internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr- date date re organization activity a year y z state x dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the following reflects information contained in that letter summary of facts organization is a state x not-for-profit corporation organized in year to engaged in activity a pursuant to its articles of incorporation at the time of organization’s formation the internal_revenue_code code had not been enacted into law historical documentation reflects that organization was organized for pleasure recreation and other non-profitable purposes similar to those described in sec_501 of the code non-member income from the rental of organization’s facilities has been minimal and all non-member use of these facilities requires member sponsorship organization’s articles and by-laws i limit benefits of organization and the use of its facilities to its stockholding members ii provide for governance by an uncompensated voluntary board_of directors drawn from its membership iii authorized a second class of stock subject_to assignment to charity upon sale or liquidation of the primary assets of the corporation and iv require the return of stock certificates to organization upon resignation failure to pay dues forfeiture or termination of membership_organization has represented that it has always filed returns as a taxable corporation no member of the organization has ever received a dividend liquidating_distribution a distribution_in_redemption_of_stock or any other financial benefit by virtue of stock ownership in organization and all share certificates have been cancelled and shares of stock exist only as accounting entries it has also been represented that the only benefits of stock ownership in organization are the benefits of membership so long as dues are paid and membership is maintained in good standing additionally non-member income accounts for less than y of organization’s total gross_receipts factoring in membership dues and assessments and gross_receipts from restaurant and catering operations and related_income from the use of organization’s facilities is consistently less than z from non-member sources law sec_501 of the code provides for the exemption of taxpayers organized and operated for pleasure recreation and other nonprofitable purposes substantially_all the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the income_tax regulations treas reg states that the exemption provided to organizations described in sec_501 of the code applies only to taxpayers which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any taxpayer if its net_earnings inure to the benefit of any private shareholder the regulation also states that in general this exemption extends to social and recreational taxpayer’s which are supported solely by membership fees dues and assessments however a taxpayer otherwise entitled to exemption will not be disqualified because it raises revenues from members through the use of taxpayer facilities or in connection with taxpayer activities sec_1_501_c_7_-1 provides that a taxpayer which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not tax exempt solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the taxpayer is engaging in business and is not being operated exclusively for pleasure recreation or social purposes revrul_58_589 1958_2_cb_266 discusses the various criteria for recognition of exemption under sec_501 of the code in order to establish that a taxpayer is organized and operated for pleasure recreation and other nonprofitable purposes there must be an established membership of individuals personal contacts and fellowship a commingling of the members must play a material part in the life of the organization revrul_58_589 also states that a taxpayer which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate etc may not be considered organized and operated exclusively for pleasure recreation or social purposes further a social taxpayer which advertises to attract public patronage of its facilities is engaged in an activity which impacts adversely on its exempt status however a taxpayer will not be denied exemption merely because it receives income from the general_public that is persons other than members and their bona_fide guests or because the general_public on occasion is permitted to participate in its affairs provided such participation is incidental to and in furtherance of its general taxpayer purposes this is generally true where the receipts from nonmembers are no more than enough to pay their share of the expenses revrul_60_324 1960_2_cb_173 describes a social taxpayer exempt under sec_501 whose facilities include a regular dining room and bar a private dining room suitable for cocktail parties small wedding receptions or similar private parties and a ballroom which when not used for the taxpayer’s dances is available for private use by members for larger parties such as wedding receptions banquets and parties and similar non-taxpayer activities over a seven year period banquet sales for outside organizations and groups accounted for to percent of total income from all sources including dues in one year gross_profits from outside activities accounted for percent of total gross_income for the year rul concludes that the organization does not qualify for exemption because its transactions with outside organizations and groups are of such magnitude and recurrence as to constitute engaging in business revrul_68_639 1968_2_cb_220 holds that the exempt status of a social taxpayer will not be adversely affected where it redeems certain members’ stock at the book_value of the shares at the time of redemption even though the stockholder may realize gain therefrom the revenue_ruling cites revrul_58_501 c b and revrul_65_64 1965_1_cb_241 to the effect that under certain circumstances a sec_501 social taxpayer may make cash distributions to its members without losing its tax exemption the stockholders have a right both legal and equitable to the assets of the taxpayer when the taxpayer dissolves the assets may be distributed to members without loss of exemption similarly when a stockholder terminates his membership or reduces his stock ownership he is entitled to an aliquot share of the taxpayer ’s assets sec_337 authorizes regulations to prevent avoidance of corporate level gain by the use of a tax-exempt_entity sec_1_337_d_-4 provides that if a taxable corporation transfers all or substantially_all of its assets to a tax-exempt_entity the taxable corporation must recognize gain_or_loss immediately before the transfer as if the assets transferred were sold at their fair_market_value under sec_1_337_d_-4 a taxable corporation's change in status to a tax exempt entity will be treated as if it transferred all of its assets to a tax-exempt_entity immediately before the change in status becomes effective in a transaction in which sec_337 d -4 a applies sec_1_337_d_-4 defines taxable corporation as any corporation that is not a tax-exempt_entity as defined in paragraph c of this section in turn sec_1_337_d_-4 defines tax-exempt_entity as any entity that is exempt under sec_501 or sec_529 ruling based on the above and the information submitted organization should be able to qualify for tax exemption under sec_501 of the code on a retroactive basis upon its submission of an exemption application on irs form_1024 if organization qualifies for recognition of tax-exempt status as of a date that is prior to date organization will recognize no gain under sec_1_337_d_-4 caveats we express no opinion on the federal_income_tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above ruling procedural statements the rulings in this letter are based on the facts and representations submitted under penalties of perjury in support of the request verification of the information representations and other information may be required as part of the audit process a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely yours ______________________________ lisa a fuller assistant to chief branch office of associate chief_counsel corporate


department of the treasury internal_revenue_service commerce street dallas texa sec_7524 allas t tax exempt and date government entities division legend org organization name taxpayer_identification_number xx date address address form number release date org address tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear in a determination_letter dated june 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code code1986 based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on december 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are required to file federal_income_tax returns for the tax periods shown above if you have not yet filed these returns please file them with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted or unless an examiner’s report for income_tax_liability was issued to you with other instructions file returns for later tax years with the appropriate service_center indicated in the 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 if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations internal_revenue_service department of the treasury tax exempt government entities division date date org address commerce street dallas texas taxpayer_identification_number form tax_year s ended 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 revocation 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 for your convenience an envelope is enclosed 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 rev catalog number 34801v organization appeal procedures for unagreed issues if a 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 you may also request that we refer this matter for technical_advice as explained in publication exempt 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 revoking your exempt status if we do not hear from you within days from the date of this letter we 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 if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely sunita lough director eo examinations enclosures publication publication form_6018 report of examination envelope letter rev catalog number 34801v schedule no or exhibit year period ended december 20xx december 20xx form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein legend org