t c memo united_states tax_court james maguire and joy maguire petitioners v commissioner of internal revenue respondent marc maguire and pamela maguire petitioners v commissioner of internal revenue respondent docket nos filed date ps owned two s_corporations whose businesses were related one an auto dealership the other a finance company that purchases customer notes from the auto dealership during the years in issue the finance company operated at a profit and the dealership operated at a loss ps did not have sufficient bases in the dealership to deduct its losses ps had substantial bases in the finance company at the end of each year the finance company owned substantial accounts_receivable due from the dealership at the end of each year ps received distributions of the accounts_receivable from the finance company and then contributed them to the related dealership in order to increase their bases in the dealership enough to allow for the deduction of its losses r disallowed the claimed loss deductions on the basis of r’s determination that ps’ actions were insufficient to increase their bases in the dealership because the transactions between ps and their related s_corporations did not amount to ps’ making an economic outlay held shareholders in two related s_corporations are not prohibited from receiving a distribution of assets from one of their s_corporations and then contributing those assets into another of their s_corporations in order to increase their bases in the latter the effect is to decrease the shareholders’ bases in the s_corporation making the distribution and thereby reducing the shareholders’ ability to get future tax-free distributions from the distributing s_corporation while increasing the shareholders’ bases in the s_corporation to which the contributions are made the fact that the two s_corporations have a synergistic business relationship and are owned by the same shareholders does not preclude accomplishing ps’ goal so long as the underlying distributions and contributions actually occurred we find that these transactions did actually occur f larkin fore for petitioners mark d eblen for respondent memorandum findings_of_fact and opinion ruwe judge in these consolidated cases respondent determined deficiencies and penalties as follows james and joy maguire docket no accuracy-related_penalty year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure marc and pamela maguire docket no accuracy-related_penalty year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure after concessions the issues for decision are whether petitioners james and 1in the notice_of_deficiency relating to petitioners marc and pamela maguire respondent recharacterized marc maguire’s income from cnac inc cnac for the and tax years as nonpassive and disallowed his rental real_estate passive_activity_losses respondent now concedes that marc maguire’s income from cnac for the and tax years was passive therefore respondent concedes that marc and pamela maguire’s passive real_estate losses for and may be used to offset marc maguire’s passive_income from cnac for those years in the notice_of_deficiency respondent also determined and marc and pamela maguire have not contested that they had unreported interest_income of dollar_figure from cnac for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year a dollar_figure decrease of their deduction for advertising continued joy maguire are entitled to deduct s_corporation losses of auto acceptance inc auto acceptance for the years and and a net_operating_loss_carryback of auto acceptance from to whether marc and pamela maguire are entitled to deduct s_corporation losses of auto acceptance for the years and and a net_operating_loss_carryback of auto acceptance from to whether marc and pamela maguire are entitled to a dollar_figure deduction for passive losses from real_estate rental_activity for and whether petitioners are liable for accuracy-related_penalties under sec_6662 at the time the petitions were filed petitioners resided in kentucky continued expenses for the tax_year and a dollar_figure decrease of their charitable_contribution_deduction for the tax_year with regard to petitioners james and joy maguire in the notice_of_deficiency respondent determined and they have not contested that they had unreported interest_income of dollar_figure from cnac for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year unreported compensation income in the form of fringe_benefits of dollar_figure for the tax_year and a dollar_figure decrease in their charitable_contribution_deduction for the tax_year 2unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact i james and joy maguire petitioners james and joy maguire are husband and wife with the filing_status of married_filing_jointly for the tax years and during the years at issue james and joy maguire owned a majority interest in cnac and james owned a majority interest in auto acceptance cnac and auto acceptance were both s_corporations s_corporations are passthrough entities that generally do not pay income_tax rather the income and losses of s_corporations are passed through to their shareholders who must include the income or losses on their individual income_tax returns in the notice_of_deficiency issued to james and joy maguire respondent disallowed losses that they claimed from auto acceptance for the taxable years and of dollar_figure dollar_figure and dollar_figure respectively because respondent determined that those losses were in excess of james maguire’s adjusted_basis in auto acceptance for the same reason respondent also disallowed a net_operating_loss_carryback of dollar_figure from auto acceptance’ sec_3the deductibility of a shareholder’s loss from an s_corporation is limited to the sum of the shareholder’s adjusted_basis in the shareholder’s stock in the s_corporation and the adjusted_basis of any indebtedness of the s_corporation to the shareholder sec_1366 tax_year that james and joy maguire claimed on their form 1040x amended u s individual_income_tax_return james and joy maguire received a refund and tax_credit of dollar_figure on the basis of their amended_return the refund claim for the tax_year was processed and paid_by respondent’s service_center before the examination for the tax years in issue ii marc and pamela maguire petitioners marc and pamela maguire are husband and wife with the filing_status of married_filing_jointly marc is the son of james and joy maguire during the years at issue marc maguire owned a minority interest in cnac and during and he owned a minority interest in auto acceptance in the notice_of_deficiency issued to marc and pamela maguire respondent disallowed losses claimed from auto acceptance for and of dollar_figure and dollar_figure respectively because respondent determined that those losses are in excess of marc maguire’s adjusted_basis in auto acceptance for the same reason respondent also disallowed a net_operating_loss_carryback of dollar_figure from auto acceptance’s tax_year that marc and pamela maguire claimed on an amended_return for marc and pamela maguire received a refund and tax_credit totaling dollar_figure on the basis of their amended_return for iii the s_corporations auto acceptance is a car dealership and cnac is a finance company that deals exclusively with auto acceptance’s customers auto acceptance is primarily engaged in the purchase of used vehicles at auction and the resale of those vehicles cnac purchases retail installment notes related to the vehicles that auto acceptance sells for the tax years at issue auto acceptance and cnac both elected to be taxed as s_corporations under sec_1361 a ownership as of date james maguire owned of auto acceptance during james maguire made a gift of of his interest in auto acceptance to marc maguire as of date and james maguire owned of auto acceptance and marc maguire owned james maguire was an officer of auto acceptance for the and tax years and marc maguire was an officer for the and tax years as of date and james maguire owned of cnac joy maguire owned and marc maguire owned for the tax years and james maguire was an officer of cnac for the tax years and marc maguire was an officer of cnac b basis in and cnac operated at a profit and auto acceptance operated at a loss before the end of petitioners were advised by