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 b04 plr-137991-17 date date legend taxpayer spouse date date year year trust accountant dear ------------ ----------------------------------------------- ------------------------------------------------ ------------------------ ------------------------ ------- ------- ----------------------------------------------------------------------------------------------------------- --------------------- this letter responds to your authorized representative’s letter dated date and subsequent correspondence requesting an extension of time under sec_2642 of the internal_revenue_code code and sec_301_9100-3 of the procedure and administration regulations to elect out of the generation-skipping_transfer gst_exemption automatic allocation rules the facts and representations submitted are summarized as follows on date in year a date after date taxpayer established an irrevocable grantor_retained_annuity_trust trust taxpayer and spouse each filed a timely form_709 united_states gift and generation-skipping_transfer_tax return on each form taxpayer and spouse signified their consent to treat the year transfers as having been made one-half by each spouse under sec_2513 plr-137991-17 taxpayer's retained_interest in trust terminated at the end of the annuity term on date in year the estate_tax_inclusion_period etip with respect to the year transfer closed for gst tax purposes on date on date trust continued as a_trust for the benefit of the family members of taxpayer trust has gst potential accountant was responsible for preparing form sec_709 united_states gift and generation-skipping_transfer_tax returns for taxpayer and spouse taxpayer and spouse did not make any taxable_gifts in year accountant failed to advise taxpayer and spouse that it was necessary to file a form_709 for year to opt_out of an automatic allocation of gst_exemption to trust neither taxpayer nor spouse filed a form_709 for year taxpayer requests an extension of time under sec_301_9100-3 to elect under sec_2632 not to have the automatic allocation rules contained in sec_2632 apply to taxpayer’s year transfer to trust law and analysis sec_2513 provides that a gift made by one spouse to any person other than his spouse shall for purposes of this chapter be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2601 provides that a tax is imposed on every generation-skipping_transfer gst sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of gst tax is the taxable_amount multiplied by the applicable_rate sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2631 provides that for purposes of sec_2631 the gst_exemption amount for any calendar_year shall be equal to the applicable_exclusion_amount under sec_2010 for such calendar_year sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed plr-137991-17 sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of this subsection the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter made to a gst_trust sec_2632 provides in part that the term gst_trust means a_trust that could have a generation-skipping_transfer with respect to the transferor unless the exceptions enumerated in i through vi apply sec_2632 provides that for purposes of sec_2632 an indirect_skip to which sec_2642 applies shall be deemed to have been made only at the close of the etip the fair_market_value of such transfer shall be the fair_market_value of the trust property at the close of the etip sec_2632 provides that an individual may elect to have sec_2632 not apply to an indirect_skip sec_2632 provides that an election under sec_2632 shall be deemed to be timely if filed on a timely filed gift_tax_return for the calendar_year in which the transfer was made sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that in the case of an indirect_skip made after date to which sec_2642 relating to transfers subject_to the estate_tax_inclusion_period or etip does not apply the transferor’s unused gst_exemption is automatically allocated to the property transferred but not in excess of the fair_market_value of the property on the date of the transfer this automatic allocation is effective whether or not a form_709 is filed reporting the transfer and is effective as of the date of the transfer to which it relates an automatic allocation is irrevocable after the due_date of the form_709 for the calendar_year in which the transfer is made sec_26_2632-1 provides that except as otherwise provided the transferor may prevent the automatic allocation of gst_exemption with regard to an indirect_skip by making an election as provided in sec_26_2632-1 sec_26_2632-1 provides in part that a transferor may prevent the automatic allocation of gst_exemption elect out with respect to any transfer or transfers constituting an indirect_skip made to a_trust or to one or more separate shares that are treated as separate trusts under sec_26_2654-1 a transferor may elect out with respect to one or more prior-year transfers subject_to sec_2642 regarding etips made by the transferor to a specified trust or trusts one or more or all current-year transfers made by the transferor to a specified trust or trusts one or plr-137991-17 more or all future transfers made by the transferor to a specified trust or trusts and all future transfers made by the transferor to all trusts whether or not in existence at the time of the election out or any combination of through above sec_26_2632-1 provides that to elect out the transferor must attach an election out statement to a form_709 filed within the time period provided in sec_26_2632-1 in general the election out statement must identify the trust and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers under sec_26_2632-1 to elect out the form_709 with the attached election out statement must be filed on or before the due_date for timely filing the form_709 for the calendar_year in which for a transfer subject_to sec_2642 the etip closes or for all other elections out the first transfer to be covered by the election out was made sec_26_2632-1 provides that a direct_skip or an indirect_skip that is subject_to an etip is deemed to have been made only at the close of the etip the transferor may prevent the automatic allocation of gst_exemption to a direct_skip or an indirect_skip by electing out of the automatic allocation rules at any time prior to the due_date of the form_709 for the calendar_year in which the close of the etip occurs whether or not any transfer was made in the calendar_year for which the form_709 was filed and whether or not a form_709 otherwise would be required to be filed for that year sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_transfer_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 plr-137991-17 sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based upon the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to elect out of the automatic allocation rules under sec_2632 for the transfer made during year to trust the election should be made on a form sec_709 for year the form_709 should be filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh you should attach a copy of this letter to form_709 we have enclosed a copy for this purpose in accordance with the power of accountant on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-137991-17 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries leslie h finlow by _________________________ leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


t c memo united_states tax_court linda g gaitor petitioner v commissioner of internal revenue respondent docket no filed date linda g gaitor pro_se brandon s cline for respondent memorandum findings_of_fact and opinion whalen judge in two notices of deficiency issued to petitioner one for taxable_year and a second for taxable years and respondent determined the following tax deficiencies additions to tax and penalties in petitioner’s federal_income_tax year deficiency sec_6651 sec_6662 addition_to_tax penalty dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure dollar_figure dollar_figure all section references are to the internal_revenue_code as amended and in effect during the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure the notices of deficiency the tax deficiencies are based upon adjustments to petitioner’s taxable_income for the years in issue together with the disallowance of certain credits as shown below adjustments dollar_figure -- -- schedule e--disallowed expenses schedule e--income rents itemized deductions--medical and dental itemized deductions-- miscellaneous deductions union dues cash contributions home mortgage interest other miscellaneous deductions-- business_expense -- -- -- -- dollar_figure -- dollar_figure big_number dollar_figure big_number big_number -- -- -- -- -- big_number -- big_number -- -- big_number -- unreimbursed employee_expenses excess miscellaneous deductions debt_cancellation household finance gambling winnings--seminole tribe of florida bingo exemptions for grandchildren c k ‘07 and j m ‘08 total adjustments to taxable_income -- -- -- big_number -- -- -- big_number -- -- big_number -- -- -- -- -- big_number big_number big_number big_number big_number big_number disallowed credits child tax credit--c k child tax credit--j m recovery rebate credit additional child tax credit--j m the petition -- -- -- -- -- -- -- -- dollar_figure -- -- -- -- in response to the notices of deficiency petitioner timely filed a petition in which she asked the court to redetermine the deficiency for each year because she disagreed with some but not all of the adjustments determined for that year the petition quoted below sets forth the