t c memo united_states tax_court windsor production corporation petitioner v commissioner of internal revenue respondent docket no filed date kenneth w gideon gregory p joseph sheldon s cohen ellen k harrison mark s bader b john williams jr john f coverdale and ruth e kent for petitioner lindsey d stellwagen and chalmers w poston jr for respondent memorandum opinion colvin judge this matter is before the court on petitioner's motion for litigation costs under section and section references are to the internal_revenue_code in continued rule respondent concedes that petitioner meets all of the requirements for an award of litigation costs under sec_7430 except whether respondent's position in the underlying proceeding was substantially justified for reasons discussed below we hold that respondent's position was not substantially justified the parties submitted memoranda and affidavits supporting their positions we decide the motion based on the memoranda and affidavits provided by the parties neither party requested a hearing and respondent stated that no hearing is required there are no significant factual disputes we conclude that a hearing is not necessary to properly decide this motion rule a background petitioner and the underlying tax case petitioner was a closely_held_corporation the principal_place_of_business of which was in new york when it filed its petition petitioner was in the oil gas film and television business during the years in issue petitioner's underlying case was decided at saltzman v commissioner tcmemo_1994_641 several consolidated cases were decided by that opinion the primary issue involving petitioner was whether it was liable for accumulated_earnings_tax under sec_531 continued effect for the years in issue rule references are to the tax_court rules_of_practice and procedure petitioner's shareholders and board_of directors met on date the minutes of that meeting show that petitioner would probably need to plug wells at a cost of between dollar_figure and dollar_figure per well the minutes also show that petitioner had begun negotiations to buy oil or gas projects which required initial investments as follows dollar_figure for kelso dollar_figure for quail creek dollar_figure for boren and dollar_figure for turkey creek the board allocated dollar_figure million to plug wells and acquire new projects revenue agent's contacts with petitioner's representatives richard saul saul respondent's revenue_agent assigned to this case worked closely with leonard hochheiser hochheiser petitioner's representative on date saul asked hochheiser for a copy of petitioner's tax returns for and hochheiser gave those returns to saul on date on date saul asked hochheiser to agree to extend the time to assess tax for petitioner's year saul received a letter on date in which hochheiser declined on date saul met with hochheiser and discussed petitioner's business generally and the audit saul briefly mentioned sec_531 as an issue to be considered he did not ask petitioner's owners or hochheiser whether petitioner needed to accumulate earnings or had plans to expand hochheiser did not say whether petitioner had plans to expand on date respondent notified petitioner in writing that petitioner was under audit for fiscal years and on date saul sent petitioner an information_document_request idr in it saul noted that the only issue saul was considering was the amortization of film rights for to the idr led petitioner to believe that respondent would not pursue the sec_531 issue saul did not consider asserting sec_531 against petitioner then because he did not believe the sec_531 issue was strong for respondent saul told hochheiser that he leaned against pursuing the sec_531 issue however after meeting with a reviewer in early date saul concluded that respondent should assert the sec_531 issue against petitioner on the assumption that windsor had substantial liquidity and no plans to expand and because hochheiser did not mention expansion plans after saul briefly mentioned sec_531 saul did not ask petitioner's owners or hochheiser about whether petitioner needed to accumulate earnings saul did not ask to see petitioner's board minutes on date saul told hochheiser that he would assert the sec_531 issue because he believed petitioner had no reasonable needs to accumulate earnings and the 3-year period to assess tax was about to expire on date respondent issued notices to petitioner under sec_534 proposing to assert accumulated_earnings_tax for each year in issue on date respondent issued a notice_of_deficiency to petitioner the accumulated_earnings_tax issue was the primary_adjustment determined by respondent respondent determined that petitioner had accumulated excess_taxable_income of dollar_figure in dollar_figure in and dollar_figure in that was taxable under sec_531 on date petitioner submitted a statement under sec_534 detailing its plans to expand its oil gas film and television businesses petitioner attached copies of corporate minutes to verify the amounts of accumulated earnings needed for each of petitioner's expansion programs petitioner also stated that it needed a reserve for contingent liabilities from an nfc oil co lawsuit settled in environmental liabilities including plugging oil wells and breach of contract and copyright violations petitioner attached copies of corporate minutes to verify the amounts it needed for these reserves on date petitioner filed the petition in this case in it petitioner denied that it was subject_to the accumulated_earnings_tax and referred to the sec_534 statement it filed in which it stated its needs to accumulate earnings respondent filed the answer on date and an amended answer on date respondent alleged that petitioner's sec_534 statement was not sufficient respondent conceded the accumulated_earnings_tax issue after trial and after petitioner filed its opening brief motion for litigation costs introduction discussion generally a taxpayer who has substantially prevailed in a tax_court proceeding may be awarded reasonable_litigation_costs sec_7430 to be entitled to an award the taxpayer must a exhaust administrative remedies sec_7430 respondent concedes that petitioner meets this requirement b substantially prevail with respect to the amount in controversy sec_7430 respondent concedes that petitioner meets this requirement c show that the position_of_the_united_states in the action was not substantially justified sec_7430 respondent contends that petitioner does not meet this requirement petitioner contends and we hold that petitioner meets this requirement d be an individual whose net_worth did not exceed dollar_figure or an owner of an unincorporated business or any partnership corporation etc the net_worth of which did not exceed dollar_figure when the petition was filed sec_7430 u s c sec d b respondent concedes that petitioner meets this requirement e establish that the amount of costs and attorney's_fees claimed by petitioner is reasonable sec_7430 c respondent concedes that petitioner meets this requirement a taxpayer has the burden of proving that it meets each requirement before the court may order an award of litigation and administration costs under sec_7430 rule e 985_f2d_1315 5th cir 92_tc_192 affd 905_f2d_241 8th cir 88_tc_492 a taxpayer must establish that the position_of_the_united_states in the litigation was not substantially justified to be entitled to an award for administrative or litigation costs sec_7430 the position_of_the_united_states is the position taken by respondent a in the court_proceeding and b in the administrative_proceeding as of the earlier of i the date the taxpayer receives the notice of the decision of the internal_revenue_service office of appeals or ii the date of the notice_of_deficiency sec_7430 here petitioner did not receive a notice of decision from respondent's appeals_office respondent's position in the notice_of_deficiency the answer throughout trial and until petitioner filed its posttrial brief was that petitioner accumulated earnings beyond its reasonable business needs thus respondent's position in both the administrative and the judicial proceeding was that taken in the notice_of_deficiency for purposes of sec_7430 accordingly we must decide whether respondent's position was substantially justified when respondent issued the notice_of_deficiency and when respondent filed the answer in this case whether respondent's position that petitioner accumulated earnings beyond its reasonable business needs was substantially justified a background the equal access to justice act's substantially justified standard requires that the government's position be justified to a degree that would satisfy a reasonable person 487_us_552 that standard applies to motions for litigation costs under sec_7430 60_f3d_1020 3d cir revg tcmemo_1994_280 comer family equity pure trust v commissioner 958_f2d_136 6th cir affg tcmemo_1990_316 100_tc_457 affd on this issue and revd in part and remanded on other issues 43_f3d_172 5th cir to be substantially justified the commissioner's position must have a