organization name motto - motto xx - date state - state service - service issue does org continue to qualify for exemption under sec_501 given that the majority of their income is from gaming activities with nonmembers facts org is tax-exempt under sec_501 your exempt_purpose is to improve the relationship between military and civilian populations and to maintain liaison with active personnel of the service org org was founded in 19xx by two men retired from the service the two dedicated retirees realized that they and their fellow enlisted retirees had no voice in the corridors of power to stand up for their hard-earned rights and promised benefits today org has grown to become the most influential organization working to protect and ensure the health and welfare of all military personnel especially retirees your organization is the chapter of org you were incorporated in the state of state on july 19xx and recognized by the internal_revenue_service as a veterans organization exempt under sec_501 of the code on june 19xx your specific and primary purposes per your articles of incorporation are to a improve the relationship between military and civilian populations b maintain liaison with active personnel of the service the organization’s current activities include conducting gaming motto activities with nonmembers general_public and fund charitable causes the organization is conducting gaming activities with the general_public and not with members past or present members of the service of your organization the organization conducts motto at a public facility twice a week which is open to the general_public no activities were presented to further the organization’s exempt_purpose the members rarely meet due to members are located throughout the united_states the majority of income received comes from gaming activities which is open to the general_public which suggest you are operating a commercial activity unrelated to your exempt purposes law form 886-a ev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended december 20xx december 20xx sec_501 of the internal_revenue_code describes a post or organization of past or present members of the service of the united_states or an auxiliary unit or society of or a_trust or foundation for any such post or organization a organized in the united_states or any of its possessions b at least percent of the members of which are past or present members of the service of the united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows widowers ancestors or lineal_descendants of past or present members of the service of the united_states or of cadets and shareholder or individual federal tax regulation sec_1_501_c_19_-1 in general c no part of the net_earnings of which inures to the benefit of any private in addition an auxiliary unit or society described in paragraph d of this section of such a veterans post or organization and a_trust or foundation described in paragraph e of this section for such post or organization may be exempt as an organization described in sec_501 states that for taxable years beginning after date a veterans post or organization which is organized in the united_states or any of its possessions may be exempt as an organization described in sec_501 if the requirements of paragraphs b and c of this section are met and if no part of its net_earnings inures to the benefit of any private_shareholder_or_individual paragraph b of this section contains the membership requirements such a post or organization must meet in order to qualify under sec_501 paragraph c of this section outlines the purposes at least one of which such a post or organization must have in order to so qualify in order to be described in sec_501 under paragraph a of this section an organization must meet the membership requirements of sec_501 and this paragraph there are two requirements that must be met under this paragraph the first requirement is that at least percent of the members of the organization must be war veterans for purposes of this section the term war veterans means persons whether or not present members of the united_states service who have served in the service of the united_states during a period of war including the korean and vietnam conflicts federal tax regulation sec_1_501_c_19_-1 membership requirements department of the treasury - internal_revenue_service form 886-a rev page -2- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended december 20xx december 20xx the second requirement of this paragraph is that at least percent of all members of the organization must be described in one or more of the following categories war veterans present or former members of the united_states service i ii iii cadets including only students in college or university rotc programs or at armed services academics or iv spouses widows widowers of individuals referred to in paragraph b i ii or iii of this section federal tax regulation sec_1_501_c_19_-1 exempt purposes n addition to the requirements of paragraphs a and b of this section in order to be described in sec_501 under paragraph a of this section an organization must be operated exclusively for one or more of the following purposes to promote the social welfare of the community as defined in sec_1_501_c_4_-1 to assist disabled and needy war veterans and members of the united_states service and their dependents and the widows ad orphans of deceased veterans to provide entertainment care and assistance to hospitalized veterans or members of the service of the united_states to carry on programs to perpetuate the memory of deceased veterans or members of the service and to comfort their survivors to conduct programs for religious charitable scientific literary or educational_purposes to sponsor or participate in activities of a patriotic nature to provide insurance benefits for their members or dependents of their members or both or to provide social and recreational activities for their members substantially unrelated activities may prohibit exemption the following are examples of unrelated activities that may affect exemption e e e e rents out its facilities to the general_public facilities such as bar and dining facilities open to the general_public sells liquor and or food to members and or the public for consumption off the premises gaming activities with nonmembers form 886-a crev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer _ explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended december 20xx december 20xx government position as a result of our examination of your form_990 and 990-t for period ending december 20xx and december 20xx we have determined that your organization no longer qualifies as an exempt veteran organization described in the internal_revenue_code sec_501 since your organization conducted gaming activities motto with the general_public your organization is not in furtherance of your exempt_purpose the majority of income received was from the general_public based on the above we are proposing revocation of your exempt status under sec_501 of the internal_revenue_code effective january 20xx taxpayer's position the organization agrees with the revocation and completed form_1120 for tax_year ending december 20xx december 20xx and december 20xx agent sent form 6018-a for signature on november 20xx for an officer signature the organization declined to have a closing conference conclusion ‘as a result of the examination of your organization’s activities and form_990 for the period ended december 20xx and december 20xx it was determined that your organizations primary activity was the operation of conducting gaming motto with the general_public the organization does not continue to qualify for exemption as an organization described in sec_501 of the internal_revenue_code consequently the exempt status of the organization is being revoked effective january 20xx should this revocation be upheld you are required to file form_1120 for all future periods whether or not you have taxable_income form 886-a ev department of the treasury - internal_revenue_service page -4-


department of the treasury internal_revenue_service commerce street dallas texas is dal number release date date 2gend org organization name ‘ex date ull address address org address dear ein tax period ending december identification_number contact telephone number in reply refer to te_ge review staff this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons the org fails to meet the requirement for exemption under sec_501 the organization is not operating exclusively for pleasure recreation and other non-profitable purposes the organization is operating similar to a commercial business gross_receipts generated from non-members and general_public use of the facilities exceeds the limit set forth by public law sec_1 c of the income_tax regulations defines social clubs as clubs organized and operated exclusively for pleasure recreation and other non-profitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder or general_public public law provides that social clubs may receive up to percent of their gross_receipts including investment_income from sources outside of their membership without losing their tax-exempt status it is also intended that within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from nonmember use of the club's facilities a recent audit of your organization's activities and forms and 990-t for the period asa result of ended december 20xx the organization does not meet the requirements under sec_501 which requires income from non-member use of the club’s facilities to not exceed percent of their gross_receipts total nonmember income wa sec_36 percent for the tax period ending december 20xx which substantially benefits the general_public and is more like a commercial entity than a non-profit organization based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 c of the internal_revenue_code effective january 20xx you have agreed to the revocation of your c status by the signing of form_6018 on september 20xx ‘you are required to file federal_income_tax returns on form_1120 you have properly provided us form_1120 for tax petiods ending december 20xx and december 20xx and we will submit them for processing ‘you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling the office_of_the_taxpayer_advocate at or by writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations not extend the time fixed by law that you have to file a petition in the united_states tax_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 ifyou have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely vieki l hansen acting director eo examinations government entities org address department of the treasury internal_revenue_service commerce street dallas texas date taxpayer_identification_number form tax_year s ended person to contactd 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 ifyou request a conference we will forward your written_statement of protest to the appeals_office and they will contact you enclosed ifyou do not agree with aur position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service rs decision publication also includes information on your tights as a taxpayer and the rs collection process ityou and appeals do not agree on some or all of the issues after your appeals_conference of 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 for your convenience an envelope is letter catalog nuraber you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues fa 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 periad s shown abave 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 retums 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 ifyou have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you letter caalog number thank you for your coaperation enclosures publication publication form_6018 report of examination envelope sincerely marsha a ramirez director eo examinations letter catalog number schedule noor exhibit ‘yeat petiod ended foun 886a ‘name of taxpayer ‘depart of the tasanny rtral ravens sie explanation of items december 20xx org ein legend org organization name issut doss income gross_receipts for the period under examination exceed the limit allowed by public law org continue to qualify for exemption under sec_601 given that its level of nonmember country country xx date facts org org is tax-exempt under sec_501 for the furtherance of it's exempt purpase to provide a social org organization for pleasure recreation and other non-proftable purpases within the meaning of sec_501 of the internal revenue cade org was founded in 18xx for literary purposes mutual improvement and the promotion of social intercourse the org was organized with an educational and sociat mission the org was first created a the first women’s organization in the ‘were incorporated in the district of country on march 19xx and racognized by the service as a social org exempt under section of the cade in october 19xx your specified and primary purposes per your articles of incorporation are to function as a social org which shall be the establishment maintenance and management of a org for literary and educational_purposes mutual improvement and promotion of social intercourse ‘country men were accorded privileges in 19xx you ‘the organization's activities include the operation and maintenance of a facility for org members restaurant hall rentals various programs and events throughout the year your organization has non- member income from hall rental and reciprocal members ‘your organization reported the following sources and amounts of revenue on forms dollar_figure for the period ending december 20xx doxki2 contributions program service revenue membership dues assessments interest on savings rental income ‘gross sales of inventory total nonmember income total income nonmember investment - bic nonmember - aic a o key a c l during the examination for tax_year 20xx your non-member inoome wa sec_25 from gross_receipts and from investment_income ouring the prior examination for tax_year 20xx letter dated february 20xx was provided to your organization the letter advised you of some deficiencies to include limits imposed by public law which states organizations exempt under sec_501 c may lose their exempt status if they form 886-arev department of the trcasury - internal_revenue_service page tarren af ch tren ttenal reeve soni explanation of items fom 686a ‘name of taxpayer org _ein schedule noor exhibit ‘year period ended december 20xx receive gross_receipts from non-member in excess of of total receipts also within thi sec_35 limit no more than of gross_receipts may be derived from non-member use of the orgs facilifies your organization responded with an action plan adopted by the board_of governors which expressed your commitment te monitor and ensure that your non-member receipts were reduced to satisfy public law law sec_501 of code describes organizations such as social clubs organized and operated exclusively for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net eamings of which inuras to benefit of any private shareholder treas reg c -1 b states that a club which engages in business such as making its social and recreational facilities available 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 solicitation by advertisement or otherwise by advertisement or otherwise for public patronage of its facilities is prima facie evidenos that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes sec_512 states that the term unrelated business taxable inoome as it applies to social clubs exempt under sec_501 means tha gross_income excluding any exempt_function_income less the deductions income excluding exempt_function_income both computed with the modifications provided in paragraphs and of subsection b sec_512 defines the term exempt_function_income to mean the gross_income from dues fess charges or similar amounts paid_by members of the organization as consideration for providing such members or theit dependents or guests goods facilities or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid such term also means all income other than an amount equal to the gross_income derived from any unrelated_trade_or_business reguiarly carried on by such organization computed as if the organization were subject_to paragraph which is set_aside allowed by this chapter which are directly connected with the production of the gross for a purpose specified in sec_170 or in the case of an organization described in paragraph or of sec_5010 to provide for the payment of life sick accident or other benefit including reasonable cost of administration directly connected with a purpose described in clause i or ii if during the taxable_year an amount which is attributable to income do set_aside is used for a purpose other than that described in clause i or i such amount shall be inchided under subparagraph a in unrelated taxable_income for the taxable_year revrul_66_149 provides that a social_club is not exempt from federal_income_tax as an organization described in sec_501 of the code if income from nonmember sources such as for example prior to its amendment in irc c required that social clubs be operated exclusively for pleasure recreation and other nen-profitable purposes public law amended the exclusi provision to read substantially in order to allow c organizations to receive up to peroent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status the committes reports for public law senate report no 2d session c b further states it regularly derives a substantial part of its dividends and interest on investments form 886-a cev department of the treasury - internal_revenue_service page daparanen of tangy rene revs re explanation of items sega fam ‘name of taxpayet org ein schedule no or exhibit ‘yeax period ended december 20xx within thi sec_35 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 racaipts from a ‘combination of investment_income and receipts from non-members long as the latter do not represent more than percent of total receipts b thus social_club may receive investment_income up to the full percent of its gross_receipts if no income is received from non-members’ use of club facilities c in addition the committee reports state that where 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 revenue procedures sets forth the guidelines fro determining the effect gross_receipts derived from use of social club's facilities by the general_public have on the club's exemption from federal_income_tax under sec_501 c of the intemal revenue cade of revrul_81_69 states that a social_club in determining its unrelated_business_taxable_income under itc a may not deduct losses_incurred on sales of food and beverages in certain situations from its net_investment_income itis also intended that within thi sec_35 percent amount not more than percent of the gross_receipts public law provides that social clubs may receive up to percent of their gross_receipts including investment_income fram sources outside of their membership without losing their tax-exempt status should be derived from nonmember use of club facilities government positioi as a result of our examination of your form_990 for period ending december 20xx we have determined that your organization no longer qualifies as an exempt social org described in the internal_revenue_code sec_501 c your non-member revenue exceeds the percentage allowed by law your total gross_receipts to include investment_income were for tax_year ending december 20xx whereas revproc_71_17 and public law allow a maximum of of non-member income from gross_receipts and a maximum of of investment_income with a total of ‘we propose a revocation of your exempt status under sec_501 of the intemal revenue code effective january 20xx positio taxpayer's the organization agrees with the revocation and completed form_1120 for tax_year ending december 20xx and december 20xx the organization signed form 6018-a on september 20xx the organization declined to have a closing conference conclusion for organizations exempt under irc the term unrelated_business_income encompasses gross_income after first excluding all exempt_function_income exempt_function_income consists essentially of amounts derived from dues fees charges or similar amounts of gross_income and constitutes amounts paid_by members as consideration for providing such members dependents and guests with goods facilities or services in the furtherance of the organization's exempt_purpose the hall rental and any incurred expenses included to the general_public do not constitute exempt_function_income this activity form 886-agon45 page -3- department of the treasury -tnvemal revenue service fom 886a ‘name of taxpayer tdepacinsat of he trea tral rovens sn explanation of items schedule no or exhibit ‘yeat period ended december 20xx org_ein was not made for the purpose of providing such member with the benefits associated with org membership traas reg -1 b states that any organization which engages in business such as making it's social and recreational facilities available to the general_public is nol organized and operated exclusively for pleasure recreation and other non-proftable purposes and is not exempt under sec_601 the organization failed to meet the percent limitation on gross_receipts derived from the use of social org's facilities or services by the general_public as required by public law your organization no tonger qualifies for exemption under sec_501 of the code as your non- member revenue exceeds the percentage allowed by law therefore your exempt status under sec_501 c of the internal_revenue_code should be revoked effective january 20xx should this revocation be upheld you are required to file form_1120 for all future periods whether or not you have taxable_income ‘department of the treasury - entemal revenue service form 886-adtev s-63 page -4-


