could not say in the language of rule a that justice requires that leave be granted to amend see r v i guar co ltd subs v commissioner t c pincite ax v commissioner the pleading justice might require the opposite however where instead the non-moving party is given adequate time such as by a continuance of trial to respond to the new pleading there is no prejudice or any prejudice is cured see 83_tc_381 aff ’d 823_f2d_1310 9th cir because no trial date has yet been set petitioners have ample time to prepare to resist the commissioner’s new contentions we see no prejudice to petitioners in this cir- cumstance petitioners do complain about surprise and lack of fair notice but the gist of their argument is not with the timing of the raising of the arguments but with the supposed vagueness of the amended answer-an issue properly addressed in connection with their third contention dis- cussed in part iii below iii the commissioner’s amendment to his answer is ade- quate under rule b the commissioner’s motion for leave proposes an amend- ment to his answer that raises two new issues not in the nod- economic_substance and ordinary and necessary the motion admits at para that the commissioner will bear the burden_of_proof with respect to the micro-captive arrangement’s lack of economic_substance because though the motion does not spell it out he evidently acknowledges that the issue is new_matter under rule a peti- tioners contend however that both new issues are new_matter for which the commissioner bears the burden_of_proof and in a sur-reply opposing the motion petitioners fur- ther contend that under rule b the proposed amended answer is therefore deficient in its pleading of the ordinary and necessary issue rule a provides that in respect of any new_matter pleaded in the answer the burden_of_proof shall be upon the respondent rule b provides that the answer shall contain a clear and concise statement of every ground in fact as we note above the nod did disallow a deduction of dollar_figure claimed by medit by explaining that petitioners did not establish that a part of the insurance expense claimed on your tax_return was ordi- nary and necessary to your business this amounted to less than of the captive insurance premiums disallowed in the nod united_states tax_court reports together with the facts in support thereof on which the commissioner relies and has the burden_of_proof thus if an issue is new_matter under rule a then under rule b the answer must contain the facts in support thereof the nod asserts that petitioners did not establish that the amount shown was a insurance expense and b paid emphasis added the motion for leave would add the asser- tion that a mounts paid as premiums through the micro- captive arrangement were neither ordinary nor necessary the commissioner’s position is that the ordinary and nec- essary issue is implicit in the nod’s insurance issue and that as a consequence it is not new_matter under rule a to which the pleading requirement of rule b applies we agree-and petitioners’ own submissions bear out the commissioner’s contention petitioners state three times within the past two years this court found that insur- ance premiums_paid to a captive_insurance_company constituted ordi- nary and necessary business_expenses see rent-a-center inc v commissioner t c securitas holdings inc v commis- sioner tcmemo_2014_225 date and rvi v commis- sioner t c no date those three cases answered the ordinary and necessary business_expense question by focusing on whether the policies i covered insurable risk ii shifted risk from the insured to the insurer and iii distributed risk among unrelated parties and iv appeared to be insurance within common usage thus petitioners’ description of the ordinary and necessary issue in the captive insurance context overlaps very substan- tially with the description of the insurance issue in r v i guar co ltd subs v commissioner 145_tc_209 ndollar_figure because of petitioners’ truncated view of the nod’s dispute about insurance they fail to see this overlap but when the nod’s assertion that petitioners did not establish that the amount shown was insurance the commissioner’s motion for leave states in para disallowing the insurance related deductions because such expenses were neither ordi- nary nor necessary however is implicit in the notice_of_deficiency re- spondent however makes the related affirmative allegations out of an abundance of caution the third of these three cases-r v i guar co ltd subs v com- missioner t c 209-did not involve a captive_insurance_company ax v commissioner expense is construed with reasonable breadth it is indeed broad enough to encompass the later assertion that the amount was neither ordinary nor necessary consequently the ordinary and necessary issue is not new_matter and is not subject_to the pleading requirement of rule b as to facts in support thereof to reflect the foregoing an appropriate order will be issued f see 644_f2d_1385 9th cir i f a deficiency_notice is broadly worded and the commissioner later advances a theory not inconsistent with that language the theory does not con- stitute new_matter and the burden_of_proof remains with the taxpayer rev’g tcmemo_1978_392 by holding that the ordinary and necessary issue is not subject_to the pleading requirement of rule b we do not by any means foreclose petitioners from using discovery informal and formal to learn the details of the commissioner’s contentions and the facts known to him that are rel- evant to those contentions


