internal_revenue_service number release date index number -------------------------- -------------------------------------------- ------------------------- --------------------------------- ---------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-132952-09 date date legend x country d1 dear ----------- -------------------------------------------- ------ ---------------- --------------------- ---------------------- this responds to your letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as an association_taxable_as_a_corporation for federal tax purposes the information submitted states that x was formed in country on d1 as an entity eligible to make a classification election x's default status was a partnership for federal tax purposes x intended to be classified as an association_taxable_as_a_corporation for federal tax purposes effective d1 however a form_8832 entity classification election for x to elect to be treated as an association effective on d1 was not timely filed sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code plr-132952-09 sec_301_7701-3 provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 further provides that an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a partnership if it has two or more members and at least one member does not have limited_liability except as provided in sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing a form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that 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 with a deadline 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_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that request 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 based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of sixty days from the date of this letter to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective d1 the election plr-132952-09 should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_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 will be sent to x's authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosure copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court nathaniel h and carol a garfield petitioners v commissioner of internal revenue respondent docket no filed date ronald j cohen and david s schwan for petitioners frank j jackson and karen a rennie for respondent memorandum findings_of_fact and opinion foley judge the issues for decision are whether income received by petitioners should be treated as ordinary_income or long-term_capital_gain and whether petitioners are liable for the section accuracy-related_penalty unless otherwise indicated all section references are to continued findings_of_fact on date nathaniel garfield and thomas mcsherry formed mcsherry associates lp the partnership a new york limited_partnership the purpose of the partnership was to finance research and develop a variety of mechanical patents mr mcsherry the general_partner had a 51-percent equity_interest and mr garfield after making an initial dollar_figure contribution was a limited_partner with the remaining 49-percent equity_interest on date thomas mcsherry filed an application with the u s patent office for his invention the expansible fastener at the time of his application mr mcsherry also recorded an assignment to the partnership of all patent rights relating to the expansible fastener on date mr mcsherry and mr garfield incorporated mechanical plastics corp mpc upon formation of the corporation the partnership owned shares of mpc stock and j wolfe golden another investor owned the remaining shares on date mr mcsherry signed an employment agreement with mpc providing him with an annual salary and royalties relating to his inventions also on that date mpc’s board_of directors held a special meeting at which they executed continued the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure a shareholders’ agreement the shareholders’ agreement delineated the shareholders’ rights and restricted the transfer of company stock on date the partnership and mpc executed an assignment agreement which assigned the rights to the expansible fastener ie for which a patent application was pending from the partnership to mpc in consideration of the transfer of patent rights mpc was obligated to make payments to the partnership of percent of the gross_proceeds from the sale of expansible fasteners on date the partnership dissolved thereafter mr mcsherry owned percent and mr garfield owned percent of mpc shares pursuant to the dissolution agreement all shares of mpc owned by the partnership were distributed to mr mcsherry and mr garfield the dissolution agreement further provided that mr mcsherry and mr garfield would each receive percent of mpc’s payments due to the partnership in addition the assignment agreement provided that upon dissolution of the partnership payments relating to the expansible fastener were to be made directly to mr mcsherry and mr garfield on date the u s patent office granted the patent for the expansible fastener and thereafter mr mcsherry and mr garfield began to collect royalty payments from the sales of the device from through petitioner and mr mcsherry made joint assignments to mpc of the rights relating to various inventions ie for which patent applications were pending petitioners timely filed their joint federal_income_tax returns relating to and on date respondent issued petitioners a notice_of_deficiency in which he determined that income reported by petitioners as long-term_capital_gain ie in the amounts of dollar_figure dollar_figure and dollar_figure relating to and respectively was ordinary_income respondent further determined that petitioners were liable for a sec_6662 penalty relating to and on date petitioners while residing in purchase new york filed their petition with the court opinion petitioners contend that pursuant to sec_1235 income reported by petitioners in the amounts of dollar_figure dollar_figure and dollar_figure relating to and respectively qualifies for long-term_capital_gain treatment sec_1235 provides that a transfer of property consisting of all_substantial_rights_to_a_patent is considered a sale_or_exchange of a capital_asset held for more than year ie a long-term capital_asset regardless of how long the transferor actually held the rights to the patent long-term_capital_gain treatment however is not available pursuant to sec_1235 if such a transfer is made to a related_person as defined in sec_267 see sec_1235 for purposes of sec_1235 a corporation and an individual owning more than percent of such corporation are related_persons sec_267 the patent rights to the expansible fastener were transferred to the partnership by mr mcsherry on date the same date that he filed an application with the u s patent office on that date mr garfield was an equity partner in the partnership but did not hold any patent rights associated with the expansible fastener mr garfield transferred all of his patent rights to mpc after date on that date and thereafter mr garfield had a 36-percent interest in mpc because mr garfield owned more than percent of the stock of mpc he and mpc were related_persons sec_267 sec_1235 thus pursuant to sec_1235 royalty payments from mpc to mr garfield do not qualify for long-term_capital_gain treatment petitioners contend that mr garfield and mr mcsherry signed a forbearance agreement in that transferred to the partnership all substantial rights to any patents that this transfer qualifies for long-term_capital_gain treatment pursuant to sec_1235 and that upon formation of mpc in the terms of the purported forbearance agreement carried over to the shareholders of mpc thereby qualifying the reported income for capital_gain treatment pursuant to sec_1235 we reject petitioners’ contentions because there is insufficient credible_evidence to establish the existence of a forbearance agreement petitioners further contend that if capital_gain treatment is not available pursuant to sec_1235 then the payments are entitled to such treatment pursuant to sec_1221 and sec_1222 sec_1_1221-1 income_tax regs provides that a patent may qualify as a capital_asset in order to qualify for long- term capital_gain treatment however a taxpayer must hold his capital_asset for the requisite period prior to a sale_or_exchange sec_1222 at no time during the existence of the partnership did mr garfield hold a capital_asset mr garfield and mr mcsherry did make joint transfers of patent rights to mpc between and but mr garfield did not hold the patent rights for the requisite period to qualify for long-term_capital_gain treatment accordingly we sustain respondent’s determination sec_6662 imposes a penalty equal to percent of the amount of any underpayment attributable to a substantial pursuant to sec_7491 petitioners have the burden_of_proof unless they introduce credible_evidence relating to the issue that would shift the burden to respondent rule a our conclusions however are based on a preponderance_of_the_evidence and thus the allocation of the burden_of_proof is immaterial see 110_tc_189 ndollar_figure understatement of income_tax sec_6662 an understatement is the amount by which the correct_tax exceeds the tax reported on the return sec_6662 the understatement is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 and ii petitioners erroneously reported income resulting in understatements of tax of dollar_figure dollar_figure and dollar_figure for and respectively an understatement is reduced by the portion of the understatement that is attributable to the tax treatment of an item for which there is substantial_authority or with respect to which there is adequate_disclosure