t c memo united_states tax_court jeremiah j o'connor and mary k o'connor petitioners v commissioner of internal revenue respondent docket no filed date in p-h's wholly owned s_corporation h became a participating employer in the a plan which purported to be a or more employer welfare_benefit_plan under sec_419a providing death_benefits to selected employees of an employer participating in the plan to fund the death_benefits for covered employees each participating employer made cash contributions to a_trust associated with the a plan which by and through the plan trustee used the cash to fund premiums for a life_insurance_policy on the life of each covered_employee the trustee was both owner and beneficiary of the policies in date b the plan_administrator advised employer participants that under anticipated final irs regulations they would lose their deductions for payments to fund insurance_policy premiums under the a plan and that it intended to terminate the a plan in in october and date p-h on behalf of h attempted unsuccessfully to terminate h's participation in the a plan and have the policy on p-h's life transferred directly from the a plan to the bs plan a separate sec_419a welfare_benefit_plan on several occasions during b advised h to voluntarily terminate its participation in the a plan which under the terms of the plan would entail a distribution of the policies to covered employees taxation of each employee on the net cash_surrender_value of his or her policy and the employee's transfer of the policy to a new plan b stated that it could not allow a direct transfer of an insurance_policy from it to another plan_administrator pursuant to that advice in date h executed a corporate resolution terminating its participation in the a plan after receiving that resolution b on date mailed to p-h a transfer of policy ownership form signed by the trustee under the a plan as the old owner of p-h's policy and a blank change_of beneficiary designation form on date a representative of the bs plan signed the transfer of policy ownership form as the new owner of the policy the actual transfer of the policy did not occur until date ps argue that they could not have received taxable_income with respect to the policy transfer any earlier than when p-h's policy was actually transferred to the bs plan and that transfer was exempt from tax under sec_1035 which provides for nonrecognition of gain on an exchange of life_insurance policies r argues that ps were taxable in under sec_402 or either when h terminated its participation in the a plan or when b provided to p-h the transfer of policy ownership form signed by the a plan trustee which allowed p-h to either retain the policy or transfer it to a new owner and sec_1035 is inapplicable because there was no exchange of policies r also seeks to impose a substantial_understatement_penalty under sec_6662 held ps are taxable under sec_402 on the net cash or accumulation value of p-h's policy in either when h terminated its participation in the a plan or when b provided to p-h the transfer of policy ownership form signed by the a plan trustee gluckman v commissioner tcmemo_2012_329 aff'd 545_fedappx_59 2d cir followed held further sec_1035 is inapplicable because there was no exchange of life_insurance policies held further sec_6662 penalty sustained ira b stechel for petitioners brian j bilheimer brian e derdowski jr and eugene a kornel for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency notice respondent determined a dollar_figure deficiency and a dollar_figure accuracy-related_penalty with respect to petitioners' federal_income_tax respondent's principal adjustment is a dollar_figure increase in petitioners' income for the issues for decision are whether petitioners received taxable_income in with respect to a cash unless otherwise stated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar value life_insurance_policy on mr o'connor's life held by a_trust administered under a plan known as the advantage death_benefit plan advantage plan sponsored and administered by bisys insurance services inc bisys and if so whether petitioners are liable for the accuracy-related_penalty under sec_6662 findings_of_fact this case was submitted fully stipulated under rule petitioners resided in massachusetts when they filed their petition petitioners who are married timely filed their joint federal_income_tax return for on date petitioner jeremiah j o'connor was an employee of his wholly owned s_corporation j p o'connor hardware inc hardware throughout the relevant periods discussed herein it is hardware's participation in and withdrawal from the advantage plan that gives rise to the issues in this case the notice also reflects a dollar_figure reduction in petitioners' itemized_deductions for which derives from the principal adjustment and is not directly disputed by petitioners the term s_corporation is defined in sec_1361 in general an s_corporation has no federal_income_tax liability and its items of income deduction credit and such are passed through ie taken into account by its shareholders see sec_1363 sec_1366 the advantage plan the advantage plan purported to be a 10-or-more-employer welfare_benefit_plan under sec_419a providing death_benefits to selected employees of an employer participating in the plan the advantage plan was created in and beginning in was administered by bisys in order to fund the death_benefits for covered employees each participating employer made cash contributions to the trust associated with the advantage plan which by and through the plan trustee used the cash received to fund premiums for a life_insurance_policy on the life of each covered_employee the life_insurance_policy obtained on the life of each covered_employee provided a death_benefit in an amount equal to the death_benefit provided in the adoption_agreement executed by the employee's employer under the terms of the advantage plan the plan trustee was both the owner and the beneficiary of the life_insurance_policy for a covered_employee the advantage plan did not allow any reversion of plan assets to a participating employer article vi of the advantage plan document entitled distribution of benefits provides as follows the advantage plan trust was never a tax-exempt_trust section events permitting distribution the trustee shall upon advice of the plan_sponsor within a reasonable period of time after notice make a complete distribution of a covered employee's or participant's interest or commence to distribute such interest upon notification by employer of entitlement to death_benefits by covered_employee or participant together with death certificate and other materials required by plan_sponsor or discontinuance of the plan termination or partial_termination of the trust the covered_employee or participant may purchase upon termination of employment or an event described in subsection above from the trustee the benefits provided hereunder if transferable under applicable law the purchase_price for the benefits shall be the amount set forth under sec_5 the trustee shall take all necessary steps to facilitate the purchase by the covered_employee or participant during the thirty day period following termination of employment or event described in subsection above during such thirty day period all beneficiary designations shall remain in full force and effect in the event the insured does not elect to acquire such coverage the trustee may surrender such policy to the insurer the proceeds from the sale or surrender of the policy shall be added to the trust fund and allocated among participants in proportion to each participant's then current salary as compared to all participants' salaries in the event such insured does not elect to acquire any insurance_policy and dies prior to the surrendering of the policy by the trustee but after the expiration of the thirty-day option period the trustee shall become the beneficiary and the death_proceeds thereof shall be added to the trust fund section manner of distributing interests payment of such benefits may be either a b c payment directly to the covered_employee or participant payment to other individual or entity for benefit of the covered_employee or participant at the direction of the plan_sponsor upon an employer's determination to discontinue participation in the plan the plan_sponsor shall retain an actuary to determine that there are sufficient benefits remaining in the plan to meet the trust's benefit requirements if those liabilities have been currently met then the trustee is permitted to distribute policies to the covered employees of the employer if the actuary retained by the plan_sponsor and or trustee determines that there are insufficient assets to meet the current_liability then there shall be no distribution to the covered employees of the withdrawing employer terminating distribution shall be in-kind or in cash if in-kind such distributions may take the form of the cash_value life_insurance policies maintained by the trust on the life of the covered employees who shall receive the terminating distribution article vii of the advantage plan document entitled miscellaneous