reasonable basis in both law and fact pierce v underwood supra 748_f2d_1011 5th cir powers v commissioner supra pincite for a position to be substantially justified there must be substantial evidence to support it respondent recognizes that this is the controlling standard at issue in this case on brief respondent states to determine whether respondent acted reasonably the court must consider whether respondent's position had a reasonable basis both in law and fact 487_us_552 100_tc_457 pierce v underwood supra pincite powers v commissioner supra pincite the fact that the commissioner eventually loses or concedes the case does not in itself establish that a position is unreasonable 991_f2d_359 7th cir 975_f2d_1150 5th cir revg an unpublished order of this court however it is a factor to be considered 967_f2d_116 5th cir affg in part and revg in part tcmemo_1991_189 931_f2d_1044 5th cir powers v commissioner supra pincite the taxpayer need not show bad faith to establish that the commissioner's position was not substantially justified for purposes of a motion for litigation costs under sec_7430 estate of perry v commissioner supra powers v commissioner supra b respondent's claimed basis in fact a taxpayer is liable for accumulated_earnings_tax if it is formed_or_availed_of to avoid income_tax for its shareholders by permitting earnings_and_profits to accumulate instead of being divided or distributed sec_532 90_tc_1 the most important factor in deciding if the accumulated_earnings_tax applies is whether a corporation accumulated_earnings_and_profits beyond the reasonable_needs_of_the_business 393_us_297 101_tc_397 respondent contends that there was a reasonable basis in fact for the position in the notice_of_deficiency and the answer because respondent knew the following facts before issuing the notice_of_deficiency i petitioner had passive_assets such as certificates of deposit ii petitioner had investments unrelated to its oil_and_gas operations iii petitioner had a steady cash-flow from film rights iv petitioner paid arnold saltzman a dollar_figure dividend in and v petitioner paid management fees to arnold saltzman we do not believe that these facts provide a reasonable basis in fact for respondent's position respondent does not state the amounts of petitioner's liquid_assets respondent alleged in the answer that petitioner had accumulated liquid_assets worth more than dollar_figure in each year in issue respondent might have been referring to amounts in petitioner's federal corporate tax returns for the years in issue petitioner reported other investments of dollar_figure on its tax returns for dollar_figure for and dollar_figure for however the only way to know if these amounts are excessive is to compare them to petitioner's business plans respondent lacked a basis in fact for applying the accumulated_earnings_tax because respondent had no facts about petitioner's business plans the fact that petitioner had a steady cash-flow from its film rights without more does not provide a basis for respondent's position that petitioner unreasonably accumulated income the fact that petitioner paid dividends and management fees to arnold saltzman without more does not provide a basis for respondent's position respondent does not state how much petitioner paid to arnold saltzman nor does respondent say how an expense by a business shows that the business accumulated too much we conclude that the facts known to respondent do not provide a reasonable basis in fact for respondent's position in the notice_of_deficiency after respondent issued the notice_of_deficiency petitioner filed its statement under sec_534 explaining its reasons to accumulate earnings respondent does not claim to rely on different facts for the answer than those upon which respondent relied in the notice_of_deficiency we conclude that the facts known to respondent do not provide a reasonable basis for respondent's position c effect of burden_of_proof respondent claims to be substantially justified in determining that petitioner is liable for the accumulated_earnings_tax because petitioner has the burden_of_proof we disagree the fact that petitioner bears the burden_of_proof does not give respondent a basis in fact or establish that respondent's position is substantially justified powers v commissioner supra pincite williford v commissioner tcmemo_1994_135 d respondent's lack of diligence respondent erroneously assumed that petitioner had no reasonable business needs to accumulate earnings or plans to expand which would justify accumulations respondent did not ask to see petitioner's records or otherwise investigate petitioner's needs to accumulate funds before issuing the notice_of_deficiency on date saul believed that the accumulated earnings issue was not strong for respondent he told hochheiser that respondent would not pursue the accumulated earnings issue the commissioner did not have a reasonable basis in fact and law without diligently investigating the case nicholson v commissioner f 3d pincite 998_f2d_244 5th cir revg and remanding tcmemo_1992_ 797_f2d_1454 8th cir powers v commissioner t c pincite the fact that respondent issued the accumulated_earnings_tax notice under sec_534 day before respondent issued the notice_of_deficiency suggests that respondent was not seriously interested in investigating the accumulated_earnings_tax issue sec_534 provides before mailing the notice_of_deficiency referred to in subsection a the secretary may send by certified mail or registered mail a notification informing the continued sec_534 is designed to enable a taxpayer to respond to the commissioner's sec_534 notification before the commissioner determines a deficiency 76_tc_1161 in that case we said the commissioner admits that part of sec_534's function is to encourag e the internal_revenue_service to be more deliberate than it had been in the past such deliberation can result only if respondent reads and considers a taxpayer's sec_534 response before issuing a notice_of_deficiency and we are confident that congress intended for respondent to do just that id fn ref omitted respondent failed to request information about petitioner's needs to accumulate earnings even though hochheiser gave copies of petitioner's tax returns to saul in november of and saul knew in date that petitioner would not agree to extend the time to assess tax we conclude that respondent did not diligently investigate this case before issuing the notice_of_deficiency or filing the answer continued taxpayer that the proposed notice_of_deficiency includes an amount with respect to the accumulated_earnings_tax imposed by sec_531 sec_534 provides within such time but not less than days after the mailing of the notification described in subsection b as the secretary may prescribe by regulations the taxpayer may submit a statement of the grounds together with facts sufficient to show the basis thereof on which the taxpayer relies to establish that all or any part of the earnings_and_profits have not been permitted to accumulate beyond the reasonable_needs_of_the_business e whether respondent's desire to have a trial bars an award of litigation fees respondent contends that trial was needed so respondent could assess the probative value admissibility of testimony and documents offered by petitioner to prove its business needs for example respondent wanted to assess arnold saltzman's credibility at trial respondent argues that until respondent conceded the accumulated_earnings_tax issues respondent's litigating position was substantially justified because this case could only be resolved by examining the facts and circumstances including assessing the credibility of the witnesses we disagree the government is not automatically excused from having a reasonable basis in fact in cases where facts and witnesses' credibility are in dispute respondent cites richman v commissioner tcmemo_1994_ for the proposition that respondent's position is substantially justified where the issues are factual and depend on a determination of credibility this is not what we held in richman in richman the commissioner determined that the taxpayer fraudulently omitted interest_income we held that the commissioner had a reasonable basis in fact because when respondent issued the notice_of_deficiency respondent knew that the taxpayer used an incorrect social_security_number on his account statements and the account statements contained a notice that the amount of interest would be reported to the internal_revenue_service id respondent contends that respondent was substantially justified in asserting the accumulated earnings issue because petitioner did not provide documents relevant to that issue in its protest letter dated date we disagree respondent first proposed to assert the accumulated earnings issue in date it is unreasonable to fault petitioner for not anticipating that respondent would raise the accumulated earnings issue later respondent contends that petitioner acknowledged the need for trial in its motion to shift the burden_of_proof to respondent we disagree