and a reasonable basis see sec_6662 sec_1_6662-4 income_tax regs petitioners did not have substantial_authority for their position nor did they adequately disclose their position no reduction therefore is appropriate sec_6664 provides that no penalty shall be imposed if a taxpayer demonstrates that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances see sec_1_6664-4 income_tax regs petitioners do not contend that they followed or even sought the advice of a tax professional we conclude that petitioners did not act with reasonable_cause when they characterized the royalty payments as long-term_capital_gains as a result petitioners are liable for the sec_6662 accuracy-related_penalty contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c tax exempt and 3overnment entities division release number release date date date contact person identification_number contact number fax number employer_identification_number uil number m applicant organization n officer o related company x y state date 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 issues under the following circumstances and considering the relationship with a foreign consulting company does the applicant organization's student exchange program qualify for exemption from federal income under sec_501 of the internal_revenue_code of facts m was incorporated as a non for profit pursuant to the statutes of the state of x ony purpose for which this corporation was organized is to promote and enhance understanding cultural awareness and friendly relations between the people of the united_states latin america and europe through educational exchanges to achieve its purpose m conducts an educational exchange activity the exchange program involves making arrangements for an american family to temporarily exchange one of its a foreign_country the exchange program is for children for a child from a family that resides in a period of 4to weeks in the summer the organization selects and matches qualified families and then arranges for the exchange the children pay an amount as a fee to the the m will distribute of its time and resources organization for finding them american families that will host them and the fee will be used for the child's transportation to and from the respective countries the president of the organization n in charge of this activity towards the educational exchange activity a copy of the organization's promotional advertising and solicitation material was requested to help explain the program the material submitted was a brochure that described the by the name of o the brochure described o as a organization as a company founded in that develops and manages foreign language instruction for company located in students the brochure also describes a summer program that includes organizing the accommodation for students with english host families there is also a full academic year in the usa offered where o organizes accommodations for students in local host families that have been carefully selected to ensure a comfortable stay in a friendly environment the applicant's president n subsequently explained that o is a company founded in provides languages services to spanish companies and its employees to better understand other countries cultures it also organizes summer exchange programs for spanish high school students to the united kingdom for those kids that want to learn a foreign language and experience living in another culture with host families n is the owner of o a copy of the o organizing document was also submitted the english translated document is referred to as a deed of incorporation the company was registered in as a public limited_company the company is governed ruled represented december and managed by the shareholders o's bylaws explain in article ii section the rights of the shareholder as follows the owner or bare owner of a share shall have the nature of shareholder and in particular he shall have the rights of information participation in the corporate bodies contest decisions of the meeting according to sec_67 and following ones of the public limited companies act the right to demand explanations from the directors right to profit to the liquidation quota preemptive right transfer of shares constitution of real_property rights on the shares and any other rights that may base on the laws or present bylaws except for that provided by law in case of usufruct that on law sec_501 of the internal_revenue_code_of_1986 provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes and educational_purposes no part of the net_earnings which inures to the benefit of any private shareholder income_tax regulation c -1 c provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals income_tax regulation -1 c provides that the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part in furtherance of the organization's of its activities if the operation of such trade_or_business is exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university application of tax law m was formed to conduct a summer exchange program for students the applicant makes arrangements for an american family to temporarily exchange one of its children for a child from a family that resides in a foreign_country the applicant organization selects and matches qualified families and then arranges for the exchange the children pay an amount as a fee to the organization for finding them an american family that will host them and the fee will be used for the child’s transportation to and from the respective countries n is the president of the organization and is in charge of the exchange program therefore n is a defined as an individual having a personal and private interest in the activities of the applicant organization n is also owner of the consultant company o to further explain the applicant's activities was a the promotional materials submitted by n brochure advertising the services of o this demonstrated that m is performing an activity that is part of the services offered by n’s consulting company furthering the programs ofa a single non-exempt purpose in addition the exchange program consulting company s represent sec_90 of the applicant's time and resources the existence of this substantial nonexempt purpose precludes the m from qualifying as an exempt_organization under sec_501 furthering the programs of n’s consulting company also violates the inurement provisions of sec_501 applicant’s position n explained that he is not compensated by o and has never been compensated for his management time and dedication to the company he also explained that he has never received any dividends from the company as a shareholder since the company was created in conclusion n’s claim that he has never been compensated for his services or received a dividend as a shareholder from o does not change the fact that m is furthering the programs of his related consulting company as a shareholder n has the right to receive profits from his company o since the applicant is providing services that benefit the clients of n’s consulting company this is furthering the consulting companies business interests furthering the business interests of a consulting business is a non exempt_purpose that also benefits the applicant's president who is a majority shareholder in the consulting company the statement of facts item you have the right to file a protest if you believe this determination is incorrect to protest you must submit a staternent 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 declaration 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 if if you do not intend to protest this determination you do not need to take any further action 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 internal_revenue_service eo determinations quality assurance room p o box cincinnati oh deliver to internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter 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 department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date contact person identification_number se eer employer_identification_number form required to be filed tax years beginning with dear 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 since 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 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 the instructions in notice 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 disagree with our proposed deletions you should follow if you agree with our deletions you do not need to take any lf 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 lois g lerner director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number