following reasons petitioner agreed or disagreed with respondent’s determinations ie her concession and assignments of error debt_cancellation by household finance was valid and the amount was taxable_income rent received for rental property is incorrectly stated i am allowed to claim as sic my gambling as winning per win loss statements were sent to sustain medical_expenses are correct since i had to pay for attendant care for my parents while i worked since mine was sic unable to walk or move with sic assistanct sic home interest was denied some was on a and other were from a recorded mortgage transaction repairs made to my rental property were denied examiner advised me that since i was sick i could mail or fax supporting documents however irs examiner refused to accept anything from me and stated i refused to come to an irs office i am allowed to claim a loss due to rent not received due to non- payment by tenant i am allowed to claim the expenses paid to get a loan on my investment_property also examiner stated that she was upset because i called her supervisor there is no mention in the petition of the following adjustments determined in the notices of deficiency a respondent’s disallowance of the deduction for cash contributions of dollar_figure claimed for taxable_year b respondent’s disallowance of the deduction for unreimbursed employee_expenses of dollar_figure claimed for taxable_year as to which the net_adjustment determined in the notice_of_deficiency was dollar_figure c respondent’s disallowance of the deduction of a personal_exemption with respect to an individual referred to as c k for taxable_year and respondent’s disallowance of a child_tax_credit with respect to the same individual d respondent’s disallowance of the deduction of a personal_exemption with respect to an individual referred to as j m for taxable_year and respondent’s disallowance of a child_tax_credit an additional_child_tax_credit and a recovery rebate tax_credit with respect to the same individual e respondent’s determinations that petitioner is liable for additions to tax under sec_6651 for taxable years through and f respondent’s determinations that petitioner is liable for accuracy-related_penalties under sec_6662 for taxable years through the issues raised in the petition after her concession of the increase of her taxable_income for by dollar_figure for debt_cancellation item above we find that petitioner raised the following six issues in her petition whether petitioner is allowed the deductions claimed on the schedule e supplemental income and loss filed with her return for each of the subject years item sec_5 and above whether for taxable years and petitioner realized taxable rental income of dollar_figure and dollar_figure more than the amounts reported on her schedules e for those years item above whether petitioner must report gambling winnings of dollar_figure for taxable_year item above whether petitioner is allowed a deduction for medical and dental expenses of dollar_figure for taxable_year as to which the net_adjustment determined in the notice_of_deficiency was dollar_figure item above whether petitioner is allowed a deduction for home mortgage interest of dollar_figure for taxable_year item above and whether petitioner is allowed a deduction for a loss due to rent not received due to non-payment by tenant item above which may be a reference to the deduction of dollar_figure claimed for taxable_year for other miscellaneous deductions respondent’s amendment to answer respondent sought and received from the court leave to file an amendment to answer that further answers the petition by alleging as follows even if petitioner substantiates the deductions claimed for real_estate rental activities for taxable years through any losses related to such activities would be limited pursuant to the passive_activity_loss rules set forth in sec_469 findings_of_fact some of the facts have been stipulated the stipulation of facts filed by the parties and the exhibits attached thereto are hereby incorporated in this opinion the principal adjustments to petitioner’s returns for the years in issue involve the income and expenses reported on schedules e for a rental property identified as single family home nw 24th avenue property the following is a summary of the schedules e filed with petitioner’s returns income rents received expenses insurance mortgage interest_paid to banks etc repairs taxes depreciation expense total expenses income or loss from rental real_estate amount disallowed amount allowed dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number -- big_number big_number big_number big_number big_number big_number big_number -- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -big_number -big_number big_number big_number big_number big_number -- -big_number -big_number big_number -- -- as shown above respondent allowed a depreciation expense deduction of dollar_figure for but disallowed all of the other expense deductions petitioner claimed on her schedules e for the subject years respondent also determined that petitioner had failed to report rental income with respect to the property of dollar_figure for and dollar_figure for petitioner obtained an interest in the property by a quitclaim_deed executed by an individual michael bernard diamond of the state of new jersey on or about date the quitclaim_deed transferred the real_property pincite1 n w 24th avenue carol city florida to the transferor mr diamond and to petitioner as joint_tenants with rights of survivorship the quitclaim_deed was recorded on date mr diamond had obtained the property from an individual sylvia m johnson by quitclaim_deed executed by ms johnson on date the parties have stipulated that mr diamond originally obtained an interest in the subject property via inheritance there is nothing in the record to suggest that mr diamond gave any consideration for the property or if he did the amount furthermore the record does not reveal the value of the property on date or date on date before the execution of the quitclaim_deed giving petitioner an interest in the property mr diamond executed a mortgage on the property securing promissory notes of even date herewith in the aggregate sum of dollar_figure on behalf of the named mortgagees alan taft and sandra taft and david lloyd and frances lloyd petitioner witnessed mr diamond’s signature on the mortgage but she was not an obligee the record does not contain the promissory notes secured_by the mortgage nor does it describe the terms of each of the loans such as the amount of the note or the rate of interest on date after the execution of the quitclaim_deed giving petitioner an interest in the property mr diamond and petitioner executed a second mortgage on the property securing a promissory note dated on the same date in the principal sum of dollar_figure on behalf of the mortgagee fremont investment loan mr diamond and petitioner are described in that mortgage as the borrower and the mortgage is signed by mr diamond and petitioner but the signature block contains the warning there are non-obligated signer s who must execute this document once again the record does not contain a copy of the promissory note secured_by the second mortgage the settlement statement for the second mortgage transaction on date shows that after closing costs of dollar_figure and certain other disbursements were made mr and mrs taft and mr and mrs lloyd were paid dollar_figure mr diamond was paid dollar_figure and the borrower was paid dollar_figure from the proceeds of the loan the record does not disclose the nature of the payments to mr diamond or to the borrower it appears that during the years in issue mr diamond continued to own the property with petitioner as joint_tenants with rights of survivorship and he was liable as a borrower on the second mortgage dated date presumably he was also liable under the related promissory note nevertheless it also appears that petitioner reported all of the rental income from the property and she deducted all of the expenses from the property on her income_tax returns for the years in issue there is nothing in the record to explain mr diamond’s relationship to petitioner other than petitioner’s comment at trial that we were partners the record does not contain anything such as a partnership_agreement that describes the terms of the partnership or explains mr diamond’s involvement with the property furthermore petitioner’s tax returns for the years in issue make no mention of mr diamond or of any partnership involving the property it is unknown what consideration if any petitioner gave to mr diamond to purchase her interest in the property as mentioned above it appears that petitioner became a joint obligor with mr diamond under a promissory note in the principal_amount of dollar_figure to freemont investment loan in date secured_by a mortgage on the property however the promissory note is not a part of the record and we have no way of knowing the amount of petitioner’s liability for the promissory note furthermore as mentioned above we have no way of knowing the nature of the payment to the borrower of dollar_figure that is shown on the settlement statement for the second mortgage or whether petitioner received all or some portion of that payment thus petitioner has not established her basis in the property for depreciation purposes see sec_167 we note that the schedules e that petitioner filed with her returns for the years in issue claim depreciation of dollar_figure per year with respect to the property according to the depreciation schedules filed with her schedules e for and she claimed dollar_figure of