their accountants at katz sapper miller llp katz sapper miller that james did not have sufficient basis in auto acceptance to deduct its losses on his individual_income_tax_return as a result katz sapper miller advised james that he could increase his basis in auto acceptance by receiving distributions of dollar_figure from cnac which he could then contribute to auto acceptance the effect would be to increase james’ basis in auto acceptance so that he could deduct auto acceptance’s losses on his individual return since james and joy maguire owned of cnac and marc owned the other it was necessary for james to borrow marc’s portion of the distribution james executed a note to marc for his share of the distribution an initial attempt to carry out katz sapper miller’s plan involved the issuance of checks totaling dollar_figure from cnac to james and marc maguire which james could then contribute to auto acceptance james joy and marc had an adjusted_basis in cnac of at least dollar_figure however cnac did not have sufficient funds in its bank account to make a cash distribution of dollar_figure to its owners after learning of their clients’ inability to make a cash contribution to auto acceptance katz sapper miller advised them to pursue an alternative method of increasing james’ basis in auto acceptance which would not require cnac to make a cash distribution to its owners katz sapper miller advised petitioners that an identical result would be reached if a distribution of accounts_receivable owed to cnac by auto acceptance was made from cnac to james joy and marc marc would lend his portion of the accounts_receivable to james who would then contribute the accounts_receivable to auto acceptance increasing james’ basis in auto acceptance enough to allow for the deduction of auto acceptance’s losses on his federal_income_tax return this advice was followed cnac distributed dollar_figure in accounts_receivable to james joy and marc maguire on or before date auto acceptance owed at least this amount to cnac before the distribution marc lent his share of accounts_receivable to james who then contributed them to auto acceptance james executed a note to marc for the amount of the loan the advice of katz sapper miller was followed in subsequent years in cnac distributed dollar_figure in accounts_receivable to its shareholders on date and the receivables were then contributed by petitioners to auto acceptance in cnac distributed dollar_figure in accounts_receivable to its shareholders on date and the accounts_receivable were then contributed to auto acceptance auto acceptance owed at least these amounts to cnac before the distributions in and the respective distributions from cnac and the respective contributions to auto acceptance were apportioned according to james’ joy’s and marc’s ownership interests the distributions and contributions of the accounts_receivable were carried out by the execution of separate written shareholder resolutions regarding the distributions and contributions which were signed at the end of and respectively adjusting journal entries were made to the corporate books in the year following the taxable_year to which they related at the time auto acceptance’s and cnac’s yearly audit was conducted in and james was a shareholder and marc was a shareholder in auto acceptance at the end of each of the tax years and petitioners’ respective bases in cnac equaled or exceeded the amounts of distributions from cnac to petitioners 4there were very slight differences in petitioners’ respective ownership percentages of cnac and auto acceptance neither party made any argument that this difference has any significance to the outcome of these cases opinion pursuant to sec_1366 a shareholder of an s_corporation is liable for the tax on his pro_rata share of the corporation’s gross_income a shareholder is also entitled to deduct his pro_rata share of an s corporation’s losses see sec_1366 137_tc_46 losses deductible by a shareholder are limited to the shareholder’s basis in the corporation see sec_1366 174_f3d_928 8th cir as a result losses cannot exceed the sum of the shareholder’s adjusted_basis in his or her stock in the s_corporation and the shareholder’s adjusted_basis in any indebtedness of the s_corporation to the shareholder sec_1366 and b a shareholder’s basis in his stock is increased by his contributions of capital to the corporation see sec_1012 sec_351 sec_358 economic outlay in determining whether a particular transaction qualifies as a shareholder investment a taxpayer must make an actual economic outlay 63_tc_468 aff’d 535_f2d_309 5th cir 54_tc_1293 aff’d a f t r 2d 8th cir oren v commissioner tcmemo_2002_172 aff’d 357_f3d_854 8th cir a taxpayer makes an economic outlay when he incurs a cost or is left poorer in a material sense after the transaction 352_us_82 ruckriegel v commissioner tcmemo_2006_78 oren v commissioner tcmemo_2002_172 see estate of 268_f3d_553 8th cir aff’g tcmemo_2000_355 bergman f 3d pincite in order for petitioners to have sufficient bases in auto acceptance to deduct the losses claimed for the years in issue they must have made an actual economic outlay when they contributed the accounts_receivable to auto acceptance we find petitioners did make the required economic outlay respondent contends that the written yearend resolutions and the subsequent adjusting corporate journal entries are insufficient to increase petitioners’ bases in auto acceptance under sec_1366 much of respondent’s position is rooted in his factual conclusion that the distributions and contributions of accounts_receivable never actually took place however the record sufficiently establishes that petitioners were advised by their team of accountants and attorneys before the end of each year in issue to use the distributions and contributions of the accounts_receivable in order to increase their bases in auto acceptance for the years in issue and that this advice was actually followed petitioners james and marc maguire both testified that katz sapper miller advised them to effectuate the accounts_receivable transaction at the end of each year in issue and that they followed this advice in addition jeffrey taylor a certified_public_accountant c p a and partner with katz sapper miller and kevin sullivan a tax attorney c p a and tax partner with katz sapper miller testified that they advised petitioners to make the distributions and contributions of accounts_receivable before the end of each of the taxable years in issue and that they determined the best way to implement their plan was to have petitioners execute the corporate resolutions and make adjusting journal entries on the corporate books the resolutions dated date and and the adjusting journal entries coupled with the relevant testimony and the pattern of following this procedure for three straight years is persuasive evidence that petitioners followed katz sapper miller’s advice and effected the distributions and contributions at the end of each year in issue 5mr taylor has been a c p a since and concentrates his practice in the retail automotive industry mr sullivan has been an attorney and a c p a since mr sullivan has worked in c p a firms as an accountant and in a law firm as a tax attorney as a tax partner mr sullivan is engaged as a technical tax resource by other members of his firm as well as by its clients we include information regarding messrs taylor and sullivan’s backgrounds only to demonstrate that they were individuals whose advice petitioners sought regarding their income_tax situation on the basis of their experience and qualifications we have not relied on their legal conclusions in reaching our decision respondent also argues that no economic outlay was made because the resolutions and adjusting journal entries made to the books of the related companies were devoid of any economic reality and did not alter the economic positions of the parties we find that the distributions and contributions did have real consequences that altered the positions of petitioners individually and those of their businesses as petitioners point out the distributions and contributions created actual economic consequences for the parties because the accounts_receivable had real value in that they were legitimate debts that auto acceptance owed to cnac and thus were legitimate