petitioner's motion to shift the burden_of_proof did not state that trial was needed rather petitioner asserted that respondent should bear the burden_of_proof if the matter went to trial respondent contends that petitioner admitted that trial was needed by proposing findings_of_fact after trial we disagree petitioner properly proposed findings_of_fact in its posttrial brief this has no bearing on whether respondent's position was substantially justified respondent argues that respondent's position was substantially justified because in response to discovery petitioners represented that they had produced all documents establishing the allegations in their petition but in fact not all of the documents were produced and identified until after respondent filed her response to petitioner's motion for an order to show cause pursuant to rule f respondent points out that respondent had objected to petitioner's motion under rule f to compel stipulation in part because respondent had not seen many of the documents that petitioner proposed to be stipulated these facts could not provide a basis in fact for respondent's position when the notice_of_deficiency was issued or the answer was filed we conclude that the documents that petitioner sought to include in a proposed stipulation do not show that trial was needed or otherwise substantially justify respondent's position f whether petitioner must show that respondent had neither a basis in fact nor a basis in law respondent contends that to establish that the position_of_the_united_states was not substantially justified petitioner must show that legal precedent does not substantially support respondent's position given the facts reasonably available to respondent respondent contends that petitioner has failed to do this we disagree as discussed above facts about petitioner's need to accumulate earnings were reasonably available to respondent if respondent had investigated the issue respondent failed to make such an investigation in the circumstances we conclude that respondent had insufficient knowledge of the facts of the case to render respondent's position substantially justified 487_us_552 100_tc_457 conclusion we conclude that respondent's position was not substantially justified when respondent issued the notice_of_deficiency or filed the answer to reflect the foregoing an order will be issued granting petitioner's motion for an award of litigation costs


t c summary opinion united_states tax_court david earl white and debra ann mcnicoll petitioners v commissioner of internal revenue respondent docket no 19568-12s filed date david earl white and debra ann mcnicoll pro sese donald d priver for respondent summary opinion gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to continued pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined income_tax deficiencies of dollar_figure and dollar_figure for petitioners’ and tax years respectively the sole question for our consideration is whether deductions for losses reported on petitioners’ schedules e supplemental income and loss are limited by the passive_activity rules of sec_469 background petitioners were residents of california at the time their petition was filed during and through date petitioner david e white worked as a community resource coordinator providing resources for prison parolees and helping to facilitate their reentry into society during date and throughout mr white did similar work at san quentin penitentiary during he was employed and earned wages from seventh step foundation inc and the state of california totaling dollar_figure during he was employed and earned wages from the state of california of dollar_figure his work hours were from a m to p m five days per week before date he worked hours continued the tax_court rules_of_practice and procedure per week petitioner debra a mcnicoll was employed and earned wages from at t for and of dollar_figure and dollar_figure respectively during and petitioners owned two pieces of rental property one in bremerton washington and the other in colorado springs colorado petitioners also owned their residence in pacifica california petitioners did not elect to treat all of their real_estate interests as a single rental real_estate activity within the meaning of sec_1_469-9 income_tax regs mr white was involved in football and has been a football coach for many years while attending san francisco state university mr white met mr woods a football player who became involved in the real_estate business during or mr white was also interested in becoming involved in the real_estate business he read books and studied techniques for successfully acquiring real_property ultimately he decided that the purchase of realty where there was a military presence provided an environment for growth and increased property values mr white following mr woods’ lead purchased the washington and colorado residential properties for investment and rental purposes during and both the residences needed repairs and mr white intended to he had also purchased a home in georgia and rehabilitated and sold it at a profit during rehabilitate and improve the properties to enhance their value he subcontracted some of the work and performed some of it himself initially the properties increased in value and accumulated additional equity value in excess of their cost by and however the real_estate bubble had burst leaving petitioners with a debt of approximately two-thirds of a million dollars and properties with less value than the outstanding mortgages petitioners did not abandon the properties instead they continued to repair and maintain them during and petitioners did not purchase any additional real_property during and petitioners attached schedules e to their and income_tax returns on the schedules e petitioners reported dollar_figure of total rental income from their two rental properties petitioners also reported expenses and depreciation that exceeded the reported income resulting in reported losses of dollar_figure and dollar_figure for the and tax years respectively during the audit examination of their and income_tax returns petitioners sent respondent two letters concerning the question of whether they qualified for the exception to the passive_loss_rules in a letter respondent received on date petitioners stated that hours per week or hours per year were spent on their real_estate activity in that letter petitioners supported their hour-per-year statement by indicating that mr white worked from a m to p m at his state of california job and then devoted the hours of p m to p m monday through friday and six or more additional hours during the weekend pursuing their real_estate activity in a letter dated date petitioners in further support of the hours stated in their first letter provided a somewhat more detailed schedule showing some specific types of activities during each month of and and further reflecting a total of hours for each month or a total of hours per year generally mr white spent his time in his real_estate activity in the areas of maintenance repairs tenant problems renovation and miscellaneous administrative matters he also was attempting to find ways to finance and possibly to expand their real_property holdings at trial mr white offered a document that was received as a summary of his testimony reflecting that he spent from p m to p m afterwork hours each weekday and from a m to p m on each weekend day working on his real_estate activity mr white’s testimony conflicts with the letters sent to respondent in that his testimony is that he spent more than twice as much time big_number hours per year as originally reported to respondent or hours per year during the audit discussion3 generally a deduction in connection with business or investment_income is allowable against a taxpayer’s income see sec_162 sec_212 sec_469 however limits deductibility of losses from passive_activity against a taxpayer’s other income a passive_activity_loss is defined as the excess of the aggregate losses over the aggregate income from all passive activities for a taxable_year sec_469 a passive_activity is defined as any trade_or_business in which a taxpayer does not materially participate sec_469 rental_activity however is treated as passive regardless of whether the taxpayer materially participates sec_469 a taxpayer who engages in the rental real_estate business is not statutorily considered to be engaged in a passive_activity under sec_469 if he can show that he is a qualifying real_estate_professional under section c see also sec_1_469-9 income_tax regs specifically sec_469 sets forth the following requirements the parties did not raise the question of burden_of_proof the sole question we consider is whether petitioners are entitled to deductions in excess of income from real_estate activity against their ordinary_income accordingly petitioners bear the burden of showing their entitlement to the losses under consideration see rule a i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates in determining whether a taxpayer is a