depreciation on a single-family dwelling that had cost dollar_figure and was placed_in_service on date the depreciation schedules also show that she claimed dollar_figure of depreciation on a heating unit that had cost dollar_figure and was placed_in_service on date thus in effect the depreciation schedules claim that petitioner had purchased a single-family dwelling and a heating unit for a total of dollar_figure and that she had placed those assets in service as a rental property in there is nothing in the record to reconcile this to the stipulation of facts which states that petitioner did not acquire an interest in the property until date at the earliest when the quitclaim_deed was executed by mr diamond the schedules e filed with petitioner’s tax returns for and report that petitioner had received rents with respect to the use of the property of dollar_figure dollar_figure dollar_figure and dollar_figure respectively the record does not identify the lessees of the property during or for the following two years and the record shows that payments for use of the property were made to petitioner by the miami-dade housing choice voucher program for these payments totaled dollar_figure or dollar_figure more than the amount reported on petitioner’s return for the payments totaled dollar_figure or dollar_figure more than the amount petitioner reported petitioner’s tax returns for and each claim that petitioner was a so-called real_estate_professional and that the losses reported from the property are from rental_real_estate_activities in which you materially participated under the passive_activity_loss rules see schedule e part v summary the notices of deficiency disallow the expense deductions claimed on petitioner’s schedules e for failure to substantiate each of the expenses reported the notices of deficiency do not raise the passive_activity_loss rules as a basis to disallow the loss deductions claimed this issue was not raised until respondent’s amendment to answer as described above petitioner’s prosecution of the instant case this case was set for trial three times by notice setting case for trial issued to the parties on date the case was first set for trial during the trial session of the court beginning in miami florida on date that notice called the attention of the parties to the standing_pretrial_order issued in the case and to the requirement that the parties enter into a stipulation of facts to be submitted on date if the case could not be settled in which the parties must agree in writing to all facts and all documents about which there should be no disagreement the notice also called the attention of the parties to the requirement that there be an exchange of documents in which no later than date ie days before the first day of the trial session each party must provide to the other all the documents or materials that the party expects to offer into evidence at trial and that are not included in the stipulation these requirements are set out in the standing_pretrial_order that was issued to the parties on date that order stated as follows standing_pretrial_order the attached notice setting case for trial notifies the parties that this case is calendared for trial at the trial session beginning on monday date communication between the parties the parties shall begin discussing settlement and or preparation of a stipulation of facts as soon as practicable valuation cases and reasonable_compensation cases are generally susceptible of settlement and the court expects the parties to negotiate in good_faith with this goal in mind all minor issues should be settled so that the court can focus on the issue s needing a court decision if a party has trouble communicating with another party or complying with this order the affected party should promptly advise the court in writing with a copy to each other party or request a conference call for the parties and the trial judge to help the efficient disposition of all cases on the trial calendar stipulation it is ordered that all facts shall be stipulated agreed upon in writing to the maximum extent possible all documents and written evidence shall be marked and stipulated in accordance with rule b unless the evidence is to be used only to impeach discredit a witness either party may preserve objections by noting them in the stipulation if a complete stipulation of facts is not ready for submission at the start of the trial or when otherwise ordered by the court and if the court determines that this is due to lack of cooperation by either party the court may order sanctions against the uncooperative party trial exhibits it is ordered that any documents or materials which a party expects to use except solely for impeachment if the case is tried but which are not stipulated shall be identified in writing and exchanged by the parties at least days before the first day of the trial session the court may refuse to receive in evidence any document or material that is not so stipulated or exchanged unless the parties have agreed otherwise or the court so allows for good cause shown pretrial memoranda it is ordered that unless a basis of settlement resolution of the issues has been reached each party shall prepare a pretrial memorandum containing the information in the attached form each party shall serve on the other party and file the pretrial memorandum not less than days before the first day of the trial session during the proceedings respondent filed a motion to show cause why the proposed facts and evidence should not be accepted as established hereinafter referred to as respondent’s rule f motion petitioner was given a copy of respondent’s rule f motion and she raised no objection to the facts recited therein respondent’s rule f motion states that respondent sent so-called branerton letters see 61_tc_691 to petitioner on july august and date explaining that the parties are required by rule a to stipulate all relevant facts not in dispute those letters are not in the record but we take note that it is the commissioner’s practice to schedule an informal conference with the taxpayer in every tax_court case as a prerequisite to formal discovery and as a prelude to stipulation during which the parties can make a voluntary exchange of necessary facts documents and other data as an aid to the more expeditious trial of cases as well as for settlement purposes see branerton corp v commissioner t c pincite according to respondent’s rule f motion petitioner failed to appear at the scheduled conferences did not seek to reschedule and did not send in the requested documents respondent’s rule f motion also states that petitioner failed to respond to a letter sent to her by respondent’s attorney on date reminding her of the stipulation requirement petitioner did not file a pretrial memorandum before the date calendar call as required by the standing_pretrial_order respondent filed a pretrial memorandum and in the section entitled evidentiary problems respondent notified petitioner and the court as follows respondent will object to any attempt by petitioner to introduce testimonial and documentary_evidence on the ground of failure to comply with the court’s standing_pretrial_order if the witness is not identified in a timely trial memorandum or the document was not timely exchanged petitioner did not appear at the date calendar call because five days beforehand she had filed a request for continuance that was granted by the court without objection by respondent in her request for continuance petitioner in effect acknowledged her obligation to submit the documents necessary to substantiate the deductions claimed on her returns among other things she advised respondent and the court that she had recently hired a c p a to help her get the documents necessary to substantiate her expenditures taxes and medical_expenses the court’s order granting petitioner’s request for continuance set the case for trial during the trial session of the court beginning on date this was the second time the case was set for trial the order also directed the clerk of the court to issue a second standing_pretrial_order to petitioner that standing_pretrial_order contained the same provisions governing stipulation trial exhibits and pretrial memoranda as the previous standing_pretrial_order quoted above finally the order stated the court will not be inclined to grant any further continuance in this case respondent’s rule f motion states that respondent’s attorney sent letters to petitioner on date and date before the second trial setting again reminding petitioner of the stipulation requirement pursuant to rule a and enclosing draft stipulations of fact for her review according to respondent’s motion petitioner did not respond to these letters and she failed to send the documents that respondent had requested on date respondent filed a pretrial memorandum as required by the second standing_pretrial_order petitioner did not file a pretrial memorandum significantly respondent’s pretrial memorandum again warned petitioner that respondent would object to the introduction of any documentary_evidence that had not been timely exchanged notwithstanding the order of date in which the court had stated that it would not be inclined to grant any further continuance petitioner filed a request for continuance on date less than two weeks before the calendar call among other things petitioner’s request for continuance states through ara i was given information in order to get subpoenas served to substantiate my expenses as it sic relates to attendant care educational expenses medical_expenses etc i will have all the documents needed within two