assets of cnac petitioners’ contribution of the accounts_receivable resulted in their being poorer in a material sense in that the accounts_receivable were no longer collectible by them individually when petitioners received the accounts_receivable from cnac as they had every right to do and contributed them to auto acceptance that transaction reduced the liabilities of auto acceptance made auto acceptance solvent in terms of its assets exceeding its liabilities and increased the net_worth of auto 6these accounts_receivable that auto acceptance owed to cnac are to be distinguished from the interest-bearing notes that auto acceptance received from car buyers and sold to cnac acceptance exposing a greater amount of its assets to its general creditors at the same time petitioners’ bases in cnac were reduced by the amounts of the accounts_receivable that cnac had distributed to them thereby reducing their ability to receive future tax-free distributions from cnac see sec_1368 7petitioners stress that the risk involved in exposing more of auto acceptance’s assets to its creditors was more than hypothetical because by mid- the kentucky attorney_general had instituted a lawsuit against petitioners and their businesses claiming millions of dollars on the basis of consumer fraud claims petitioners contend that the risk of the loss to auto acceptance’s creditors including vendors that it alone dealt with when viewed in consideration of the attorney general’s lawsuit was very real and the additional net_worth in auto acceptance created by the capital_contribution was put at greater risk making them poorer in a material sense 8in general a shareholder’s basis in the stock of an s_corporation is increased by the shareholder’s pro_rata share of the corporation’s income decreased by the shareholder’s pro_rata share of the corporation’s losses and deductions and also decreased by the amounts of distributions not includable in income see sec_1367 sec_1368 provides that a distribution_of_property made by an s_corporation with respect to its stock to which but for this subsection sec_301 would apply shall be treated in the manner provided in subsection b or c whichever applies sec_1368 generally provides that if such a distribution is made by an s_corporation out of previously taxed undistributed_earnings and profits it shall not be included in income to the extent it does not exceed the adjusted_basis of the stock if the distribution is made by an s_corporation which has no accumulated_earnings_and_profits pursuant to sec_1368 the distribution shall not be included in gross_income to the extent that it does not exceed the adjusted_basis of the stock and the amount of the distribution which exceeds the adjusted_basis of the stock shall be treated as gain from the sale_or_exchange of property the fact that the cnac accounts_receivable were distributed to petitioners and then contributed to a related_entity does not require a finding that there was no economic outlay we have previously considered this issue and have held that the fact that funds lent to an s_corporation originate with another entity owned or controlled by the shareholder of the s_corporation does not preclude a finding that the loan to the s_corporation constitutes an ‘actual economic outlay’ by the shareholder ruckriegel v commissioner tcmemo_2006_78 see also yates v commissioner tcmemo_2001_280 culnen v commissioner tcmemo_2000_139 rev’d and remanded on another issue 28_fedappx_116 3d cir the fact that petitioners contributed intangible assets to auto acceptance rather than cash does not preclude increases in their bases the tax basis of an s_corporation may be increased through the contribution of cash tangible assets or intangible assets such as accounts_receivable see sec_1012 sec_351 sec_358 see also 90_tc_206 aff’d 875_f2d_420 4th cir as a result of the transactions the values of petitioners’ investments in cnac were diminished by the amounts of the receivables distributed to them when petitioners contributed the accounts_receivable to auto acceptance the contributions increased their bases in auto acceptance and made them poorer individually because they no longer owned the receivables in their individual capacities respondent argues that the close relationships between the shareholders and the two s_corporations warrants disregarding petitioners’ attempt to increase their bases in auto acceptance while it is appropriate to scrutinize the validity of transactions between related parties we see no reason why shareholders in two related s_corporations should be prohibited from taking distributions of assets from one of their s_corporations and investing those assets into another of their s_corporations in order to increase their bases in the latter the effect is to decrease the shareholders’ bases in the s_corporation making the distribution thereby reducing the shareholders’ potential future tax-free distributions from the distributing s_corporation while increasing the shareholders’ bases in the s_corporation to which the contribution is made the fact that the two s_corporations have a synergistic business relationship and are owned by the same shareholders should make no difference so long as the underlying distributions and contributions actually occurred t he existence of a close relationship between the parties is not necessarily fatal if other elements are present which clearly establish the bona fides of the transactions and their economic impact bhatia v commissioner tcmemo_1996_429 as previously stated we have found that these transactions did actually occur the fact that petitioners were motivated by tax considerations is not fatal any one may so arrange his affairs that his taxes shall be as low as possible 69_f2d_809 2d cir aff’d 293_us_465 we find that petitioners made an actual economic outlay when they contributed the accounts_receivable to auto acceptance we hold that petitioners are entitled to their claimed bases increases in auto acceptance and their claimed s_corporation losses for the years and marc and pamela maguire’s passive real_estate losses in the notice_of_deficiency respondent disallowed dollar_figure of marc and pamela maguire’s passive rental losses for the tax_year sec_469 generally disallows for the taxable_year any passive_activity_loss sec_469 a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the taxable_year over the aggregate income from all passive activities for that year sec_469 a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 or to the extent provided in regulations any activity with respect to which expenses are allowable as a deduction under sec_212 sec_469 rental_activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 there are two principal exceptions to the general_rule that rental activities are per se passive activities real_estate_professional the first exception to the general_rule is found in sec_469 under that section the rental activities of taxpayers in real_property trades_or_businesses are not treated as per se passive activities but rather as trade_or_business activities subject_to the material_participation requirements of sec_469 sec_469 see also sec_1_469-9 income_tax regs petitioner marc maguire does not contend that he is a real_estate_professional and the record does not establish that he is offset for rental_real_estate_activities the second exception to the general_rule that rental_real_estate_activities are per se passive activities and therefore subject_to the disallowance rule_of sec_469 is found in sec_469 that section provides that a taxpayer who actively participates in a rental real_estate activity may deduct a maximum loss of dollar_figure per year related to the activity see sec_469 and this exception is subject_to phaseout when the taxpayer’s adjusted_gross_income agi determined without regard to any passive_activity_loss exceeds dollar_figure sec_469 the active_participation standard can be satisfied without regular continuous and substantial involvement in an activity the standard is satisfied if the taxpayer participates in a significant and bona_fide sense in making management decisions such as approving new tenants deciding on rental terms approving capital expenditures or arranging for others to provide services such as repairs madler v commissioner tcmemo_1998_112 on his