internal_revenue_service number release date index number ------------------------------ ------------------------------- ------------------------------------ ------------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number --------------------- refer reply to cc ita b03 plr-108023-10 date date legend legend investors ------------------------------- corporation x ---------------------------------------- z ---------------------- date ---------------- date ----------------------- date ----------------- date ----------------------- country --------------------------------------- government ----------------------------------------------------------------- act -------------------------------------------------------- act ----------------------------- act ----------------------------------------- fund ----------------------------------------------- agency -------------------------------------------------- n ------ p --- plr-108023-10 q --- r ----------------------------------------------------------------------------------------------------------- dear ---------------- this is in response to your request for a ruling under sec_165 and sec_1231 of the internal_revenue_code dated date facts the investors are a series of trusts which are treated as partnerships for federal_income_tax purposes on date the investors purchased an aggregate investment of approximately n of the stock of corporation x on date government passed act which had the purpose of stabilizing the financial markets as part of that legislation government established the fund and the agency the fund and the agency are subject_to legal and substantive supervision by government financial department on date government passed act authorizing the nationalization of corporation x under act the fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in all other cases a majority shareholder is required to acquire a higher minimum ownership of q in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation government and fund took the following steps in order to acquire of the stock of corporation x fund provided liquidity guarantees to corporation x in addition to support provided by the government central bank and a consortium of country financial institutions fund subscribed to new shares of corporation x out of authorized capital of the company by excluding the subscription rights of all other shareholders fund acquired additional shares of corporation x stock through a public_tender_offer public documents stated that shareholders who did not accept the public_tender_offer would become subject_to an expropriation of their shares at a lower price under the governing documents in place for the investors only a small percentage of the investors’ shares were sold in the public_tender_offer such shares are not the subject of this letter_ruling plr-108023-10 a second capital increase was approved that resulted in fund increasing its ownership in corporation x to at least p following which and pursuant to government legislation granting fund the legal right to do so with regard to corporation x it was resolved that all remaining corporation x shares not already owned by fund should be transferred to fund in exchange for cash compensation determined according to the corporate statutes of country and government in an amount equal to r the legislation granting fund this right to compel transfer of corporation x shares also provided for severe penalty provisions in the event of objection by minority shareholders on date pursuant to government court action the transfer of the shares to fund took effect under the transfer resolution for the squeeze out of minority shareholders including investors minority shareholders became entitled to a cash settlement payment from fund the amount of the cash settlement payment was determined in accordance with the provisions of act which provides that the minimum level of cash compensation is equal to r following the transfer of their shares to fund investors and certain other minority shareholders filed suits against corporation x in the courts of country requesting that their shares of stock in corporation x be returned to them the suits note that the provisions relating to the recapitalization and the related modifications to the squeeze-out rules were newly introduced into the law of country in the context of the measures aimed at stabilization of the financial markets and allege violations of the constitution of country and several articles of the z contract investors also filed suits against fund requesting additional compensation_for transferring their shares to fund investors request a ruling that they recognized a loss under sec_165 of the internal_revenue_code equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss applicable law sec_165 of the code provides that any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise may be deducted sec_165 states that the basis for determining the amount of the deduction for any loss shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_1_165-1 of the income_tax regulations states that sec_165 provides that in computing taxable_income under sec_63 any loss actually sustained during the taxable_year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject_to any provision of the internal revenue laws which prohibits or limits the amount of the deduction this deduction for plr-108023-10 losses sustained shall be taken in accordance with sec_165 and the regulations thereunder sec_1_165-1 of the regulations states that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions fixed by identifiable events and except as otherwise provided in sec_165 and sec_1_165-11 relating to disaster losses actually sustained during the taxable_year only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss sec_1_165-1 of the regulations provides that as to the year of deduction a loss shall be allowed as a deduction under sec_165 only for that taxable_year in which the loss is sustained for this purpose a loss shall be treated as sustained during the taxable_year in which the loss occurs as evidenced by closed and completed transactions and as fixed by indentifiable events occurring in such taxable_year sec_1_165-1 of the regulations provides that if a casualty or other event occurs which may result in a loss and in the year of such casualty or event there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss with respect to which reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not such reimbursement will be received whether a reasonable_prospect_of_recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim issue does investors’ filing of a suit against x in courts of country prevent the loss from being sustained in year sec_165 provides for the deduction of losses sustained during the taxable_year for which no compensation is received in the case of individuals sec_165 limits the deduction to losses_incurred in a trade_or_business or in any transaction entered into for profit in order to be deductible a loss must be evidenced by a closed and completed transaction fixed by identifiable events and actually sustained during the taxable_year 326_us_287 sec_1_165-1 a loss is only deductible for the taxable_year in which such loss is sustained sec_1_165-1 the determination of whether a loss occurred during a particular taxable_year is purely one of fact 524_f2d_888 9th cir affg t c memo a critical inquiry is to focus on the year that the taxpayer loses control_over and possession of the property at issue 274_us_398 plr-108023-10 whether a reasonable prospect for recovery exists with respect to a claim for reimbursement of the loss is a question of fact to be determined upon examination of all of the facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim the determination of whether reasonable certainty exists as to reimbursement is an objective inquiry into the facts and circumstances surrounding the loss as of the close of the taxable_year in which the deduction is claimed see 326_us_287 ramsey scarlett co v commissioner 61_tc_795 aff'd 521_f2d_786 4th cir brown v commissioner tcmemo_1996_284 various cases and rulings discuss the timing of a loss caused by a seizure of stock by a foreign government such cases and rulings generally permit the loss in the year of the seizure finding that there was not a reasonable prospect for recovery_of the loss in spite of the purported existence of claims for reimbursement for example in united_states v s s white dental mfg co the supreme court held that a taxpayer creditor and stockholder of a corporation seized by the german government in could take a deduction for the loss of the taxpayer’s investment in the year of seizure even though in a later year the german government bound itself to make a payment to the taxpayer in respect of the seized property in fuchs v commissioner 413_f2d_503 2d cir a loss caused by the seizure of rental properties by the czechoslovakia government in was held to be deductible in notwithstanding that the taxpayer recovered a portion of her loss from a fund set up by the united_states government in see also 48_tc_711 revrul_62_197 1962_2_cb_66 discusses when a loss is permitted to u s taxpayers whose property was seized by the government of cuba it states it is the position of the service that acts of confiscation whether by way of seizure intervention in expropriation or similar taking of property by the cuban government constitute identifiable events which in light of all of the circumstances have resulted in closed and completed transactions notwithstanding promise of indemnification emphasis added an act of confiscation has occurred when the taxpayer has been deprived of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore in revrul_75_121 1975_1_cb_70 the taxpayer’s domestic subsidiary s formed to own and operate property in a foreign_country was occupied by the government of that country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer secured_by the stock of s the ruling holds that there is a loss when the taxpayer after originally agreeing to make the investment later determined such investment to be unfeasible upon which the foreign government declared the stock of s to be forfeited revrul_76_41 1976_1_cb_52 which in part clarified revrul_75_121 stated that implicit in revrul_75_121 is the requirement that plr-108023-10 a seizure of stock in a domestic_corporation results in a loss for purposes of sec_165 sec_172 and sec_1231 only if the u s