months the court denied petitioner’s request for continuance on date petitioner’s case was called from the second trial calendar on date initially petitioner did not appear and respondent made an oral motion to hold petitioner in default or to dismiss the case for failure to properly prosecute in explaining the basis of the oral motion to the court respondent’s counsel stated among other things that petitioner had not cooperated with the c p a whom she had hired to help obtain the documents necessary to substantiate her deductions respondent’s counsel stated as follows mr cline she indicated in her original motion for continuance filed date that she obtained an accountant to help her get her documents my conversations with the accountant indicated that she had not been cooperating with him had refused to answer his phone calls and had not sent a single document to him and then a week before this calendar she filed another last- minute motion for continuance indicating that the accountant was not very helpful and she needed an attorney to help her get the documents but that request for continuance was denied it turned out that petitioner was late in arriving for the calendar call on date when she finally appeared she stated the following to the court among other things sir i think i have everything for him respondent’s attorney now i have documentation for him now i have some documents that i think would take care of most of this would take care of in fact all of it because i know i don’t owe the internal revenue indeed according to respondent’s rule f motion petitioner provided some documents to respondent’s counsel after the calendar call on date and respondent made a number of concessions that are based upon those documents and reflected in the stipulation of facts the court set petitioner’s case for trial on the following day date when the case was called at that time however petitioner did not appear due to a claimed illness according to the order of continuance that was issued by the court on the same day the court’s order of continuance struck the case and reset it for trial during the trial session of the court beginning on date this was the third time the case was set for trial the order stated that the case had been continued twice and petitioner is advised that the court is inclined to not grant any further continuances finally the order directed that the court’s date miami florida standing_pretrial_order remains in full force and effect this meant that the deadline for the exchange of documents remained date and was not extended by the continuance according to respondent’s rule f motion respondent sent a letter to petitioner on date before the third calendar again reminding petitioner of the stipulation requirement pursuant to rule a and enclosing a draft stipulation of facts for her review respondent’s motion states that petitioner did not respond to that letter and she failed to send any documents to respondent when petitioner’s case was called from the third calendar on date petitioner did not appear respondent appeared and asked the court to dismiss petitioner’s case for failure to properly prosecute before entertaining respondent’s motion the court set the case for recall the next morning and the court asked respondent’s counsel to contact petitioner and notify her that the case would be recalled at that time later during the calendar call on date petitioner appeared before the court once again petitioner was late for the proceeding during the discussion about the issues in the case that ensued respondent provided the following summary of petitioner’s failure to provide the documents necessary to substantiate the expenses claimed mr cline she has not substantiated any of the expenses except for a few minor repair expenses that respondent has conceded i will say that ms gaitor failed to -- she provided some documents to exam she failed to cooperate with appeals and she failed to cooperate with me for the october calendar for the january calendar she brought documents on monday january 30th of calendar call i took those documents with me considered them made additional concessions and sent ms gaitor a proposed stip of facts to which she has not responded so respondent has taken some of her documents and made considerations and concessions but the bulk of the items are still at issue and she has failed to substantiate them the court set the case for a pretrial conference after the noon recess when the case was called for the pretrial conference however petitioner did not appear respondent’s attorney appeared and raised the fact that petitioner had failed to enter into a stipulation of facts he represented that he had sent stipulations of fact and that petitioner had failed to communicate with him at all when the court asked whether respondent’s counsel wanted to make a motion_to_compel_stipulation under rule f he answered as follows mr cline yes this case has been in exam since march of she petitioner failed to cooperate during that time she failed to cooperate during appeals and now three trial calendars she’s failed to cooperate with me in stipulating so yes i would move at this time that the facts provided for in my proposed stip of facts be deemed admitted under rule f subsequently petitioner arrived and appeared before the court at approximately p m 1½ hours late for the pretrial conference that had been set for p m the court inquired about a stipulation of facts petitioner acknowledged that respondent had sent a stipulation to her but she said that she had not signed it because she wanted to have an attorney look at it before she did there was also a discussion about the fact that petitioner had documents that she had not shown to respondent’s counsel that discussion ended with petitioner saying what i will try to do is go now find a copier copy them and give them to him respondent’s counsel when the case was called for trial on the following day the court inquired about the stipulation of facts respondent’s attorney stated that petitioner had informed him that she would not sign the stipulation of facts that they had discussed for that reason respondent’s attorney asked the court for leave to file respondent’s rule f motion describing respondent’s unsuccessful attempts to obtain petitioner’s cooperation petitioner appeared and filed a motion for recusal of judge which the court denied after that the court explained to the parties that it was necessary to obtain a complete stipulation of facts the court directed both parties to adjourn to a conference room and negotiate a complete stipulation of facts the court stated that the trial would resume after that when the case was recalled the parties submitted a bare-bones stipulation of facts in which they stipulated nothing more than the notices of deficiency petitioner’s tax returns two quitclaim deeds relating to the subject rental property one concession by petitioner and a number of concessions by respondent the court asked whether there were other documents to be included in the record respondent’s counsel stated that respondent had three or four other documents that had previously been provided to petitioner petitioner stated that she had probably documents that had never been provided to respondent the court noted the fact that the standing_pretrial_order required all unstipulated documents to be exchanged at least days before the first day of the calendar call and ruled that both parties would be held to that requirement in passing we note that this ruling had the effect of extending the deadline for the exchange of documents from date to date respondent did not object to the court’s ruling after petitioner’s testimony finally got under way she sought the introduction of eight documents one after the other respondent objected to a number of those documents on the ground that petitioner had not submitted the document in accordance with the 14-day rule_of the standing_pretrial_order when the issue arose the court stated as follows i made a ruling and i don’t want to just throw it out the window counsel has said that he has not seen this document and i’m not prepared right now to overrule that in this one case i want to see what your petitioner’s case is i’m going to put this document aside and we’ll look at the record and make a final ruling at the end of the proceeding go ahead let’s see your next -- document as petitioner’s testimony proceeded it became readily apparent that because of petitioner’s failure to exchange her documents with respondent as required by the standing_pretrial_order it would take an enormous amount of time for all of petitioner’s or so documents to be marked for identification described objected to and ruled upon the court stated as follows the court well this is not going to work we can’t sit here and have this kind of discussion with respect to each document respondent has a legitimate objection with respect to probably most of your pile ms gaitor and the reason for that is you can’t wait with the history of this case delaying and kind of not being available and then all of a sudden swoop into court with four or pages of documents and expect respondent to say okay i agree with all of that the witness sir -- the court now for the -- the witness may i say something here the court the court shouldn’t put one of the parties in that position now i’m sensitive to that at the same time i want to be fair to you if you have legitimate expenses i’d like to see you get your deduction but we’re not going to get there doing this the only way that i see that we’re going to get anywhere is if you two sit down and work up a list of what this stuff is so