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 b02 plr-148730-12 date date legend x lp state -------------------------- ------ ----------------- ------------------------- ------------------------ -------------- dear --------------------- this letter responds to a letter dated date submitted on behalf of x requesting a ruling under sec_7704 of the internal_revenue_code x is a corporation organized under the laws of state x intends to form a publicly-traded partnership by organizing lp under the laws of state the interests in lp will be listed and traded on a nationally recognized exchange lp through subsidiaries and disregarded entities intends to build a facility that will process natural_gas into dimethyl ether dme dme is a premium diesel_fuel with a cetane number of or higher which is used as fuel for compression ignition diesel engines dme will be marketed by lp as fuel for use in diesel engines dme is produced using a three step integrated process first the natural_gas enters a steam methane reformer where under high heat the natural_gas is combined with steam to produce synthesis gas second the synthesis gas is converted into methanol in the presence of a catalyst third and finally the methanol is converted into dme in a reactive distillation column through methanol dehydration in the presence of a second plr-148730-12 catalyst lp will then sell the dme to third-party distributors who then further distribute the dme to end-user customers x on behalf of lp requests a ruling that income derived from processing natural_gas into dme and income from marketing dme will constitute qualifying_income under sec_7704 sec_7704 provides generally that a publicly_traded_partnership shall be treated as a corporation section sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in the partnership are traded on an established_securities_market or interests in the partnership are readily_tradable on a secondary market or substantial equivalent thereof sec_7704 exempts from treatment as a corporation any publicly_traded_partnership for any_tax year if the partnership meets the gross_income requirements of sec_7704 for that year and each preceding tax_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that a partnership meets the gross_income requirements of sec_7704 for any_tax year if or more of the partnership's gross_income for that year consists of qualifying_income sec_7704 defines qualifying_income to include income and gains derived from the exploration development mining or production processing refining transportation or marketing of any mineral_or_natural_resource based solely on the facts submitted and the representations made we conclude that the income derived by lp from processing natural_gas into dme and marketing the dme will constitute qualifying_income under sec_7704 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion as to whether lp is taxable as a partnership for federal tax purposes this ruling is directed only to the taxpayer requesting it however in the event of a technical_termination of lp under sec_708 the resulting_partnership may continue to rely on this ruling in determining its qualifying_income under sec_7704 plr-148730-12 according to sec_6110 this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index nos number release date cc dom it a b9 plr-117996-99 attention ein date dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however the form was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer's late filed form_1128 requesting permission to change to a tax_year ending effective for the short_period of to is considered timely filed the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending a copies of this letter_ruling to the taxpayer's authorized representatives this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s richard l carlisle by richard l carlisle acting deputy assistant chief_counsel enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil dear contact person identification_number contact number employer_identification_number form required to be filed tax years 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 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 our deletions you do not need to take any further action if you agree with 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 about your federal_income_tax status and responsibilities please contact irs customer service at if you have any questions letter cg catalog number or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 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 vil legend city b c state m date n area z number 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 qualify for exemption under sec_501 of the code no for the reasons stated below facts you incorporated in c on m to provide on a non-profit basis such community and other facilities or benefits as may be necessary for the welfare and usefulness of your members your bylaws state membership is restricted to those who own property in the b subdivision and are current on your annual assessment fee your purposes are outlined as promoting and maintaining the facilities of b for property owners currently you have letter cg catalog number 47628k z property owners in your subdivision your activities include promoting and maintaining such community facilities as may be necessary for the general welfare and usefulness of the property owners in b you will promote and protect the interest of the property owners in b enforce property restrictions collect assessments maintain roads right-of-ways drains maintain parks and easements you hold title to five pieces of property within b all parks two of which are currently developed and in use three of which you have indicated you will be creating or maintaining in the future you had been maintaining the roads within b but recently had those dedicated to the care of the county roads within b are open to non-residents while the parks are not restricted in terms of access parks are posted with signs prohibiting use to anyone not an owner of property in b parks are for_the_use_of property owners in the subdivision and are posted as such parks are located at the edges of a lake n within b and offer residents shelters access ramps and docks as well as recreation equipment you refer to yourself in your newsletter as an active lake community you also state that you work cooperatively for the benefit and health and general welfare of the property owners of b and in no way for the profit of an individual owner you carry on any business to promote your interests or enhance the value of the property in b to have and exercise all powers conferred by c for welfare organizations in addition to the regular maintenance provided you offer occasional work parties and picnics and provide property owners with a guide to businesses and services located along n your income comes primarily from property