shareholder cannot expect to regain legal ownership of the stock through a u s court_proceeding in boehm v commissioner the court held that there was no prospect of recovery as to stock in a failing corporation in spite of a shareholders derivative suit that was filed against the corporation and its board_of directors the shareholders purchased stock for dollar_figure in by the corporation had sustained large losses and a receiver was appointed the shareholders instituted a stockholder’s derivative suit against the corporation and nine members of its board_of directors the suit was settled in and the shareholders took a loss for the stock at that time the court denied the loss holding that the stock had become worthless in a previous year even though the shareholders were pursuing a claim against the corporation the court determined that the shareholders had not shown that there was any value to the suit as there was no evidence in the stipulation of the merits of the suit the probability of recovery or any assurance of collection of an amount sufficient to pay the creditor’s claim and to provide a sufficient surplus for stockholders so as to give any real value to their stock u s pincite unlike the situation in rev ruls and the stock in this case is not stock in a u s subsidiary and investors cannot expect to regain legal ownership through a u s court_proceeding under the reasoning of boehm v commissioner the mere fact of having filed a suit to recover their shares does not automatically establish that there is a valid claim for reimbursement or recovery under boehm it is necessary to consider the merits of the suit including the probability of recovery in this case although investors have instituted a suit in the courts of country to regain their stock in view of the circumstances under which corporation x stock was transferred the investors have represented that they have no reasonable prospect of recovering their corporation x shares as a result of these legal actions instead the legal actions were intended as an incentive to fund to offer additional compensation_for the stock based upon this it is appropriate to consider the loss as sustained as of date when the stock was transferred to fund pursuant to the forced sale issue does the loss result from the involuntary_conversion of the stock into other_property or money under sec_1231 sec_1231 provides that the term sec_1231 loss means any recognized loss from a sale_or_exchange or conversion described in sec_1231 sec_1231 provides that sec_1231 gain means any recognized gain from the compulsory or involuntary_conversion as a result of destruction in whole or in part theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof into other_property or money of property used in a trade_or_business or any capital_asset held for more than one year that is held in connection with a trade_or_business or a transaction entered into for profit plr-108023-10 sec_1_1231-1 of the regulations provides that for purposes of sec_1231 the terms ‘compulsory or involuntary conversion’ and ‘involuntary conversion’ of property mean the conversion of property into money or other_property as a result of complete or partial destruction theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof revrul_72_1 1972_1_cb_52 situation holds that a taxpayer y owning stock in a foreign_corporation t may deduct the loss caused by the nationalization of the stock of t whose assets were located in the foreign_country when there was no reasonable prospect for payment of such compensation nor of recovery_of y’s interest in the corporation or indemnification by insurance or otherwise in addition the ruling notes that if the prospect for compensation is favorable but y is required as a condition to receiving compensation to enter into a formal contract of sale with country b in respect of y’s stock in t such a ‘sale’ will be viewed by the service as merely an agreement as to the amount of compensation to be paid for the involuntary_conversion of y’s stock revrul_75_121 holds that the taxpayer’s loss qualifies under sec_1231 when s a domestic subsidiary formed to own and operate property in a foreign_country was occupied by the government of that foreign_country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer the taxpayer agreed to make the investment but later determined such investment to be unfeasible and so notified the foreign government upon which the foreign government declared the stock of s to be forfeited with compensation under the pledged agreement generally a seizure for federal tax purposes occurs when a governmental authority enters into physical possession of property without authority of a court order with compensation to be determined later and is limited to the taking of property for public use revrul_79_269 1979_2_cb_297 an act of confiscation whether by way of seizure intervention in expropriation or similar taking of property occurs when a foreign government deprives a taxpayer of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore revrul_62_197 1962_2_cb_66 clarified by revrul_64_149 1964_1_cb_233 modified by revrul_69_498 1969_2_cb_31 compensation may be received in some instances of seizure by a foreign government revrul_72_1 situation the expropriation or confiscation of property by a foreign government is considered a loss under and an involuntary_conversion for purposes of sec_1231 see revrul_72_1 1972_1_cb_52 see also revrul_62_197 situation at times forced sales of stock have been held to be involuntary_conversions however other cases and rulings have held that forced sales of stock do not qualify as involuntary_conversions in revrul_79_269 1979_2_cb_297 a sale of stock by a plr-108023-10 trustee in bankruptcy of a customer’s securities held in a margin_account of a bankrupt brokerage firm was not considered an involuntary_conversion sale of stock by one of two shareholders under a state deadlock statute was held not to be an involuntary_conversion 274_f2d_656 affg 31_tc_1168 american natural_gas co v u s ct_cl held that a sale of public_utility stock by sec order was not an involuntary_conversion the acquisition of stock in this case by fund was pursuant to the squeeze-out provisions of government law the circumstances of this sale differ from the cases cited above in which a forced sale was not considered an involuntary_conversion while the cases cited above resulted in the forced sale of stock pursuant to a government order those sales did not result in the acquisition by the government or a government controlled_entity of the stock and the stock was not acquired for a public purpose rather they resulted in another private party acquiring the stock in this case the forced sale resulted in acquisition of stock by fund an instrumentality of government for a public purpose the stabilization of the economy of country pursuant to the provisions of act described above fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation as described above fund acquired p of the shares of corporation x on date all remaining corporation x shares not already owned by fund were transferred to fund in exchange for cash compensation this was pursuant to the express provisions of act described above which directed that fund should acquire the shares of corporation x either by purchase or by nationalization if necessary under revrul_72_1 this should be treated as an involuntary_conversion of the stock of corporation x through seizure or confiscation even though the stock was purchased under the laws of government and the shareholders of corporation x received compensation equal to r the terms of act make it clear that it was the intention of government to acquire the stock of corporation x for public purposes the provisions of act first instructed fund to acquire the shares through purchase and if that was not possible authorized the nationalization of corporation x therefore it is held that investors recognized a loss under sec_165 of the internal_revenue_code as of date equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss 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 plr-108023-10 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christopher f kane chief branch income_tax accounting


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-113586-98 date jan legend x y z a b country c date this responds to a letter submitted on your behalf dated date requesting an extension of time to elect to treat b as an entity that is disregarded as an entity separate from its owner for federal tax purposes facts b is a country c entity that is eligible to elect to be disregarded as an entity for federal tax purposes through tiers of wholly owned entities y z and a x owns of b b intended to elect to be disregarded as of date but the election was not timely filed with the appropriate service_center plr-113586-98 law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be taxable as an entity that is disregarded as an entity separate from its owner pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of time is granted to elect that b be treated as an entity that is disregarded as an entity separate from its owner for federal tax purposes until days following the date of this letter the election should be made by following the procedure for filing form_8832 a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to plr-113586-98 the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely signed paul f kugler paul f kugler assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court stanley sheldon kradman and laura sarah kradman petitioners v commissioner of internal revenue respondent docket no 3909-07l filed date stanley sheldon kradman and laura sarah kradman pro_se derek p richman for respondent memorandum opinion cohen judge the petition in this case was filed in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination with respect to petitioners’ income_tax_liability for and and a decision letter concerning equivalent_hearing under sec_6320 and or sec_6330 of the internal_revenue_code decision letter for petitioners’ income_tax liabilities for through the issues for decision are whether the decision letter should be treated as a notice_of_determination entitling petitioners to judicial review whether sustaining the filing of a federal_tax_lien was an abuse_of_discretion and whether penalties and or interest on petitioners’ outstanding liabilities should be abated unless otherwise indicated all section references are to