department of the treasury internal_revenue_service washington d c date number release date cc dom fs fi p tl-n-4800-99 uilc internal_revenue_service national_office field_service_advice memorandum for associate district_counsel from deborah a butler assistant chief_counsel field service cc dom fs subject amounts paid for guaranty this field_service_advice responds to your memorandum dated date and to your e-mail providing supplemental facts dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer b c d e f g h j k date date date date date date date date tl-n-4800-99 year year year year year country a state a dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree f v w x issues dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure whether amounts paid_by taxpayer to its parent company b purportedly in consideration for the following two guarantees qualify as insurance premiums deductible by taxpayer a b’s guaranty to an unrelated third party k that taxpayer’s subsidiaries c and d would meet their obligations to contribute amounts to a limited_partnership in which c d and k were limited partners and b b’s guaranty to taxpayer’s subsidiary e that taxpayer would meet its obligation to repay a loan from e whether either of these guarantees should be considered shams conclusions on the basis of the facts presented the purported guarantees do not involve sufficient risk shifting to be considered insurance accordingly the payment by taxpayer to b does not qualify as a deductible insurance premium moreover it appears that because the price paid for the guarantees was excessive and because the payment appears to be lacking a non-tax business reason we also conclude that the transaction are shams we note however that because the facts in this case are not fully developed our conclusions may change if additional facts are established in this regard we have set forth infra additional areas of potential factual development and we encourage you to seek further advice if appropriate tl-n-4800-99 facts taxpayer is the u s subsidiary of b a corporation domiciled in country a on date year taxpayer and b entered into a memorandum of understanding mou regarding their participation in a project to develop a power plant in state a the mou provided that taxpayer and b would participate in the development of the project with f an unrelated energy company the mou further provided that since the project was a high risk profile project taxpayer would promote the project by providing a development fund through a special purpose corporate subsidiary in exchange for this taxpayer or its special purpose subsidiary would receive a return on any money lent in addition to a development fee the mou also provided that b would furnish a back-up guaranty for taxpayer’s equity contribution obligation to the project and would arrange the source of the funds for the equity contribution to the project made by taxpayer’s special purpose subsidiary in exchange for this the mou provides that b would receive any equity distribution rights from the project which the special purpose subsidiary is entitled to receive lastly the mou provided that taxpayer or its special purpose subsidiary had the option to request that b transfer the equity distribution rights back to taxpayer or the special purpose subsidiary at fair_market_value when the project was completed on date year f’s two subsidiaries h and j formed g a limited_partnership through which the proposed power plant would be constructed and operated h was the general_partner on date year taxpayer and h executed the joint development agreement as part of this agreement taxpayer agreed to lend dollar_figurea to g to make the loan to g taxpayer in turn borrowed money from e one of taxpayer’s subsidiaries which is used to fund b’s projects in the u s according to your e-mail dated date taxpayer maintains that b guaranteed repayment of taxpayer’s obligation to e the joint development agreement also required taxpayer to provide equity funding upon completion of the project in an amount no greater than v or the project cost at a maximum amount of dollar_figureb b agreed in writing to furnish to k an unrelated entity which provided the primary source of funding for the project a guaranty for this equity funding on date year taxpayer formed two domestic corporate subsidiaries c and d for the purpose of participating in the project on date year c became a w limited_partner in g and d became a x limited_partner in g c and d made an initial capital_contribution to g in the amount of dollar_figurec moreover c and d received a it is unclear whether the parties anticipated that this development fund would consist of loans equity contributions or both tl-n-4800-99 line of credit from e one of taxpayer’s other subsidiaries in the amount of dollar_figureb in consideration e received the rights to v of the income from g the equity rights e thereafter transferred the equity rights to b on date year taxpayer indicated to b that it wished to purchase from b the equity rights b had received from e taxpayer’s subsidiary two months later e on behalf of taxpayer made a payment to b for these rights purportedly for fair_market_value in the amount of dollar_figured on date year c and d fulfilled their obligations to provide equity funding to g by making a payment to g in the total amount of dollar_figuree apparently c and d used their line of credit from e to make this payment as explained in your e-mail dated date and by idr f date year taxpayer maintains that the payment it made to b in the amount of dollar_figured was in consideration for the following two guarantees made by b b’s guaranty to k that c and d would meet their obligations to make equity contributions to g and b’s guaranty of taxpayer’s obligation to repay e for amounts borrowed by taxpayer consequently taxpayer argues that the payment is deductible as an insurance premium law and analysis whether the transactions are insurance sec_162 of the internal_revenue_code allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business generally under sec_162 a taxpayer may deduct premiums_paid for insurance if directly connected with the taxpayer’s carrying on of a trade_or_business sec_1_162-1 although the internal_revenue_code does not define the term_insurance the united_states supreme court has explained that to constitute insurance a transaction must involve risk shifting from the insured to the insurer and risk_distribution by the insurer 312_us_531 the tax_court has defined the term_insurance contract as follows in common understanding an insurance_contract is an agreement to protect the insured or a third-party beneficiary against a direct or indirect economic loss arising from a defined contingency the insurer undertakes no present duty_of performance but stands ready to assume the financial burden of any covered loss an essential feature of insurance is this assumption of another’s risk of economic loss tl-n-4800-99 66_tc_1068 citation omitted affd 572_f2d_1190 7th cir in this case the purported insurance contracts are guarantees by b that its subsidiaries will meet certain obligations in 285_us_191 affg 50_f2d_107 2d cir the supreme court of the united_states addressed whether a taxpayer which issued many loan guarantees should be treated as an insurance_company for federal tax purposes in home title the taxpayer made loans secured_by mortgages on real_estate the taxpayer then sold the notes to third parties accompanied by the taxpayer’s guarantee to the purchaser of the note that payments of principal and interest would be made the premium paid for the guaranty equaled the spread between the interest rate paid_by the debtor to the taxpayer and the interest rate paid_by the taxpayer to the purchasers of the notes the court concluded that the taxpayer was taxable as an insurance_company in reaching its conclusion the court reasoned that the guaranty of a debtor’s payment of principal and interest on a loan constitutes insurance u s pincite the court implicitly accepted the determination of the united_states court_of_appeals for the second circuit that the risk transferred pursuant to these guarantees is the risk of noncollection from the debtor see f 2d pincite consequently because the taxpayer’s principal business was issuing such guarantees the taxpayer was taxable as an insurance_company although the opinion in home title supports the notion that a guaranty may constitute an insurance_contract the guaranty must otherwise result in sufficient risk shifting before it can be considered insurance since insurance must involve the transfer of risk i mplicit in the concept of insurance is that the loss occur as the result of events that are fortuitous rather than planned intended or anticipated lee r russ couch on insurance sec_102 3d ed in this regard the court in 709_f2d_1088 6th cir explained insurance is a contract where one undertakes to indemnify another against loss damage or liability caused by an unknown or contingent event see under the second circuit’s analysis the guarantor is the insurer and the party purchasing the note is the insured typically a debtor whose obligation is guaranteed is not insured because the guarantor has the right of subrogation against the debtor if the guarantor is required to perform under the guaranty see am jur 2d guaranty sec_120 in home title the second circuit explained that the risk shifted from the purchaser of the note to the guarantor was the risk of noncollection from the debtor the court further explained that it was irrelevant that the debtor rather than the purchaser of the note actually paid the insurance premium see f 2d pincite tl-n-4800-99 also eg 178_f3d_804 6th cir noting that fortuitous loss is implicit in concept of insurance 89_f3d_1386 8th cir recognizing fundamental premise that insurance protects an insured from fortuitous loss the principle that a contract constitutes insurance only where it provides coverage for fortuitous events is not only set forth in case law several states have codified this requirement for example n y ins law sec_1101 mckinney provides insurance_contract means any agreement or other transaction whereby one party is obligated to confer benefit of pecuniary value upon another party dependent upon the happening of a fortuitous event fortuitous event means any occurrence or failure to occur which is or is assumed by the parties to be to a substantial extent beyond the control of either party moreover cal ins code sec_22 west provides insurance is a contract whereby one undertakes to indemnify another against loss damage or liability arising from a contingent or unknown event a whether b’s guaranty of c’s and d’s obligations to g is insurance