owners’ assessment fees your budgets include expenses for maintenance and improvements to the parks mowing expenses attorney fees and other miscellaneous expenses at least of your budget is used directly for the maintenance of parks law sec_501 of the code provides that civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes and no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual may be exempt from federal_income_tax sec_1_501_c_4_-1 provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way letter cg catalog number 47628k the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements and is not an action_organization as set forth in paragraph c of regulation c -1 revrul_74_99 1974_1_cb_131 held that a homeowners_association to qualify for exemption under sec_501 of the code must serve a community which bears a reasonable recognizable relationship to an area ordinarily identified as governmental it must not conduct activities directed to the exterior maintenance of private residences and the common areas or facilities it owns and maintains must be for the use and enjoyment of the general_public association of such areas as roadways and parklands sidewalks and streetlights access to or the enjoyment of which is extended to members of the general_public as distinguished from controlled use or access restricted to the members of the homeowners_association 868_f2d_108 the court held that a homeowners_association did not qualify for exemption under sec_501 of the code when it did not benefit a community bearing a recognizable relationship to a governmental_unit and when its common areas or facilities were not for the use and enjoyment of the general_public application of law sec_501 of the code provides that civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare may be exempt from federal_income_tax sec_1_501_c_4_-1 defines social welfare as primarily being engaged in promoting in some way the common good and general welfare of the people of the community you do not promote the common good and general welfare of the people in the community but rather promote the interests of the property owners in b your activities are aimed at the maintenance of private areas not open to the public and serve an exclusive rather than broad class of people an organization that is operated essentially for the private benefit of its members is not primarily engaged in activities for the common good and general welfare of the people of the community thus you are operating for the private interests of your members and do not qualify for exemption under c revrul_74_99 above describes the criteria that must be met in order for a homeowners_association to qualify for exemption under sec_501 of the code the court in flat top lake ass'n v united_states held that the criteria set forth in revrul_74_99 must be met in order for a homeowners_association to qualify for exemption under sec_501 of the code one of these criteria is that facilities you own or maintain must be for_the_use_of the public rather than being restricted in use you currently have two parks that are restricted in use the maintenance and upkeep of letter cg catalog number 47628k these parks require the majority of your funding also as stated in your articles and bylaws you are serving the private interests of the property owners in b through the maintenance of parks not open to the public an organization that operates for the exclusive benefit of its members does not serve a community as that term relates to the broader concept of social welfare because you fail the requirements set forth in revrul_74_99 you do not qualify for exemption as a homeowners_association under sec_501 of the code conclusion based on the facts and information submitted you are not operated for exempt purposes under sec_501 you have not established that your activities promote social welfare and you are serving the private interests of your members therefore you are not described in sec_501 of the code 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 that 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 declared true under penalties of perjury to the appeal the following signed declaration this may be done by adding 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 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 to be letter cg catalog number 47628k represented 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 for more information about representation see 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 intend to protest this determination you do not need to take any further action determination_letter to you that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse 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 also fax your statement using the fax number shown in the heading of this letter if 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 sincerely lois g lerner director exempt_organizations enclosure publication letter cg catalog number 47628k


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01 plr-100708-01 date feb legend x state d1 this responds to the letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law x’s shareholder intended that x be a subchapter_s_corporation effective d1 however an s_corporation_election under sec_1362 was not timely filed s_corporation sec_1362 provides that a small_business_corporation may elect to be an law and analysis sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for cc psi b01 plr-100708-01 any taxable_year after the date prescribed for making such election for such taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year x did not timely file an election under sec_1362 to be treated as an s_corporation effective d1 x however has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d1 we conclude that x will be recognized as an s_corporation effective as of d1 x should file a completed form_2553 with a copy of this ruling attached reflecting its election of subchapter_s_corporation status as of d1 with the applicable service_center within days of the date of this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this ruling is being sent to taxpayer’s authorized representative sincerely dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court stephen and sara galligan petitioners v commissioner of internal revenue respondent docket no filed date stephen galligan and sara galligan pro sese blaine c holiday for respondent memorandum opinion pajak special_trial_judge respondent determined deficiencies in petitioners’ federal_income_tax in the amounts of dollar_figure and dollar_figure for the taxable years and respectively unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure - - in an amended answer respondent claimed an increased deficiency of dollar_figure for a total deficiency of dollar_figure for the taxable_year after a concession by respondent the sole issue we must decide is whether petitioners are entitled to deduct legal educational expenses_incurred by petitioner sara galligan in obtaining her law degree some of the facts have been stipulated and are so found petitioners resided in kagan minnesota at the time they filed their petition petitioner sara galligan mrs galligan has been an academic and court law librarian for years mrs galligan has held a variety of law librarian positions as a state court employee for years she is currently the dakota county law library manager law library manager as the law library manager mrs galligan’s primary duties consist of legal research overall management and administration of the law library and support on an on-going basis to attorneys judges and other individuals using the dakota county law library she was president of the minnesota association of law librarians from to mrs galligan attended william mitchell law school from date through date and received her law degree while she attended law school mrs galligan worked full-time for the minnesota state law library she was admitted to the bar in minnesota on date although the courses taken to obtain her law degree improved or maintained her skills in her position as a law librarian mrs galligan’s employer did not require her to obtain a law degree or attend law school the job posting for mrs galligan’s position as law library manager only indicated that a law degree or at least two years of professional experience ina law library is strongly preferred during and petitioners claimed deductions of dollar_figure and dollar_figure respectively for mrs galligan’s legal educational expenses petitioners argue that they are permitted to deduct the expenses_incurred by mrs galligan while attending law school because the legal educational expenses improved and maintained her skills as a law librarian respondent contends that petitioners are not entitled to deduct mrs galligan’s legal educational expenses because the expenses led to her gualification for a new trade_or_business because the burden_of_proof does not affect the result in this case we find that sec_7491 has no bearing on the determination of the legal issues before us sec_162 allows a deduction for ordinary and necessary expenses_incurred in carrying_on_a_trade_or_business section - - income_tax regs sets forth the guidelines for determining those educational expenses incident to a taxpayer’s trade_or_business which are deductible educational expenses may be considered ordinary and necessary business_expenses if the education maintains or improves skills required by the taxpayer in his employment or meets the express requirements of an employer imposed as a condition for the taxpayer’s continued employment status or rate of compensation sec_1_162-5 income_tax regs educational expenses however are not deductible if they are made by an individual for education which is part of a program of study being pursued by her which will lead to qualifying her in a new trade_or_business sec_1 b income_tax regs such educational expenses are not deductible even though the education may maintain or improve skills required by the individual in her employment sec_1 b income_tax regs examples and of sec_1 b income_tax regs illustrate this rule example a a self-employed_individual practicing a profession other than law for example engineering accounting etc attends law school at night and after completing his law school studies receives a bachelor of laws degree the expenditures made by a in attending law school are nondeductible because this course of study qualifies him for a new trade_or_business example assume the same facts as in example except that a has the status of an employee rather than a self-employed_individual and that his employer requires him to obtain a bachelor of laws degree a intends to continue practicing his nonlegal profession as an employee of such employer nevertheless the expenditures made by a in attending law school are not deductible since this course of study qualifies him for a new trade_or_business the regulations establish an objective standard for determining whether an educational expense is deductible 56_tc_1357 54_tc_398 in arbaugh v commissioner tcmemo_1992_565 the court held that pursuant to the regulations law school expenses constitute nondeductible personal expenses regardless of the taxpayer’s primary motive in pursuing such studies and regardless of whether such education improves or helps maintain the taxpayer’s skills in his business or profession because the course of study qualifies the taxpayer for a new trade_or_business the regulations do not predicate disallowance of the deduction on the actual practice of the new trade_or_business 52_tc_1106 affd 443_f2d_29 9th cir in weiler this court held that law school expenses were not deductible by an internal revenue_agent even though he never intended to practice in the legal profession the court held that whether the taxpayer’s present employment be considered that of an accountant internal revenue_agent or tax expert because the taxpayer was qualifying himself as a lawyer a trade_or_business separate and distinct from that in which he is now engaged his educational expenses were nondeductible weiler v commissioner supra pincite petitioners contend that mrs galligan obtained her law degree to maintain and improve her skills as a law librarian mrs galligan testified that knowledge of the law is both necessary and helpful in her duties as a law librarian petitioners also argue that mrs galligan did not