the internal_revenue_code background petitioners resided in florida at the time that they filed their petition after this case was set for trial respondent filed a motion to dismiss for lack of jurisdiction and to strike as to the taxable years through motion to dismiss in the motion to dismiss respondent contended that petitioners did not timely request a hearing under sec_6320 and that therefore they were properly issued a decision letter rather than a notice_of_determination with regard to their tax years through however in a supplement to respondent’s motion to dismiss respondent contended that petitioners had made but withdrawn a timely request for a hearing with respect to those years a second request for the same years was not timely thus according to respondent petitioners were entitled only to an equivalent_hearing resulting in the issuance of a decision letter with respect to those years because the decision letter is not a determination under sec_6330 respondent argues the court does not have jurisdiction and petitioners are not entitled to judicial review under sec_6320 or sec_6330 with respect to through see 116_tc_255 respondent also filed a motion for partial summary_judgment with respect to and the motion to dismiss and the motion for partial summary_judgment were set for hearing at the time previously set for trial petitioner stanley sheldon kradman petitioner testified as did the hearing officer petitioner testified among other things that he had made a timely request for a hearing for all years in dispute that he was later told by irs personnel that unless he withdrew that request he could not settle his liabilities or pursue an offer- in-compromise oic and that he either misunderstood or was misled about the effect of withdrawing his request respondent’s counsel acknowledged that respondent was unable to find the purported withdrawal or any information regarding the circumstances under which it occurred in any event a hearing with respect to all years through occurred at the same time involved the same issues and requires the same analysis from the court because petitioner made a timely request for a hearing and there is no reliable evidence of an effective withdrawal the motion to dismiss will be denied see 119_tc_252 because the motion for partial summary_judgment presumed that the motion to dismiss would be granted and because testimony was taken as at trial the motion for partial summary_judgment will be denied and the case decided on the evidence presented at trial the facts are essentially undisputed though not stipulated since petitioners have been attempting to resolve their long-outstanding tax_liabilities through oics the oics were rejected on the ground that petitioners were not in compliance with then-current tax obligations as a condition of processing one of the later oics petitioners were requested to submit a dollar_figure fee petitioner asserted that they could not pay the fee on date the internal_revenue_service irs sent petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 for tax years through on date petitioners requested a hearing on date a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 was sent to petitioners with respect to tax years and on date petitioners requested a hearing a hearing was conducted by an appeals settlement officer hearing officer on date and the notices underlying this case were sent on date at the time of the hearing conducted under sec_6330 the hearing officer explained that collection alternatives could not be considered unless petitioners brought themselves into compliance with then-current obligations the hearing officer determined that petitioners were not in compliance with estimated_tax requirements for and had not filed their return nonetheless the hearing officer received and reviewed financial data petitioners provided he advised petitioners that collection alternatives could be considered such as an installment_agreement for payments of approximately dollar_figure per month if petitioners became compliant petitioners declined to pursue an installment_agreement discussion petitioners have invoked our jurisdiction under sec_6330 to review the determination of the hearing officer to sustain the notice of filing a federal_tax_lien they have not challenged the amount of the underlying liability although at trial petitioner asserted that their inability to pay the outstanding balances results from delays by the irs that increased the amount of penalties and interest because the matter of abatement of the penalties and interest was not raised before the office of appeals we cannot consider it now see 129_tc_107 because the underlying liability is not properly at issue we review the determination only for abuse_of_discretion which requires us to decide whether the determination was arbitrary capricious or without sound basis in fact or law see id pincite reliance on a failure to pay current taxes in rejecting a collection alternative does not constitute an abuse_of_discretion id pincite citing 123_tc_1 affd 412_f3d_819 7th cir petitioners complain that misstatements were made as to whether they had timely requested a hearing with respect to their through liabilities and that those misstatements and other delays by the irs increased penalties and interest beyond petitioners’ ability to pay petitioners’ tax history and the testimony at trial suggest that the outstanding amounts would not have been paid any earlier if the confusion about the timeliness of their request for hearing had not occurred the essence of their complaint is that their liabilities should have been compromised in spite of their failure to maintain current compliance petitioners have presented no persuasive evidence or argument that an abuse_of_discretion occurred here petitioners have not shown that there was an error in determining that they were not compliant with their current tax obligations and they did not offer or agree to any collection alternatives we conclude that it was not an abuse_of_discretion to sustain the filing of a lien an appropriate order and decision will be entered


t c memo united_states tax_court dwight e and leslie e lee petitioners v commissioner of internal revenue respondent docket nos filed date thomas r moore for petitioner wilton a baker for respondent memorandum opinion dawson judge these consolidated cases were assigned to chief special_trial_judge peter j panuthos pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 unless otherwise indicated all section references are to the internal_revenue_code in effect for the tax years all rule continued the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge panuthos chief special_trial_judge respondent determined deficiencies in petitioners' federal income taxes for the taxable years through as follows docket no year deficiency dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure these cases were submitted by the parties fully stipulated the three dockets have a long history which we will briefly review one of the issues in all three dockets relates to petitioners' participation in transactions with futures trading inc fti merit securities inc merit in four consolidated cases seykota v commissioner tcmemo_1991_234 supplemented by tcmemo_1991_541 we addressed issues concerning the various fti merit transactions petitioners were not parties to those cases the decisions in those cases are final on date a stipulation of settled issues was filed in all three dockets the parties stipulated to all issues except one which was described as follows continued references are to the tax_court rules_of_practice and procedure the only issue remaining in dispute between the parties is whether petitioners are entitled to interest_expense deductions claimed in connection with peng partners this issue relates to the merit project and either will be resolved by the parties or submitted to the court for resolution as a result of a continuing dispute as to the proper interpretation of terms of the stipulation a number of motions were filed and resolved by the court when cross-motions for orders to show cause were filed in march and date the court set these cases for hearing at a session scheduled to take place in new york new york the cases were ultimately submitted fully stipulated background at the time the petitions were filed petitioners resided in new york new york during through petitioner dwight e lee petitioner was a partner in an entity known as peng partners during those years peng partners participated in arbitrage and carry a c transactions promoted by fti in and peng partners also participated in t-bill options transactions through merit this court has considered both the fti a c transactions and the merit t-bill options transactions in cases involving merit securities see seykota v commissioner tcmemo_1991_234 supplemented by tcmemo_1991_541 other investors also disputed the terms of apparent agreements with respect to transactions with fti merit see for example lamborn v commissioner tcmemo_1994_515 although the record in these cases is sketchy and not entirely clear it appears that the parties agree that the transactions at issue here are factually the same as those we addressed in the seykota opinions in those opinions we found that the fti transactions were fundamentally cash and carry tax_shelters in simplified terms an investor would borrow large sums of money he would acquire gold with the loan proceeds he would also enter into contracts to sell that gold at a specified time in the future in the gold markets the price which the investor paid for the gold was lower than the price at which he agreed to sell that gold in the future the difference between these two prices largely reflected the amounts of interest_and_other_carrying_charges that the investor would incur while he owned the gold the a c customer would deduct the interest charges plus other carrying charges--such as charges for management insurance and storage-- in the year he borrowed the money these deductions offset other ordinary_income for that year when he sold the gold in the next year the investor would report the gain at favorable capital_gains rates the net gain approximately equaled the costs of the interest_and_other_carrying_charges in effect the investor could defer the taxation of income at rates as high as percent for a year he could also convert that income into capital_gains taxable at maximum rates no higher than percent as an integral part of