that we can have a proceeding where we’re not passing documents back and forth we have the numbers assigned we have the documents available i will take respondent’s objection very seriously so i’m not saying that this is going to get all of these documents into evidence but i want to see what your case is i want to understand what you’re talking about and i can’t do that with you fumbling around taking five or ten minutes just to hand up a document for dollar_figure i mean that’s just not going to work the witness well your honor i’m sorry that i am so slow with it but as i -- the court no i’m talking about any -- this isn’t any criticism on anybody the process is slow the witness yeah the problem -- the court and you have created a situation where by not presenting these documents earlier in a way that would have allowed respondent to look at them in a timely way and evaluate them you’ve created a situation where you’re putting the court in the position of trying to either -- being unfair to respondent and not shutting you off or trying to do something for you and trampling respondent now i don’t want to do either one of those things the witness sir -- the court so here’s what i want to do i think you all have to sit down and work up a list of this stuff i want to hear your testimony and i want to see what these documents are i’m not pre- judging this in any way and i want to understand what this case is about i can’t understand it right now the court -- here’s what i want you to do i want you sit down and work up a list counsel i’m really imposing on you and i understand and i’m sorry for that but that’s the situation we’re in the court directed petitioner to give to respondent’s attorney the documents she wanted in the record--she had still not done so and would not do so until a m on the following day--and directed respondent’s attorney to prepare a list of all of the documents for which petitioner sought admission into the record with exhibit numbers and an indication of respondent’s objections if any the court further directed that the case be recalled two days later pincite p m petitioner asked that the case be recalled pincite p m rather than pincite p m at that point the court recessed the trial two days later on date petitioner did not appear pincite p m the time she had requested petitioner did not appear until p m approximately minutes later petitioner’s late arrival made it unlikely that the trial of the case could be completed without further recessing the case overnight when the case was called the court noted on the record we’ve called this case four times during this trial session and at every one of those times petitioner was late the court then reviewed the fact that from the first petitioner was well aware of the need to obtain the documents necessary to substantiate the deductions that were at issue the court noted that petitioner’s request for continuance filed date stated as follows also i recently hired a cpa who will help me get all the documents and serve subpoenas on bank of america in order to get checks that will substantiate my expenditures taxes and medical_expenses the court also noted that the standing pretrial orders that were issued to the parties on date when the case was set for trial on date and on date when the case was set for trial on date both directed the parties to identify in writing and exchange any documents and materials which are not stipulated at least days before the first day of the trial session the court further noted that both standing pretrial orders state the court may refuse to receive in evidence any document or material that is not so stipulated or exchanged unless the parties have agreed otherwise or the court so allows for good cause shown after reviewing that background the court stated i am going to enforce that provision the 14-day rule in this case and any document or material that was not presented to mr cline or government counsel prior to january - i think it’s january the 30th will not be accepted in this proceeding thereupon the court reviewed the list of the documents and materials for which petitioner sought admission the court made specific rulings on which documents were included in and which documents were excluded from the record on the basis of respondent’s objections the court then gave petitioner an opportunity to present her case after that petitioner accused the court of not making any attempt to be fair to her and she raised her voice until she was yelling the court granted petitioner’s request for a brief recess when the case was recalled petitioner submitted a second typewritten motion for recusal of judge after the court denied petitioner’s motion she again began shouting and she approached the bench in a manner that caused the united_states marshals to move to block her path whereupon even though the trial was ongoing petitioner packed her things and left the courtroom opinion petitioner’s violation of the 14-day rule_of the standing_pretrial_order the trial of this case was held during the trial session that began in miami florida on date after it had been continued from two prior trial sessions petitioner had been given more than enough time approximately nine months while the case was pending on those prior sessions to obtain the documents and materials necessary to substantiate the deductions at issue and exchange them with respondent’s attorney at least days before the first day of the trial sessions as required by the standing pretrial orders nevertheless at trial petitioner sought the admission into evidence of approximately documents that she had not previously provided to respondent respondent’s attorney had forewarned petitioner in two pretrial memoranda one dated date and the other date that he would object to the introduction of any document that was not exchanged in conformity with the 14-day rule and he made timely objection to such documents at trial initially at the start of petitioner’s testimony the court resisted sustaining respondent’s objection to the admission of petitioner’s documents on the basis of a violation of the so-called 14-day rule the court explained to the parties counsel has said that he has not seen this document and i’m not prepared right now to overrule that in this one case i want to see what your petitioner’s case is i’m going to put this document aside and we’ll look at the record and make a final ruling at the end of the proceeding go ahead let’s see your next -- document i want to be fair to you ie petitioner if you have legitimate expenses i'd like to see you get your deduction after making the above statement it became clear to the court from a review of the record over the ensuing days that petitioner had deliberately failed to exchange documents with respondent’s counsel and had deliberately failed or refused to cooperate with respondent’s counsel in the preparation of her case for trial on three successive trial calendars it also became clear that respondent would be prejudiced by petitioner’s conduct as a result the court announced that it would sustain respondent’s objection to the introduction of any documents that had not been exchanged days before the first day of the trial session the court took such action pursuant to rule b which provides that failure to comply with a standing_pretrial_order may subject a party to sanctions which may include the exclusion of evidence offered in violation of the 14-day rule see rule sec_104 sec_123 griffin v commissioner tcmemo_2010_252 coppin v commissioner tcmemo_2009_221 slip op pincite kanofsky v commissioner tcmemo_2006_79 aff’d 271_fedappx_146 3d cir fairey v commissioner tcmemo_2005_129 slip op pincite n schaefer v commissioner tcmemo_1998_163 aff’d without published opinion 188_f3d_514 9th cir in 77_f3d_637 2d cir the court_of_appeals affirmed a ruling by the tax_court excluding from evidence a category of documents that pro_se taxpayers had not produced at least days before the first day of the trial as required by a pretrial order similar to the standing pretrial orders in the instant case according to the court_of_appeals the tax_court acted within its discretion in excluding the documents id see also dumanis v commissioner 182_f3d_899 2d cir affirming the exclusion of documents that taxpayers pro_se litigants had failed to exchange at least days before the first day of the trial session in derogation of tax court’s pretrial order in sustaining respondent’s objection in this case the court took into account the fact that petitioner had been given ample notice of the requirement that the parties identify in writing and exchange not less than days before the first day of the trial session any unstipulated documents or materials that they expected to use at trial petitioner also had been given ample warning that the court might refuse to receive in evidence any document or material that was not stipulated or so exchanged these matters were spelled out in the notice setting case for trial sent to petitioner on date the standing_pretrial_order also sent to her on date and the standing_pretrial_order dated date that was sent to petitioner as an attachment to the court’s order dated date petitioner was also warned in respondent’s pretrial memoranda filed on date before the first trial calendar and on date before the second trial calendar that respondent would object to the introduction of any documentary_evidence if the document had not been timely exchanged in sustaining respondent’s objection the court also took into account the fact that petitioner had failed or refused to cooperate with respondent’s attorney in preparing this case for trial during each of