practice as an attorney and is in fact not allowed to practice law according to the tenets of her profession petitioners rely on beatty v commissioner tcmemo_1980_ which we find distinguishable in beatty the court held that a taxpayer was allowed to deduct the educational expenses associated with the pursuit of a masters of science degree in administration in that case the court held that the studies provided the taxpayer with a broad general background in management and business administration activities which were already components of the taxpayer’s work activities id unlike the instant case the court noted that the taxpayer’s education did not qualify him for a new trade_or_business id we do not dispute that mrs galligan was an outstanding law librarian and that the legal education was helpful in her profession as a law librarian however by attending law school and obtaining her law degree mrs galligan became entitled to seek admission to the bar as she did and to enter the general - practice of law if she should choose unlike the taxpayer in beatty mrs galligan’s pursuit of a law degree qualified her for the practice of law thus mrs galligan’s law school education was part of a program which qualified her for a new trade_or_business accordingly we sustain respondent’s determination that mrs galligan’s legal education expenses are not deductible decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br3-plr-145859-02 date date do ty legend taxpayer corp corp taxable_year c taxable_year d date date country a business k dear this is in response to your letter dated date requesting consent for taxpayer to revoke its predecessors’ elections effective for taxable_year c to use the safe_harbor method described in sec_1_901-2a in determining the amount of foreign_income_tax paid_or_accrued to country a the information submitted for consideration is substantially as set forth below 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 plr-145859-02 taxpayer is a widely held and publicly traded domestic_corporation taxpayer is the common parent of an affiliated_group_of_corporations that join in the filing of a consolidated federal_income_tax return the due_date for taxpayer's taxable_year c consolidated federal_income_tax return including extensions was date taxpayer and its affiliated companies are engaged in business k within and without the united_states prior to date taxpayer was known as corp on date corp changed its name to taxpayer to reflect the acquisition of corp as a wholly owned subsidiary and a new member of the affiliated_group taxpayer has made the following representations in connection with its ruling_request a b c d both corp and corp conducted business k operations in country a through subsidiaries the corp and corp subsidiaries were and continue after the date acquisition to be dual capacity taxpayers with respect to their country a operations as that term is defined under sec_1_901-2 corp and corp each filed a safe_harbor election for taxable_year d with respect to country a qualifying levies neither corp nor corp 2's safe_harbor election has been revoked pursuant to sec_1_901-2a sec_1_901-2a permits dual capacity taxpayers to compute foreign tax_credits for qualifying levies of each foreign_country either by a facts and circumstances or safe_harbor method sec_1_901-2a describes the manner in which taxpayers may elect the safe_harbor method sec_1_901-2 provides that a member_of_an_affiliated_group that files a consolidated u s income_tax return may use the safe_harbor method only if the common parent has made the election on behalf of all members of the group to use the safe_harbor method with respect to that country sec_1_901-2a provides that an election to use the safe_harbor method that has been properly elected may not be revoked without the consent of the commissioner an application_for consent must be made not later than the 30th day before the due_date including extensions for the filing of the income_tax return for the first taxable_year for which the revocation is sought to be effective with some exceptions not applicable to this situation the commissioner may make his consent to any revocation conditioned upon adjustments being made in one or more taxable years so as to prevent the revocation from resulting in a distortion of the amount of any item plr-145859-02 relating to tax_liability in any taxable_year the commissioner will normally consent to a revocation under the circumstances described in sec_1_901-2a through vi if a safe_harbor election is revoked a subsequent election to apply the safe_harbor method for the same foreign_country may be made only with the commissioner's consent sec_1_901-2a sec_1_901-2a provides that the commissioner will normally consent to a revocation of a safe_harbor election if the election has been in effect with respect to at least three taxable years prior to the taxable_year for which the revocation is to be effective based solely on the information and representations submitted taxpayer's application_for consent to revoke the safe_harbor elections made by corp and corp with respect to qualifying levies of country a was made not later than the 30th day before the federal_income_tax return_due_date including extensions for taxable_year c and corp and corp 2's safe_harbor elections have been in effect for more than three taxable years prior to taxable_year c sec_1_901-2a accordingly consent is granted to taxpayer to revoke the elections made by corp and corp to use the safe_harbor method described in sec_1_901-2a with respect to qualifying levies of country a effective for taxable_year c sec_1_901-2a no opinion was requested and none is expressed about whether based upon all relevant facts and circumstances the amount if any paid pursuant to a levy or levies imposed by country a is not an amount_paid in exchange for a specific_economic_benefit this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant sincerely anne o’connell devereaux senior technical reviewer office of associate chief_counsel international