we turn to the question of whether b’s guaranty of c’s and d’s obligations resulted in sufficient risk_transfer to be considered insurance c and d were obligated to provide capital to g and b guaranteed that this capital would be provided taxpayer by characterizing this transaction as insurance implicitly argues that the risk of c’s and d’s insolvency was transferred from g and g’s other investors to b at the time that c and d were obligated to provide capital to g c and d were special purpose subsidiaries which had no sources of funds other than in the form of capital contributions from either taxpayer or b accordingly b could willingly create the loss event covered by the guaranty by failing to adequately capitalize c and d since b had complete control_over whether c and d were able to meet their obligation to g the event covered by the guaranty was not fortuitous from b’s standpoint therefore the guaranty does not involve sufficient risk shifting to constitute insurance in addition prior to the execution of the guarantees in issue b was already tl-n-4800-99 responsible for the risks underlying those guarantees as reflected by the mou it was contemplated at the outset of the project prior to formation of c and d that b would be ultimately liable to g for b’s subsidiaries’ obligations to finance the project the other parties participating in the project were sophisticated we doubt that such parties would enter into such a transaction without the understanding that b rather than c and d would be ultimately liable although c and d may have been nominally obligated to g all of the parties involved in the project appeared to be aware that b ultimately bore that obligation cf 462_f2d_712 5th cir controlling shareholder guaranteeing obligation of undercapitalized corporation treated as the primary obligor rather than as guarantor consequently the guaranty represents nothing more than b’s affirmation of its pre-existing_obligation to g this factor also supports a conclusion that no risk shifted as a result of the guaranty b whether b’s guaranty of taxpayer’s obligation to e is insurance we turn to the question of whether b’s guaranty of taxpayer’s obligation to repay e resulted in sufficient risk_transfer to be considered insurance taxpayer borrowed money from its subsidiary e and taxpayer’s parent_corporation b guaranteed taxpayer’s repayment of the loan taxpayer by characterizing this transaction as insurance implicitly argues that the risk of noncollection from its indebtedness was transferred from its subsidiary e to b since b owns directly or indirectly all of the stock of both taxpayer and e the risk of uncollectibilty under the note cannot be transferred to b the value of taxpayer’s and e’s stock is reflected on b’s balance_sheet regardless of whether taxpayer meets its obligation to e b will suffer no economic loss cf 811_f2d_1297 9th cir purported insurance transaction between parent and wholly owned captive subsidiary does not result in risk shifting because claims paid_by the captive reduces dollar for dollar the value of the insurer’s stock as reflected on the parent’s balance_sheet therefore the guaranty does not involve sufficient risk shifting to constitute insurance in addition we note that b again has substantial control_over whether the loss event will occur from b’s perspective it appears that the loss event covered by the guaranty can be avoided if b adequately capitalizes taxpayer this factor also supports a conclusion that the guaranty does not result in risk shifting whether the transactions are shams furthermore apart from whether either of the transactions were insurance it tl-n-4800-99 appears that the transactions lacked economic_substance and were motivated by tax rather than business considerations in this regard we believe that the facts in this case are comparable to the facts set forth in the recent tax_court opinion in united parcel service of america inc v commissioner tcmemo_1999_268 ups the taxpayer in ups was a shipper which offered coverage to its customers for lost or damaged packages the taxpayer charged its customers a fee generating a large profit the taxpayer then decided to shift these profits offshore it accomplished this by finding a commercial insurance_company to insure the risks of the taxpayer’s customers and a bermuda corporation affiliated with the taxpayer then reinsured those risks from the commercial insurer thus the profits were shifted from the taxpayer to the commercial insurer which retained a small percentage and then to the taxpayer’s offshore affiliate the tax_court concluded that the entire transaction was a tax motivated sham and an impermissible assignment_of_income accordingly the court concluded that none of the amounts ultimately paid to the taxpayer’s reinsurance affiliate were for insurance although some theoretical risk had been transferred to the reinsurer the court specifically discussed the vastly inflated price paid_by ups to the commercial insurer relative to the remote risk transferred the court noted that ups would not have paid such an inflated price had the reinsurer not been affiliated with ups similarly the amount_paid for the guarantees in this case seem excessive and the payments seem to lack a business_purpose the guarantee payments represent a significant percentage of the underlying obligation we question the business_purpose of a payment for a guarantee which constitutes such a large portion of the underlying obligation we doubt that taxpayer would have made a payment in the amount of dollar_figured if b were not a related_party furthermore it is unclear how or whether taxpayer and b attempted to determine the fair amount to pay for the risk purportedly transferred pursuant to the guarantees since b controlled the probability that the underlying loss events would occur we question whether b could possibly make the determination of a fair premium to pay for the guaranty we note that since the purported guarantees do not involve risk shifting the business_purpose of any payments for such guarantees are inherently questionable importantly the tax_court in ups relied upon common_law sham principles to reject the entire transaction and did not rely upon sec_482 to reallocate a portion of the items in issue in so doing the court noted that the transaction was heavily tax motivated tl-n-4800-99 business_purpose appears to be particularly lacking with respect to b’s guaranty of taxpayer’s obligation to e since the purpose of obtaining a guarantor for a loan is to either secure an otherwise unavailable loan or to secure a loan on more favorable terms it is unclear why e required such a guaranty before providing a loan to taxpayer its parent company again we doubt that taxpayer would have paid a guaranty fee to an unrelated guarantor to secure a similar loan from e we note that our conclusion that these guarantees are shams may change if additional facts are established as mentioned infra we suggest further factual development with respect to this issue case development hazards and other considerations our analysis does not discuss risk_distribution although such a requirement is typically necessary in order for a guaranty to be considered insurance home title f 2d pincite we believe that such an approach in this case would be a red herring a payment made to secure a guaranty could conceivably qualify as an ordinary_and_necessary_expense under sec_162 regardless of whether the party making the guaranty may distributes or pools the risks with other similar risks furthermore we do not discuss this case in the context of the captive insurance analysis set forth in revrul_77_316 1977_2_cb_53 neither of the guarantees at issue fit within the typical captive insurance fact pattern b’s guaranty of c’s and d’s obligation actually involve the risks of entities unrelated to b such as k and b’s guaranty of taxpayer’s obligation to e involves a parent insuring its subsidiaries whereas the ruling involved a subsidiary insuring its parent and since we have concluded that the transactions lacked risk shifting without regard to the economic family theory set forth in revrul_77_316 we see no reason to raise the ruling in our analysis turning to areas of factual development tl-n-4800-99 lastly we have been advised that this transaction based on the facts as we know them implicates important international tax issues and accordingly we advise you to coordinate with cc intl please call if you have any further questions deborah a butler assistant chief_counsel field service by joel e helke chief financial institutions and products branch