federal_income_tax return marc maguire took the position that he was active in the management of his real_estate activities and claimed the maximum deduction of dollar_figure respondent has not contested marc maguire’s contention that he was active in the real_estate management and the record does not indicate otherwise as a result the claimed deduction should be disallowed only if marc maguire’s agi for is high enough that the phaseout rule applies sec_469 marc and pamela maguire reported a net_operating_loss for of dollar_figure however respondent disallowed dollar_figure in claimed losses from auto acceptance and increased their agi because he determined that they lacked the necessary basis in auto acceptance as a result respondent determined that marc and pamela maguire’s agi for exceeded dollar_figure making them ineligible for the deduction because we have decided the adjusted_basis issue in petitioners’ favor marc and pamela maguire will have negative agi for purposes of their return as a result marc and pamela maguire are not subject_to the sec_469 phaseout limitation we therefore find that petitioners marc and pamela maguire are entitled to their claimed deduction of dollar_figure for passive losses from real_estate rental_activity for sec_6662 accuracy-related_penalties respondent determined accuracy-related_penalties against james and joy maguire for the taxable years and of dollar_figure dollar_figure and dollar_figure respectively respondent also determined accuracy-related_penalties against marc and pamela maguire for the and tax years of dollar_figure dollar_figure and dollar_figure respectively because of our holding in petitioners’ favor on the adjusted_basis issue and because of the parties’ various concessions respondent’s sec_6662 penalty computations must be adjusted accordingly in the event that petitioners are found liable for the penalties we must decide whether petitioners are liable for the sec_6662 penalties with respect to items not related to respondent’s determinations of their bases in auto acceptance which include various determinations involving their receipt of unreported interest_income and unreported fringe benefit income and the reduction of advertising expense and charitable_contribution deductions pursuant to sec_6662 and b a taxpayer may be liable for a penalty of of the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code this includes a failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 aff’d 925_f2d_348 9th cir 85_tc_934 disregard means any careless reckless or intentional disregard sec_6662 petitioners have not contested several of the adjustments respondent determined in the notice_of_deficiency for their tax_year james and joy maguire agree that they had unreported interest_income from cnac of dollar_figure because they failed to impute interest_income at the applicable_federal_rate on loans cnac made to related parties marc and pamela maguire do not contest that they also had unreported interest_income of dollar_figure from cnac for petitioners have also conceded that they had unreported fringe benefit income for the personal_use of company-owned vehicles petitioners were unable to provide records to respondent to substantiate the business_purpose of the automobile use and indicated that such records had not been maintained as a result respondent’s revenue_agent determined that petitioners had used company automobiles for personal reasons additionally marc and pamela maguire have not contested that they failed to substantiate advertising expenses for of dollar_figure petitioners have also conceded that they claimed deductions for charitable_contributions which they could not substantiate james and joy maguire conceded that their charitable_contribution_deduction for be decreased by dollar_figure while marc and pamela maguire conceded that their charitable_contribution for be decreased by dollar_figure 9for the taxable years and james and joy maguire conceded that they had dollar_figure dollar_figure and dollar_figure in unreported fringe benefit income from cnac respectively for their personal_use of company automobiles marc and pamela maguire conceded that they had unreported fringe benefit income of dollar_figure dollar_figure and dollar_figure for their personal_use of company automobiles for the and taxable years respectively because petitioners failed to keep adequate books_and_records and to substantiate properly the items in question on their returns we find that they were negligent and therefore liable for the accuracy-related_penalties with respect to the conceded adjustments to reflect the foregoing decisions will be entered under rule


t c summary opinion united_states tax_court lorianne blake petitioner v commissioner of internal revenue respondent docket no 3583-03s filed date lorianne blake pro_se jeremy l mcpherson for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioner's federal income taxes of dollar_figure for and dollar_figure for after concessions the issue remaining for decision2 is whether petitioner is entitled to costs of goods sold and deductions on schedule c profit or loss from business in excess of those allowed by respondent background the stipulation of facts and exhibits received into evidence are incorporated herein by reference petitioner resided in chico california at the time the petition was filed during and petitioner did sales work for norfield industries in chico california during those years petitioner was also engaged as a distributor of herbalife products on her and form sec_1040 u s individual_income_tax_return petitioner reported income and expenses from her herbalife activities on schedules c petitioner described her activity as nutrition consultant 1in the notice_of_deficiency respondent disallowed auto expenses of dollar_figure for and dollar_figure for and other interest_expenses of dollar_figure for and dollar_figure for additionally respondent determined that petitioner received advance earned_income_credit payments during and in the amounts of dollar_figure and dollar_figure respectively petitioner did not report the advance earned_income_credit payment on her tax_return petitioner has conceded these issues 2the amounts of any liabilities for and deductions of self- employment_taxes depend on the resolution of the other issues in this case product-related expenses petitioner claimed deductions for advertising on line of her and schedules c in the amounts of dollar_figure and dollar_figure respectively approximately dollar_figure of her claimed advertising expense for and dollar_figure for was for samples which she gave away the remaining dollar_figure for and dollar_figure for of petitioner's advertising expenses was for herbalife products which petitioner used personally petitioner did not maintain any records of the products that she gave away or for the products she used herself the amounts petitioner deducted as advertising expenses were based upon the retail value of the items not on the amount which petitioner had actually paid for the products petitioner's actual merchandise costs were dollar_figure in and dollar_figure in respondent disallowed all of petitioner's claimed advertising expenses petitioner also reported costs of goods sold on her and schedules c in the amounts of dollar_figure and dollar_figure respectively in calculating costs of goods sold line of schedule c reports purchases less cost of items withdrawn for personal_use petitioner entered the total_amounts she paid for herbalife products for each year those amounts were dollar_figure and dollar_figure for and respectively petitioner did not subtract from these amounts the value of products which she used personally or gave away and for which she had simultaneously claimed a deduction for advertising expenses respondent disallowed dollar_figure and dollar_figure for and respectively of the total_amounts which petitioner had claimed as costs of goods sold mortgage interest in petitioner and her then husband john little mr little borrowed dollar_figure from tri-counties bank to pay expenses_incurred in their children's apparel business petitioner's father vernon blake mr blake cosigned the note petitioner and mr little signed a security_agreement with mr blake and signed quitclaim deeds on three properties as security for mr blake mr blake