the fti a c transactions the investors were placed in a number of alleged trades involving options in u s treasury obligations these trades were to function as alleged hedges against losses in the gold trades in the present cases the stipulation of settled issues resolved all the issues before the court except whether petitioners are entitled to investment_interest expense deductions resulting from peng partners' participation in the fti a c transactions the investment_interest expense deductions in issue are as follows year amount dollar_figure big_number big_number big_number discussion respondent's determination that the claimed interest_expense deductions are not deductible is presumptively correct and petitioners bear the burden of proving that respondent's determination is erroneous rule a 503_us_79 290_us_111 the fact that these cases are fully stipulated does not relieve petitioners of that burden 95_tc_82 affd 943_f2d_22 8th cir sec_163 generally permits the deduction of all interest_paid or accrued within the taxable_year on indebtedness the deductibility of interest however is subject_to an important exception interest is not deductible where the underlying indebtedness lacks economic_substance beyond the taxpayer's desire to obtain an interest_deduction 364_f2d_734 2d cir affg 44_tc_284 in goldstein the taxpayer sought to reduce the income taxes that she would owe on sweepstakes winnings accordingly in prearranged transactions she borrowed dollar_figure from commercial banks pincite percent interest and purchased dollar_figure in treasury notes paying percent interest the treasury notes secured her loans she then prepaid the interest on the bank loans and sought to deduct the amount of the interest as an offset against the sweepstakes income the net effect of these transactions was to produce an economic loss that was more than offset by tax savings from the deduction of the prepaid_interest we sustained the commissioner's disallowance of the deduction and the court_of_appeals for the second circuit affirmed the court_of_appeals for the second circuit explained that sec_163 does not permit a deduction for interest_paid or accrued in loan arrangements that cannot with reason be said to have purpose substance or utility apart from their anticipated tax consequences goldstein v commissioner f 2d pincite we applied the reasoning of goldstein in 82_tc_492 in julien we denied most of the claimed interest deductions at issue because the taxpayer had failed to prove that the transactions giving rise to such deductions had actually taken place in one instance however we accepted the taxpayer's representation that he had purchased silver worth dollar_figure on date and simultaneously agreed to sell the same amount of silver at a price of dollar_figure on date there was thus an indicated gain of dollar_figure the taxpayer borrowed the purchase_price from an affiliate of the promoter the taxpayer paid dollar_figure as interest on that amount on date he paid commissions of another dollar_figure the terms of his loan agreement effectively precluded him from further disposition of either the silver he had purchased or his contract to sell that silver there was thus no way for the taxpayer to profit from that transaction his indicated gain of dollar_figure was more than offset by his interest and commission expenses we disallowed the deduction of the interest_expense for quoting goldstein v commissioner supra pincite we stated sec_163 does not 'intend' that taxpayers should be permitted deductions for interest_paid on debts that were entered into solely in order to obtain a deduction julien v commissioner supra pincite we applied the same principle in 94_tc_738 there the issue was whether certain repurchase agreements called repos generated interest deductions a repo is an agreement to finance the purchase of a treasury bill or t-bill by selling the t-bill to another party with an agreement to repurchase the t-bill for the original selling_price plus interest on or before the t-bill's maturity_date we observed that the transactions were designed so that the interest that the taxpayer paid in repurchasing the t-bill was greater than the interest actually paid_by the t-bill during the period the repo was in effect we found that the repo transactions were without substance beyond the anticipated tax consequences of generating interest deductions citing goldstein we explained that loans or other financing transactions will merit respect and give rise to deductible_interest only if there is some tax-independent purpose for the transactions sheldon v commissioner supra pincite these cases present the issue of the deductibility of interest in fti a c transactions in these transactions the investors borrowed money which was used to buy gold their investments were hedged by alleged trades in options for u s treasury obligations the transactions generated interest and other deductions the investors recovered their investment in in 94_tc_738 we noted that some of the transactions at issue presented a small potential for gain we nonetheless found 364_f2d_734 2d cir affg 44_tc_284 dispositive stating the principle of that case would not permit deductions merely because a taxpayer had or experienced some de_minimis gain sheldon v commissioner supra pincite see 393_f2d_232 2d cir affg tcmemo_1966_225 the next taxable_year when the gold was sold we earlier addressed the deductibility of interest arising from these transactions in seykota v commissioner tcmemo_1991_234 seykota i supplemented by tcmemo_1991_541 seykota ii in seykota i we found that the fti a c transactions lacked economic_substance we therefore disallowed the taxpayers' claimed deduction of losses_incurred as a result of their participation in that program we made an exception for the deduction of interest_paid in connection with borrowing funds to participate in the program on the commissioner's motion for reconsideration however we modified that opinion citing goldstein julien and sheldon we held in seykota ii that the taxpayer could not deduct interest_expenses paid to borrow funds to acquire gold in connection with fti a c transactions based on the record before us in seykota ii the interest payments appeared to be integral parts of transactions that seen as a whole lacked economic_substance or any purpose other than generating tax deductions id the taxpayers had the burden of persuading us otherwise and when they failed to do so we sustained the commissioner's disallowance of the claimed interest deductions respondent maintains that the interest deductions at issue here are factually indistinguishable from those we addressed in seykota ii respondent accordingly concludes that the reasoning we applied in seykota ii controls here and that the interest deductions are not allowable petitioners however argue that our holding in seykota ii has been vitiated by our subsequent opinion in lieber v commissioner tcmemo_1993_424 in lieber the commissioner disallowed deductions relating to a computer leasing tax_shelter the court held that the majority of the deductions at issue were not allowable the court however permitted the taxpayers to deduct interest_paid upon indebtedness they incurred in order to invest in the computer leasing transaction in so holding the court quoted as dispositive precedent the following language from 915_f2d_832 2d cir revg on other grounds t c memo even if the motive for a transaction is to avoid taxes interest incurred therein may still be deductible if it relates to economically substantive indebtedness 752_f2d_89 4th cir both lieber and jacobson explicitly adopt the holding in 752_f2d_89 4th cir affg in part and revg in part 81_tc_184 rice's toyota world inc addressed the case of a taxpayer who borrowed money to invest in a tax_shelter part of the indebtedness was secured_by a short-term recourse note the court_of_appeals for the fourth circuit affirmed our disallowance of most of the deductions at issue with respect to the taxpayer's loan transaction however the court_of_appeals found that the debt secured_by the short-term recourse note was valid and that the taxpayer could deduct interest_paid on that note to the lender we adopted the reasoning of rice's toyota world inc in 88_tc_386 affd 868_f2d_851 6th cir accordingly our opinions in lieber and jacobson conclude that in situations such as that presented in rice's toyota world inc the interest is deductible the situation in the rice's toyota world inc line of cases which allows interest deductions is however distinguishable from the situation in the 364_f2d_734 2d cir line of cases wherein the courts have disallowed the claimed interest deductions the court_of_appeals for the third circuit has provided a detailed discussion of that distinction in 31_f3d_117 3d cir there the court_of_appeals had before it a repo transaction virtually identical to that addressed in 94_tc_738 and similar in concept to the situations in goldstein 82_tc_492 and seykota addressing first the transaction that yielded deductible_interest in rice's toyota world inc the court_of_appeals for the third circuit explained the transaction was unusual because the interest payments on the recourse note were separable from the interest payments and depreciation that would have created the principal benefits of the transaction wexler v commissioner supra pincite in contrast in the repo situation-- taxpayer's case differs in a critical respect there is no debt obligation that can be separated from the underlying scheme or that was undertaken for some reason other than the tax benefits of deducting interest on that obligation itself id pincite- the court_of_appeals for the third circuit noted that in the repo situation the loan is the very obligation that will generate the interest payments constituting the tax benefits of the entire transaction id pincite it accordingly rejected the taxpayer's argument that the debt was an economically substantive 'genuine indebtedness' id we have applied a distinction similar to that described by the court_of_appeals for the third circuit in wexler to cases involving the fti a c program in seykota ii we determined that the interest payments were not separable from the underlying scheme instead as we explained the interest payments merely functioned as the first part of a scheme for the mismatching of deductions and income we concluded that the fti a c transactions lacked economic_substance or any purpose other than generating tax