department of the treasury internal_revenue_service commerce mc dal dallas tx tax_exempt_and_government_entities_division number release date date date uil taxpayer_identification_number form tax_year s ended person to contact id number contact numbers certified mail- return receipt requested dear in a determination_letter dated july 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final letter with regard to your exempt status we previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on april 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 c of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit taxpayeradvocate irs gov or call1-877-777-4778 if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter thank you for your cooperation sincerely margaret von lienen director eo examinations internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examination sec_11 commerce street ms dal dallas tx department of the treasury date date taxpayer_identification_number form tax period s ended person to contact id number contact telephone number fax number dear during our examination of the return s indicated above we determined that your organization was not described in sec_501 for the tax period s listed above and therefore it does not qualify for exemption from federal_income_tax this letter is not a determination of your exempt status under sec_501 for any period other than the tax period s listed above the attached report of examination form 886-a explanation of items summarizes the facts the applicable law and the service's position regarding the examination of the tax period s listed above you have agreed with our determination by signing form 6018-a consent to proposed action accepting our determination of non-exempt status for the period s stated above you have filed the required income_tax returns in the future if you believe your organization qualifies for tax-exempt status and would like to establish its status you may request a determination from the internal_revenue_service by filing form_1024 application_for recognition of exemption under sec_501 a and paying the required user_fee you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter catalog number if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely margaret von lienen director eo examinations enclosures form 886-a letter catalog number form 886a name oftaxpayer i department of the treasury - internal_revenue_service explanation of items year period ended xx xx issue does continue to qualify for exemption under sec_501 c given that it receives more than of its income from the general_public on a recurring basis facts is open to the public the following day sundays 9am -1pm may thru september during these times nonmembers may participate in several of the club's activities of the trap fields nonmembers may enter the grounds of the club through an entry gate that is unlocked during these hours in order to participate in these activities they have only to identify themselves to the employee working the counter in the clubhouse the counter person then solicits the nonmembers to become a member and charges them the league member fee for participating in these activities therefore the new members can participate in club shoots league members do not have the same privileges as regular members all members have access to the remaining property owned by the club the sec_501 to provide social recreational and other activities to its members the benefits provided to the members include but are not limited to the following activities trap shooting hunter safety and clubhouse social activities is organized and operating as an organization described in the specific and primary purpose of the per its' constitution is the formation of a membership of sportsmen interested in outdoor recreation wildlife conservation restoration and education your organization reported the following sources and amounts of revenue on forms for periods ending december 20xx and december 20xx year period ended december 20xx december 20xx form 886-a rev of gross_receipts from nonmember use of gross_receipts total investment from investment_income i income nonmember income department of the treasury- internal_revenue_service page -1- form 886a n arne oft axpayer i department of the treasury - internal re enue service explanation of items year period ended 20xx 20xx while reviewing the general ledger income statement minutes of meetings your website as well as other internal documents provided by your organization such as cash register receipts and counter income expense report it has been noted that your organization is open to the general_public on a regular basis as stated previously the nonmember income has been recorded in the following accounts within your general ledger and counter income expense report nonmember league membership nonmembers trap leagues nonmember calendar sales nonmember bar income advertising income based on conducting a two-year analysis of gross_receipts it has been noted that the organization received and respectively during tax years ending december 20xx and december 20xx the gross_receipts received by your organization are well over the threshold permitted in public law member use of facilities total receipts less general membership dues scrip sales leagues income members raffles club house rental memorial bar income calendar sales total 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure adjusted gross_receipts per rev_proc dollar_figure nonmember use of facilities league membership dues leagues income non-members calendar ads bar income calendar sales total nonmember income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 20xx 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure fonn 886-a rev department of the treasury - internal_revenue_service page -2- form 886a n arne of taxpayer i department of the treasury - internal_revenue_service explanation of items year period ended 20xx 20xx 20xx nonmember use test limited to nonmember income nonmember use interest total nonmember investment_income dollar_figure i i nonmember income test 20xx nonmember use test o limited to limited to nonmember income nonmember use interest total nonmember investment_income dollar_figure i nonmember income test limited to sec_501 exempts from federal_income_tax clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and not part of the net_earnings of which inures to the benefit of any private shareholder sec_1 c of the income_tax regulations provides that in general the exemption extends to social and recreation clubs supported solely by membership fees dues and assessments however a club that engages in a business such as making its social and recreational facilities open to the general_public is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 a prior to its amendment in sec_501 c required that social clubs be operated exclusively for pleasure recreation and other nonprofitable purposes public law form 886-a rev department of the treasury - internal_revenue_service page -3- form 886a name oftaxpayer i department of the treasury- internal_revenue_service explanation of items year period ended 20xx 20xx amended the exclusive provision to read substantially' in order to allow an sec_501 organization to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status the committee reports for public law senate report no 2d session c b further states a within the percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non members so long as the latter do not represent more than percent of total receipts b thus a social_club may receive investment_income up to the full percent of its gross_receipts if no income is derived from non-members' use of club facilities c in addition the committee report states that where a club receives unusual amounts of income such as from the sale of its clubhouse or similar facilities that income is not to be included in the percent formula revrul_66_149 holds a social_club as not exempt as an organization described in sec_501 c where it derives a substantial part of its income from non-member sources revproc_71_17 sets forth the guidelines for determining the effect of gross_receipts derived from the general public's use of a social club's facilities on exemption under sec_501 where nonmember income from the usage exceeds the standard as outlined in this revenue_procedure the conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status taxpayer's position historically did operate within the rules of sec_501 c as a social_club in order to raise money for operations and for programs to promote conservation within the community the organization began a calendar sale calendars were sold by members to nonmembers resulting in nonmember income in excess of of gross_receipts and nonmember and investment_income in excess of of gross_receipts intentionally disregard the c rules while the organization would have liked the opportunity to correct operations to comply with the rules they accept the revocation of their exempt status did not form 886-a rev department of the treasury- internal_revenue_service page -4- form 886a n arne oft axpayer i department of the treasury - internal_revenue_service explanation of items year period ended 20xx 20xx government's position your organization has exceeded the non-member threshold on a recurring basis during tax years ending december 20xx and december 20xx and therefore revocation of your organization's exempt status is warranted conclusion the sec_501 tax-exempt status of since the nonmember income received by the club exceeded of the club's total gross_receipts for the years under examination further it main activity of selling calendars to the general_public and use of their facilities to the general_public reflecting evidence that the club is engaged in a business and is not being operated exclusively for pleasure recreation or social purposes should be revoked no longer meets the requirements to qualify as exempt from federal_income_tax under sec_501 as described in sec_501 therefore your exempt status under c of the internal_revenue_code will be revoked effective january 20xx as a taxable entity the organization is required to file form_1120 u s_corporation income_tax return for the periods open under statute under g these periods include the years ending december 20xx and subsequent tax years additionally the organization is reminded of the provisions of sec_277 concerning membership organizations which are not exempt_organizations sec_277 stipulates in the case of a membership_organization which is not exempt from taxation deductions for the taxable_year attributable to furnishing services goods or other items of value to members shall be allowed only to the extent of income derived from members form 886-a rev department of the treasury- internal_revenue_service page -5-