did not record his security interests in any of the three properties in petitioner and mr little filed a voluntary chapter bankruptcy petition mr blake never attempted to foreclose upon his security interests in any of the properties during the bankruptcy petitioner and mr little relinquished their interests in the properties the bankruptcy trustee disposed of the properties and mr blake did not receive any of the properties or the proceeds from their sale petitioner does not have any records from the bankruptcy and does not know whether her father filed a claim or received any distributions from the bankruptcy some time after the dollar_figure loan with tri-counties bank was converted to a line of credit with bank of america in mr blake's name as of the amount mr blake owed on the bank of america line of credit was still unpaid in mr blake took out a mortgage on his home in the amount of dollar_figure before this mortgage mr blake had owned the home free and clear of any debts or encumbrances since he had purchased it in mr blake and bank of america agreed a that dollar_figure of the dollar_figure mortgage would be applied against the line of credit which mr blake owed to bank of america b that dollar_figure of the dollar_figure mortgage would be applied against a visa account held by petitioner and her father with bank of america and c that bank of america would forgive dollar_figure of debt owed by mr blake to bank of america petitioner and her father both lived in the home from date through date when mr blake died petitioner inherited the house and has continued to live there since her father's death petitioner made all of the mortgage payments on the home during and but the mortgage account remained in her father's name the interest portions of the mortgage payment sec_3bank of america reported to the i r s that for the tax_year mr blake had dollar_figure of income from debt_cancellation for and totaled dollar_figure and dollar_figure respectively petitioner claimed mortgage interest deductions in these amounts on her and schedules c respondent disallowed these amounts in full discussion deductions are a matter of legislative grace and the taxpayer bears the burden of proving the entitlement to any deductions claimed see 503_us_79 taxpayers generally bear the burden of proving that the commissioner’s determinations are incorrect rule a 290_us_111 the resolution of the issues in this case does not depend on which party has the burden_of_proof the court resolves these issues on the preponderance of evidence in the record therefore sec_7491 does not apply here product-related expenses sec_162 allows a taxpayer deductions for ordinary and necessary business_expenses incurred during the taxable_year in carrying_on_a_trade_or_business generally a taxpayer must establish that deductions taken pursuant to sec_162 are ordinary and necessary business_expenses and must maintain records sufficient to substantiate the amounts of the deductions claimed sec_6001 sec_1_6001-1 income_tax regs sec_262 however expressly provides that no deduction shall be allowed for personal living or family_expenses for each of the years in issue petitioner claimed a schedule c deduction for advertising expenses for herbalife products she purchased however petitioner personally consumed the majority of the herbalife products she purchased she also gave away an undocumented portion of the purchases as samples additionally in computing her costs of goods sold petitioner failed to deduct from her purchases the products she consumed personally or gave away as a result petitioner's costs of goods sold are improperly inflated as detailed supra petitioner deducted these same amounts as advertising expenses to allow petitioner not only to report these amounts as costs of goods sold but also to deduct them as advertising expenses would allow her the practical equivalent of double deduction 394_us_678 292_us_62 589_f2d_1383 10th cir affg 67_tc_760 and 65_tc_278 as this court has previously held the code 'should not be interpreted' to allow double deductions for the same amount 'absent a clear declaration of intent by congress ' and we do not think sec_162 reflects any such intent 62_tc_878 quoting united_states v skelly oil co supra pincite the court sustains respondent's determinations disallowing petitioner's advertising expense deductions and the improperly claimed amounts for costs of goods sold mortgage interest for and petitioner claimed deductions for mortgage interest on her schedules c petitioner alleges she paid a mortgage in her father's name largely because mr blake assumed in full and refinanced petitioner's business loan which he had originally cosigned petitioner has not provided evidence to show what portion of the mortgage payments if any represents interest on the debt she owed her father therefore she is not entitled to schedule c business_interest deductions sec_163 allows a deduction for interest_paid or accrued within the taxable_year on indebtedness the indebtedness for purposes of sec_163 must in general be an obligation of the taxpayer and not an obligation of another 604_f2d_34 9th cir affg tcmemo_1976_150 84_tc_889 affd without published opinion 805_f2d_1073 d c cir 74_tc_1266 however sec_1_163-1 income_tax regs provides in pertinent part interest_paid by the taxpayer on a mortgage upon real_estate of which he is the legal or equitable owner even though the taxpayer is not directly liable upon the bond or note secured_by such mortgage may be deducted as interest on his indebtedness only interest_paid on a mortgage on property for the period after the taxpayer becomes the legal or equitable owner of the property is deductible by the taxpayer as interest on her indebtedness zards v commissioner tcmemo_1995_497 citing 64_tc_300 state law determines the nature of property rights and federal_law determines the appropriate tax treatment of those rights see 472_us_713 363_us_509 thus whatever rights or interests if any petitioner held in the property during the years at issue must be determined by applying applicable california law under california law title to the property of a decedent's_estate vests subject_to administration in his or her heirs or devisees and legatees immediately on death cal prob code sec west olson v toy cal rptr 2d ct app citing dorland v dorland cal rptr dist ct app raczynski v judge cal rptr ct app such vesting is not contingent on any assent acceptance or election by the heirs estate of taylor v crippled children's socy cal rptr ct app citing estate of meyer v mcgrath p 2d cal dist ct app thus here legal_title to the property passed to petitioner at the time of mr blake's death in date the court holds that petitioner is entitled only to mortgage interest deductions on schedules a itemized_deductions for the interest portion of mortgage payments she made on the property from the date of mr blake's death in date through date petitioner is not entitled to a mortgage interest_deduction on schedule a for payments she made prior to mr blake's death because she was not directly liable on the note securing the mortgage and she has failed to prove that she was the legal equitable or beneficial_owner of the property during that period reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