deductions we accordingly denied the interest deductions at issue we returned to that issue in alessandra v commissioner tcmemo_1995_238 an opinion issued after lieber v commissioner supra in alessandra the issue was whether the taxpayer was taxable upon interest_income generated by participation in fti a c transactions there we concluded that the transactions giving rise to the indebtedness possessed economic_substance and were separable from those aspects of the program that lacked economic_substance we cited lieber and jacobson v commissioner supra as well as the other pertinent authorities in holding that the evidence of record as developed in alessandra demonstrated that each of the transactions had distinct economic utility other than any anticipated tax benefits allesandra v commissioner supra we distinguished the situation in seykota ii where the disallowed interest deductions were the tax_benefit to be obtained id an appeal in these cases would be to the court_of_appeals for the second circuit the court_of_appeals for the second circuit explained in jacobson that the deductibility of interest in sham situations is limited to economically substantive indebtedness jacobson v commissioner f 2d pincite neither jacobson nor lieber which relied on jacobson suggests that interest is deductible where-- there is no debt obligation that can be separated from the underlying scheme or that was undertaken for some reason other than the tax benefits of deducting interest on that obligations itself united_states v wexler supra pincite the second circuit's earlier opinion in goldstein stated we here decide that sec_163 does not intend that taxpayers should be permitted deductions for interest_paid on debts that were entered into solely in order to obtain a deduction goldstein v commissioner f 2d pincite in lieber v commissioner tcmemo_1993_424 we quoted this sentence and posed the question whether goldstein v commissioner supra conflicted with the second circuit's later opinion allowing interest deductions in jacobson v commissioner supra clearly jacobson which did not mention goldstein supports the principle that interest deductions are not rendered nondeductible merely because the proceeds are used to invest in a sham tax_shelter transaction in some cases the underlying indebtedness might still be economically substantive jacobson v commissioner f 2d pincite jacobson thus indicates that the language of goldstein would not apply so broadly that it would deny all interest deductions that are related to sham transactions we believe however that goldstein continues to apply to the narrower situation where a taxpayer enters into a borrowing transaction for no purpose other than to claim the deductions generated by that transaction indeed in 31_f3d_117 3d cir the court_of_appeals for the third circuit explained rice's toyota jacobson and lieber indicate that in some circumstances a sham_transaction may have separable economically substantive elements that give rise to deductible_interest obligations fn ref omitted the court continued however yet in each of those cases a key requirement is that the interest obligation be economically substantive id itself such a transaction is not economically substantive both 752_f2d_89 pincite and rose v commissioner t c pincite specifically distinguish goldstein from situations in which interest deductions were allowable see 932_f2d_109 2d cir decided after jacobson affg tcmemo_1989_493 see also united_states v wexler f 3d pincite n in these cases as in seykota ii petitioners have not shown that interest payments in the fti a c transactions were separable from the interest payments and other deductions that would have created the principal tax benefits of the transaction united_states v wexler supra pincite the latter type of sham transactions are those presented in wexler goldstein julien sheldon and as we held in seykota ii in the fti a c transactions in those cases the taxpayers paid no interest on economically substantive indebtedness that was separable from the sham_transaction itself accordingly we sustain respondent's disallowance of the interest deductions at issue in the goldstein line of cases--julien sheldon wexler and as we held in seykota ii in the fti a c transactions--the taxpayers borrowed large sums of money and simultaneously entered into offsetting transactions these transactions lacked economic_substance instead the effect was that of a taxpayer actually borrowing his own money to create interest_expense 932_f2d_109 2d cir affg tcmemo_1989_493 apparently the deductions generated by the fti a c transactions included not only the interest deductions at issue continued we are not persuaded otherwise by petitioners' further argument that respondent has made a number of concessions in the stipulations of settled issues petitioners claim that these concessions require respondent to concede that the interest_expenses at issue are deductible respondent counters that the alleged concessions merely reflect this court's holdings in the seykota opinions the record before us in these fully stipulated cases does not support petitioners' assertions suffice it to say that petitioners have not shown that the claimed concessions operate to confer economic_substance upon the transactions at issue on this record those transactions are indistinguishable from those we found to lack economic_substance in seykota ii accordingly the interest generated by those transactions is not deductible to reflect the foregoing decisions will be entered under rule continued but also other deductions for items such as management fees or storage charges however neither here nor in seykota have taxpayers proven that the existence of such other deductions make the underlying obligation one of economic_substance that can be separated from the underlying scheme 31_f3d_117 3d cir


department of the treasury internal_revenue_service washington d c date number release date cc intl br6 tl-n-6613-99 uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel connecticut-rhode island district attn robert e marum cc ner ctr har from anne p shelburne assistant to the branch chief cc intl br6 subject this field_service_advice responds to your memorandum received date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend company x company y company z tl-n-6613-99 country x country y country z date date date insurance co product a product b product c taxable_year taxable_year us city us company issue where us company’s sales of inventory_property to related and unrelated non- united_states customers took place in taxable_year sec_1 and conclusion us company’s sales of inventory_property to related and unrelated non-united states customers in taxable_year sec_1 and took place outside the united_states in the foreign_country of ultimate destination facts us company is a united_states_corporation which manufactures inventory_property product a product b and product c in the united_states in taxable_year sec_1 and us company sold its products to customers located within and without the united_states in taxable_year sec_1 and us company used the same price list for all its non-u s customers both related and unrelated the sales prices of the products sold to related and unrelated non-u s customers were the same the sales process began when a customer contacted us company to place an order at that time us company prepared a purchase order package by entering customers placed orders by phone fax or in writing tl-n-6613-99 information about the order on a pre-printed form such as the customer’s name and address ship to address quantity ordered part number description and unit price the purchase order package comprised three identical pages marked respectively original invoice accounting copy and purchase order copy us company responded to all customer orders by sending the customer an order acknowledgment the front side of the order acknowledgment set forth specific information for the particular order the reverse side of the order acknowledgment contained thirteen pre-printed numbered terms conditions which provided in relevant part as follows acceptance any order to purchase goods from us company will be in accordance with and expressly limited to the terms of this quotation notwithstanding any prior writing usage of trade course of dealing or conflicting terms in the buyer’s order to the contrary title title is to remain with us company until the full purchase_price is paid shipments all shipments are f o b us city all shipments must be completed within one year from the date of order entry with a maximum of four separate shipments for shipments to destinations inside continental_united_states the risk of loss or damage to the goods shall be assumed by customer on and as of the date of shipment for shipments to destinations outside continental_united_states the risk of loss or damage to the goods shall be assumed by customer upon arrival at the port of entry of country of ultimate destination terms of payment a separate invoice will be issued for each shipment all payments are due within days of the invoice date after sending the order acknowledgment us company assembled and packaged the order and shipped the products to the customer utilizing various shippers including fedex and ups the original invoice from the purchase order package was attached to the packaged order us company could not provide order acknowledgments for taxable_year and indicated that order acknowledgments are not maintained for more than one year from the date_of_issuance tl-n-6613-99 the pre-printed information on the original invoices included the notation f o b us city on certain original invoices for taxable_year to three related non-u s customers companies x y and z the pre-printed terms f o b us city were stricken through and substituted by the words f o b destination added above the stricken shipping terms this change appears to have been made at the time the original invoice was prepared not all of the original invoices for taxable_year to companies x y and z were changed ie some of the taxable_year original invoices to these companies retain the f o b us city notation no changes to the notation f o b us city were made on the original invoices of any unrelated customers u s or non-u s all of us company’s non-u s customers paid their own shipping and freight costs as well as the customs duties and value added taxes on the products purchased from us company us company maintained an insurance_policy