the three trial sessions on which it had been set in fact as described above respondent’s attorney had sent petitioner proposed stipulations of fact without receiving a response from petitioner and petitioner did not enter into a stipulation of facts until the court recessed the trial and directed that the trial would resume after the parties had entered into a stipulation in sustaining respondent’s objection the court took into consideration the fact that many of the documents that petitioner had not exchanged with respondent appeared to have been altered after they were originally written such as checks or invoices with altered dates or checks with memos added in different ink furthermore a number of the documents had no apparent relevance to the issues in the case such as checks to a church in a year for which no adjustment had been made to the charitable deductions claimed or checks for medical_expenses in a year for which no adjustment had been made finally the court took into consideration petitioner’s disdainful and contemptuous attitude toward the court petitioner was late--without apology or explanation--every time her case was called by the court she was hostile and abusive to the court staff finally petitioner had to be admonished that it is customary to stand when her case was called default and failure to properly prosecute or comply with the rules or orders of the court as described above shortly after the court’s ruling petitioner packed her belongings and left the court petitioner’s conduct leaving the courtroom while her trial was in progress raises the question whether we should declare petitioner in default and enter judgment for respondent pursuant to rule a see eg 72_tc_126 failure to appear at trial similarly petitioner’s failure to stipulate all unprivileged facts to the fullest extent to which complete or qualified_agreement can or fairly should be reached as required by rule a and petitioner’s failure to communicate with respondent’s attorney and to cooperate in the preparation of her case for trial as required by the standing_pretrial_order raise the question whether we should dismiss this case pursuant to rule b for failure to properly prosecute or to comply with the rules and orders of the court see eg branson v commissioner tcmemo_2012_124 we choose to decide this case on the merits rather than declare petitioner in default or dismiss the case for failure to properly prosecute or to comply with the rules and orders of the court see comey v commissioner tcmemo_2001_275 slip op pincite furniss v commissioner tcmemo_2001_137 slip op pincite n we do so in order to take into account certain concessions principally respondent’s concessions in petitioner’s favor that are set forth in the stipulation of facts issues for decision this case involves plain vanilla substantiation issues including whether petitioner is allowed a deduction for for medical and dental expenses of dollar_figure whether she is allowed a deduction for for home mortgage interest of dollar_figure and whether she is allowed deductions for all of the subject years for the expenses reported on schedules e allegedly due to a rental real_estate business of dollar_figure dollar_figure dollar_figure and dollar_figure respectively it also involves the substantiation of a loss petitioner described as a loss due to rent not received due to non-payment by tenant this vague statement in the petition may be a reference to a miscellaneous deduction of dollar_figure claimed on petitioner’s return for that was disallowed finally the case involves two income issues first whether the rent realized by petitioner from the alleged rental business was understated by dollar_figure and dollar_figure for and respectively and second whether petitioner must report gambling winnings of dollar_figure for these are the only issues that petitioner raised in the assignments of error in her petition pursuant to rule b any issues that she did not raise in her assignments of error are deemed waived see eg 123_tc_213 we note parenthetically that the fact that petitioner is a pro_se litigant does not excuse her from the obligation to comply with the court’s rules see eg 771_f2d_478 11th cir before addressing each of the six issues raised in the petition we must first address the burdens of proof applicable to this case burden of proof--deductions generally taxpayers bear the burden of proving by a preponderance_of_the_evidence that the determinations of the commissioner in a notice_of_deficiency are incorrect rule a deductions are a matter of legislative grace and taxpayers bear the burden of proving entitlement to any claimed deductions rule a 503_us_79 see generally 512_f2d_882 9th cir aff’g tcmemo_1972_133 an exception to this general_rule is found in sec_7491 which places the burden_of_proof on the commissioner if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining her liability has complied with the substantiation requirements has maintained all records required and has cooperated with reasonable requests for witnesses information documents meetings and interviews petitioner has done none of those things as a result the burden_of_proof with respect to the deductions claimed on the subject returns remains with petitioner burden of proof--unreported income when a case involves unreported income and is appealable to the u s court_of_appeals for the eleventh circuit as this case appears to be absent a stipulation to the contrary see sec_7482 the commissioner’s determination of unreported income is entitled to a presumption of correctness only if the determination is supported by a minimal evidentiary foundation linking the taxpayer to an income-producing activity see 994_f2d_1542 11th cir aff’g tcmemo_1991_636 once the commissioner produces evidence linking the taxpayer to an income-producing activity the burden shifts to the taxpayer to rebut the presumption by establishing that the commissioner’s determination is arbitrary or erroneous id see generally 428_us_433 we find that respondent’s introduction of the records of payments to petitioner for and by the miami-dade housing choice voucher program which are hereby taken into the record of this case establish the minimal evidentiary foundation linking petitioner with the rental payments made by the miami-dade housing choice voucher program during and see blohm v commissioner f 2d pincite accordingly respondent’s determination is presumed correct and petitioner bears the burden to rebut the presumption by establishing that respondent’s determination is arbitrary or erroneous see id burden of proof--respondent’s amendment to answer the notices of deficiency determine that petitioner is not allowed to deduct the expenses reported on the schedules e filed with her returns for the years in issue for failure to substantiate the expenses as mentioned above respondent’s amendment to answer alleges that even if some deductions claimed on schedule e are substantiated any losses related to petitioner’s real_estate rental activities would be limited pursuant to the passive_activity_loss rules set forth in sec_469 because respondent first asserted the passive loss argument in his amendment to answer respondent bears the burden_of_proof on this issue see rule a tarakci v commissioner tcmemo_2000_358 on the basis of our review of the record we find that respondent has not established that any losses in this case are limited under sec_469 burden of proof--additions to tax and penalties with respect to additions to tax and penalties sec_7491 ordinarily imposes the burden of production on the commissioner however petitioner made no assignment of error as to the additions to tax under sec_6651 or the penalties under sec_6662 that were determined in the notices of deficiency petitioner is deemed to have conceded those items see rule b accordingly respondent incurs no obligation to produce evidence in support of those determinations pursuant to sec_7491 see funk v commissioner t c pincite 118_tc_358 issue sec_1 and disallowance of expenses for a rental_activity reported on schedule e and increase of the income from such activity respondent conceded in the stipulation of facts and at trial that petitioner is entitled to deductions on schedule e as follows respondent’s concessions dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- schedule e--repairs -- schedule e--repairs -- schedule e--repairs -- schedule e--repairs schedule e--repairs -- schedule e--real estate_taxes -- dollar_figure -- dollar_figure -- schedule e--insurance -- dollar_figure dollar_figure dollar_figure depreciation expense total dollar_figure big_number big_number -- -- -- -- -- -- -- -- -- -- -- -- dollar_figure dollar_figure on the basis of our review of the record we find that the above deductions conceded by respondent are the only schedule e deductions to which petitioner is entitled for the years in issue petitioner has failed to prove that she is entitled to any other deductions claimed on her schedules e furthermore we find that the records of the miami-dade housing choice voucher program establish that rental payments were made to petitioner amounting to dollar_figure in and dollar_figure in accordingly the rental income petitioner reported on her schedules e was understated by dollar_figure ie dollar_figure less dollar_figure for and by dollar_figure ie dollar_figure less dollar_figure for we note that the understatement of income for dollar_figure is dollar_figure less than the understatement determined in the notice_of_deficiency ie dollar_figure issue gambling winnings of dollar_figure for in the stipulation of facts petitioner concedes that she had failed to