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 corp b05 plr-133698-18 date may legend parent ------------------------------------------------------------ ------------------------------- sub ------------------------------------------------------------ -------------------------------- sub ------------------------------------------------------------ ------------------------------- sub ------------------------------------------------------------ ---------------------------------------- sub ------------------------------------------------------------ -------------------------------- sub ------------------------------------------------------------ --------------------------------------------- sub ------------------------------------------------------------ --------------------------------------- sub ------------------------------------------------------------ ----------------------------- sub ------------------------------------------------------------ --------------------------------- sub ----------------------------------- plr-133698-18 ------------------------------------------------------------ date date date ----------------------- ---------------------- --------------------------- company official -------------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------------- tax professional ---------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------ ---------------------------------------------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make an election the extension is being requested for parent and its affiliated subsidiaries the parent group to make an election to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations the election for the taxable_year ending on date additional information was submitted in letters dated date and date the material information submitted for consideration is summarized below parent sub and sub were formed on date on date sub which was wholly- owned by sub which in turn was wholly-owned by parent acquired all of the stock of sub which owned all of the stock of sub sub sub sub sub and sub an election for the parent group to file a consolidated_income_tax_return with parent as the common parent for the taxable_year ending on date was due on the last day prescribed by law including extensions of time for the filing of parent’s return however for various reasons a valid election ie the filing of the consolidated_return was not filed by the due_date of parent’s return this request was submitted under sec_301_9100-3 for an extension of time to file the election sec_1_1502-75 of the income_tax regulations provides in part that an affiliated_group_of_corporations which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member plr-133698-18 of the group during any part of the taxable_year for which the consolidated_return is to be filed consents in accordance with sec_1_1502-75 of the regulations to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for the filing of the common parent’s return the period of limitations on assessment under sec_6501 has not expired for the taxable_year ending on date or any subsequent taxable_year parent has represented that it is not attempting to alter a return position taken for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time parent requested relief and for which the new position requires or permits a regulatory election for which relief is requested under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by regulations ie sec_1 a therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided that parent group qualifies substantively to file a consolidated_return for the taxable_year ending on date an plr-133698-18 extension of time is granted under sec_301_9100-3 until sixty days from the date on this letter for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for each of its affiliated subsidiaries for its taxable_year ending on date parent must attach a copy of this letter_ruling to such return or if parent files the return electronically a statement must be attached to the return that provides the date on and the control number plr-133698-18 of this letter_ruling the above extension of time is conditioned on parent group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the parent group’s tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion with respect to whether in fact the parent group qualifies substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the return or the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely t ian russell t ian russell branch chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index numbers -------------------------------------- ----------------------------------------------- ----------------------------- -------------------------------- 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 b3 plr-102118-15 date date legend x y a b state date date date year n p ----------------------------------------- ------- ---------------- -------------------------------- ------------------------ ---------------------- ----------------- ------------ ----------------------- -------------------- -------------------------- ------ --- --- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code plr-102118-15 facts the information submitted states that x was incorporated under the laws of state on date and elected to be an s_corporation effective year on date a an individual and sole owner of x stock transferred n of the shares of x stock to b an individual and p of x stock to y an s_corporation y was an ineligible s_corporation shareholder under sec_1361 accordingly x’s s_corporation_election was terminated on date x and its shareholders were not aware that the transfer of x stock to y would terminate x’s s_corporation_election on date b transferred all of his stock to y as owner of x y could make a qsub election under sec_1361 x represents that x and its shareholders have filed tax returns consistent with x being an s_corporation from date to date x further represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 by a corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s plr-102118-15 corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election on date was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date to date provided that x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1362 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent 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 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely richard probst senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number 860d ---------------------- ------------------- ------------------------ ------------------------------------ ------------------------------------ department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc fip b2 plr-148889-07 date january legend trustee --------------------------------------------------------------------- trust ------------------------- --------------------------------------------------------------------- trust --------------------------------------------------------------------- trust --------------------------------------------------------------------- former trustee ----------------------------------------------------------------------- ----------------- ----------------------------------------------------------------------- ----------------- ----------------------------------------------------------------------- -------------------------------- ------------------------------------------------------------------------ ------------- underwriter state date ---------------------------------------- ------------- ---------------------- ------ ------- ------- ------- ------- ----------- ----------------------- ----------------------- plr-148889-07 date date month month year year year year dear -------------------- this responds to a letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_860d of the internal_revenue_code to treat trust sec_1 and collectively the trusts as real_estate mortgage investment conduits remic s facts trust and trust were formed on date and trust was formed on date the trusts were formed as state statutory trusts pursuant to trust agreements between underwriter and former trustee trustee represents that the trusts each meet the requirements to qualify as a remic under sec_860a through 860g and were eligible to be treated as a remic starting in taxable_year the trusts are part of a series of the underwriter’s remic securitization program each trust agreement provides that the former trustee would file the appropriate forms to treat trusts as remics beginning in year the trust agreements further provide that the former trustee would serve as trusts’ direct representative and were thus responsible for preparing signing and filing the tax and information returns for each remic under the trust agreements remic elections were supposed to be made on forms filed for each trust beginning with taxable_year former trustee and underwriter discussed assigning the responsibility to make the remic elections to an outside vendor and former trustee believed underwriter had obtained an accounting firm to file form_1066 and make remic elections an engagement letter was drafted assigning former trustee’s filing and reporting plr-148889-07 obligations to an accounting firm but the engagement letter was never signed this resulted in a misunderstanding