provisions provides in pertinent part as follows section amendment or termination the plan_sponsor reserves the right to retroactively or prospectively modify alter amend_or_terminate this plan or the trust at any time by an instrument in writing to be duly executed and delivered to the trustee in the case of the trust and that any such instrument shall not revest in the employer any corpus or income of the trust no modification amendment or termination of the plan shall be construed a termination of the trust so as to require the trustee to make a distribution of the trust assets to any covered_employee or participant except in accordance with article vi unless the instrument expressly so provides upon employer termination under policies may be distributed to covered employees or successor plans providing similar benefits section employer's right to terminate each employer hereby reserves the right to terminate its participation in the plan at any time an employer's termination of participation in the plan shall be evidenced by a certified copy of the resolution of the employer authorizing such termination which shall be filed with the plan_sponsor at least sixty days prior to the effective date thereof or such lesser time as may be agreed to by the plan_sponsor termination of an employers participation in the plan shall be effective upon the date specified in such instrument but such termination shall not vest in the employer any right title or interest in or to the funds held hereunder nor shall termination by one employer affect the participation in the plan by an other employer upon termination by an employer of its participation in the plan the plan_sponsor shall request the trustee to perform a valuation of the trust the plan_sponsor based upon such valuation shall determine i the portion of the trust fund attributable to benefits funded by the terminating employer and ii the balance of said portion remaining after provision for payment of the proportionate amount of trust expenses and liabilities attributable to the terminating employer after satisfaction of the above expenses and liabilities the trustee shall offer the policies of insurance then held by it to the covered employees on whose lives the policies were issued in the manner provided in sec_5 assets then remaining shall be distributed among all the then living covered employees of the employer who were employed by the terminating employer within the two-year period immediately preceding the date of termination in the same ratio that each said covered employees total compensation received during the employees participation in the plan is of the total compensation received by all said covered employees if there shall be no covered employees employed by the employer within the above-described two-year period then living the remaining excess_assets shall be treated as an experience gain sec_5 referenced in both sections dollar_figure and dollar_figure of the advantage plan document gives a covered_employee the right to purchase the insurance_policy obtained by the trustee to provide the death_benefit for an amount equal to the net cash_surrender_value of the policy hardware's participation in and termination of its participation in the advantage plan hardware became a participating employer in the advantage plan when it adopted the plan pursuant to its execution of an advantage death_benefit plan adoption_agreement on date mr o'connor through hardware became a covered_employee in the advantage plan on date thereafter on date a life_insurance_policy insuring mr o'connor's life o'connor policy was selected and obtained from jefferson pilot financial insurance co jefferson pilot all premiums on the o'connor policy were funded through contributions to the trust by hardware by letter dated date bisys advised employer participants in the advantage plan including hardware of enhanced risks that the internal_revenue_service irs on audit would challenge the deductibility of the amounts paid to fund premium payments under the plan and it offered the participating employers an opportunity to purchase a fiduciary audit protection insurance_policy bisys also advised that p ending final irs regulations it intended to terminate the advantage plan early in shortly thereafter on date mr o'connor in his capacity as a member of hardware's board_of directors executed a resolution to be adopted by unanimous written consent of directors in which it was resolved that the advantage plan be terminated and the existing plan benefit be transferred to another 419a f sponsor and trustee and hardware's officers be authorized and directed to execute all documents necessary to effectuate said termination and transfer thereafter on date mr o'connor on behalf of hardware executed a certificate of resolution to adopt and fund benefits for certain hardware employees through the benistar plan trust benistar plan described therein as a multiple employer welfare_benefit_fund under sec_419a on date mr o'connor on behalf of hardware executed an adoption_agreement pursuant to which hardware purported to adopt join and agree to participate in the benistar plan on date jacqueline campbell a bisys employee mailed to kathleen kehoe apparently a benistar plan employee transfer of ownership forms for hardware and a trustee transfer agreement form which provided that hardware and the benistar plan would indemnify bisys and the advantage plan from any damages or costs arising out of or relating to hardware's participation in the advantage plan on date daniel e carpenter on behalf of the benistar plan signed the transfer of ownership form transferring the o'connor policy to benistar admin services as the new owner of the policy the form was not signed by anyone on behalf of bisys as the old owner of the o'connor policy mr carpenter as trustee of the benistar plan was unwilling to sign the trustee transfer agreement with the above-described indemnification clause that refusal delayed the actual transfer of the o'connor policy from the advantage plan to the benistar plan until date when jefferson pilot confirmed that it had recorded on its books that the trust under the benistar plan was the new owner of the policy in a letter dated date purportedly sent to all insurance sellers and agents bisys stated that it expected the proposed_regulations issued in to be finalized substantially as proposed because of the resulting adverse tax effects on the advantage plan it would no longer accept contributions to the plan after date and all employers' participation in the plan must terminate by the later of date or the date the irs finalizes the proposed_regulations the letter then states - - therefore employers should consider taking steps to voluntarily terminate their participation in the advantage plan before date and electing one of the alternatives outlined below otherwise after date an employer's participation in the advantage plan will automatically terminate resulting in the surrender of any policies remaining in the trust a reallocation of the cash surrender values and a distribution of the assets to participants any employer that has not voluntarily terminated its participation in the advantage plan on or before date will not have the option of electing one of the alternatives outlined below alternative one--employees retain policies first the employer terminates its participation in the advantage plan second the policies' cash surrender values are reallocated in accordance with the advantage plan document third the policies are rolled-out to the employees and the employees are taxed on the reallocated net cash_surrender_value alternative two--employer adopts the advantage dbo plan first the employer terminates its participation in the advantage plan second the policies' cash surrender values are reallocated in accordance with the advantage plan document third the policies are rolled-out to the employees and the employees are taxed on the reallocated net cash_surrender_value fourth the employer adopts the advantage dbo plan and the rolled-out policies may be used as a funding vehicle for the advantage dbo plan the dbo plan or the new plan we have attached a fact sheet regarding the dbo plan the irs issued final regulations for 10-or-more employer plans in date see t d 2003_2_cb_729 please note that a trustee-to-trustee transfer ie from the advantage plan to another welfare_benefit_plan such as the dbo plan is not permitted under applicable irs regulations in april june july august and date bisys provided employer participants with additional correspondence reiterating their need to terminate participation in the advantage plan by date and advising as to the mechanics and tax results of such termination on february and ms campbell on behalf of bisys sent to mr o'connor representing hardware identical letters acknowledging receipt of his request to transfer to another plan_administrator she reiterated bisys position in earlier correspondence eg the date letter to employer participants in the advantage plan that bisys cannot allow a transfer to another plan_administrator as such a transfer may put the integrity of the entire plan at risk the letters then offered to hardware the alternative options of staying in the advantage plan and paying its share of the fiduciary audit_fee referred to in its date letter to employer participants or terminating the plan assuming mr o'connor's decision to terminate the letters requested a certified copy of hardware's corporate resolution to terminate its participation in the plan using an enclosed form of corporate resolution as a guide on date ms campbell on behalf of bisys sent mr o'connor a letter acknowledging his decision not to participate in the fiduciary audit of the advantage plan again requesting his submission of a certified copy of hardware's corporate resolution to terminate its participation in the plan with a new sample resolution attached and requesting that he also submit signed transfer of ownership of the policy with jefferson pilot on his life and change_of beneficiary designation forms also enclosed to bisys the letter stated that upon termination each employee covered by hardware's participation in the advantage plan would be entitled to the net_surrender_value of the policy covering the employee's life not having received any response from mr o'connor on behalf