for all products shipped to its non- u s customers from the united_states covering damage to goods in transit the insurance attached from the time the products left us company’s warehouse and continued until the products were delivered to the customer’s warehouse or place of storage in the country of destination under the policy us company products were insured against all risks of physical loss or damage from any external cause with certain expressly provided exceptions eg nuclear incidents related customers did not carry any insurance policies for goods in transit it is not clear whether unrelated customers or others such as carriers or bailees carried insurance policies for goods in transit we have been provided a copy of us company’s open ocean cargo policy under which insurance co agreed to insure us company’s international shipments made on or after date a date falling within taxable_year we have not been informed whether us company maintained insurance for international shipments made during taxable_year but prior to date and for the purposes of this discussion we have assumed that an insurance_policy with similar terms covered us company shipments made prior to date us company’s insurance_policy provides that it was to remain in force until canceled by either party on days’ written notice we have assumed that the policy remained in force from date through all of taxable_year the insurance_policy provided that it would be deemed void to the extent of any insurance procured by a carrier or bailee which was available to us company if us company or others excluding a carrier or bailee procured ocean marine insurance attaching on a date earlier than the policy’s date of attachment the policy would be liable only to the extent of any deficiency in the prior insurance if us company or others excluding a carrier or bailee procured ocean marine insurance attaching on a date later than the policy’s date of attachment the policy would be liable up to the sum insured without any claim to contribution if us company or others excluding a carrier or bailee procured ocean marine insurance attaching on the same date as the policy the policy would be liable only for a pro_rata share of any claim tl-n-6613-99 law and analysis the place of us company’s sales to non-united states customers the issue in this case is where sales occur in us company’s export sales to related and unrelated foreign customers under the code the place of sale determines whether the taxpayer’s income from the sale is from sources within or without the united_states see i r c in this case if the sales occurred outside the united_states us company’s income from these sales would pursuant to sec_863 be treated as partly from sources within the united_states and partly from sources without the united_states if instead the sales occurred in the united_states us company would derive u s source income from the sales since the regulations in sec_1_861-7 have defined place of sale as follows for the purposes of part i sec_861 and following subchapter_n chapter of the code and the regulations thereunder a sale of personal_property is consummated at the time when and the place where the rights title and interest of the seller in the property are transferred to the buyer where bare_legal_title is retained by the seller the sale shall be deemed to have occurred at the time and place of passage to the buyer of beneficial_ownership and the risk of loss however in any case in which the sales transaction is arranged in a particular manner for the primary purpose of tax_avoidance the foregoing rules will not be applied in such cases all factors of the transaction such as negotiations the execution of the agreement the location of the property and the place of payment will be considered and the sale will be treated as having been consummated at the place where the substance of the sale occurred thus the issue here is where us company passed the rights title and interest in the inventory_property to its customers or if us company retained bare_legal_title where beneficial_ownership and risk of loss in the inventory_property passed to its customers in applying sec_1_861-7 the terms rights and interest should be interpreted to include economic as well as legal rights and interests eg risk of loss with respect to the property this approach is consistent with the regulation language providing that even if a seller retains bare_legal_title a sale is deemed to occur where beneficial_ownership and risk of loss pass to the buyer according to a contact memorandum dated date us company’s secretary and treasurer hereinafter us company’s secretary stated that unrelated non-u s customers most likely carried insurance on the products in transit in an undated response to the form_5701 notice of proposed_adjustment dated date us company stated that its secretary could not know whether unrelated non-u s customers carried such insurance tl-n-6613-99 case law holds that the parties’ agreement will generally control in determining the place of sale see eg a p green export co v united st284_f2d_383 pincite ct_cl 236_f2d_298 pincite 2d cir cert_denied 352_us_968 liggett group inc v commissioner tcmemo_1990_18 in the present case the writings between the parties - the purchase order package containing the original invoice and the order acknowledgment - are the primary evidence of the place of sale these writings could be viewed to contain some conflicting statements as to the place of sale most notably the inconsistencies between the delivery terms in the order acknowledgments and some original invoices moreover pursuant to these writings different components of the bundle of rights considered in determining place of sale were transferred at different times while title to the products did not pass until payment risk of loss or damage was assumed by the customer upon the products’ arrival at the port of destination us company’s insurance_policy however covered the products until their arrival at the customer’s warehouse we have analyzed the effect of these writings under the united nations convention on contracts for the international sale of good sec_5 the convention and the uniform commercial code given that the convention will not necessarily apply to all of us company’s agreements with its non-united states customers our analysis also considered the international chamber of commerce incoterms7 as well as case law united nations convention on contracts for the international sale_of_goods done date i l m entered into force for the united_states on date hereinafter convention the convention automatically applies to sales contracts entered into by parties whose places of business are in different countries that have adopted the convention absent an express choice to exclude its application which does not appear in the present case convention arts a see also calzaturificio claudia s n c v olivieri footwear ltd u s dist lexis at s d n y date the u s senate ratified the convention in and it became a part of u s domestic law in given the facts we have been provided we assume that countries y and z are the places of business of companies y and z respectively both country y and country z have adopted the convention country x which we assume to be company x’s place of business has not adopted the convention for a list of countries where the convention has entered into force see international trade law branch united nations office of legal affairs status of conventions and model laws last updated date http www uncitral org english status status pdf we have not been provided information on the places of business of us company’s other non-u s customers international chamber of commerce incoterms international rules for the interpretation of trade terms basic documents of int’l econ l cch edition hereinafter incoterms the incoterms are intended to provide rules for the tl-n-6613-99 although commercial law doctrine does not provide guidance for determining the place of sale for tax purposes it does set out the rights and obligations of the parties with respect to the goods to the extent sec_1_861-7 and case law find the rights and obligations used in commercial transactions to be relevant in determining the place of sale for tax purposes it is appropriate to consider the terms as used by the parties in a particular case to determine the place of sale given the facts we have been provided the original invoice prepared by us company at the time a customer’s order was received appears to be a written memorial of the customer’s offer to purchase us company products though the original invoice would appear to embody the terms of a customer’s offer it is not clear that us company’s customers indicated their desired shipping terms at the time they placed an order us company not the customer-offeror prepared the original invoice the facts also suggest that us company not the customer determined the shipping terms noted on the invoice we believe that us company’s order acknowledgment when sent to a customer operated to confirm and accept the customer’s offer given the facts we have been provided however it is not clear the extent to which the content of the customers’ offers orders corresponded to the order acknowledgment’s terms conditions we note that we have not examined the facts and circumstances surrounding each individual order in the taxable years at issue we interpret the convention and u c c to provide that the terms and conditions noted in the order acknowledgment were part of the sales contract between us company and its customers where however there is clear evidence of customer intent to include materially different terms in an order offer the order acknowledgment terms and conditions would not uniform interpretation of the trade terms used by parties to international sales contracts according to the date contact memorandum us company’s secretary stated that us company acquired computer_software during taxable_year which was used to mark all sales invoices to related foreign customers f o b destination the contact memorandum also notes statements by us company’s secretary to the effect that the shipping terms were changed by us company to create foreign_source_income and get foreign_tax_credit benefits eg our accountants told us to change the sales terms on the foreign related sales invoices to ‘f o b destination ’ tl-n-6613-99 necessarily form part of the parties’ contract under the convention9 or u c c and this issue would require