department of the treasury internal_revenue_service p o box irs cincinnati oh number release date uil dear date date employer id number contact person id number contact telephone number telephone number after date form you must file tax years this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code 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 follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service cincinnati oh legend p state q name r date of formation dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated in the state of p on r your formation document states that you are organized as a trade_association you maintain the common areas of the q industrial park each member of your board is required to be an lot is owner of a lot located in the q industrial park and current in the payment of assessments if the owner of a a corporation partnership or other legal entity a designated agent of that entity is eligible to serve as a member of your board you provide for the operation care upkeep maintenance and improvement of the common areas of the q industrial park specifically you pay for water waste removal electricity telephone and other necessary utility_services of the common areas you are also responsible for landscaping gardening snow removal painting cleaning tuck-pointing maintenance repair and replacement of the common areas you prepare adopt and distribute the annual budget levy and collect assessments employ and dismiss personnel necessary for the maintenance of the common area and obtain adequate insurance you also pay for other materials supplies furniture labor services maintenance repairs or structural alterations which your board is required to secure or pay for pursuant to your bylaws which are necessary or proper for the maintenance and operation of the property as a first class commercial condominium building you are funded by association fees of the members law sec_501 of the code provides for the exemption from federal_income_tax of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 provides in part that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements revrul_73_306 1973_2_cb_179 provides that an organization formed for the purpose of promoting the common interest of tenants who reside in a particular apartment complex does not qualify for exemption under sec_501 of the code any person regularly living in the complex was eligible for membership the organization represented its member-tenants in negotiations with the management of the complex in order to secure better maintenance and services as well as reasonable rents the ruling holds that the organization was not described in sec_501 because it operated essentially to benefit its members and thus was not primarily engaged in activities that promote the common good and general welfare of the community revrul_74_99 1974_1_cb_131 provides that in order to qualify for exemption under sec_501 of the code a homeowners_association must serve a community which bears a reasonable recognizable relationship to an area ordinarily identified as governmental it must not conduct activities directed to the exterior maintenance of private residences and the common areas or facilities it owns and maintains must be for the use and enjoyment of the general_public revrul_80_63 1980_1_cb_116 clarified revrul_74_99 and states that by providing facilities only for_the_use_of its members the association was operating for the private benefit of its members and not for the promotion of social welfare within the meaning of sec_501 of the code in 488_f2d_684 2d cir cert_denied 419_us_827 plumbers working in new york city were responsible for the cuts they made in the city streets prior to the organization's existence the city had repaired the cuts and billed the plumbers individually in what proved to be a highly inefficient system the organization was formed to restore the city streets it only repaired cuts made by its members the joint effort of the plumbers reduced their liability and their expenses and more efficiently repaired the city streets while the court found that the program provided substantial benefits to the public it concluded that the organization primarily served the private economic interests of its members and thus could not be considered exempt under sec_501 of the code application of law you are not described in sec_501 of the code because you are not operated for the promotion of social welfare you are operated for the benefit and convenience of your members you do not meet the requirements of sec_1_501_c_4_-1 because you are not primarily engaged in promoting in some way the common good and general welfare of the people of the community you do not bring about civic betterment and social improvements to the community as a whole the primary beneficiary of your activities is your members like the organization described in revrul_73_306 you are operating to benefit your members and not primarily engaged in activities that promote the letter rev catalog number 47628k common good and general welfare of the community and thus not exempt under sec_501 of the code you are not serving the community as a whole and your facilities are not for the use and enjoyment of the general_public causing you to fail to qualify for exemption under sec_501 of the code as described in revrul_74_99 and revrul_80_63 providing services for your members who are owners of lots in the q industrial complex is not a sec_501 activity the services you provide confer a sufficient amount of private benefit on your members who are the owners of the lots in the q industrial park even if you were to substantially benefit the community you would fail to qualify for exemption because you primarily benefit private interests see contracting plumbers conclusion based on the information submitted we conclude that you are not an organization described in sec_501 of the code because you are not operated exclusively for the promotion of social welfare and your activities privately benefit your members if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete letter rev catalog number 47628k your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service 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 can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter rev catalog number 47628k you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k