real_estate_professional material_participation is considered separately with respect to each parcel of rental property unless a taxpayer makes an election to treat all property as a single activity see sec_469 with respect to joint income_tax returns either spouse’s qualification as a real_estate_professional may satisfy the above requirements respondent maintains that mr white is not a real_estate_professional for or because he has not substantiated through a reasonable means that he performed more than hours_of_service in relation to his rental activities and his personal services performed in the rental activities during and or do not exceed the hours that mr white spent in his jobs petitioners offered evidence in an attempt to show that they have met the threshold requirement of sec_469 that would permit losses to be applied against income other than petitioners did not make this election for or passive_income our task is to evaluate petitioners’ evidence and decide whether it suffices to meet the sec_469 requirements initially we note that there is no evidence in the record that mrs mcnicoll spent any time on the real_estate activities during or with respect to mr white we must consider whether he has met the first and second requirement of showing that he performed more than hours of services each year in the rental real_estate activity and whether the hours spent were more than one-half of the personal services performed in all trades_or_businesses the evidence on these points is contradictory during the audit examination petitioners sent a letter to respondent stating that hours was spent each year in the rental real_estate activity subsequently petitioners sent respondent another letter providing some detail of the type of real_estate activity indicating that hours per month or hours per year were spent engaging in the real_estate activity during mr white worked hours per week until november when he began working hours per week for the state of california accordingly he worked approximately big_number hours x from january through date during november and december he worked approximately hours x accordingly mr white would have to show that his material_participation in the real_estate activity exceeded big_number hours for the year for mr white worked hours per week for a total of approximately big_number hours per year so that he would have to show that his material_participation in the real_estate activity exceeded that amount if petitioners’ statements to respondent were accepted at face the 750-hour test may have been met for and at trial mr white supplied a new schedule of his real_estate activity for and indicating that he spent big_number hours each year involved in the activity we have reviewed all of the schedules presented both to respondent and to the court and make the following observations petitioners did not keep a daily calendar for or indicating the number of visits made to the rental properties quantifying the number of hours spent on their rental activities property investigation and related activity petitioners instead summarized and generalized the activities for and in which they generally explained the activities performed concerning the rental properties and provided annual estimates of the hours based on mr white’s available nonwork hours the summary schedules presented to respondent and the court were prepared after the fact and appear to contain pure estimates of the timing and type of activity that it appears that petitioners realized after the fact that the hours provided to respondent during the audit examination would not suffice to pass both tests petitioners contend was performed and in both schedules the basis for the total annual time spent was mr white’s afterwork hours and the summary schedules essentially assigned all of mr white’s waking nonjob hours to the real_estate activity and did not provide time for other necessities of life overall we find the summaries which represent substantially_all of the evidence petitioners offered to be estimates some of which are unrealistic and all of which remain uncorroborated in the record see eg hill v commissioner tcmemo_2010_ aff’d 436_fedappx_410 5th cir bailey v commissioner tcmemo_2001_296 with respect to the evidence that may be used to establish hours of participation sec_1_469-5t temporary income_tax regs fed reg date provides the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries this court has held that while the above regulations are somewhat ambiguous concerning the records to be maintained by taxpayers they do not allow a noncontemporaneous ballpark guesstimate hill v commissioner tcmemo_2010_200 carlstedt v commissioner tcmemo_1997_331 speer v commissioner tcmemo_1996_323 goshorn v commissioner tcmemo_1993_578 because of petitioners’ failure to support their contentions that they met the hours-per-year requirement or to show personal services concerning rental real_estate in an amount that exceeds one-half of all hours spent in other jobs we hold that petitioners have failed to meet the threshold requirements of sec_469 that would permit their deduction of the loss for or accordingly petitioners are not entitled to apply the or the loss from passive rental real_estate activity against other income reported for those tax years to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number -------------------- ---------------------------- ---------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-121847-09 date date x --------------------------------------------------- ------------------- state date ------------- ------------------------- dear ------------ this letter responds to a letter dated date submitted by x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes as well as relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts x was organized as a limited_liability_company under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective date however x inadvertently failed timely to file a form_8832 entity classification election and form_2553 election by a small_business_corporation law and analysis plr-121847-09 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b 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 the taxable_year and sec_1362 shall not apply sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is plr-121847-09 filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner may 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 not more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 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 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date if x files a completed form_2553 effective date with the appropriate service_center within sixty days from the date of this letter a copy of this letter should be attached to the election except for the specific rulings above no opinion is expressed or implied 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 concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-121847-09 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representative the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely curtis g wilson curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court robert j guadagno petitioner v commissioner of internal revenue respondent docket no 8019-06l filed date robert j guadagno pro_se donald a glasel for respondent memorandum opinion chiechi judge this case is before the court on respon- dent’s motion for summary_judgment respondent’s motion we shall grant respondent’s motion 1although the court ordered petitioner to file a response to respondent’s motion he failed to do so background the record establishes and or the parties do not dispute the following petitioner resided in massapequa new york at the time he filed the petition in this case on date respondent issued to petitioner a notice_of_deficiency notice with respect to his taxable years and which he received in that notice respondent determined deficiencies in and additions to petitioner’s federal_income_tax tax for each of his taxable years and as fol- lows year deficiency dollar_figure big_number sec_6651 additions to tax sec_6654 dollar_figure big_number dollar_figure big_number dollar_figure big_number a sec on date petitioner submitted a document to the court with respect to the notice relating to his taxable years and that the court had filed as a petition and that commenced the case at docket no on date the court issued an order in that case date order in the case at docket no ordering petitioner to file a proper amended petition in the form enclosed with that 2all section references are to the internal_revenue_code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure order and to pay the filing fee of dollar_figure on or before date the date order in the case at docket no further provided that if an amended petition and the filing fee were not received on or before date the court would dismiss the case at docket no or take such other action as the court deemed appropriate petitioner did not file a response to the court’s date order in the case at