report gambling winnings of dollar_figure for taxable_year and respondent concedes that petitioner is entitled to an itemized_deduction for gambling_losses pursuant to sec_165 of dollar_figure for taxable_year issue net medical and dental expenses of dollar_figure for for taxable_year respondent disallowed the deduction of net medical and dental expenses of dollar_figure for lack of substantiation according to the stipulation of facts respondent now concedes that petitioner is entitled to an itemized_deduction for medical_expenses with respect to the following payments date payee date date date date date date date total surgical world hazel mitchell hazel mitchell lois wilson gwendolyn taylor gwendolyn taylor danielle gibson amount dollar_figure big_number big_number on the basis of our review of the record in this case we find that the above deductions conceded by respondent are the only deductions for medical and dental expenses to which petitioner is entitled for taxable_year issue home mortgage interest of dollar_figure for on the basis of our review of the record we find that petitioner has not substantiated that she is entitled to a deduction for home mortgage interest for taxable_year of dollar_figure issue loss due to nonpayment of rent as mentioned above item of the petition refers to a loss due to rent not received due to non-payment by tenant it appears that petitioner is claiming a loss deduction under sec_165 for rent that a tenant failed to pay this is the only mention of this matter in these proceedings petitioner has not shown that she is entitled to a loss deduction under sec_165 as the u s supreme court held in a case dealing with the predecessor of sec_165 nothing in that section indicates that congress intended to allow the taxpayer to reduce ordinary_income actually received and reported by the amount of income he failed to realize 313_us_28 in any event in addition to the foregoing we find that petitioner has not substantiated her entitlement to a deduction for any taxable_year for a loss due to rent not received due to non-payment by tenant other matters respondent concedes that for taxable_year petitioner is entitled to a deduction from adjusted_gross_income for student_loan interest of dollar_figure petitioner did not raise this issue in the petition nevertheless we accept respondent’s concession and hereby find that petitioner is entitled to such a deduction finally we note as mentioned above that petitioner raised no issue in her petition as to and thus conceded respondent’s determination of her liability for additions to tax under sec_6651 for taxable years through and her liability for the accuracy-related_penalty under sec_6662 for taxable years through in order to give effect to the concessions of the parties decision will be entered under rule


internal_revenue_service director exempt_organizations rulings and agreements date jun department of the treasury p o box - room cincinnati oh employer_identification_number person to contact - l d number contact telephone numbers dear sir or madam we have considered your application_for recognition of exemption from federal_income_tax under the provisions of sec_501 of the intemal revenue code of and its applicable income_tax regulations based on the available information we have determined that you do not qualify for the reasons set forth on enclosure i consideration was given to whether you qualify for exemption under other subsections of sec_501 of the code however we have concluded that you do not qualify under another subsection as your organization has not established exemption from federal_income_tax it will be necessary for you to file an annual income_tax return on form_1041 if you are a_trust or form_1120 if you are a corporation or an unincorporated association contributions to you are not deductible under sec_170 of the code if you are in agreement with our proposed denial please sign and return one copy of the enclosed form_6018 consent to proposed adverse action you have the night to protest this proposed determination if you believe it is incorrect to protest you should submit a written appeal giving the facts law and other information to support your position as explained in the enclosed publication exempt_organizations appeal procedures for unagreed issues the appeal must be submitted within days from the date of this letter and must be signed by one of your principal officers you may request a hearing with a member of the office of the regional_director_of_appeals when you file your appeal ifa hearing is requested you will be contacted to arrange a date for it the hearing may be held at the regional_office or if you request at any mutually convenient district_office if you are to be represented by someone who is not one of your principal officers he or she must file a proper power_of_attorney and otherwise qualify under our conference and practice requirements as set forth in sec_601_502 of the statement of procedural rules see treasury_department circular no if you do not protest this proposed determination in a timely manner it will be considered by the internal_revenue_service as a failure to exhaust available administrative remedies sec_7428 of the internal_revenue_code provides in part that a declaratory judgement or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization ‘involved has exhausted administrative remedies available to it within the internal_revenue_service if we do not hear from you within the time specified this will become our final_determination in that event appropriate state officials will be notified of this action in accordance with the provisions of sec_6104 of the code sincerely is f seams - director exempt_organizations rulings and agreements enclosures enclosure i form_6018 publication enclosure issue sec_1 the un-conformed amendment to the organization’s articles of incorporation cause the organization to fail the organizational_test under sec_501 of the code the undue control of the organization by a related board causes the organization to serve private interests and thus fail the operational_test under sec_501 of the code the ownership of the school property by some of the related board members and the payment of rent for which market_value has not been determined and the creation of improvements by thé organization on the property owned by the board members causes the organization to fail the operational_test under sec_501 of the code facts you incorporated in the state of activity for which corporations may be formed under chapter title of the revised statutes non- profit corporation law to engage in any lawful on _ page of your form_1023 states center providing care for children of working parents and will educate children in grades prek-3 through the 8th grade will operate this childcare page of your form_1023 indicates that the organization has assets consisting of a mortgageloanofdollar_figure organization has other liabilities of dollar_figure following assets totaling dollar_figure were purchased by the school in january of a schedule provided indicates that the _and other assets of dollar_figure page further indicates that the equipment furniture toys outside equipment no other information exists in the file to explain the information indicated on page also no appraisal was received to indicate that the items purchased in january of were purchases at market_value in an arms-length transaction while it is not totally clear it appears that the organization was attempting to put the value of the school and property owned by the related board members on their balance_sheet 90u44 page an attachment to the form_1023 states the following are the board_of directors for clark child care development president - vice president - secretary - treasurer - member - _ - non-related - non-related - non-related your letter dated date indicates that is in fact the father of thu sec_3 of the members of your board are related your brochures disclosed that _ _ was established in _ the information in the file indicates that at formerly named some time after the school’s creation the name was changed to the your brochure the school is now owned and directed by of the related board members in the spring of the school changed ownership according to ' two and your letter dated date revealed that you operate a school with before after school day care the school has year tuition ranges from dollar_figure you offer an optional lunch program on a monthly basis which can be paid_by check if the check is returned for non-sufficient funds the child cannot participate in your lunch program but the school will give the child a sandwich if the lunch bill is not paid ‘students between the agesof the school to dollar_figure' to an attachment titled agreement dated april states ' ‘tn support of this agreement you submitted a credit sale document between seller mortgagee and represented by as the as the purchaser mortgagor paid_by the purchaser as follows no - the sale is made and accepted for dollar_figure cash down and the balance represented by one promissory note of said purchaser date _ april payable to the order of the bearer for the sum of dollar_figure with interest of per annum from the date until paid in consecutive monthly payments of s additional terms revealed in improvements were made by to the property owned by in your letter dated date you stated that you resolved the inurement issue because the organization owns the property in support of that statement you submitted an unsigned settlement statement between and the you also submitted a ‘ of dollar_figure oo between and the andendingon _ the term of the lease is for for a