further examination as noted above sec_1_861-7 defines place of sale with reference to the transfer of a bundle of rights under this approach place of sale does not turn on any single factor and its determination requires an examination of all relevant elements of the parties’ agreement and conduct accordingly in the present case our analysis looks to delivery terms contractual provisions regarding risk us company’s insurance_policy and the passage of title to us company products the writings between us company and its customers contain delivery terms which in some cases conflict the order acknowledgment states at sec_3 that all shipments are f o b us city the invoices however do not all contain the same delivery terms while some invoices state f o b us city others state f o b destination given this conflict it is particularly important to clarify the meaning of the f o b delivery term under some case law t he use of the term ‘f o b ’ raises the presumption that title passes to the buyer on the seller’s delivery of goods to the indicated place u pon such delivery both title and the risk of loss during the course of any further shipment pass to the buyer citation omitted liggett group tcmemo_1990_18 the court of claims has noted however that presumptions connected with delivery terms are useful in ascertaining intention only if no express intention of the parties appears citations omitted a p green export co f 2d pincite emphasis added the convention does not expressly incorporate delivery terms the incoterm sec_11 define delivery terms by describing the respective risks and article of the convention provides that a reply to an offer containing additions or modifications which materially alter the terms of the offer is not an acceptance but instead a rejection and a counter-offer u c c provides that an acceptance or written confirmation sent within a reasonable_time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon unless acceptance is expressly made conditional on assent to the additional or different terms between merchants the additional terms become part of the contract unless the offer expressly limits acceptance to its terms the additional terms materially alter the terms of the offer or the original offeror objects in the present case sec_1 of the terms conditions states any order to purchase goods from us company will be in accordance with and expressly limited to the terms of this quotation article of the convention provides that the parties are bound by any usage to which they have agreed any practices which they have established between themselves and any usage they knew or ought to have known was a customary practice in the trade the incoterms are familiar to most parties to international sales and have been argued to represent a codification of international custom and usage tl-n-6613-99 obligations of buyer and seller and do not make use of the concept of title the u c c similarly defines delivery terms by reference to the risks and obligations of the partiesdollar_figure neither the incoterms nor the u c c definition of a delivery term will apply to the extent an agreement contains express provisions on the passage of risk and the relevant obligations of the partiesdollar_figure in the present case the parties explicitly provided for the transfer of risk pursuant to sec_3 of the order acknowledgment risk of loss or damage was assumed by us company’s non-u s customers outside the united_states upon arrival at the port of entry of country of ultimate destination it is important to note that us company’s insurance_policy with insurance co is consistent with the passage of risk of loss outside the united_states under this policy us company insured the products against loss or damage until the products’ arrival at the customer’s warehouse or place of storage given the express language of the order acknowledgment as to risk of loss and us company’s insurance_policy we believe that risk of loss passed to the customer outside the united_states regardless of the delivery terms used in the order acknowledgment and invoice the parties’ agreement also provided for the passage of title sec_2 of the order acknowledgment expressly provides title is to remain with us company until the full purchase_price is paid under the terms of payment contained in sec_5 all payments were due within days of the invoice date as the original invoice was attached to the packaged us company products non-u s customers would receive us company invoices after the products’ arrival at destination if customers paid for us company products after they had received an invoice the functional result of sec_2 would be that the formal passage of title would occur after the products had entered the destination country in the present context we believe title should be viewed as essentially equivalent to a security_interest ie the bare_legal_title of sec_1_861-7 we note that in modern commercial law the concept of title has largely been supplanted by a focus on the passage of rights obligations and risk of loss between buyer and see peter winship introduction to incoterms basic documents of int’l econ l cch date because the incoterms are not law or treaty however they will not apply unless a contract expressly or implicitly incorporates them by stating eg f o b us city incoterms revision it is unclear whether the f o b delivery term found in us company’s documents is used as an incoterm or as a term that must be defined under the u c c see eg u c c f o b and f a s terms the incoterms state special provisions in the individual_contract between the parties will override anything provided in the rules the definition of f o b in u c c begins with the qualifying phrase unless otherwise agreed tl-n-6613-99 sellerdollar_figure the convention does not contain any provisions on passage of title moreover u nder the u c c the passage of rights obligations and risk of loss are determined independent of the passage of title u c c provides each provision of this article with regard to the rights obligations and remedies of the seller the buyer purchasers or other third parties applies irrespective of title to the goods except where the provision refers to such title insofar as situations are not covered by the other provisions of this article and matters concerning title become material the following rules apply any retention or reservation by the seller of the title property in goods shipped or delivered to the buyer is limited in effect to a reservation of a security_interest unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods despite any reservation of a security_interest and even though a document of title is to be delivered at a different time or place applying u c c to the present facts title would pass outside the united_states upon delivery despite us company’s reservation of title in sec_2 sec_1_861-7 and case law provide that a delay in the passage of title to protect the seller will not prevent the passage of beneficial_ownership and risk ie the consummation of a sale in 44_bta_1130 the board_of_tax_appeals stated it is well established that where this method of dealing is followed only for the purpose of giving some security to the seller it does not prevent the passage of beneficial_ownership and risk in the goods to the buyer at the point of shipment ie pursuant to the shipping terms agreed upon by the parties citations omitted see 79_tc_700 the concept of title as used in article of the u c c is no more than ‘bare legal title’ such as is referred to in treas reg sec_1_861-7 see also linda galler an historical and policy analysis of the title passage rule in international sales of personal_property u pitt l rev t he concept of title in the modern law of sales exists largely as an historical footnote kates holding co t c pincite tl-n-6613-99 b t a pincite see also yelencsis v commissioner 74_tc_1513 pincite the retention by a seller of formal attributes of ownership does not preclude finding a sale regardless of the fact that us company retained legal_title to the products pursuant to sec_2 of the order acknowledgment a sale can still take place where title has not been transferred even if title had not yet passed we believe beneficial_ownership and the risk of loss passed outside the united_states and the sales at issue occurred outside the united_states although us company’s documents in some cases contained inconsistent delivery terms the totality of the circumstances indicates that the sales occurred outside the united_states examination also raises the issue of tax_avoidance sec_1_861-7 provides that where a transaction is arranged in a particular manner for the primary purpose of tax_avoidance the general_rule will not be applied and the sale will be treated as having been consummated at the place where the substance of the sale occurred in the present case it does not appear that this rule would apply to us company’s sales to its non-united states customers the court of claims citing gregory v helvering has stated that taxpayers are free to arrange their affairs so that their taxes are as low as possible and the reason for structuring sales in a particular manner is irrelevant so long as the consummated agreements were no different than they purported to be and provided the retention of title was not a sham but had a commercial purpose apart from the expected tax consequences citations omitted a p green export co f 2d pincite see also 35_tc_365 pincite the real issue is whether the petitioners’ retention of title was a sham us company’s retention of title in the present case does not appear to be a sham us company undertook real responsibilities and risks it would not have undertaken had title to the products passed in the united_states us company maintained an insurance_policy for all products shipped to its non-u s customers covering damage to goods in transit retaining title until the customers’ payment also appears to have served legitimate business purposes apart from the expected tax consequences us company has represented that retaining title permitted savings on insurance costs as it was cheaper to insure the products from the united_states than from overseas according to us company assuming the risk of loss or damage during shipment would also protect its customer relationships by mitigating the potential for future disputes in the event products were damaged or lost during shipment finally retention of title served to protect us company should a non- u s customer become bankrupt or otherwise be unable to pay by making it more likely that the products would be recovered by us company accordingly we conclude that us company’s sales to non-united states customers in taxable_year sec_1 and took place without the united_states 293_us_465 tl-n-6613-99 the source_rules pursuant to sec_863 where us company’s sales of inventory_property manufactured by us company in the united_states took place outside the united_states its income from these sales was partly from sources within the united_states and partly from sources without the united_states please note that this advice considers solely the issue of where us company’s sales of inventory_property to related and unrelated non-u s customers in taxable_year sec_1 and occurred we express no view on us company’s allocation and apportionment of the income from these sales to sources within and without the united_states please call if you have any further questions by anne p shelburne assistant to the branch chief branch office of associate chief_counsel international