docket no as a result on date the court entered an order of dismissal for lack of jurisdiction in that case on date respondent assessed petitioner’s tax and the additions to tax determined in the notice relating to petitioner’s taxable years and as well as interest as provided for law for each of those years we shall refer to those assessed amounts as well as interest as provided by law accrued after date as petitioner’s unpaid liabili- ties for and respondent issued to petitioner the notice_and_demand for payment required by sec_6303 with respect to his unpaid liabilities for and on date respondent issued to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy with respect to his taxable years and on or about date in response to the notice_of_intent_to_levy petitioner timely filed form request for a collection_due_process_hearing petitioner’s form and requested a hearing with respondent’s appeals_office appeals_office on date a settlement officer with the appeals_office settlement officer held an appeals_office hearing with petitioner with respect to the notice_of_intent_to_levy at that hearing petitioner indicated that he was not liable for peti- tioner’s unpaid liabilities for and on date the appeals_office issued to petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination that notice stated in pertinent part collection is sustained no collec- tion alternatives were offered for consideration by appeals an attachment to the notice_of_determination stated in pertinent part summary the liabilities arose from your failure_to_file returns for and you were sent a statutory_notice_of_deficiency you had a prior opportunity to appear at an appeal’s conference and an opportunity to petition the us tax_court therefore the underlying liability issue is precluded from this determination under sec_301 and sec_6330 3petitioner apparently attached a document to petitioner’s form that is not part of the record in this case brief background on date settlement officer elissa dellosso sent you a letter giving you an opportunity for a telephonic hearing for date you were advised in that letter that the underlying liability issue that was raised in your cdp request was precluded from this hearing but that she would consider other collection alternatives ms dellosso sent you a collection information statement to prepare and send back to her by date she did not receive it on date you requested a postponement and a face to face hearing which was granted on date you appeared in her office and she conducted a face-to- face hearing with you you did not submit the collec- tion information statement and stated you wanted an- other postponement because you had just hired a firm to represent you this request was denied because you had sufficient time to obtain representation prior to the original scheduled hearing date verification - legal and procedural requirements a general verification requirements the assessment was properly made per sec_6201 for the and tax periods a statutory_notice_of_deficiency was mailed to you via certified mail on date the administrative file shows that on date the us tax_court ordered you to perfect the petition and pay the fee by you did not do so and the court dismissed your case the notice_and_demand for payment letter was mailed to your current address within days of the assessment as required by sec_6303 there was a balance due when the cdp levy notice was requested ms dellosso verified the collection_period allowed by statute to collect these taxes has been suspended by the appropriate computer codes for the tax periods at issue there was no pending bankruptcy at the time the notices were issued ms dellosso had no prior involvement with you concern- ing the applicable tax periods before this cdp case the cdp_notice was sent by certified mail return re- ceipt requested to your last_known_address ms dellosso verified all laws and administrative procedures were met through review of computer tran- scripts and actions documented in the administrative file verification of validity of assessment the assessment for your u s individual_income_tax_return for the tax periods ended and are valid this assessments were made after you failed to file a valid petition with the us tax_court the deficiency_notice was issued on date your subsequent attempt to petition the court is sufficient proof that you received the statutory notice issues and or collection alternatives raised by the taxpayer you raised the issue of the underlying tax_liability which is precluded from this hearing you did not raise any additional issues or collection alternatives collection action be no more intrusive than necessary sec_6330 requires that the appeals_office consider whether a proposed collection action balances the need for efficient collection_of_taxes with the legitimate concern that any collection action be no more intrusive than necessary you did not offer a collection alternative that appeals could accept as an alternative to the notice_of_levy that was issued to your employer therefore our determination is that the levy is sustained this balances the government’s need for the efficient col- lection of tax with your concern that collection be no more intrusive than necessary reproduced literally in the petition commencing the instant case petitioner alleged that he believes that he owes only dollar_figure plus penalties and interest sic on taxes less the dollar_figure already paid and not the dollar_figure the i r s claims discussion the court may grant summary_judgment where there is no genuine issue of material fact and the decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there are no genuine issues of material fact regarding the questions raised in respondent’s motion petitioner received from respondent a notice_of_deficiency with respect to his taxable years and petitioner submitted a document with respect to that notice that the court had filed as a petition and that commenced the case at docket no however petitioner failed to respond to the court’s date order in the case at docket no in which the court directed petitioner to file a proper amended petition and to pay a filing fee on or before date as a result on date the court entered an order of dismissal for lack of jurisdiction in that case we conclude that petitioner may not dispute the respective underlying tax_liabilities for his taxable years for and where as is the case here the validity of the underlying tax_liability is not properly placed at issue the court will review the determination of the commissioner of internal revenue for abuse_of_discretion 114_tc_604 114_tc_176 based upon our examination of the entire record before us we find that respondent did not abuse respondent’s discretion in determining to proceed with the collection action as determined in the notice_of_determination with respect to petitioner’s taxable years and we have considered all of the parties’ contentions and arguments that are not discussed herein and we find them to be without merit and or irrelevant on the record before us we shall grant respondent’s motion to reflect the foregoing an appropriate order granting respondent’s motion and decision will be entered for respondent


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division release number release date date vil legend university trust u o w dear we have considered your ruling_request dated date concerning the federal_income_tax consequences under sec_512 of the internal_revenue_code_of_1986 as amended hereafter code relating to a proposed contractual arrangement in the manner and for the purposes described below facts university is an educational_institution recognized as a tax-exempt_organization under sec_501 and sec_170 of the code university maintains an endowment fund comprised of privately raised endowments which fund was established to provide economic resources to university to provide for its educational activities the endowment fund is heavily diversified in both domestic and international markets and utilizes alternative investment strategies to reduce the overall risk of the portfolio and to enhance investment returns much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains but some income is debt financed or otherwise is treated as unrelated_business_taxable_income university is both the trustee and sole charitable_remainder beneficiary of trust trust is a charitable_remainder_unitrust described under sec_664 of the code under the terms of the trust agreement trust’s donor is the income_beneficiary entitled to an annual payout of a unitrust_amount equal to a percentage of the net fair_market_value of trust's assets pursuant to sec_643 of the code the remainder_interest is distributable to university upon the death of donor presently trust assets are managed by various investment managers in accordance with a strategy developed by an outside for-profit advisor university represents that trust's donor funded trust with the intention that university substantially benefit from the remainder value and that the assets will be managed to achieve the