lump sum payment in your letter dated date as a response to our service position letter addressing the inurement issue of the provertv vou submitted another this document is identical to the document submitted between and the with the exception of paragraphs one and two being altered to reflect the names of the lessor and lessee therefore no property appraisal has been submitted by your organization that shows that is reasonable and at market_value furthermore no lease the purchase priceofdollar_figure appraisal has been submitted that indicates that the lease agreement between the school and the related board members is reasonable and at market_value law sec_501 of the internal_revenue_code provides for exemption from federal _ income_tax for organizations which are organized and operated exclusively for charitable religious and educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to qualify for exemption under sec_501 an organization must be both organized and operated exclusively for one or more exempt purposes failure to meet either the organizational or operational_test will disqualify an organization from exemption sec_1_501_c_3_-1 of the income_tax regulations specifies that an organization is organized for one or more exempt purposes if its articles of incorporation limit the purposes of such organization to exempt purposes section c -1 b of the regulations provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization's assets will be considered dedicated to an exempt_purpose if upon dissolution such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes or to the federal government or to a state_or_local_government for a public purpose sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish such purposes an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the inurement proscription contained in regulation sec_1_501_c_3_-1 states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals inurement is likely to arise where the financial benefit represents a transfer of the organization's financial resources to an individual solely by virtue of the individual’s relationship with the organization and without regard to the accomplishment of exempt purposes inurement of income is strictly forbidden under sec_501 without regard to the amount_involved this proscription applies to persons who because of their particular relationship with an organization have an opportunity to control or influence its activities such persons are considered insiders for purposes of determining whether there is inurement of income generally an organization's officers directors founders and their families are considered insiders sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized or operated for any purpose under sec_501 unless it serves a public rather than a private interest thus to meet the requirements of this subparagraph it is necessary for an organization to establish 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 moreover even though an organization may have exempt purposes it will not be considered as operating exclusively for such purposes if more than an insubstantial part of its activities serve private interests in better business bureau v united_states u s the court held that the existence of a single non-exempt purpose if substantial in nature would destroy exemption under sec_501 regardless of the number or importance of truly exempt purposes to qualify for exemption under sec_501 the applicant organization must show that it is organized and operated exclusively for religious or pazes charitablé purposes and that no part of the net_earnings inures to the benefit of a private individual or shareholder in bubbling well church of universal love v commissioner u s court_of_appeals 9th circuit no affirmed 74_tc_531 the tax_court reviews an organization that states it is a church operating exclusively for religious purposes three members of one family who also serve as the sole members of the board_of trustees and or directors established the church the organization had no affiliation with any denomination or ecclesiastical body and was not subject_to any outside influence in the control of the organization's affairs the court stated that under the circumstances described the family was in a position to perpetuate control of the organization's operations indefinitely prepare its budget and had complete control of the organization's finances and made the decisions on how the funds were spent since the organization had no connection with any denomination or outside body it was not subject_to any outside influence in the conduct of the church’s affairs in 27_tc_37 exemption was denied a corporation where the purchase_price of an asset exceeded the fair_market_value of the property the courts held that this arrangement inured to the benefit of insiders 35_tc_490 provided that where an exempt_organization engages in a transaction with a related interest and there is a purpose to benefit the private interest rather than the organization exemption may be lost even though the transaction ultimately proves profitable for the exempt_organization operating for the benefit of private parties constitutes a substantial nonexempt purpose 477_f2d_340 cir cert_denied 413_us_910 in texas trade school v commissioner u s a f t r 2d exemption was denied to a corporation where insiders benefited from the use of the organization’s funds through improvements to property owned by executive committee who were also members of the board_of directors revrul_76_91 published in cumulative bulletin on page provides that where the purchaser is controlled by the seller or there is a close relationship between the two at the time of the transaction the presumption is that the agreement cannot be _ made because the elements of an arm's length transaction are not present application of the law our review of your application indicates that your articles of incorporation do not meet the organizational_test required to be recognized as tax exempt under sec_591 since this document does not limit your purposes exclusively to one or more purposes described in this section you also have not made any provision for the distribution of 20u447049 paseo your asséts to qualified sec_501 organizations in the event your organization dissolves the amendment found in the file that contained language conforming to the requirements of sec_501 was not conformed therefore you have failed the organizational requirements of sec_501 of the code sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized or operated for any purpose under sec_501 unless it serves a public rather than a private interest an organization must establish 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 five individuals control your organization it was later disclosed that the president vice president and treasurer are all related thus related individuals control your organization as in bubbling well church of universal love the alverezs and mr age are in a position to perpetuate control of the organization's operations indefinitely prepare its budget have complete control of the organization's finances and make all decisions on how the funds were spent therefore the undue control of the organization by a related board causes the organization to serve private interests and thus fail the operational_test you first submitted a credit sale’ document in which the property used by is being purchased at dollar_figure as is by you stated that the bank appraised the property before issuing the loan but are unable to provide a copy of the bank appraisal or any other independent appraisal to support the purported value of the property thus we hold that the purchase_price far exceeds the fair_market_value of the property kolkey v commissioner supra you submitted two lease of property with option to purchase documents the first and the second between between signed by and who is not an officer or director of the organization each lease requires a lump sym payment of for the appraisal has been provided we hold that the transactions between the the terms of the the second lease is an avenue to reimburse them for the money expended in the first lease no lease and the are not arms-length thereby serving their private interest revenue_ruling supra no formal appraisal was received regarding the asset purchases of dollar_figure organization by the you expended the income of the organization to improve property owned by regardless of the amount expended this is inurement and prohibited under c of the code hence your organization is similar to leon a beeghley v commissioner old dominion box co v united_states and texas trade school v commissioner supra therefore the ownership of the school property by the related board members the payment of rent to the related board members and the creation of improvements by the organization on the property owned by the related board members causes the organization to fail the operational_test conclusion although you may have some educational activities the failure of both the organizational and operational tests defeats exemption inurement and private benefit to the related board members who are also the property owners is substantial as in better business bureau v united_states u s the existence of a single non-exempt purpose if substantial in nature destroys exemption under sec_501 regardless of the number or importance of truly exempt purposes based on the evidence submitted we have determined that you have not met your burden_of_proof to show that you are organized and operated exclusively for an exempt_purpose and that you do not serve the private interests of your creators and founders