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom corp plr-102442-00 date date controlled b holdco b1 holdco b2 holdco b3 merger llc a merger llc b merger llc c conversion llc a contribution llc a contribution llc b contribution llc c contribution llc d contribution llc e contribution llc f contribution llc g contribution llc h new partnership a plr-102442-00 new partnership b new partnership c partnership c f assets g assets h assets this letter replies to your date request that we further supplement our letter_ruling dated date plr-121425-98 as supplemented by our letter_ruling dated date plr-107269-99 together the prior letter rulings capitalized terms not defined in this letter retain the meanings assigned them in the original letter_ruling the prior letter rulings address certain federal_income_tax consequen- ces of the distributions by distributing of the stock of controlled a and controlled b and related transactions summary of facts controlled b wholly owns holdco b1 holdco b1 wholly owns merger llc a merger llc b merger llc c conversion llc a and holdco b2 merger llc a wholly owns contribution llc a and contribution llc b contribution llc a and contribution llc b are the general_partner and limited_partner respectively of new partnership a merger llc b wholly owns contribution llc c and contribution llc d contribution llc c and contribution llc d are the general_partner and limited_partner respectively of new partnership b new partnership b owns f assets conversion llc a wholly owns contribution llc e and contribution llc f contribution llc e and contribution llc f are the general_partner and limited_partner respectively of new partnership c new partnership c owns h assets merger llc c owns g assets holdco b2 wholly owns holdco b3 holdco b3 wholly owns contribution llc g and contribution llc h contribution llc g and contribution llc h are the general_partner and limited_partner respectively of partnership c proposed transactions for good business reasons controlled b has proposed the following transactions plr-102442-00 i holdco b1 will contribute its ownership_interest in merger llc a to holdco b2 ii holdco b2 will contribute the ownership_interest in merger llc a received in step i to holdco b3 iii contribution llc g will merge with and into contribution llc a contribution llc h will merge with and into contribution llc b and partnership c will merge with and into new partnership a following step iii merger llc a will continue to own all of the interests in contribution llc a and contribution llc b iv the f g and h assets may be sold or otherwise_disposed_of ruling based on the information submitted with the original and supplemental ruling requests we rule that the transactions described in steps i ii iii and iv above will not adversely affect any of the rulings contained in the prior letter rulings and the prior letter rulings retain full force and effect procedural matters this letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax return of each affected taxpayer for the tax_year in which the transactions covered by this letter are completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely assistant chief_counsel corporate by wayne t murray senior technician reviewer branch


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi - plr-120459-00 date date number release date index number x a b d1 d2 d3 d4 d5 ira year z dear this letter responds to your date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated d1 and elected to be s_corporation effective d2 on d3 x issued z shares of x to ira an individual_retirement_account for the benefit of a b as x’s vice-president and chief financial officer represents that a believed that as a retirement_plan ira would be an eligible shareholder x’s attorney transferred the stock certificates of x to ira however x’s attorney did not inform x that an ira is not an eligible shareholder in d4 another of x’s shareholders attempted to direct his ira to invest in x’s stock however that shareholder’s stockbroker informed that shareholder that an ira is not an eligible s_corporation shareholder at that time x contacted its accountant who confirmed that an ira is an ineligible shareholder therefore on d5 x repurchased all the shares issued to ira b represents that for year a reported the income allocable to ira from x on a’s form_1040 u s individual tax_return b represents that the circumstances resulting in the termination of x’s s_corporation_election on d3 were inadvertent b represents also that x and its shareholders did not intend to engage in tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x agree to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 as in effect for taxable years beginning on or before date provided that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in c who is not an individual revrul_92_73 1992_2_cb_224 holds that a_trust that qualifies as an individual_retirement_account under sec_408 of the code is not a permitted shareholder of an s_corporation under sec_1361 sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x’s election was terminated on d3 because an ineligible shareholder held shares of x we hold also that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 we further hold that under the provisions of sec_1362 x will be treated as an s_corporation effective d3 to d5 provided x’s election to be an s_corporation was not otherwise terminated under sec_1362 accordingly x’s shareholders in determining their federal tax_liability must include their pro_rata share of the separately and nonseparately computed items of x under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by x to shareholders under sec_1368 if x or its shareholders fail to treat x as described above this ruling shall be null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code specifically no opinion is expressed on whether the original election made by x to be an s_corporation was a valid election under sec_1362 this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code 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 x sincerely yours jeanne m sullivan assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court adetutu canty petitioner v commissioner of internal revenue respondent docket no filed date thomas f decaro jr for petitioner han huang for respondent memorandum findings_of_fact and opinion ruwe judge this case arises from respondent’s denial of petitioner’s request for relief from joint_and_several_liability under sec_6015 for the taxable_year sec_2010 and sec_2011 in her pretrial memorandum petitioner concedes that she does not satisfy the requirements of sec_6015 because she is still married to and living with the continued unless otherwise indicated all section references are to the internal_revenue_code in effect for all relevant years and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in maryland at the time she filed her petition petitioner married charles canty in date and was married to mr canty throughout the taxable_year sec_2010 and sec_2011 petitioner and mr canty are still married and live together petitioner has a bachelor’s degree in economics and a master’s degree in business and public administration since petitioner has been employed by the nuclear regulatory commission as a financial management analyst petitioner earned dollar_figure and dollar_figure in taxable wages and salary for the taxable_year sec_2010 and sec_2011 respectively petitioner is currently still employed as a financial management analyst with an annual salary of dollar_figure continued nonrequesting spouse see sec_6015 during the taxable_year sec_2010 and sec_2011 mr canty owned and operated the charles canty law office law office in washington d c mr canty prepared his and petitioner’s joint form sec_1040 u s individual_income_tax_return for the taxable_year sec_2010 and sec_2011 a schedule c profit or loss from business was attached to the and returns reporting the activity of the law office the schedule c reported gross_receipts of zero returns and allowances of dollar_figure net gross_receipts of dollar_figure and net profit of dollar_figure the schedule c reported gross_receipts of dollar_figure returns and allowances of dollar_figure net gross_receipts of dollar_figure and net profit of dollar_figure neither petitioner nor mr canty made estimated_tax payments with respect to the law office activity for the taxable_year sec_2010 and sec_2011 petitioner did not ask to review the returns for the taxable_year sec_2010 and sec_2011 before they were filed petitioner was not forced to sign the returns for the taxable_year sec_2010 and sec_2011 under duress threat of harm or other form of coercion at the time she signed the tax returns for and petitioner had no mental or physical health problems which prevented her from understanding the contents of the tax returns petitioner was not a victim of spousal abuse or domestic violence during her marriage to mr canty on date a notice_of_deficiency was mailed to petitioner and mr canty for their taxable_year sec_2010 and sec_2011 in the notice_of_deficiency respondent made adjustments to the schedule c income and expenses as follows income expense ty ty business use of home dollar_figure dollar_figure other dollar_figure dollar_figure utilities dollar_figure dollar_figure meals and entertainment dollar_figure dollar_figure travel dollar_figure dollar_figure rent lease other business property dollar_figure dollar_figure office dollar_figure dollar_figure insurance not health dollar_figure dollar_figure depreciation and sec_179 dollar_figure