greatest possible return on investment university further represents that it wishes to achieve greater economies of scale in the management of trust a potentially higher and more stable investment return for trust and increased diversification of trust's investments therefore in an attempt to achieve these goals university proposes to allow trust to commingle its assets with that of university’s endowment fund a higher rate of return on trust’s assets would cause its donor to receive a higher unitrust payout and would cause university to ultimately receive a higher final payment as the remainder beneficiary university proposes to enable trust to participate in university’s endowment fund through the acquisition of units university proposes to create a contractual obligation pursuant to which it will issue to trust a contract right called units in its endowment fund in exchange for trust investing its assets in the endowment fund university represents that the number of units trust will receive will be in proportion to the value of trust’s investment in university’s endowment fund the contract will provide that trust will receive an income payout based on the number of units owned and the annual endowment fund spending rate which rate is determined by university the value of the units both at the time of acquisition and redemption will be based on the value of all underlying investment_assets held in the endowment fund the contract provides that trust could choose to either reinvest part of the payout or redeem additional units depending on trust’s cash requirements the payout up to the endowment fund spending rate will be characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain ordinary_income or a return_of_capital redemptions of units by trust over and above receipt of the payout rate will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the units furthermore university will pay any_tax owed on unrelated_business_taxable_income earned by its endowment fund university represents that under the contract trust would not have any ownership_interest in the underlying assets of the endowment fund or any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review university’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation trust would not have the right to veto or opt_out of any of the underlying endowment investments the contract would provide that with respect to the issuance of units university is neither a partner nor an agent of trust trust would also never be or become liable for any cost expense or payment incurred or due by university or for which university is liable or responsible relating to the endowment or the underlying endowment assets and university would indemnify and hold trust harmless from and against any liability arising out of any_action or inaction by university with respect to the endowment fund or the underlying assets as to the issue of fees and cost university represents that it will not charge a fee for management of the trust although it may recover its actual costs of management of the endowment fund as a charge against total investment return university also represents that it does not assess a trustee’s fee but currently charges a fee to the charitable_remainder trusts to cover the actual cost of the services it provides them finally university represents that it may recover the actual costs of administration of the trust as a charge against the trust you have requested the following ruling the issuance of endowment fund units by university to trust the making or receipt of payments with respect to the units and the holding or redemption of units will not generate unrelated_business_taxable_income to university or trust law sec_501 of the code in part provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific and certain other purposes sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_512 of the code excludes from the definition of unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans as defined in subsection a amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income it also excludes all royalties including overriding royalties whether measured by production or by gross or taxable_income_from_the_property and all deductions directly connected with such income it also excludes certain rents sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 of the code provides that a trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services an activity does not lose its identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization sec_664 of the code defines a charitable_remainder_unitrust as a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in subparagraph a and other than qualified gratuitous transfers described in subparagraph c may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in subparagraph a the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in subsection g all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined by subsection g and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_1_512_b_-1 of the income_tax regulations regulations defines certain investment_income to include dividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner and all deductions directly connected with any of the foregoing items of income shall be excluded in computing unrelated_business_taxable_income sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions sec_1_513-1 of the regulations provides that the primary objective of adoption of the unrelated_business_income_tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt_organizations upon the same tax basis as the nonexempt business endeavors with which they compete in general any activity of a sec_511 organization which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 - and which in addition is not substantially related to the performance of exempt functions - presents sufficient likelinood of unfair competition to be within the policy of the tax accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services thus the term trade_or_business in sec_513 is not limited to integrated aggregates of assets activities and good will which comprise businesses for the purposes of certain other provisions of the internal_revenue_code activities of producing or distributing goods or performing services from which a particular amount of gross_income is derived do not lose their identity as a trade_or_business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization thus for example the regular sale of pharmaceutical supplies to the general_public by a hospital pharmacy does not lose its identity as a trade_or_business merely because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purposes or in compliance with the terms of sec_513 similarly activities of soliciting selling and publishing commercial advertising do not lose their identity as a trade_or_business even though the advertising is published in an exempt_organization periodical which contains editorial matter related to the exempt purposes of the organization sec_1_513-1 of the regulations provides that in determining whether a trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 of the regulations provides that in general gross_income derives from an unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question - the activities that is of producing and distributing the goods or performing the services involved - and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code the organization received funds from participating exempt_organizations and invested the proceeds in stocks reinvested the income and realized appreciation and upon request liquidated participant's interests and distributed the proceeds to the participant the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the service further held that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for other tax-exempt organizations thus the service concluded that the organization was not tax exempt under sec_501 because it was regularly carrying on a business of providing investment services that would be an unrelated_trade_or_business if carried on by any of the tax-exempt organizations on whose behalf it operated analysis the issue is whether university and trust will each incur unrelated_business_taxable_income upon the issuance of university’s endowment fund units to trust upon the making or receipt of payments with respect to the units and upon the holding or redemption of the units sec_511 of the code imposes a tax on the income earned by an organization described in sec_501 if the income results from the operation of the organization's unrelated_trade_or_business an organization described in sec_501 that provides services will have unrelated_trade_or_business taxable_income if three conditions are satisfied the trade_or_business generates income the trade_or_business is regularly carried on and the trade_or_business is unrelated to the organization's exempt_purpose or function see sec_512 sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 the proposed contractual relationship between university and trust is