of hardware to its date letter on date bisys sent mr o'connor a letter reiterating the urgency of hardware's terminating its participation in the advantage plan and withdrawing from it the policies covering him and mr ashe the letter stated bisys' intent to dissolve the plan trust by date and to direct the trustee beginning date to mr o'connor and a nonshareholder employee of hardware david ashe were insured under the advantage plan and bisys furnished transfer of ownership and change_of beneficiary designation forms for both begin surrendering any life_insurance policies that are still owned by the trust in order to fully liquidate the trust and make final distributions on date mr o'connor on behalf of hardware executed the termination of participation in the advantage plan resolution hardware's termination resolution previously forwarded to him in blank by bisys hardware's withdrawal from the plan to be effective as of that same date hardware's termination resolution was sent to frank pragosa of bisys on date on date shortly after receiving hardware's termination resolution mr pragosa mailed to mr o'connor transfer of policy ownership and change_of beneficiary designation forms for both mr o'connor and mr ashe the transfer of policy ownership forms were signed on behalf of bb t as trustee of the advantage plan under a date of date the rest of the form essentially providing for the name address and signature of the new policy owner was left blank mr pragosa also enclosed an adopting employer acknowledgement form to be completed and executed by mr o'connor on behalf consistent with that advice the bisys board_of directors on date resolved to terminate the advantage plan effective as of date and in accordance with sec dollar_figure of the plan permit participant employers to withdraw from the plan of hardware acknowledging that hardware's covered employees had filled out the transfer of ownership and change_of beneficiary forms the transfer of policy ownership form for the policy on mr o'connor's life with the benistar plan shown as the new policy owner was completed and executed by mr carpenter on behalf of the benistar plan on date the adopting employer acknowledgement form was executed by mr o'connor on behalf of hardware and marked received by bisys on date as noted supra the actual transfer of ownership of the policy on mr o'connor's life from bisys to benistar did not occur until date the notice in the explanation of items portion of the notice respondent first states the portion of the payments contributions to the advantage plan used to pay the cost of providing life_insurance for is includible in your income pursuant to sec_61 and sec_1 d ii in addition respondent states the portion of the payments in excess of the amount used to pay the cost of providing life_insurance protection for you for was made for your economic benefit and is includable in income as deferred_compensation under either sec_301 and sec_61 or sec_402 and sec_83 thus the notice seeks to tax petitioners on all payments made on their behalf to the advantage plan trust i burden_of_proof opinion petitioners argue that they have satisfied all of the requirements of sec_7491 necessary to shift the burden_of_proof to respondent pursuant to that section ie they have introduce d credible_evidence with respect to any factual issue relevant to ascertaining the liability in this case see sec_7491 and they have maintained proper books_and_records and thoroughly cooperated with respondent's requests for witnesses information documents meetings and interviews in compliance with sec_7491 respondent disagrees and argues that in any event the stipulated facts and exhibits should be more than enough to show that petitioners failed to report income from their receipt of life the parties have stipulated that if we find that there was a taxable_event by which the o'connor policy is includable in petitioners' income for the proper measure of that value is the policy's accumulation value and that that value in was dollar_figure that stipulation apparently represents a concession by petitioners that if the o'connor policy is properly includable in petitioners' income the proper income adjustment arising out of that inclusion is dollar_figure not the income adjustment in the notice of dollar_figure respondent has not sought a corresponding increase in the amount of the determined sec_6662 penalty insurance policies from the advantage plan in the year and that petitioners are subject_to a penalty under sec_6662 because we decide this case on the basis of a preponderance_of_the_evidence the assignment of the burden_of_proof herein is immaterial see 91_tc_575 ndollar_figure our determinations have been made on the basis of the preponderance_of_the_evidence accordingly it is immaterial who bears the burden_of_proof 87_tc_305 ndollar_figure ii respondent's income adjustment a the parties' argument sec_1 petitioners' arguments petitioners first argue that mr o'connor was not in constructive receipt of his policy in ie the policy was not set apart for him or otherwise made available see sec_1_451-2 income_tax regs because mr o'connor was unable to collect anything from bisys in due to the impasse created in by bisys' insistence upon indemnification from benistar before engaging in any transfer of assets and benistar's flat refusal to do so petitioners further state that the transfer of the o'connor policy on the insurer's books_and_records and the recognition of benistar as the new owner and beneficiary of the o'connor policy occurred in not in petitioners also argue that the pooling of risk among all employers participating in the plan precluded mr o'connor from constructively receiving the policy until its actual transfer in petitioners also argue that sec_1035 which provides for nonrecognition of gain on an exchange of life_insurance policies applies to preclude recognition of gain to them on the transfer of the o'connor policy from the advantage plan to the benistar plan and under sec_83 and sec_402 they are not required to include in income for the value of mr o'connor's interest in the advantage plan because that interest was not substantially_vested in lastly petitioners argue that there was no constructive_dividend distribution by hardware to mr o'connor with respect to the former's interest in either the advantage plan or the benistar plan because there was neither any contribution in made by hardware towards a policy premium to either plan on behalf of mr o'connor during that year nor was there any unrestricted right to either demand or receive a benefit payment from either plan respondent's arguments on brief respondent specifically eschews reliance on the constructive_receipt_doctrine and by not addressing it on brief he also ignores the notice's alternative argument that mr o'connor received a constructive_dividend taxable to petitioners under sec_61 and sec_301 rather on brief respondent premises his income adjustment for primarily on his argument that mr o'connor was vested in his policy in either when hardware terminated its participation in the advantage plan by submitting its corporate resolution to that effect to bisys or when bisys provided a transfer of policy ownership form signed by the trustee to mr o'connor which allowed mr o'connor to transfer the policy to a new owner in either event thereby becoming taxable on the net cash_value of the policy under sec_402 and sec_83 therefore we restrict our analysis to a determination of the merits of that argument by respondent respondent also rejects petitioners' argument that the policy transfer from the advantage plan to the benistar plan constituted a nontaxable_transaction under sec_1035 which provides that no gain_or_loss shall be recognized on the exchange of one contract of life_insurance for another contract of life_insurance see sec_1035 respondent argues in essence that because there was no exchange of policies by mr o'connor sec_1035 is inapplicable respondent also argues that the o'connor policy was in substance actually distributed or made available to mr o'connor in causing petitioners to be taxable under sec_402 because we find petitioners taxable for under sec_402 we do not address respondent's sec_402 arguments b applicable law pursuant to sec_402 employer contributions to a nonexempt employee_trust are included in the employee's gross_income to the extent that the employee's interest in such contributions is substantially_vested within the meaning of sec_1_83-3 income_tax regs at the time the contributions are made see sec_1_402_b_-1 income_tax regs if an employee's rights under a nonexempt employee_trust become substantially_vested during a taxable_year of the employee and the taxable_year of the trust ends with or within such year the value of the employee's interest in the trust on the date of such vesting is included in the employee's gross_income for that taxable_year see id para b an employee's interest in property is substantially_vested when it is either transferable or not subject_to a substantial_risk_of_forfeiture sec_1_83-3 income_tax regs whether a risk of forfeiture is substantial depends on the facts and circumstances id para c a substantial_risk_of_forfeiture exists where rights in property that are transferred are conditioned upon the future performance or refraining from performance of substantial services by any person or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied id c analysis and conclusion application of sec_402 in gluckman v commissioner tcmemo_2012_329 aff'd 545_fedappx_59 2d cir we considered the tax ramifications of a similar distribution to employees whose employer like hardware terminated its participation in the advantage plan trust in in gluckman the married taxpayers and their two children were the sole shareholders of and one or more of them was employed by the employer_corporation after receiving the employer's corporate resolution authorizing its withdrawal from the advantage plan bisys on date sent to the employer care of the taxpayer husband partially completed change_of_ownership and blank change_of beneficiary designation forms as well as duplicate copies of the underlying life_insurance policies on the lives of the taxpayer employees the original insurance policies were provided to the taxpayers' insurance agent the change_of policy ownership forms