dollar_figure contract labor dollar_figure dollar_figure advertising dollar_figure dollar_figure car and truck --- dollar_figure gross_receipts sales dollar_figure --- in the notice_of_deficiency respondent made adjustments to non-schedule c income deductions and credits as follows item ty ty taxable interest dollar_figure --- self-employed health insurance big_number --- student_loan_interest_deduction big_number dollar_figure itemized_deductions big_number big_number tuition fees deduction big_number education credit big_number big_number making work pay government retiree credits --- refundable education credit big_number --- neither petitioner nor mr canty petitioned the court in response to the notice_of_deficiency on date respondent assessed against petitioner and mr canty with respect to the taxable_year additional taxes of dollar_figure interest of dollar_figure an accuracy-related_penalty under sec_6662 of dollar_figure and a failure to pay timely addition_to_tax of dollar_figure on the same date respondent assessed against petitioner and mr canty with respect to the taxable_year additional taxes of dollar_figure interest of dollar_figure and an accuracy- related penalty under sec_6662 of dollar_figure on date respondent received from petitioner a form_8857 request for innocent spouse relief requesting relief from joint_and_several_liability for the taxable_year sec_2010 and sec_2011 petitioner explained in an attachment to the form_8857 as follows the taxpayer was not involved in the operating of spouse’s legal practice and had now sic knowledge of the finances of the business therefore taxpayer had no way to determine the accuracy of the figures reported on the and tax returns with regard to the business the taxpayer and spouse have separate finances the taxpayer was not involved in the preparation of either the or tax returns the taxpayer gave her documentation to spouse and he prepared the returns and filed them electronically without the taxpayer having reviewed them petitioner also indicated in the form_8857 that she did not maintain a joint account with mr canty for the taxable_year sec_2010 and sec_2011 and there were large expenses made during and such as family vacations a trip to nigeria and the purchase of a vehicle for petitioner’s daughter petitioner’s form_8857 further states that she has monthly household_income of dollar_figure monthly household expenses of dollar_figure and assets with a net value of dollar_figure on date respondent issued to petitioner a preliminary determination denying petitioner relief from joint_and_several_liability for the taxable_year sec_2010 and sec_2011 on date petitioner submitted a form statement of disagreement which petitioner signed and dated date on date the internal_revenue_service irs office of appeals issued a final appeals determination final_determination denying petitioner’s request for relief from joint_and_several_liability in full the final_determination listed the following reasons for denial petitioner knew or had reason to know of the income or deductions that caused the additional tax petitioner is not eligible because of her current marital status and petitioner did not show that it would be unfair to hold her responsible petitioner timely petitioned the court for review of the final_determination petitioner filed her income_tax return for the taxable_year on date and was assessed additions to tax for late filing and late payment petitioner’s account balance for the taxable_year is currently satisfied petitioner is currently compliant with all federal_income_tax obligations for the taxable_year sec_2013 and sec_2014 opinion petitioner asks this court to review respondent’s final_determination denying her relief from joint_and_several_liability for the taxable_year sec_2010 and sec_2011 a married taxpayer may elect to file a joint federal_income_tax return with his or her spouse sec_6013 generally after making the election each spouse is jointly and severally liable for the entire tax_shown_on_the_return or otherwise determined to be due sec_6013 however sec_6015 provides relief from joint_and_several_liability for spouses who meet the conditions of subsection b and it provides for equitable relief in subsection f when the relief provided for in other subsections is not available olson v commissioner tcmemo_2009_294 tax ct memo lexis at the tax_court has jurisdiction to review respondent’s denial of petitioner’s request for relief under sec_6015 see sec_6015 both the scope and standard of review in cases requesting relief from joint_and_several income_tax_liability are de novo 132_tc_203 except as otherwise provided in sec_6015 the spouse requesting relief bears the burden_of_proof rule a 119_tc_306 aff’d 101_fedappx_34 6th cir i sec_6015 sec_6015 authorizes the commissioner to grant relief from joint_and_several_liability for tax if the taxpayer requesting relief satisfies each of the following five requirements a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual elects the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the individual making the election the requirements of sec_6015 are conjunctive and therefore the failure of a requesting spouse to satisfy any one of the elements precludes relief alt v commissioner t c pincite respondent concedes that petitioner satisfies the requirements of sec_6015 and e but asserts that petitioner does not meet the requirements of sec_6015 c or d sec_6015 provides that in order to obtain relief the requesting spouse must establish that she did not know and had no reason to know that there was an understatement a requesting spouse has reason to know of an understatement if a reasonable person in similar circumstances would have known of the understatement sec_1_6015-2 income_tax regs the facts and circumstances that are considered include among other things whether the requesting spouse failed to inquire at or before the time the return was signed about items on the return or omitted from the return that a reasonable person would question id petitioner bears the burden of proving that she satisfies the requirements of sec_6015 see rule a 94_tc_126 aff’d 992_f2d_1132 11th cir the no-knowledge-of-the-understatement requirement in sec_6015 is virtually identical to the requirement of former sec_6013 therefore cases interpreting sec_6013 remain instructive to our analysis 118_tc_106 aff’d f 3d continued petitioner claims that she had no knowledge of the erroneous information on the law office’s schedules c even if we were to believe petitioner that she had no knowledge of the income and expenses attributable to the law office a reasonable person in similar circumstances would have reviewed the tax returns before filing and inquired about certain items reported on the return see sec_1_6015-2 income_tax regs the schedule c for the taxable_year reported gross_receipts of zero returns and allowances of dollar_figure net gross_receipts of dollar_figure and net profit of dollar_figure in her posttrial brief petitioner acknowledges that the zero gross_receipts is an obvious error since the schedule c for reflects gross_income petitioner is a highly educated individual who works as a financial management analyst and a cursory review of the tax_return would have revealed this obvious error the law office’ sec_2011 schedule c reported gross_receipts of dollar_figure returns and allowances of dollar_figure net gross_receipts of dollar_figure and net profit of dollar_figure petitioner acknowledged at trial that the net profit for attributable to the law office looked to me like it was low however the record before us does not establish that petitioner inquired about this unusually low amount as a continued 10th cir reasonable person would petitioner testified that she asked mr canty about the low profit figure and that he assured her it was accurate however we do not find petitioner’s testimony credible throughout the proceedings petitioner has provided inconsistent and evolving explanations regarding her review of the and tax returns in her form_8857 petitioner states that mr canty prepared the returns and filed electronically without petitioner seeing or reviewing the return in the typewritten attachment to the form_8857 petitioner similarly states that mr canty prepared the returns and filed them electronically without petitioner having reviewed them petitioner stipulated that she did not ask to review the returns for and before they were filed in her petition petitioner states that mr canty presented the returns to her for signature and she asked him specifically if the return was accurate at trial petitioner testified that she took a brief look at the tax returns but did not study or review any other pages during cross-examination petitioner testified that she reviewed more than the first page of the form sec_1040 but did not study the numbers that were there to determine whether those numbers were accurate or how those numbers were calculated on the basis of petitioner’s inconsistent and vague testimony we are not persuaded that she reviewed the tax returns or inquired as a reasonable person would do sec_6015 was not designed to protect willful_blindness or to encourage the deliberate cultivation of ignorance doyel v commissioner tcmemo_2004_35 tax ct memo lexi sec_35 at quoting 53_f3d_523 2d cir aff’g in part rev’g in part and remanding t c memo accordingly we hold that petitioner has failed to prove that she did not know or have reason to know about the understatements petitioner has therefore failed to satisfy the requirements of sec_6015 sec_6015 provides that in order for a requesting spouse to obtain relief it must be inequitable to hold