regarding former trustee’s filing duties therefore former trustee failed to file forms or make remic elections for taxable_year an employee of former trustee employee subsequently concealed the failure_to_file forms or make remic elections throughout year consequently forms were also not filed for taxable_year in month of year former trustee merged with trustee at which point trustee became responsible for the administration of the trusts trustee represents that due diligence was performed to determine that former trustee was in compliance with all of its fiduciary duties due to employee’s continued concealment however trustee did not discover the failure_to_file forms for year sec_1 and and thus the failure to make remic elections the concealment along with trustee’s responsibility for filing thousands of other tax forms each year resulted in a failure_to_file forms for taxable_year trustee discovered that forms had not been filed for taxable_year sec_1 and upon employee’s departure in month of year and as a result that the trusts had not elected remic status trustee filed forms for each of the trusts’ taxable_year sec_1 and making remic elections for each of the trusts on date trustee then requested sec_301_9100-3 relief seeking reasonable extension of time to make remic election under sec_860d taxpayer makes the following representations trustee filed forms for taxable_year sec_1 and made remic elections and sought reasonable extension of time to file before the internal_revenue_service discovered the failures to file and make remic elections the trustee did not alter a return position of which a sec_6662 penalty has been or could be applied and did not adopt a new position that requires or permits the election to which the request for relief relates the trustee did not choose to not make a remic election after having been informed of the tax consequences of making such an election finally taxpayer represents that since no facts have changed since the original due_date for making the remic election the election will not be advantageous to the trusts therefore the trusts will not have a lower tax_liability in the aggregate for all the years affected by the remic election than if the remic election had been timely made law and analysis sec_860d of the code provides that an entity which meets the requirements of a remic under sec_860d may elect to be treated as a remic on the return for its first taxable_year once elected sec_860d provides that the entity will be treated as a remic for the first taxable_year in which the election is made and all plr-148889-07 subsequent taxable years until such status is terminated under sec_860d sec_1_860d-1 of the income_tax regulations provides that a qualified_entity makes a remic election by timely filing for its first taxable_year a form_1066 u s real_estate_mortgage_investment_conduit income_tax return signed by a person authorized to sign that return this regulation also provides a reference to sec_301_9100-1 for rules regarding extensions of time for making elections sec_1_860f-4 provides that the due_date and any extensions for filing a remic’s annual tax_return are determined as if the remic were a partnership therefore pursuant to sec_1 e a remic’s annual return must be filed on or before the fifteenth day of the fourth month following the close of the taxable_year unless an extension is granted sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief plr-148889-07 sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money in the instant case taxpayer represents that the request for relief was made prior to the service discovering the failure to make the regulatory election thereby satisfying the reasonable and in good_faith requirement of sec_301_9100-3 taxpayer also asserts that none of the exceptions under sec_301_9100-3 apply and thus taxpayer is not precluded from being deemed to have acted reasonably and in good_faith additionally taxpayer represents that the government will not be prejudiced under sec_301_9100-3 since granting relief will not result in lower tax_liability in the aggregate for all applicable years conclusion based on the information submitted and representations made we conclude that trusts have satisfied the requirements for granting a reasonable extension of time to allow them to make elections under sec_860d to be treated as remics for year and subsequent taxable years therefore the forms filed on date on behalf of the trusts electing remic status for year will be deemed to have been timely filed this ruling is limited to the timeliness of the remic election of the trusts this ruling does not relieve the trusts from any penalty that they may owe as a result of the failure to timely file form_1066 this ruling’s application is limited to the facts representations code sections and regulations cited herein while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination no opinion is expressed with regard to whether the trusts qualify as remics under subchapter_m part of the code no opinion is expressed with regard to whether the trusts’ tax_liability is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect a copy of this letter is being forwarded to the service_center where trusts file their return with instructions that although their forms were not timely filed the trusts are treated as having made timely elections under sec_860d plr-148889-07 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives thomas m preston thomas m preston senior counsel branch office of associate chief_counsel financial institutions products sincerely


department of the treasury tax_exempt_and_government_entities_division release number release date uil code internal_revenue_service s dearborn street chicago il date taxpayer_identification_number form s 990-t tax_year s ended xx xx xx person to contact id number contact numbers telephone fax certified mail -- return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you enclosed for your convenience an envelope is if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues lfa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at local taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number 34801v thank you for your cooperation sincerely nanette m downing director exempt_organizations exams enclosures publication publication form_6018 form 886-a envelope letter catalog number 34801v department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items year period ended org xx xx xx issue does org club continue to qualify for exemption under internal_revenue_code sec_501 given that it receives more than of its gross_receipts including investment_income from sources outside its membership on a recurring basis facts org is recognized as an organization exempt under sec_501 of the internal_revenue_code the club received exemption on may 20xx according to its articles of incorporation the primary purpose of the club is to promote the intellectual moral charitable religious benevolent cultural and recreational interests of its members and the community in general by providing a place for meetings social functions recreation and cultural activities or such other facilities which may further interests on the part of the members of this corporation or the community in general the organization’s source of financial support for its initial year of operation as an exempt entity the year ended december 20xx is investment_income the organization’s sources of financial support for subsequent years under examination years ended december 20xx and december 20xx are also investment_income the club does not receive membership dues according to its articles of incorporation all members in good standing of the council no aa of the automatically become members of org and have the right to vote at any general membership meeting the club filed a form_1120 u s_corporation income_tax return prior to receiving exemption the real_estate and personal_property of the club was sold on december 20xx beginning january 20xx members of council no aa held meetings periodically to discuss the options available to them regarding the use of the funds generated by the sale the funds are currently being held as an investment the buyers of the property have leased it to a third party who operates it as a restaurant and bar the new owners continue to provide