had already been endorsed by the advantage plan trustee as the current owner of the policy the completion of the change_of_ownership forms and the actual transfer of the policies to a new plan did not occur until id at the taxpayers argued that because they never owned the policies ie because there was in essence a trustee-to-trustee transfer they did not control the policies and their interests in the policies were at all times subject_to a substantial_risk_of_forfeiture id at we rejected the taxpayers' argument we noted first that because of the advantage plan requirement that covered employees remain employed by the participating employer to remain eligible for benefits the parties agreed that the taxpayer employees' interests in the plan were subject_to a substantial_risk_of_forfeiture through id at we then noted that when the taxpayer husband's employer submitted its resolution in date however the situation was markedly different because c ontinued employment was no longer a requirement and under the advantage plan the plan could offer the policies for purchase by the employees distribute the policies to the covered employees or transfer the policies to another welfare_benefit_plan id at as noted supra bisys in date did in fact distribute to the taxpayer husband both duplicate copies of the policies and partially completed_transfer of ownership forms lacking only the new owner information on the basis of those facts we stated these actions placed petitioners' underlying policies squarely within their control because petitioners were then free to name the policies' new owner and beneficiary which could have been themselves or another welfare_benefit_plan when a taxpayer has dominion and control_over property the value of such property generally will be included in his or her gross_income see 136_tc_38 aff'd without published opinion a f t r 2d ria 4th cir chambers v commissioner tcmemo_2011_114 gluckman v commissioner at we cited cadwell which involved the conversion of a welfare_benefit_plan from a multiple-employer plan to a single- employer plan for the proposition that the taxpayer's interest in the latter became vested because he gained the ability to control the plan assets when the plan was converted to a single-employer_plan id at we then concluded here either at the time the employer submitted its corporate resolution withdrawing from the plan or when the change_of_ownership and beneficiary forms were sent to them petitioners gained the ability to control their underlying policies id petitioners make the point that mr pragosa of bisys in a deposition taken in connection with this case and related cases involving the same issue testified that notwithstanding bisys' stated position prohibiting any trust-to-trust transfers it did in fact allow a number of such transfers in we disposed of a similar claim in gluckman stating e ven if trustee-to-trustee transfers to other plans were still being done by the advantage plan such a transfer simply did not occur here bisys distributed the change_of_ownership and change_of beneficiary designation forms to petitioners the covered employees in care of the employer and to petitioners' insurance agent not to another plan trustee once the change_of_ownership and change_of beneficiary designation forms were received petitioners had the ability to name themselves or another welfare_benefit_plan as the owner and beneficiary of the underlying policies because the policies were subject_to petitioners' direct control the transaction was not a trustee- to-trustee transfer id at we held that the taxpayers' interests in the advantage plan represented by their underlying policies were substantially_vested under sec_402 in id at petitioners seek to distinguish gluckman from this case on two grounds first mr o'connor had essentially enrolled hardware in the benistar plan in the year before any request to bisys for a transfer of the o'connor policy held by the advantage plan to the benistar plan took place moreover that request actually emanated from the benistar plan not from mr o'connor second in gluckman but not in this case bisys transferred the original copies of the insurance policies to the taxpayer's insurance agent with duplicate copies to the taxpayer petitioners argue having the original policy in hand together with the partially completed policy transfer form can be said to produce dominion and control whereas the o'connor policy remained at all times within the dominion and control of the insurance_company and the advantage plan neither of petitioners' attempts to distinguish gluckman withstands scrutiny it is clear that hardware' sec_2002 attempts to terminate its participation in the advantage plan adopt and participate in the benistar plan and have bisys transfer the o'connor policy to the benistar plan were unsuccessful the transfer of policy ownership form for transferring the o'connor policy from the advantage plan to the benistar plan was not signed by anyone on behalf of bisys as the old owner of that policy without that signature ie the advantage plan trustee's agreement to transfer the o'connor policy mr o'connor was powerless to transfer it to the benistar plan moreover because the trustee transfer agreement required the benistar plan to indemnify bisys and the advantage plan for any liabilities arising out of hardware's participation in the latter plan mr carpenter refused to sign that agreement on behalf of the benistar plan as a result there was no right to require a transfer and no actual transfer of the o'connor policy in furthermore we surmise that mr o'connor knew that his attempts to effect a direct trust-to-trust transfer of his policy were unsuccessful otherwise he would not have again in date submitted to bisys hardware's corporate resolution to terminate its participation in the advantage plan as directed by bisys and then when he received them from bisys sent the new change_of policy ownership and change_of beneficiary designation forms already signed by bb t as trustee of the advantage plan to mr carpenter who signed them on behalf of the benistar plan it is also clear that our decision in gluckman did not depend on the fact that duplicate copies of the insurance policies were transmitted to the taxpayers and the originals to their insurance agent the lynchpin of our decision in gluckman was our determination that o nce the change_of_ownership and change_of beneficiary designation forms were received petitioners had the ability to name themselves or another welfare_benefit_plan as the owner and beneficiary of the underlying policies gluckman v commissioner at dollar_figure as noted supra we stated in gluckman v commissioner tcmemo_2012_329 at aff'd 545_fedappx_59 2d cir that the taxpayers became vested in the underlying policies either at the time the employer submitted its corporate resolution withdrawing from the plan or when the change_of_ownership and beneficiary forms were sent to them gluckman v commissioner at it was unnecessary in gluckman to select between those two alternatives because both occurred in the same taxable_year here too both events occurred in therefore we find it unnecessary to decide whether hardware's submission of its resolution terminating its participation in the advantage plan was by itself sufficient to vest mr o'connor in the ownership of his life_insurance_policy we note however that in affirming our decision in gluckman the court_of_appeals for the second circuit appears to have selected the time at which the change_of_ownership and beneficiary forms were sent to the taxpayers as the time at which they became substantially_vested in the underlying policies see id f app'x pincite we see no reason to depart from our analysis and conclusion in gluckman and we hold that petitioners were substantially_vested in the o'connor policy in under sec_402 application of sec_1035 we agree with respondent that sec_1035 is inapplicable to the transfer of the o'connor policy from the advantage plan to the benistar plan as respondent points out there was no exchange of policies as required under sec_1035 rather the same policy was merely transferred from one owner to another the only issue being whether mr o'connor who had a right to keep the policy instead of opting to have it transferred to the benistar plan had income arising out of that right the foregoing transaction simply is not covered by sec_1035 as there must be an actual or at least a constructive exchange of one policy for another see 85_tc_1024 iii accuracy-related_penalty a the notice by the notice respondent determined the accuracy-related_penalty under sec_6662 against petitioners on the ground that they had an underpayment attributable to substantial_understatement_of_income_tax and they have not shown they had reasonable_cause for the underpayment of tax and that they acted in good_faith the notice goes on to state that the understatement amount is reduced where there was substantial_authority for the tax treatment of an item adequate_disclosure of the item and a reasonable basis for its tax treatment but that caveat appears to be inapplicable boilerplate as the amount of the penalty dollar_figure is exactly of the notice's determined tax_deficiency of dollar_figure b applicable law sec_6662 and b - provides for an accuracy-related_penalty the penalty in the amount of of the portion of any underpayment attributable to among other things negligence or intentional disregard of rules or regulations without distinction negligence any substantial_understatement_of_income_tax or any substantial_valuation_misstatement a substantial_understatement_of_income_tax exists for an individual if the amount of the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 respondent has established that petitioners' understatement of income_tax for is substantial as it exceeds of the correct_tax dollar_figure is more than of the correct tax as adjusted by respondent of dollar_figure which is greater than dollar_figure therefore we need not consider the merits of respondent's argument that petitioners were negligent and disregarded rules and regulations in not reporting the income for equal to the value of the o'connor policy for that year sec_6664 provides that the penalty shall not be imposed with respect to any portion of an underpayment if a taxpayer shows that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to that portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer reliance on the advice of a professional tax advisor does not necessarily demonstrate reasonable_cause and good_faith sec_1_6664-4 income_tax regs reasonable_cause has been found when a taxpayer selects a competent tax adviser supplies the adviser with all relevant information and in a manner consistent with ordinary business care and prudence relies on the adviser’s professional judgment as to the taxpayer's tax obligations see 115_tc_43 aff'd 299_f3d_221 3d cir sec_1_6664-4 income_tax regs cf united_states v boyle u s a taxpayer may rely on the advice of any_tax adviser lawyer or accountant see boyle u s pincite reliance on a professional tax adviser will not be considered reasonable however if the adviser is a promoter of the transaction or suffers from a conflict of interest that the taxpayer knew of or should have known about neonatology assocs p a v commissioner f 3d pincite 990_f2d_893 6th cir aff'g donahue v commissioner tcmemo_1991_181 t he taxpayer's education sophistication and business experience will be relevant in determining whether the taxpayer's reliance on tax_advice was reasonable and made in good_faith sec_1_6664-4 income_tax regs c analysis and conclusion under sec_7491 respondent bears the burden of production but not the overall burden_of_proof with respect to petitioners' liability for the sec_6662 penalty see 116_tc_438 we have previously stated that the burden imposed by sec_7491 is only to come forward with evidence regarding the appropriateness of applying a particular addition_to_tax or penalty to the taxpayer weir v commissioner tcmemo_2001_184 wl at by demonstrating that petitioners' understatement of income_tax exceeds the thresholds for a finding of substantial understatement of income_tax under sec_6662 respondent has satisfied his burden of production respondent argues that petitioners have failed to establish either reasonable_cause or good-faith reliance on professional advisers as justification for their substantial_understatement_of_income_tax petitioners argue that because of the complexity of the issues involved in this case they were justified as neophytes with respect to the nuances and subtleties of federal tax law in relying on their professionals' interpretation of the relevant provisions they further claim that there was substantial_authority for their return position and no direct authority to the contrary in rejecting petitioners' arguments respondent notes that bisys warned mr o'connor repeatedly that covered employees of employers terminating their participation in the advantage plan were taxable on the value of their policies respondent also notes that there is no evidence that any of the advisers that petitioners may have consulted were qualified_tax advisers familiar with the tax aspects of the transactions at issue in this case we agree with respondent although petitioners' return was prepared by frederick a ciampa a certified_public_accountant there is no evidence that he reviewed or was at all familiar with the events occurring in that resulted in hardware's termination of its participation in the advantage plan and the eventual transfer at mr o'connor's direction of the o'connor policy to the benistar plan the record indicates only that mr ciampa on or before date advised that mr o'connor's current employee benefit plans be transferred to benistar ie he recommended pursuing the direct trust-to-trust transfer that did not take place in either or moreover there is no evidence that mr o'connor made mr ciampa or any other professional tax adviser aware of bisys' advice that the plan termination and policy transfer events of would result in taxable_income to employees covered by the advantage plan we sustain respondent's determination of the penalty under sec_6662 decision will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-161453-04 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities -------------------------------- subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion upon reexamination that the following business continues to be an employer under the railroad retirement act and the railroad unemployment insurance act --------------------------------------------------- --------------------------------------------------- --------------------------------------------- -------------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that ---------------------------------continues to be an employer under the railroad_retirement_tax_act the prior determination copy enclosed provided that ---------------- ------------------- ceased to be an employer under the act effective --------------------- please take the appropriate action regarding this business cc janine cook


internal_revenue_service number release date index number ----------------------------- ---------------------------- ------------------------------------ -------------------------------- in re --------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-165351-04 date february ------------------------------------------------------- ------------------------------------------------------ ----------------------------------- ------------------ --------------------------- ------- --------------- legend taxpayer taxpayer trust date date year z dear ----------------------------- this is in response to your letter dated date and subsequent correspondence in which you requested an extension of time pursuant to sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate generation-skipping_transfer gst tax exemption to transfers made to a_trust the facts submitted and the representations made are as follows on date taxpayer sec_1 and created trust for the benefit of their issue section dollar_figure of trust provides that the trustees are to form four trusts trusts a b c and d one for the benefit of each child of taxpayer sec_1 and section dollar_figure provides that the child for whom a_trust has been established is to receive the net_income from his or her trust at least quarterly and trust corpus to provide for his or her support and education section dollar_figure provides each child with a testamentary limited power to appoint the assets of his or her trust among his or her spouse descendants and the descendants of taxpayer sec_1 and assets not effectively appointed are to be distributed per stirpes among the surviving descendants of each beneficiary and the beneficiary’s surviving plr-165351-04 spouse if a beneficiary is not survived by a spouse or descendants then the trust estate is to be paid to the other children of taxpayer sec_1 and for whom trusts a b c and d were created and their surviving descendants per stirpes on date in year taxpayer sec_1 and each transferred dollar_figurez to trusts c and d taxpayer sec_1 and retained an attorney to prepare their form sec_709 united_states gift and generation-skipping_transfer_tax returns reporting the date transfers to the trusts on their respective form sec_709 taxpayer sec_1 and each consented under sec_2513 to treat gifts made by either in year as made by both of them in preparing the returns the attorney inadvertently failed to allocate or advise taxpayer sec_1 and to allocate their gst exemptions to the date gifts it has been represented that taxpayer sec_1 and each have sufficient gst_exemption available to allocate to the transfers they made on date taxpayer sec_1 and are requesting an extension of time under sec_2642 and sec_301_9100-3 to allocate their gst exemptions to the transfers taxpayer sec_1 and made to trusts c and d on date and that such allocations will be based on the value of the property transferred to trusts c and d on date law and analysis sec_2501 provides that a tax computed as provided in sec_2502 is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2513 provides in part that a gift made by one spouse to any person other than his spouse shall for the purposes of this chapter be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2513 provides that sec_2513 shall apply only if both spouses have signified under the regulations provided for in sec_2513 their consent to the application of sec_2513 in the case of all such gifts made during the calendar_year by either while married to the other sec_25_2513-2 of the gift_tax regulations provides in part that consent to the application of the provisions of sec_2513 with respect to a calendar_period as defined in sec_25_2502-1 shall in order to be effective be signified by both spouses if both spouses file gift_tax returns within the time for signifying consent it is sufficient if-- i the consent of the husband is signified on the wife's return and the consent of the wife is signified on the husband's return ii the consent of each spouse is signified on his own plr-165351-04 return or iii the consent of both spouses is signified on one of the returns if only one spouse files a gift_tax_return within the time provided for signifying consent the consent of both spouses shall be signified on that return sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 as applicable during the years at issue sec_2642 provided that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c b a the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made plr-165351-04 before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant sec_2642 further provides that for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of the gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of the gst tax notice_2001_50 2001_2_cb_189 provides that under sec_2624 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election plr-165351-04 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer sec_1 and are granted an extension of time of sixty days from the date of this letter to allocate their available gst exemptions to the transfers to trusts c and d on date the allocations will be effective as of date and should be made based on the value of the property transferred to trusts c and d on date the allocations should be made on supplemental form sec_709 for year and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each supplemental form_709 copies are enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely heather c maloy associate chief_counsel passthroughs special industries enclosures copy for ' purposes copies of this letter