not a trade_or_business that will generate income for university and therefore it does not meet the first condition for a finding of unrelated_business_income university represents that it will not earn any income from the proposed contractual relationship with trust rather university will only be recovering its actual costs of managing its endowment fund and its actual costs of administrating trust furthermore the relationship between university and trust is not of a commercial nature such as that of a trade_or_business university represents that it is both the trustee and remainder beneficiary of trust’s assets as such university will be engaging in investment activity of trust assets partially on its own behalf university represents that trust neither has any ownership_interest in the underlying assets of the endowment fund nor does it have a right to control university’s decisions as to the endowment fund and that trust will not be responsible for any liability relating to the endowment although trust’s donor who is the present income_beneficiary for life may also benefit from the diversification and increased rate of return of commingling trust’s assets with those of university’s endowment fund the unique relationship between university and trust distinguishes it from a trade_or_business this relationship is also distinguishable from revrul_69_258 in which the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit and that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for the benefit of other tax- exempt_organizations because university is not charging any fees for investing in its endowment fund and because university is investing funds on its own behalf as sole remainder beneficiary and as trustee revrul_69_258 is not applicable therefore because the services university provides to trust are not a trade_or_business that will generate income university does not meet the first condition listed above for a finding of unrelated_business_income as for the issue of whether trust will incur unrelated_business_taxable_income upon the proposed transaction with university the answer is dependent in part on whether the income earned by trust is passive_income and subject_to the unrelated_business_taxable_income exception under sec_512 of the code as stated above sec_511 of the code imposes a tax on an organization’s unrelated_trade_or_business income if three conditions are met the first of which is that the organization engages in a trade_or_business that generates income see sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 however under sec_512 of the code and b -1 of the regulations investment_income is excluded in computing unrelated_business_taxable_income if the income results from d ividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner here the income that trust is expected to receive from commingling its assets with those of the university’s endowment fund falls within the exception for certain investment_income under sec_512 of the code and b -1 of the regulations university represents that much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains although university represents that some income is debt financed or otherwise is treated as unrelated_business_taxable_income the tax owed on such unrelated_business_taxable_income will be paid_by the university’s endowment fund because trust is only a passive investor and only has a contractual right against university and not any interest in the underlying investment_assets of the endowment fund the unrelated_business_taxable_income generated from any debt-financed_property is not attributable to trust specifically the contractual arrangement between university and trust provides that trust will only receive an income payout based on the number of units owned in the endowment fund and the annual endowment fund spending rate which payout is characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain or a return_of_capital the redemption of units will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the units under the terms of the contract trust would neither have any ownership_interest in the underlying assets of the endowment fund nor any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review university’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation based upon the above trust is purely a passive investor in university’s endowment fund with the income that trust earns from the endowment fund being substantially_similar to income from ordinary and routine investments therefore trust will not incur unrelated_business_taxable_income upon investing in university’s endowment fund conclusion accordingly based on the information submitted we rule that the issuance of endowment fund units by university to trust the making or receipt of payments with respect to the units and the holding or redemption of units will not generate unrelated_business_taxable_income to university or trust except as we have ruled above we express no opinion as to the tax consequences of the transaction under the cited provisions of the code or under any other provisions of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make if you disagree with our proposed available for public inspection is attached to notice deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice


t c memo united_states tax_court douglas james crawford petitioner v commissioner of internal revenue respondent docket no filed date douglas james crawford pro_se stuart spielman and gordon l gidlund for respondent memorandum opinion panuthos chief special_trial_judge this case was assigned pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 all section references are to the internal_revenue_code in effect for the years in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure this matter is before the court on respondent's motion to dismiss for lack of jurisdiction and to strike as to the taxable_year and petitioner's cross-motion to dismiss for lack of jurisdiction as to the taxable_year respondent contends that this court lacks jurisdiction over the taxable_year on the ground that petitioner failed to file his petition within the 90-day period prescribed in sec_6213 petitioner counters that jurisdiction is lacking as to the taxable_year on the ground that respondent failed to issue a valid notice_of_deficiency under sec_6212 there being no dispute that we lack jurisdiction over the taxable_year we must resolve the parties' dispute respecting the proper ground for dismissal background on date respondent mailed a notice to petitioner proposing adjustments to his federal_income_tax for the notice was mailed to petitioner pincite crystal drive san diego ca the crystal drive address the crystal drive address is the address listed on petitioner's tax_return which petitioner filed with respondent on date on or about date the envelope bearing the notice was returned to respondent marked return to sender unable to forward on date respondent mailed a notice_of_deficiency to petitioner determining a deficiency of dollar_figure in his federal_income_tax for the notice_of_deficiency was mailed to petitioner at the crystal drive address the envelope bearing the notice_of_deficiency was returned to respondent marked unable to forward according to petitioner he moved from the crystal drive address on approximately date petitioner further asserts that he resided pincite santa cruz avenue san diego ca between that date until his move to bayard street san diego ca the bayard street address on date petitioner notified respondent of his change_of address to the bayard street address sometime in date petitioner filed his tax returns for and on date listing his address as the bayard street address petitioner did not file a tax_return for consequently petitioner's tax_return was the last tax_return filed by petitioner prior to the issuance of the notice_of_deficiency for petitioner did not provide respondent with a notice of a new address during the period date until date on date respondent mailed a notice_of_deficiency to petitioner determining a deficiency of dollar_figure in his federal_income_tax for as well as an addition_to_tax under sec_6651 in the amount of dollar_figure and an addition_to_tax under sec_6654 in the amount of dollar_figure the notice_of_deficiency for was mailed to petitioner at the bayard street address petitioner provided the court with copies of forms 1099r 1099-div 1099-int and w-2 for reflecting the bayard street address respondent advised the court that an underreporter transcript in reflected four different addresses in california for petitioner none of which was the crystal drive address on date petitioner filed a petition with the court seeking a redetermination of his tax_liabilities for the taxable years and the petition was delivered to the court in an envelope bearing a u s postal service postmark date of date there is no dispute that the petition was timely filed with respect to the notice_of_deficiency determining a deficiency in petitioner's tax_liability for after several months' delay during which time