her liable for the deficiency in tax attributable to such understatement all of the facts and circumstances are considered in determining whether it is inequitable to hold a requesting spouse jointly and severally liable for an understatement sec_1_6015-2 income_tax regs the regulation specifies that some of the relevant factors are whether the requesting spouse significantly benefited directly or indirectly from the understatement whether the requesting spouse has been deserted by the nonrequesting spouse and whether the spouses have been divorced or separated id sec_1_6015-2 income_tax regs provides that a relevant factor in this determination is whether the requesting spouse significantly benefited directly or indirectly from the understatement normal support is not considered a significant benefit see 93_tc_355 the record does not indicate whether petitioner significantly benefited from the understatements we may consider whether the requesting spouse was deserted divorced or separated from the nonrequesting spouse see alt v commissioner t c pincite sec_1_6015-2 income_tax regs petitioner is still married to mr canty and they still live together in maryland the court has also held that a material factor is whether the failure to report the correct_tax liability on the joint_return results from concealment overreaching or any other wrongdoing on the part of the nonrequesting spouse see alt v commissioner t c pincite citing 118_tc_106 aff’d 353_f3d_1181 10th cir nothing in the record indicates that mr canty hid or concealed financial or tax information from petitioner and therefore we find that mr canty did not hide or conceal from her any information relating to their income_tax returns for the taxable_year sec_2010 and sec_2011 petitioner bears the burden of establishing that it is inequitable to hold her liable for the deficiencies in tax attributable to the understatements see rule a flynn v commissioner t c pincite petitioner has failed to meet her burden we find that under sec_6015 it is not inequitable to hold petitioner liable for the deficiencies in tax for and since petitioner failed to satisfy the requirements of sec_6015 and d she does not qualify for relief under sec_6015 see alt v commissioner t c pincite ii sec_6015 sec_6015 allows for an alternative means of relief for a requesting spouse who does not otherwise qualify for relief under sec_6015 pursuant to sec_6015 the commissioner is authorized to grant equitable relief from joint_and_several_liability if taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either a threshold conditions a requesting spouse must satisfy seven threshold conditions before a request under sec_6015 will be considered see revproc_2013_34 sec_4 2013_43_irb_397 modifying and superceding revproc_2003_61 accordingly we need not discuss whether petitioner satisfies the requirements of sec_6015 2003_2_cb_296 revproc_2013_34 sec_4 i r b pincite sets forth the following threshold conditions the requesting spouse filed a joint_return for the year in which relief is sought relief is not available to the requesting spouse under sec_6015 or c the claim for relief is timely filed no assets were transferred between the spouses as part of a fraudulent scheme the nonrequesting spouse did not transfer disqualified assets to the requesting spouse the requesting spouse did not knowingly participate in the filing of a fraudulent joint_return and absent certain exceptions the income_tax_liability from which the requesting spouse seeks relief is attributable either in full or in part to an item of the nonrequesting spouse respondent concedes that petitioner meets all seven threshold requirements b streamlined relief when as here the seven threshold conditions have been met the guidelines allow a requesting spouse to qualify for a streamlined determination for relief under sec_6015 if all of the following conditions are met the requesting spouse is no longer married to the nonrequesting spouse on the date the irs makes its determination the requesting spouse will suffer economic hardship if relief is not granted and on the date the joint_return was filed the requesting spouse did not know or have reason to know that there was an understatement or deficiency revproc_2013_34 sec_4 i r b pincite petitioner does not qualify for a streamlined determination because she was married to mr canty when the irs made its final_determination c facts and circumstances where a requesting spouse meets the threshold conditions but fails to qualify for a streamlined determination she may still be eligible for equitable relief if taking into account all the facts and circumstances it would be inequitable to hold her liable for the deficiency see id sec_4 the guidelines list the following nonexclusive factors that the commissioner takes into account when determining whether to grant equitable relief marital status economic hardship in the case of an understatement knowledge or reason to know of the items giving rise to the understatement or deficiency legal_obligation significant benefit compliance with income_tax laws and mental or physical health id in making our determination under sec_6015 we consider these factors as well as any other_relevant_factors no single factor is determinative and all factors shall be considered and weighed appropriately see 136_tc_432 molinet v commissioner tcmemo_2014_109 at the first factor is whether the requesting spouse is separated or divorced from the nonrequesting spouse revproc_2013_34 sec_4 a petitioner is still married to and living with mr canty accordingly this factor is neutral the second factor is whether the requesting spouse will suffer economic hardship if relief is not granted id sec_4 b i r b pincite a requesting spouse suffers economic hardship if the satisfaction of the tax_liability in whole or in part would cause her to be unable to pay reasonable basic living_expenses id in her form_8857 petitioner reported monthly household_income of dollar_figure and monthly household expenses of dollar_figure we cannot find that petitioner would suffer economic hardship if we deny her relief accordingly this factor is neutral the third factor is whether the requesting spouse knew or had reason to know of the items giving rise to the understatement as of the date the joint_return was filed id sec_4 c i a we found above that under sec_6015 petitioner failed to prove that she had no reason to know of the understatements revproc_2013_34 sec_4 c iii i r b pincite provides that the facts and circumstances that are considered in determining whether the requesting spouse had reason to know of an understatement include the requesting spouse’s level of education any deceit or evasiveness by the nonrequesting spouse the requesting spouse’s degree of involvement in the activity generating the income_tax_liability the requesting spouse’s involvement in business or household financial matters the requesting spouse’s business or financial expertise and lavish or unusual expenditures compared with past spending levels petitioner has a bachelor’s degree in economics and a master’s degree in business and public administration no evidence was presented that mr canty was deceitful or hid any information from petitioner in regard to the tax returns although petitioner was not involved with the law office she had the opportunity to question mr canty regarding the items reported on the schedules c but chose not to do so petitioner is a financial management analyst and she testified that she take s care of most of the household expenses we find that petitioner failed to prove that she did not know and had no reason to know of the understatements accordingly this factor weighs against relief the fourth factor is whether the requesting spouse or the nonrequesting spouse has a legal_obligation to pay the outstanding federal_income_tax liability id sec_4 d this factor will be neutral if the spouses are not separated or divorced id accordingly this factor is neutral the fifth factor is whether the requesting spouse significantly benefited from the understatement id sec_4 e we have not found that petitioner significantly benefited from the understatements petitioner provided no testimony or other evidence that the family vacations and vehicle purchase benefited her or to what extent this factor is neutral the sixth factor considers whether the requesting spouse has made a good- faith effort to comply with the income_tax laws in the taxable years following the years for which relief is requested revproc_2013_34 sec_4 f i r b pincite petitioner filed her income_tax return more than a year late and did not timely pay her income_tax_liability accordingly this factor weighs against granting relief the seventh factor is whether the requesting spouse was in poor physical or mental health id sec_4 g i r b pincite this factor will weigh in favor of relief if the requesting spouse was in poor physical or mental health at the time the returns to which the request for relief pertains were filed or at the time the requesting spouse requested relief id this factor is neutral if the requesting spouse was in neither poor physical nor poor mental health id petitioner stipulates that she had no physical or mental health problems at the time she signed the and tax returns petitioner did not offer any testimony or other evidence regarding her physical or mental health at the time she requested innocent spouse relief accordingly this factor is neutral on the basis of the foregoing facts and circumstances we find that it would not be inequitable to deny petitioner relief under sec_6015 in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered for respondent