meeting rooms for the groups who were previously serviced by the club and also provide a storage room for the organization all activities are conducted by volunteers of the organization there are no employees of the organization the club reported the following sources and amounts of revenue on forms for periods ending december 20xx december 20xx and december 20xx form 886-a ev department of the treasury - internal_revenue_service page -1- form 886a explanation of items department of the treasury - internal_revenue_service name of taxpayer org year period ended xx xx xx club activities-member club activities-nonmember membership dues and assessments interest on savings and temporary cash investments total nonmember income total nonmember investment_income total income 20xx 20xx 20xx - - - - - - - dollar_figure dollar_figure dollar_figure _dollar_figure - - - - dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure _ - - - - - - - a b c dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure nonmember - a c total nonmember investment - b c based on conducting a three year analysis of gross_receipts it has been noted that the organization received of income during tax years ending december 20xx december 20xx and december 20xx from investment_income the gross_receipts received by the club are over the threshold permitted in public law the club has made charitable_contributions to organizations exempt under sec_501 within their community the club has indicated if they are not exempt under sec_501 -social club they are exempt under sec_501 -social welfare organization due to these charitable_contributions law internal_revenue_code sec_501 exempts from federal_income_tax clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and not part of the net_earnings of which inures to the benefit of any private shareholder sec_1 c of the income_tax regulations provides that in general the exemption extends to social and recreation clubs supported solely by membership fees dues and assessments however a club that engages in a business such as making its social and recreational facilities open to the general_public is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 prior to its amendment in sec_501 required that social clubs be operated exclusively for pleasure recreation and other nonprofitable purposes public law amended the exclusive provision to read substantially’ in order to allow an sec_501 organization to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt form 886-a rev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items year period ended org xx xx xx status the committee reports for public law senate report no 2d session c b further states a within the percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non- members so long as the latter do not represent more than percent of total receipts b thus a social_club may receive investment_income up to the full percent of its gross_receipts if no income is derived from non-members’ use of club facilities c in addition the committee report states that where a club receives unusual amounts of income such as from the sale of its clubhouse or similar facilities that income is not to be included in the percent formula revrul_66_149 holds a social_club as not exempt as an organization described in internal_revenue_code sec_501 where it derives a substantial part of its income from non-member sources revproc_71_17 sets forth the guidelines for determining the effect of gross_receipts derived from the general public’s use of a social club’s facilities on exemption under internal_revenue_code sec_501 where nonmember income from the usage exceeds the standard as outlined in this revenue_procedure the conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization’s exempt status sec_501 of the code provides for the exemption from federal_income_tax of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 of the income_tax regulations provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community an organization embraced within this section is one that is operated primarily for the purpose of bringing about civic betterments and social welfare reg c -1 a ii states that social and recreational activities are not social welfare activities however even if a substantial part of an organization's activities consists of social functions for the benefit pleasure and recreation of its members it may qualify for exemption under sec_501 if it is primarily engaged in social welfare activities form 886-acrev department of the treasury - internal_revenue_service page -3- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items year period ended org xx xx xx internal_revenue_code sec_501 applicable to all sec_501 organizations requires that no net_earnings inure to the benefit of any private_shareholder_or_individual with respect to such organization taxpayer’s position taxpayer's position is that the club’s exempt status should be modified to an organization that is exempt under sec_501 -social welfare organization org is a membership_organization that conducts and supports activities that better the community as a whole for the years under examination the org made the following donations to the community with the amount of investment_income represented directly below it total grants and similar amounts paid total investment_income 20xx dollar_figure dollar_figure 20xx dollar_figure dollar_figure 20xx dollar_figure dollar_figure the grants and donations were made to other organizations in the community of city state to help them support their missions those organizations include but are not limited to recepient-1 for educational costs of catholic schools and recepient-2 for cost of retreats church functions and facilities the club notes that the grants and donations made year ending december 20xx is over of their investment_income and over in years ending december 20xx and december 20xx government’s position org has exceeded the threshold permitted in public law for organizations exempt under sec_501 on a recurring basis during tax years ending december 20xx december 20xx and december 20xx in addition although an organization that is exempt under sec_501 -social welfare organization is a membership_organization that conducts and supports activities that better the community as a whole the org does not meet all the requirements to be exempt under this code section internal_revenue_code sec_501 provides for the exemption from federal_income_tax of civic leagues or organizations not organized for profit but operated exclusively for the form 886-acrev department of the treasury - internal_revenue_service page -4- form_8 a name of taxpayet explanation of items department of the treasury - internal_revenue_service year period ended org xx xx xx promotion of social welfare making contributions albeit to organizations within a community does not mean that the club is engaged in social welfare activities the club cannot qualify under this section of the code as it merely makes grants and or contributions to other charitable organizations it is possible that the club could qualify as a private_foundation but it would need to apply for such status the important point here is that the club simply accrues investment_income and provides grants periodic meetings to discuss social welfare are held however activities using individuals to promote neither social welfare nor other forms of services that would lend itself to the promotion of social welfare exists consequently revocation of the org exempt status as an organization exempt under sec_501 is warranted conclusion org no longer qualifies for exemption under sec_501 of the internal_revenue_code as the investment_income has exceeded the threshold permitted in public law therefore exempt status under sec_501 of the internal_revenue_code should be revoked effective may 20xx should this revocation be upheld form_1120 must be filed starting with tax periods ending december 20xx note if you are planning to appeal the proposed revocation please refer to publication which is enclosed appeal should contain statement of facts declared true under penalties of perjury please refer to publication page for example of statement signed under penalties of perjury form 886-acrev department of the treasury - 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