department of the treasury internal_revenue_service washington d c date apr contact person number release date uil dear identification_number contact number employer_identification_number form required to be filed tax years this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely robert choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number u i l number dollar_figure dollar_figure dollar_figure date mar legend m organization n related company a president b secretary c vice president d treasurer e director f director x date y state zz amount dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issue is the organization organized and operated exclusively for charitable purposes under sec_501 of the irc facts you were incorporated on date x under the nonprofit religious corporation law in the state of y for religious purposes your articles of incorporation provide that you are organized and operated exclusively for religious purposes within the meaning of sec_501 of the internal_revenue_code your articles limit your activities to those permitted to be carried on by a corporation exempt under sec_501 and provide that upon dissolution your remaining assets will be distributed to an organization which is organized and operated exclusively for religious purposes and which has established its tax-exempt status under sec_501 letter cg catalog number 47630w your specific purpose is to provide a fundraising and communications platform for informational and inspirational messages for churches nationwide delivered via cell phone and email you will provide the technology platform that will be used much like a web-based e-mail service for pastors or church member to communicate informational and inspirational messages to their members through their cell phones via text messages and through email addresses you licensed the proprietary integration technology and intellectual_property associated with the technology you will use to perform your exempt_purpose from n which is owned by two of your board members n granted a free license in perpetuity to your organization you plan to expand the service to mms video messaging when handset penetration bandwidth and streaming costs are available this will enable pastors to send video sermons to its members you will be funded by the monthly tax deductible subscription fee paid_by the membership of the participating churches and parishes the monthly fee is dollar_figure per subscriber anddollar_figure the projected budgets you submitted show gross_receipts of dollar_figure for20 support you plan to give back approximately of your revenue to the churches that generated the revenue based on the number of participants they have in the service the budgets do not show any other projected sources of for _ for20 dollar_figure the officers of the organization and their estimated salaries in year are as follows a president b secretary c vice-pres d treasurer e director f director dollar_figurez dollar_figurez dollar_figurez dollar_figurez dollar_figure dollar_figure b and f are the parents of a c and a are business partners in n d is the son of e law sec_501 of the code provides for the exemption from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safely literary or educational_purposes to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the earnings_of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or other wise attempting to influence legislation and which does not participate in or intervene in any political campaign on behalf of or opposition to any candidate for public_office sec_1_501_c_3_-1 of the income_tax regulations states that to be tax exempt an organization must be both organized and operated exclusively for one or more exempt letter cg catalog number 47630w purposes specified in sec_501 c of the code if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -i bx of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1 c -i c i of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -l ex of the regulations states that an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 c of the code sec_170 of the code allows for the deduction of any charitable_contribution made within the taxable_year sec_1_170a-1 of the regulations states that no part of a payment that a taxpayer makes to or for_the_use_of an organization that is consideration for goods or services is a contribution or gift within the meaning of sec_170 unless the taxpayer intends to make or makes a payment that exceeds the fair_market_value of the goods or services received in revrul_69_528 c b it was held that an organization that provided investment services on a fee basis to unrelated non-profit organizations did not qualify for exemption under code sec_501 it was held that the organization was engaged in a trade_or_business the ruling indicates that the organization was engaged in a trade_or_business that would be unrelated_trade_or_business if carried on by any of the eo’s on whose behalf it operates in revrul_71_529 1071_2_cb_234 an organization that assisted member colleges and universities in fund management was held to qualify for exemption under sec_501 in this ruling the member organizations controlled the organization through selection of its governing body from among representatives of all member institutions also members paid only nominal fees substantially_all of the organization's expenses were paid_by grants for other charitable organizations it was held that the applicant achieved charitable purposes by providing an essential service for charges substantially below cost in revrul_72_369 1972_2_cb_245 it was held that an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations did not qualify for exemption under sec_501 of the code the ruling states providing managerial and consulting services on a regular basis for a fee is trade_or_business ordinarily carried on for profit the fact that the services are provided at cost and solely to exempt_organizations is not letter cg catalog number 47630w sufficient to characterize this activity as charitable within the meaning of sec_501 of the code 70_tc_352 describes an organization which provided management consulting services for a fee to nonprofit_organizations some of which were exempt and some of which were not the nonprofit_organizations engaged in various rural- related activities designed to improve health housing and vocational skills the court held that the organization's activities constituted the conduct of a consulting business of the sort which is ordinarily carried on by commercial ventures organized for profit application of law the information submitted indicates that your primary activity will consist of providing the necessary technology for pastors to communicate with its members for a fee providing such services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that these services will be provided solely for churches that such services will assist such organizations in carrying out their public or exempt purposes and that part of the subscriber payments will be donated back to the participating churches are not sufficient to characterize such services as charitable within the meaning of sec_501 of the code and the applicable regulations you are similar to the organizations described in rev ruls and in that you plan to provide a commercial-type service for a fee to unrelated exempt_organizations both rulings held that providing a service managerial and consulting services and fund management on a regular basis for a fee is a trade_or_business the fact that the recipients of the services were non-profit or tax-exempt entities did not change the character of the services they provided you are also similar to the organization described in b s w group inc v commissioner you can be distinguished from the fund management organization described in revrul_71_529 in that the churches you plan to service do not have any control_over your organization you do not anticipate receiving grants from other charitable_organization that support your activities you have not demonstrated that the fees you plan to charge are substantially below cost as the organization did in this ruling the technology based communications you plan to provide to churches and their members is very similar to the services provided by for-profit communication corporations you state in your application that you will provide the technology platform that will be used much like a web- based email service the fact that the technology will be used by churches to relay religious material does not change the character of the activity from commercial to charitable ref revrul_72_369 supra you cannot inform your subscribers that their monthly membership fees to your company are tax deductible as the members are receiving something in return for their contribution regulation sec_1_170a-1 letter cg catalog number 47630w conclusion you do not qualify for federal_income_tax exemption under sec_501 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal must be declared true under penalties of perjury this may be done by adding to the appeal the following signed deciaration the statement of facts item under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs letter cg catalog number 47630w if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh ' internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements enclosure pub form_6018 letter cg catalog number 47630w