respondent conducted a search for the administrative file concerning petitioner's tax_year respondent filed her motion to dismiss for lack of jurisdiction and to strike as to the taxable_year asserting that petitioner failed to file his petition within the 90-day period prescribed in sec_6213 petitioner responded by filing his own motion to dismiss for lack at the time of filing the petition herein petitioner resided in san diego california of jurisdiction as to the taxable_year alleging that the deficiency_notice was not mailed to his correct address petitioner subsequently filed a supplement to his motion a hearing was conducted in this case in washington d c counsel for respondent appeared at the hearing and presented argument in support of respondent's motion to dismiss during the course of the hearing counsel for respondent stated that respondent could not demonstrate what if any steps were taken to determine petitioner's correct address prior to the mailing of the disputed notice_of_deficiency in date although petitioner did not appear at the hearing he did file a written_statement with the court pursuant to rule c in support of his motion to dismiss discussion this court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer's last_known_address sec_6212 81_tc_42 if a notice_of_deficiency is mailed to the taxpayer at the taxpayer's last_known_address actual receipt of the notice is immaterial 857_f2d_676 9th cir affg 88_tc_1042 89_tc_806 frieling v commissioner supra pincite the taxpayer in turn ha sec_90 days from the date the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency sec_6213 respondent mailed the notice_of_deficiency concerning petitioner's tax_liability for on date the petition was postmarked date and was filed by the court on date given that the petition was neither mailed nor filed prior to the expiration of the 90-day statutory period for filing a timely petition with respect to the notice_of_deficiency for it follows that we lack jurisdiction over and will strike the portions of the petition relating to the taxable_year sec_6213 sec_7502 rule a and c see normac inc v commissioner supra the question presented is whether dismissal should be premised on petitioner's failure_to_file a timely petition under sec_6213 or on respondent's failure to issue a valid notice_of_deficiency under sec_6212 in this regard we must decide whether respondent mailed the notice_of_deficiency in question to petitioner's last_known_address although the phrase last_known_address is not defined in the internal_revenue_code or in the regulations we have held that a taxpayer's last_known_address normally is the address shown on the taxpayer's most recently filed return absent clear and concise notice of a change_of address 91_tc_1019 see king v commissioner supra pincite the burden of proving that a notice_of_deficiency was not sent to the taxpayer's last_known_address is on the taxpayer yusko v commissioner supra pincite the record in this case shows that respondent mailed the notice_of_deficiency for to the address appearing on petitioner's most recently filed tax_return and that petitioner failed to provide respondent with clear and concise notice of his change_of address prior to the mailing of the disputed notice however the court_of_appeals for the ninth circuit the circuit to which this case is appealable has held that where the commissioner is aware prior to issuing a notice_of_deficiency that the address she intends to use is no longer the taxpayer's correct address the commissioner is required to exercise reasonable diligence in attempting to ascertain the taxpayer's correct address see king v commissioner supra pincite n 744_f2d_674 9th cir revg and remanding tcmemo_1983_52 stroud v commissioner tcmemo_1992_666 see also monge v commissioner supra pincite taylor v commissioner tcmemo_1988_152 fernandez v commissioner tcmemo_1987_557 whether respondent has exercised reasonable diligence in this regard depends upon a consideration of all the facts and circumstances king v commissioner supra pincite in wallin v commissioner supra correspondence sent by the commissioner to the taxpayer at an address in alaska shown on the return for the year at issue was returned as undeliverable with no forwarding address in an effort to obtain the taxpayer's correct address prior to mailing a notice_of_deficiency the commissioner subsequently made inquiries at the anchorage post office and the alaska state motor_vehicle bureau and searched microfilm records for tax returns filed by alaskans in and when these steps did not produce a new address for the taxpayer the commissioner mailed the notice_of_deficiency to the taxpayer's old address under these circumstances the court_of_appeals held that the commissioner failed to exercise reasonable diligence in ascertaining the taxpayer's last_known_address in reaching this conclusion the court_of_appeals found it significant that the commissioner failed to make an adequate search of internal_revenue_service computer records for the taxpayer's correct address we conclude that respondent did not exercise due diligence in ascertaining petitioner's correct address in short the record shows that respondent was aware prior to issuing the notice_of_deficiency to petitioner for that the address appearing on the petitioner's most recently filed return was no longer petitioner's correct address however respondent was unable to demonstrate what if any steps were taken to ascertain petitioner's correct address in the absence of any evidence on the point we decline to assume as suggested by counsel for respondent at the hearing on this matter that respondent's agents complied with internal_revenue_manual directives and conducted a search of respondent's computer records in an effort to ascertain a more current address for petitioner prior to issuing the disputed notice_of_deficiency see taylor v commissioner supra by sending the notice_of_deficiency to the crystal drive address knowing that prior correspondence to that address was returned undeliverable without any evidence in this record of a follow-up check for a current address by agents of respondent respondent failed to exercise due diligence we note that a number of respondent's administrative procedures direct internal_revenue_service personnel to take various steps including conducting a computer search checking the telephone and or city directory and contacting the taxpayer's employer or a third party in an effort to obtain a taxpayer's correct address where current address information is known to be incorrect see audit internal_revenue_manual cch sec_4243 handling of undeliverable mail in the examination function pincite manner of sending notices of deficiency audit internal_revenue_manual cch sec_4 pincite 30-day notice returned as undeliverable in sum we conclude that respondent failed to mail the notice_of_deficiency concerning petitioner's tax_liability for to petitioner's last_known_address accordingly we will deny respondent's motion to dismiss and to strike as to the taxable_year and we will grant petitioner's motion to dismiss as to the taxable_year as supplemented on the ground that the notice_of_deficiency for that year is invalid under sec_6212 to reflect the foregoing an order will be issued denying respondent's motion to dismiss for lack of jurisdiction and to strike as to the taxable_year and granting petitioner's cross-motion to dismiss for lack of jurisdiction as to the taxable_year as supplemented


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-154512-05 date march x --------------------------------------- ------------------------------- a -------------------------------- -------------------------------- d1 ----------------------- d2 ---------------------- year ------- dear ----------- x requesting a ruling under ' b of the internal_revenue_code a as president of x represents that x was incorporated on d1 x however conducted no business and had no income until year x was intended to be an s_corporation effective d2 however no form_2553 election by a small_business_corporation was timely filed for x is made for any taxable_year after the date prescribed by ' b for making such election for such taxable_year or no such election is made for any taxable_year and this responds to a letter dated date submitted by you on behalf of sec_1362 of the code provides that if -- a an election under ' a based solely on the facts and the representations submitted we conclude that x plr-154512-05 b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year has established reasonable_cause for failing to make a timely election to be an s_corporation effective d2 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective d2 along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for d2 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under ' b of the code of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 except as specifically set forth above no opinion is expressed concerning the sincerely j thomas hines chief branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes