t c summary opinion united_states tax_court jeffrey mccarty and ulondra mccarty petitioners v commissioner of internal revenue respondent docket no 15225-11s filed date jeffrey mccarty and ulondra mccarty pro_se whitney n moore for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and imposed a dollar_figure sec_6662 accuracy-related_penalty the issues for decision are whether petitioners are entitled to deductions claimed on a schedule a itemized_deductions in excess of the amounts now allowed by respondent and whether petitioners are liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in california both petitioners hold advanced college degrees and were employed as special education teachers during mr mccarty is and was at all times relevant employed as a special education teacher in the azusa unified school district in he taught sixth seventh and eighth grade students mrs unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure mccarty switched places of employment during from the azusa unified school district to the rowland unified school district during she taught special education to students in kindergarten through sixth grade as special education teachers petitioners worked with children with a variety of special needs described by them to include learning disabilities emotional disorders explosive behavioral disorders traumatic brain injury autism aphasia speech and language disorders and physical disabilities the state of california required petitioners to adhere to a mandated curriculum and to develop an individual education plan for each student to comply with these requirements petitioners typically implemented a variety of teaching techniques depending on the needs of the individual student if the school district did not provide petitioners with the resources necessary to achieve compliance with state requirements then petitioners from time to time would incur out-of-pocket expenses to acquire the necessary resources the azusa unified school district’s employee_business_expense reimbursement policy reimbursement policy provided that teachers were entitled to monthly reimbursements as follows dollar_figure for elementary schools dollar_figure for middle schools dollar_figure for high schools and dollar_figure for other departments the reimbursement policy also imposed various conditions and limitations depending upon the amount of reimbursement requested both petitioners were active members of their church during and both were engaged in missionary work during that year mrs mccarty taught sunday school and volunteered for other church-related activities she was also involved in charity work with angel tree an organization that provides foster parents to children whose parents are incarcerated petitioners’ self-prepared untimely filed joint federal_income_tax return includes a schedule a as relevant here on the schedule a petitioners claimed a dollar_figure deduction for medical and dental expenses a dollar_figure deduction for charitable_contributions and a miscellaneous itemized_deduction that takes into account certain unreimbursed employee business_expenses relating to their respective employment as teachers in the notice respondent disallowed the deduction for medical and dental expenses the deduction for charitable_contributions and so much of the miscellaneous itemized_deduction as is attributable to unreimbursed employee for the year in issue medical and dental expenses are deductible only to the extent they exceed of a taxpayer’s adjusted_gross_income sec_213 references to the deduction for medical and dental expenses take into account petitioners’ adjusted_gross_income business_expenses according to the notice the underpayment_of_tax required to be shown on petitioners’ return is due to negligence or disregard of rules or regulations and is a substantial_understatement_of_income_tax therefore according to the notice petitioners are liable for a sec_6662 accuracy- related penalty other adjustments made in the notice are computational and will not be addressed i schedule a deductions discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 respondent now concedes that petitioners are entitled to a dollar_figure deduction for medical and dental expenses a dollar_figure deduction for charitable_contributions and a miscellaneous itemized_deduction of dollar_figure after taking into account allowable unreimbursed employee business_expenses petitioners do not claim that the provisions of sec_7491 are applicable and we proceed as though they are not 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs informed by these fundamental principles of federal income_taxation we turn our attention first to the deductions here in dispute a medical and dental expenses in general sec_213 allows a deduction for expenses paid during the taxable_year for medical_care that are not_compensated_for_by_insurance_or_otherwise and to the extent that such expenses exceed of adjusted_gross_income as noted petitioners claimed a dollar_figure deduction for medical and dental expenses on their return in support of their claim to this deduction petitioners submitted a summary schedule showing entries for various expenditures the total of the expenses shown on the summary schedule however is not consistent with the amount of medical_expenses shown on the schedule a after a careful review of the summary schedule which lists some personal nondeductible expenditures see sec_262 duplicates other items and contains other mistakes we find that petitioners are entitled to a medical_expense_deduction totaling dollar_figure more than now allowed by respondent b charitable_contributions generally sec_170 allows a deduction for any charitable_contribution made by the taxpayer charitable_contribution deductions are subject_to the recordkeeping requirements of sec_1_170a-13 income_tax regs for contributions of money or sec_1_170a-13 income_tax regs for contributions of property other than money any contribution of dollar_figure or more must also satisfy the requirement of sec_1_170a-13 income_tax regs which provides that to be allowed a charitable_contribution_deduction of dollar_figure or more the taxpayer must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization if a taxpayer makes a on the medical and dental expense schedule for petitioners incorrectly included a charitable_contribution as well as several expenditures apparently paid_or_incurred during years other than separate contributions of less than dollar_figure are not subject_to the requirements of sec_170 regardless of whether the sum of the contributions made by a taxpayer to a donee organization during a taxable_year totals dollar_figure or more see sec_1_170a-13 income_tax regs charitable_contribution of property other than money in excess of dollar_figure the taxpayer must maintain written records showing the manner of acquisition of the item and the approximate date of the acquisition see sec_1_170a-13 income_tax regs the dollar_figure charitable_contribution_deduction claimed on the return and disallowed in the notice_of_deficiency consists in part of cash donations in part of donations made in property and in part of mileage petitioners submitted a summary schedule showing dollar_figure in charitable_contributions they have provided no explanation for the variance between the amount shown on the summary schedule and the amount shown on the schedule a petitioners did not maintain a mileage log for the charitable_contribution_deduction related to mileage nor did they maintain adequate substantiation for many of the donations made in property according to petitioners’ summary schedule most of the donations were made to their church one or more of the schools that their children attended and goodwill after a careful review of their summary schedule we find that petitioners are entitled to a deduction for charitable_contributions totaling dollar_figure more than now allowed by respondent as noted on the basis of adequate substantiation that petitioners provided respondent now concedes that they are entitled to a dollar_figure deduction for charitable_contributions c unreimbursed employee business_expenses sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the term trade_or_business as used in sec_162 includes the trade_or_business of being an employee 54_tc_374 17_tc_1456 the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 in general an expense is ordinary if it is considered normal usual or customary in the context of the particular business out of which it arose see 308_us_488 ordinarily an expense is necessary if it is appropriate and helpful to the operation of the taxpayer’s trade_or_business see 383_us_687 83_tc_356 aff’d 777_f2d_662 11th cir on the other hand sec_262 generally disallows a deduction for personal living or family_expenses on the schedule a petitioners claimed a miscellaneous itemized_deduction that takes into account certain unreimbursed employee business_expenses they submitted a summary schedule showing dollar_figure in unreimbursed employee business_expenses paid in as with the other deductions no explanation has been given for the variance between the amounts shown on the summary schedule and the amount shown on the schedule a the summary schedule includes numerous unidentified expenses and some expenses that appear to be more personal than employment related taking into account the items shown on the summary schedule the amounts petitioners claim to have expended the connection of certain items with petitioners’ employment as teachers and the reimbursement policy we find that petitioners are entitled to a deduction for miscellaneous itemized expenses including unreimbursed employee business_expenses totaling dollar_figure more than now allowed by respondent ii sec_6662 accuracy-related_penalty as relevant here sec_6662 imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence or disregard as noted respondent now concedes that petitioners are entitled to a dollar_figure miscellaneous itemized_deduction that takes into account allowable unreimbursed employee business_expenses of rules or regulations or substantial_understatement_of_income_tax sec_6662 and b and negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax includes an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent bears the burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 sec_6664 provides an exception to the imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income in this case the deficiency underpayment_of_tax and understatement_of_tax are all computed in the same manner see sec_6211 sec_6662 sec_6664 tax regs it is the taxpayer’s burden to establish that he acted in good_faith and that there was reasonable_cause for the underpayment see higbee v commissioner t c pincite see also rule a 290_us_111 the amounts shown on petitioners’ summary schedules for the various expense deductions here in dispute are not consistent with the deductions claimed for those expenses on the schedule a the inconsistency has not been explained to the extent that the deficiency and correspondingly the underpayment and understatement of income_tax required to be shown on petitioners’ return exceeds dollar_figure we find that respondent has met his burden of production with respect to the imposition of a sec_6662 accuracy-related_penalty and petitioners have not established that they had reasonable_cause for the underpayment otherwise we find that respondent has not met his burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty upon the ground of negligence or intentional disregard of rules or regulations to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------ ------------------------- ------------------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number -------------------- refer reply to cc psi b03 plr-106423-12 date date legend legend company state a_trust b_trust c trust d trust e d1 d2 d3 d4 d5 ------------------------- tin ---------------- ----------- ---------------------- tin ----------------- -------------------------------------------------------------------- tin ----------------- ---------------------------------------------------------------- tin ----------------- -------------------------------------------------- tin ----------------- --------------------------------------- tin ---------------- ------------------------ ---------------------- ---------------------- ------------------------ ------------------------- plr-106423-12 dear ---------------- this letter responds to a letter dated date submitted on behalf of company requesting a ruling under f of the internal_revenue_code the information submitted states that company was incorporated under the laws of state on d1 and elected to be an s_corporation effective d2 the shareholders of company are a an individual who is a citizen and resident_of_the_united_states trust b and trust c trusts all of which are treated as owned by b and c respectively individuals who are citizens and residents of the united_states and trust d trust e trust d acquired company stock on d3 company represents that trust d was eligible to be an electing_small_business_trust esbt within the meaning of sec_1361 effective d3 and thereafter however the trustee of trust d did not make a timely esbt election under sec_1361 therefore trust d was not a permissible shareholder on d3 and thereafter as a result company’s s_corporation_election terminated on d3 trust e was a qualified_shareholder of an s_corporation pursuant to sec_1361 from d2 until d4 on d4 the deemed owner of trust e died and trust e remained an eligible shareholder until d5 pursuant to sec_1361 company represents that trust e was eligible to be an esbt within the meaning of sec_1361 effective d5 and thereafter however the trustee of trust e did not make a timely esbt election under sec_1361 therefore trust e was not a permissible shareholder on d5 and thereafter company represents that company and shareholders have filed tax returns consistent with company being an s_corporation since d3 company further represents that the circumstances resulting in the termination of company’s s_corporation_election were inadvertent and not motivated by tax_avoidance or retroactive tax planning company and shareholders have agreed to make any adjustments the commissioner may require consistent with the treatment of company as an s_corporation 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 the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the plr-106423-12 corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that company’s s_corporation_election terminated on d3 we also conclude that this termination was inadvertent within the meaning of sec_1362 in addition to the extent company’s s_corporation_election would have terminated on d5 we conclude that such termination was inadvertent within the meaning of sec_1362 accordingly under sec_1362 company will be treated as continuing to be an s_corporation from d3 and thereafter unless company’s s_corporation_election is otherwise terminated under sec_1362 provided trust d files an esbt election effective d3 and trust e files an esbt election effective d5 with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the esbt elections the shareholders of company must include their pro_rata share of the separately_stated and nonseparately computed items of income loss deduction or credit as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by company as provided in sec_1368 this ruling is contingent upon company and each of its shareholders filing any amended returns and making such adjustments that are necessary to properly reflect the reporting of company’s items of s_corporation income additionally trust d and trust e must file any amended returns and make adjustments that are necessary to properly reflect the treatment of trust d and trust e as esbts a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling if all of the above conditions are not met then this ruling is null and void furthermore if these conditions are not met company must notify the cincinnati service_center that its s_corporation_election has terminated except for the specific rulings above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is express or implied regarding the eligibility of company to be an s_corporation or the eligibility of trust d or trust e to be an esbt the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the plr-106423-12 material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company's authorized representative sincerely richard t probst senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-169084-01 cc psi b6 director field operations taxpayer's name taxpayer's address taxpayer's identification no year involved date of conference legend taxpayer team a b c d e f g h j k l m tam-169084-01 n p r agreement z date date date date date date date date date date issues whether e’s transferred broadcast rights constituting a j undivided_interest in broadcast rights of team a acquired by taxpayer are amortizable under sec_197 of the internal_revenue_code if the transferred broadcast rights are excluded from sec_197 are they or any part of them amortizable under sec_167 conclusion e’s transferred broadcast rights acquired by taxpayer were acquired in connection with team a the transferred broadcast rights are excluded from amortization under sec_197 pursuant to the explicit language of sec_197 tam-169084-01 with the purchase of transferred broadcast rights taxpayer acquired participation in certain media rights including the current broadcast contract with f while this current broadcast contract covers a distinct ascertainable period ending on date the asset represented by this contract is inclusive in taxpayer’s right to broadcast revenue these rights to broadcast revenues or media rights do not have a limited useful_life and are not wasting_assets individual contracts themselves are merely links in a continuous indefinite chain of media-related income while the term of a particular contract will expire it will be either renewed with the current broadcaster or replaced with a contract with a competing broadcaster the revenue flow will continue and taxpayer’s right to share in or receive that revenue will continue unaffected by changes in the contract or parties to the contract the asset the right to broadcast revenue is inherent in the underlying franchise and has no determinable expiration therefore these rights are not depreciable under sec_167 facts team a is a professional sports team and a member of b on date1 c the owner of team a assigned a j undivided_interest in all local broadcast rights of team a’s games transferred broadcast rights to d a partner in c c retained k undivided_interest in all local broadcast rights of team a retained broadcast rights d subsequently assigned these rights and obligations to e an entity owned by d the interests in the transferred broadcast rights held by e and the retained broadcast rights held by c were subject_to an existing term agreement with f for the broadcast of select team a games on cable about date g acquired team a along with the retained broadcast rights on date f exercised its rights under its then existing pay tv rights agreement with g and e to extend the term to date on date h executed a memorandum of understanding mou with e and other entities owned by d h a partnership was owned by p by entities directly or indirectly owned by l_and_r by entities owned by m under the mou h had the right to acquire e’s transferred broadcast rights on date n was formed to acquire team a from g negotiations for this purchase had commenced with h n’s predecessor in interest on date g sold team a along with its retained broadcast rights to n on date n as successor of h and e executed agreement z pursuant to this agreement z e agreed to sell to n all of e’s tv rights associated with team a which included the transferred broadcast rights an interest in the f pay tv rights agreement and an interest in the local tv rights agreement the latter agreement called for d and e to use their best efforts to cause f or its successor_in_interest or some other entity to enter into new broadcasting agreements agreement z specified tam-169084-01 a purchase_price and a scheduled closing of date agreement z states in part it would be of great benefit to n to be able to unify the e tv rights with the remaining rights that n has derived substantial tangible and intangible benefits including but not limited to its ability to promote and market n to the general_public by use of the remaining rights in cooperation with e and use of the e tv rights on date however e executed an assignment of the transferred broadcast rights and other rights specified in agreement z to taxpayer thus e sold to taxpayer the same broadcast rights that were subject_to agreement z of date between n and e at the time of the assignment taxpayer was indirectly wholly owned by l taxpayer has provided a number of business and financial reasons unrelated to taxation as to why the transferee of the transferred broadcast rights was changed from n to taxpayer law and analysis sec_167 and sec_197 provide the rules for depreciation or amortization of intangible assets sec_197 provides for a 15-year amortization period and generally applies to a broad range of purchased intangible assets sec_197 is effective for intangibles acquired after date sec_167 provides for depreciation of intangible assets not covered by or specifically excluded from sec_197 sec_197 provides that the term amortizable sec_197 intangible generally means any sec_197 intangible which is acquired by the taxpayer after date and which is held in connection with the conduct_of_a_trade_or_business or an activity described in sec_212 the term sec_197 intangible is defined in sec_197 as including in part the following intangible items business books_and_records operating systems or any other information base including lists or other information with respect to current or prospective customers any patent copyright formula process design pattern knowhow format or other similar item any customer-based_intangible any supplier-based_intangible and any other similar item any franchise trademark or trade_name the term customer-based_intangible is defined in sec_197 as meaning - composition of market market share and any other value resulting from future provision of goods or services pursuant to relationships contractual or otherwise in the ordinary course of business with customers sec_197 provides that the term sec_197 intangible shall not include a franchise to engage in professional sports and any item acquired in connection with such a franchise sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in a trade_or_business the property must be an intrinsically wasting asset 400_f2d_427 5th cir however its useful_life is not necessarily the useful_life inherent in the asset but it is the period over which the asset may reasonably be expected to be useful in the taxpayer’s trade_or_business see sec_1_167_a_-1 of the income_tax regulations the term property includes intangible assets and sec_1_167_a_-3 provides that where an intangible asset is known from experience or other factors to be of use in the business for only a limited time the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation deduction an intangible asset the useful_life of which is not limited is not subject_to the allowance for depreciation no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life application of sec_197 two months prior to the acquisition of team a by n h the predecessor of n entered into a mou with e to purchase the transferred broadcast rights eight months after n acquired the team a from g n executed agreement z with e for the purchase of e’s transferred broadcast rights notwithstanding agreement z e sold the transferred broadcast rights to taxpayer taxpayer asserts that g the seller of team a along with the retained broadcast rights was a different unrelated party to e the seller of the transferred broadcast rights that the transactions occurred at different times and that only one of the two owners of n l was also the owner of taxpayer in addition there were valid business reasons for taxpayer to purchase the transferred broadcast rights rather than n taxpayer argues that the sec_197 should apply only to the acquisition of intangibles concurrent with the acquisition of a sports franchise by the same parties however sec_197 excludes from a sec_197 intangible any intangible acquired in connection with such a franchise the phrase in connection with is a significantly broader inclusion than acquired with the acquisition of a sports franchise see for example 416_us_500 there need only to be a nexus between the intangible acquired and the professional sports franchise for exclusion from sec_197 to apply the transferred broadcast rights and the sports franchise need not be acquired simultaneously for the exclusion provisions of sec_197 to apply where the language of a statute is clear the courts will look no further in deciding its meaning 496_us_478 palay sons inc v commissioner 114_tc_473 113_tc_422 in this case the language of the statute in connection with is clear connection means as appropriate here a relationship or association in thought as of mutual dependence or involvement webster’s third new international dictionary 16th ed here the transferred broadcast rights are dependent on the existence of the sports franchise as such the transferred broadcast rights was an tam-169084-01 item acquired in connection with the sports franchise and is therefore excluded from sec_197 amortization under sec_197 even if sec_197 were read more narrowly to require related acquisitions of the transferred broadcast rights and the sports franchise the results would be the same in this case the same buying party was involved in the negotiations during the same time period to acquire both team a and the transferred broadcast rights the delay between the closings of the two acquisitions was contemplated by the buying party the valid business reasons for different buyers of team a and the transferred broadcast rights are not relevant for application of sec_197 consequently in this case the acquisition of the transferred broadcast rights did in fact occur in connection with the acquisition of team a a sports franchise accordingly the transferred broadcast rights acquired by taxpayer are excluded from treatment under sec_197 pursuant to sec_197 application of sec_167 the acquisition of team a admits the purchaser into membership of b in which the sports team competes membership in b carries with it substantial and valuable rights one of the most financially significant rights of a franchisee is media broadcast rights including sharing in national broadcast revenue if any and ownership of local broadcast rights these interests are a perpetual right that exists for as long as the franchise exists the owner of team a in conjunction with the owner of the transferred broadcast rights has the right to negotiate local broadcast contracts the current contract to televise team a’s game with f has a term running until date in order to qualify for the depreciation deduction under sec_167 the taxpayer must establish that the intangible asset has an ascertainable value separate and distinct from goodwill and has a limited useful_life the duration of which can be ascertained with reasonable accuracy 481_f2d_1240 5th cir cert_denied 414_us_1129 in 507_us_546 the court held an intangible asset that would otherwise fall within the concept of goodwill is depreciable provided it has an ascertainable value and a limited useful_life that can be determined with reasonable accuracy in order to determine whether the intangible assets at issue herein satisfy this test one must determine whether these properly identified intangibles have an ascertainable value and a limited useful_life taxpayer argues that newark morning ledger renders the older case law obsolete the resolution of this issue turns on what is the asset either the broadcast rights in general meaning the transferred broadcast rights plus the retained broadcast rights or a combination of the current pay tv contract with a stated life tam-169084-01 plus the continuing broadcast rights in contrast with other types of customer-based or supplier-based contracts the rights and interest in underlying contracts acquired by taxpayer are dependent only upon team a’s membership and participation in b the only qualification of taxpayer’s right to share in the income from the pay tv contract is team a’s continued membership in b this membership could cease only upon the elimination of team a as a member club or alternatively the demise of b as an organization under the terms of the broadcast agreement then in place the contract is not automatically renewable however past practice within the industry shows these media contracts are always renewed whether with the then current contracting network or with a competitor see generally 842_f2d_1335 2nd cir the life of an asset can not be limited by the remote speculative possibility that renewal of a contract might not occur 354_f2d_410 4th cir rather than merely acquiring an interest in an existing contract taxpayer acquired certain media rights while the current contract covers a certain distinct ascertainable period the asset represented by this contract the taxpayer’s right to broadcast revenue does not have a limited useful_life and can not be considered a wasting asset the right to contract for the local broadcast of games is a right inherent in the franchise therefore these rights have an indeterminate useful_life coextensive with the life of the franchise itself national media rights valuation and amortization were addressed in e cody 556_f2d_1224 5th cir cert_denied 434_us_1014 the court found that the taxpayer’s television rights were to last as long as the atlanta falcons remained a member of the nfl while the existing contract provided a measure of the taxpayer’s television rights over a specific period of time those rights were to continue indefinitely accordingly the television rights were found to have an indeterminate useful_life and could not be amortized in 70_tc_817 rev’d and remanded on other grds 649_f2d_707 9th cir the court addressed a national basketball association team’s right to share in revenues from national television broadcast of nba games the court held there was reasonable expectation that the nba would continue to have a favorable national television contract and since such rights could continue indefinitely they were not amortizable the court found that the rights under the then current television contract were only a link in a continuing chain of national television income these rights would last as long as the team held an nba franchise and the source of the rights was the nba membership the contract only provided a measure of value for the acquired rights to the nba television revenue such rights continued indefinitely and therefore could not be tam-169084-01 amortized the case of 807_f2d_1306 6th cir aff’g in part and vacated in part remanded 622_fsupp_595 n d ohio also dealt with the amortization of broadcast rights acquired in the purchase of a sports franchise a professional baseball team both national and local broadcast contracts were acquired and the taxpayer attempted to characterize the broadcast rights acquired as is the case herein as being comprised of two components the current broadcasting contracts existing at the time of the purchase and the future broadcasting rights inherent in the franchise which had yet to be contracted for the taxpayer argued that the current rights had a limited useful_life represented by the unexpired term of the existing contracts and had ascertainable values and thus met the test of houston chronicle supra and was subject_to amortization the court reached the opposite conclusion it found the rights did not have a limited useful_life which could be ascertained with reasonable accuracy and therefore could not be amortized as wasting_assets both national and local broadcast contracts were found to be links in a perpetual chain of broadcasting revenues as long as the team remained a major league baseball franchise the club would have the rights to share in the revenues produced by the national contract upon expiration of each contract a new contract providing for further revenues would be executed although the then current broadcast contract covered a distinct ascertainable period the asset represented by the contract each franchise’s national broadcasting rights did not have a limited useful_life and therefore could not be considered a wasting asset the same was found to hold true for local broadcast contracts the team’s right to contract for local broadcast of games was a right inherent in the franchise and had a indeterminate useful_life coextensive with the life of the franchise the right to broadcast games locally and nationally was still extremely valuable to the franchise at the expiration of the current contracts while the franchise will certainly become a party to a new broadcasting contract at the expiration of each preceding contract it does not do so in order to reacquire an asset rather it does so in order to obtain revenues from an existing asset applying the mccarthy court’s analysis to the facts of this case the outcome is the same the current local broadcast contract is a link in a continuing chain of broadcast revenues of indeterminate duration that taxpayer is entitled to share in revenues as long as team a is a member of b the term of a particular contract will expire and a new contract entered into with either the same broadcaster or a competitor the revenues flowing from a contract would continue the asset the media rights never expires in newark morning ledger co supra the supreme court dealt with the identification valuation and depreciability of intangible assets the court held that an intangible asset that would otherwise fall within the concept of goodwill is still tam-169084-01 depreciable provided it has an ascertainable value and a limited useful_life that can be determined with reasonable accuracy however this holding does not alter our determination that the assets acquired by taxpayer is not a individual_contract but are the media rights which do not have a limited useful_life and therefore are not depreciable in newark the taxpayer acquired groupings of paid subscribers to its various newspapers valuing the subscribers based on the estimate of future profit to be derived from the continuation of subscriptions into the future and depreciating this value over the expected remaining life of current subscriptions the government argued that the valuation of the subscriptions represented the continuation of customer patronage a core definition of non-depreciable goodwill the court held that an allowance for depreciation is permissible where the intangible has an ascertainable value separate and distinct from goodwill and has a measurable limited useful_life the significant question for the purposes of depreciation is not whether the asset falls ‘within the core of the concept of goodwill’ but whether it is capable of being valued and whether that value diminishes over time u s pincite here a clear distinction can be drawn between the customer-based intangibles in newark morning ledger the subscriptions and the intangible here the media rights the at-will subscribers in newark were of a finite number that would waste and not self-regenerate one customer might be replaced with another but the replacement would not self-regenerate and would be a different customer unrelated to the subscriber list in the situation at issue here a new contract would replace the current contract for the same media right but for a subsequent time period and the user of this media right the broadcaster is not the source of the asset being valued the source is the right to receive the local broadcast revenue from whatever broadcaster and this right is based upon team a’s membership in b the individual_contract might end but the right to broadcast and its derivative revenue inherent in the franchise would continue to exist and would still be valuable the asset is singular in nature and a contract to use the asset is replaced or expected to be replaced one for one as it expires the media rights are thus self-regenerative therefore the media rights are intangible assets with indefinite lives and not subject_to depreciation under sec_167 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


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-116574-08 date date x y -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------- country ---------- date ---------------------- dear-------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity the information submitted states x is an entity organized on date under the laws of country by a single owner via two wholly owned disregarded entities of y with limited_liability x intended to be treated as a disregarded_entity for federal tax purposes effective date however x did not timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-2 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301_7701-3 unless it elects otherwise a foreign eligible_entity is classified as an plr-116574-08 association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than 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 a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code plr-116574-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely curt g wilson deputy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number u i l no cc p si 5-plr-119611-00 date legend coop state a state b corp b corp c b c d dear this is in response to your letter dated date submitted on behalf of coop requesting a ruling under subchapter_t of the internal_revenue_code on a transaction described below coop was incorporated in b in state a coop is engaged principally in the distribution of c products and related general merchandise products coop primarily does business with patrons who qualify and have been accepted as member-patrons the member-patrons are the shareholders of coop and are primarily independent d coop operates on a cooperative basis within the meaning of subchapter_t and allocates amounts to patrons on the basis of the business done with or for such patrons accordingly coop is taxable on a cooperative basis pursuant to subchapter_t of the code and coop has been treated as a cooperative for federal_income_tax purposes since its formation in b however certain subsidiaries of the coop do not operate on a cooperative basis coop’s capital stock consists of three classes designated class a shares class b shares and class c shares the total number of class a shares that coop is authorized to issue is big_number of which are issued and outstanding the total number of class b shares that coop is authorized to issue is big_number of which are issued and outstanding the coop is considering changing its form of organization from that of a state a corporation to that of a state b limited_liability_company an llc the board_of directors of coop has determined that a state b llc will have certain advantages over the conduct of the business as a state a corporation as a state a corporation the coop is subject_to the provisions of the state a corporations code including section which limits the ability of coop to make distributions including distributions to repurchase its own shares section permits repurchase only when retained earnings as determined under generally_accepted_accounting_principles equal or exceed the amount of any proposed distribution historically through the operations of its subsidiaries the coop has maintained sufficient retained earnings to accomplish its share repurchase program as set forth in its articles and bylaws as a result of expenses associated with the merger with corp b and current operating losses of corp b subsidiaries as well as operating losses of retail stores owned by coop including stores acquired from corp c for resale to members or others the coop’s retained earnings have been depleted such that they are inadequate to permit repurchase of coop shares an alternative repurchase test permitted under section based on the ratio of assets to liabilities cannot be met since the coop relies heavily on borrowings to finance its operations the requirements of section are unique to state a corporations and are not typical of the corporate laws of other states or of the laws governing repurchase of shares by llcs organized in either state a or state b state the state b law applicable to share repurchases by state b corporations and state b llcs and the state a law applicable to share repurchase by llcs base the entities’ ability to repurchase shares upon a determination of whether after giving effect to the distribution the fair value of the assets of the entity exceed the total liabilities of the entity the board_of directors believes that such a governing principle will enable coop to continue to repurchase shares in accordance with the provisions of its articles and bylaws so long as the board_of directors is able to make the determination required by state b law reorganizing coop as a state b corporation rather than as a llc would not result in the application of state b law regarding distributions instead the pseudo- foreign_corporation provisions of the state a corporations code would apply so as to require that state a corporate law regarding distributions continue to apply in contrast no similar principle of state a law would require that state a rather than state b law regarding distributions apply if coop is reorganized as a state b llc instead the principles of state b law regarding distributions would apply to a state b llc coop would accomplish the change in form to a state b llc in the following manner a coop would form an llc by the filing of a certificate of formation with the secretary of state of the state of state b the name of the llc would be substantially identical to coop’s name as the organizer coop would adopt bylaws as the operating_agreement of the llc the provisions of the certificate of formation and bylaws of the llc would be substantially the same as the provisions of the amended and restated articles of incorporation and the bylaws of coop with respect to capital structure voting rights board size and board authority with the exception that the provisions authorizing class c shares one share held by each director would be eliminated b the llc will make an election under sec_301_7701-3 of the regulations to be taxed as an association effective as of the date of the llc’s organization c coop and the llc will then enter into an agreement and plan_of_reorganization pursuant to the terms of such agreement coop will be merged in the llc and all issued and outstanding class a and class b shares of coop respectively will be converted into the right to receive the same number of class a and class b shares of the llc the reorganization and the class c shares will be converted into the right to receive dollar_figure per share in cash as a result the shareholdings of member patrons in the llc immediately following the reorganization will be identical to their shareholdings in coop immediately prior to the reorganization for the foreseeable future following the reorganization the llc directly and through its wholly-owned subsidiaries will continue the operations of coop in substantially the same manner as coop had done previously coop represents that the reorganization will qualify as a tax-free reorganization under sec_368 coop further represents that following the reorganization the llc will continue to operate on a cooperative basis ruling requested coop requests a ruling that upon the reorganization the llc will be treated as a cooperative under subchapter_t of the code sec_1381 of the code and sec_1_1381-1 of the regulations promulgated thereunder provide that subchapter_t applies to any corporation operating_on_a_cooperative_basis and allocating amounts to patrons on the basis of the business done with or for such patrons emphasis added sec_301_7701-2 of the regulations provides that an llc that elects to be taxed as an association is treated as a corporation for all federal tax purposes revproc_2000_3 sec_3 states that the service will not rule whether a transaction constitutes a reorganization under code sec_368 but that policy extends only to the consequences of qualification under that section such as non-recognition of gain_or_loss and carryover of basis accordingly that rule should not prevent the service from issuing the requested ruling that the llc will be treated as a cooperative under subchapter_t of the code following the reorganization as noted above the taxpayer has represented that to the best of its knowledge the transaction will qualify as a reorganization within the meaning of sec_368 subchapter_t applies to any corporation operating_on_a_cooperative_basis and allocating amounts to patrons on the basis of the business done with or for such patrons coop currently conducts business as a cooperative and allocates patronage_dividends to patrons on the basis of the patronage based business done with or for such patrons accordingly coop is taxed on a cooperative basis pursuant to subchapter_t of the code following the reorganization the llc will continue operating as a cooperative with respect to business done on a cooperative basis and will allocate patronage_dividends to patrons on the basis of the patronage business done with or for such patrons the llc will elect to be taxed as an association effective as of the date of its organizations and under sec_301_7701-2 of the regulations will be treated as a corporation for all federal tax purposes hence the llc should be taxed on a cooperative basis pursuant to subchapter_t of the code accordingly we rule that upon the reorganization the llc will be treated as a cooperative under subchapter_t of the code provided it continues to operate on a cooperative basis this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney submitted with the ruling_request a copy of this letter is being sent to coop and a second representative sincerely yours walter h woo senior technician reviewer branch office of associate chief_counsel passthroughs special industries


t c summary opinion united_states tax_court joanna klubo-gwiezdzinska petitioner v commissioner of internal revenue respondent docket no 16501-15s filed date joanna klubo-gwiezdzinska pro_se rachel l rollins for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in and accuracy-related_penalties on petitioner’s federal_income_tax for and year deficiency sec_6662 dollar_figure dollar_figure big_number big_number penalty after concessions by respondent the issue for decision is whether payments that petitioner received during and from washington hospital center are exempt from federal_income_tax under the convention for the avoidance of double_taxation and the prevention of fiscal evasion with unless otherwise indicated all subsequent section references are to the internal_revenue_code as amended and in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure all monetary amounts have been rounded to the nearest dollar respondent concedes that a dollar_figure prize awarded to petitioner from the endocrine society in is not taxable and petitioner is not liable for the accuracy-related_penalty for either of the years in issue respondent contends that he erred in the notice_of_deficiency by allowing petitioner an exemption of dollar_figure for each of the years in issue under article b iv of the u s -poland income_tax treaty referred to infra in the text as the convention however respondent does not seek to undo that allowance by asserting increased deficiencies respect to taxes on income pol -u s date u s t entered into force date convention background some of the facts have been stipulated and they are so found the court incorporates by reference the parties’ stipulation of facts and the accompanying exhibits petitioner resided in the commonwealth of virginia at the time that the petition was filed with the court petitioner was born in poland and is a polish citizen she is highly educated having earned both a medical degree and a ph d degree in poland for most of petitioner’s medical and professional career her focus has been on thyroid cancer petitioner is well respected in her field of expertise and she has often been recognized for her work at all relevant times petitioner was and continues to be a member of the endocrine society an international_organization whose membership consists principally of medical doctors scientists researchers and educators in the field of endocrinology and metabolism among other things the endocrine society through the international endocrine scholars program helps to connect the world’s brightest young endocrinologists with unparalleled research positions at top institutions outside of their home countries it was through this scholars program that petitioner met leonard wartofsky chairman of the department of medicine at medstar washington hospital center in washington d c washington hospital center corp which does business as medstar washington hospital center washington hospital center is a nonprofit u s_corporation that is exempt from income_tax under sec_501 washington hospital center has some hospital bed sec_4 and is dedicated to delivering exceptional patient first health care it is the busiest and largest hospital in washington d c and the surrounding area with approximately big_number inpatient and outpatient visits per year by individuals from throughout the mid- atlantic area and serve s as referral center and the central hub for the region’s most advanced acute medical_care with n ationally respected programs in cancer diabetes and endocrinology among other specialized areas see http www endocrine org awards student-and-early-career-awards international-endocrine-scholars-program see https www medstarwashington org our-hospital see https www medstarwashington org our-hospital mission- vision-and-values see https www medstarwashington org our-hospital in date dr wartofsky wrote a letter to petitioner offering her a position as a research fellow at washington hospital center the letter stated it is my great pleasure to inform you that you have been awarded a position as a research fellow in endocrinology in the division of endocrinology and metabolism of the department of medicine washington hospital center in washington d c the training program appointment is effective date for a period of one year ending on date with a n opportunity for renewal for both an additional second and third year your focus of activity will be in the area of translational thyroid cancer research and the stipend will be for dollar_figure plus benefits this will be a fully salaried and supported position you will be eligible for appointment to the faculty of the georgetown university school of medicine at the rank of assistant professor of medicine petitioner accepted the position with washington hospital center and on date she entered the united_states on a j-1 visa under the exchange visitor program on date petitioner entered into a house staff agreement hsa with washington hospital center the hsa provided in relevant part in consideration of the mutual promises contained in this agreement and intending to be legally bound the hospital and the house staff member ie petitioner agree as follows the exchange visitor j non-immigrant visa category is for individuals approved to participate in work- and study-based exchange visitor programs https j1visa state gov basics the j-1 visa is for the exchange visitor the j-2 visa is for the spouse and dependents of the j-1 visa holder term this agreement shall be binding upon the parties beginning and ending salary and benefits during the term of this agreement the house staff member shall earn a salary of dollar_figure payments shall be made in equal installments on a biweekly basis the hospital further agrees to provide the house staff member with the following benefits professional general liability coverage for acts within the scope of the program regardless of when a claim is filed paid time off including vacation sick or personal time health insurance disability insurance family or medical leave of absence other leaves of absence meals laundry call quarter sec_5 counseling impaired physician other support services obligations of the house staff member house staff member agrees to comply with the general and specific obligations responsibilities and requirements of the hospital and the program including without limitation at the time of expiration or in the event of termination of this agreement house staff member shall return all hospital property complete all medical records and settle all professional and financial obligations with the hospital termination this agreement may be terminated by the parties as follows by the hospital effective immediately upon delivery of written notice by the program director to the house staff member for any legitimate reason which may include without limitation failure to maintain satisfactory academic progress workplace misconduct unprofessional behavior endangerment of the health or safety of others including co-workers patients or other parties petitioner successfully renewed her contract with washington hospital center for two additional one-year periods at a salary of dollar_figure under the second contract and at a salary of dollar_figure under the third contract as a research fellow at washington hospital center petitioner worked at least hours a week during the years in issue researching thyroid cancer petitioner also gave presentations on her research and her findings appeared in various medical publications and journals washington hospital center sent petitioner forms w-2 wage and tax statement reporting that she received wages tips other compensation of dollar_figure in and dollar_figure in on both the and forms w-2 washington hospital center checked the box indicating that petitioner was covered by a retirement_plan on date petitioner filed a form 1040nr-ez u s income_tax return for certain nonresident_aliens with no dependents for on page of the form 1040nr-ez petitioner disclosed that she was a citizen and resident of poland also on page petitioner claimed that her income of dollar_figure was exempt from federal_income_tax under article students and trainees of the convention petitioner timely filed a form 1040nr-ez for on page of the form 1040nr-ez petitioner again disclosed that she was a citizen and resident of poland also as before on page petitioner claimed that her income of dollar_figure was exempt from federal_income_tax under article of the convention on its publicly available form_990 return of organization exempt from income_tax for its fiscal_year ended date washington hospital center is not a school described in sec_170 but rather a hospital described in sec_170 on that form washington hospital center reported total revenue of dollar_figure5 billion of which dollar_figure9 billion was program service revenue with the latter amount consisting of the sum of patient service revenue of dollar_figure2 billion and pharmacy of dollar_figure million ie dollar_figure7 billion other revenue sources included but were not limited to nongovernmental contributions gifts and grants of dollar_figure million insofar as expenses were concerned washington hospital center reported on its form_990 that it employed big_number individuals in and paid compensation and benefits of dollar_figure million in contrast washington hospital center reported that it gave no monetary ie zero grants or other assistance to individuals in date respondent sent petitioner a notice_of_deficiency as relevant respondent determined that petitioner received taxable_income of dollar_figure and dollar_figure for and respectively that was not exempt from federal income_taxation in response to the notice_of_deficiency petitioner filed a timely petition for redetermination with the court alleging that her income from washington hospital center was exempt from federal income_taxation pursuant to article of the convention at trial and in her posttrial brief petitioner alleges as an washington hospital center’s form_990 for its fiscal_year covers only six months of each of the two calendar years at issue in the instant case however the reporting on washington hospital center’s forms for its fiscal_year sec_2010 and sec_2012 is comparable to the reporting on its form_990 for its fiscal_year in particular washington hospital center reported on all three forms that it gave no monetary grants or other assistance to individuals in the notice_of_deficiency respondent allowed an exemption of dollar_figure for each of the two years under article of the convention however as previously noted see supra note respondent contends that he erred in that regard but has not asserted an increased deficiency for either year alternative ground that the income was also exempt pursuant to article teachers of the convention discussion in general the commissioner’s determination in a notice_of_deficiency is presumed to be correct and the taxpayer bears the burden to show otherwise rule a 503_us_79 290_us_111 although the burden may shift to the commissioner under sec_7491 if certain requirements are satisfied petitioner has not alleged that the section applies and the record does not support its applicability i governing statutory framework under the general_rule of sec_871 a nonresident_alien_individual such as petitioner who is engaged in a trade_or_business in the united_states is subject_to u s income_tax on the individual’s taxable_income effectively connected with the conduct of that trade_or_business ordinarily an individual who performs personal services within the united_states at any time during the taxable_year conducts a trade_or_business_within_the_united_states sec_864 consequently a nonresident_alien who receives compensation_for the performance of personal services in the united_states has income effectively connected with the conduct_of_a_trade_or_business in the united_states and therefore has gross_income under the internal_revenue_code see sec_864 a a sec_1_864-4 income_tax regs see also sec_61 however under sec_894 the internal_revenue_code is applied to any taxpayer with due regard to any treaty obligation of the united_states that applies to that taxpayer an applicable treaty obligation can therefore alter an individual’s income_tax_liability under the internal_revenue_code ii the united states-poland income_tax treaty as previously stated the united_states is party to an income_tax treaty with poland ie the convention see supra pp petitioner contends that the payments that she received in and from washington hospital center are not taxable_income to her pursuant to either article or article of the convention respondent contends that petitioner fails to qualify for the benefits under either of those articles as discussed below the court agrees with respondent the interpretation of treaty provisions must begin with the wording of the treaty n w life assurance co of can v commissioner 107_tc_363 the role of the judiciary in interpreting treaty provisions is to decide their underlying intent or purpose 120_tc_430 the court therefore begins its analysis by examining the convention itself article is considered first because it has been petitioner’s principal focus throughout this proceeding a article the pertinent part of article students and trainees provides as follows a an individual who is a resident of one of the contracting states at the time he becomes temporarily present in the other contracting state and who is temporarily present in that other contracting state for the primary purpose of -- iii studying or doing research as a recipient of a grant allowance or award from a governmental religious charitable scientific literary or educational_organization shall be exempt from tax by that other contracting state with respect to amounts described in subparagraph b for a period not exceeding taxable years from the date of his arrival in that other contracting state b the amounts referred to in subparagraph a are-- ii the grant allowance or award iv income from personal services performed in that other contracting state in an amount not in excess of big_number united_states dollars for any taxable_year respondent does not dispute that petitioner was a resident of poland at the time that she became temporarily present in the united_states that petitioner became temporarily present in the united_states for the primary purpose of conducting research for washington hospital center and that washington hospital center is a charitable_organization within the meaning of sec_501 rather respondent contends that the payments petitioner received did not constitute a grant allowance or award within the meaning of article a iii and therefore are not exempt from taxation by the united_states under that article instead respondent contends that those payments constitute compensation from employment that is taxable by the united_states pursuant to article and the governing statutory framework discussed in part i in the discussion of this summary opinion see supra pp both parties cite sarkisov v united_states a f t r 2d ria u s tax cas cch para big_number fed cl to support their article dependent_personal_services provides in pertinent part as follows salaries wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only by that contracting state unless the employment is exercised in the other contracting state if the employment is so exercised such remuneration as is derived therefrom may be taxed by the other contracting state respective positions in that case the court of federal claims had to decide whether mr sarkisov a russian citizen was doing research as a recipient of a grant according to the meaning and application of that phrase as it appeared in the u s -russia tax_treaty the pertinent facts were as follows mr sarkisov entered the united_states from russia on a temporary basis on a j-1 visa to conduct research in physics for the university of nevada the university’s funding came from several grants mr sarkisov was not the direct recipient of any of the grants and none of them specified that the funding depended on mr sarkisov’s employment the university of nevada paid mr sarkisov a salary and withheld federal_income_tax mr sarkisov reported the salary payments but ultimately commenced a refund action against the united_states in the court of federal claims contending that his remuneration was exempt under the treaty as grants for research in granting summary_judgment in favor of the united_states the court of federal claims held that mr sarkisov’s salary from the university of nevada was not exempt from federal_income_tax as a grant in so holding the court commented that the record was replete with references to mr sarkisov as an employee of the university and that the record contained no references to him as the recipient of a grant id pincite u s tax cas cch para big_number at big_number in the instant case the hsa that petitioner entered into with washington hospital center provided that she would earn a salary and receive a variety of benefits such as paid time off including vacation sick or personal time liability insurance health and disability insurance and family or medical leave of absence the hsa further provided that petitioner would receive her salary in equal installments on a biweekly basis receiving remuneration in the form of a salary and benefits such as these is generally indicative of an employment relationship see weber v commissioner 103_tc_378 aff’d 60_f3d_1104 4th cir in addition the hsa provided that washington hospital center could terminate petitioner for any legitimate reason which may include without limitation failure to maintain satisfactory academic progress workplace misconduct unprofessional behavior or endangerment of the health or safety of others the right to discharge a worker is also indicative of an employer- employee relationship see rodriguez v commissioner tcmemo_2012_286 at citing weber v commissioner t c pincite in addition washington hospital center apparently regarded petitioner as an employee as it issued her a form_w-2 for each of the years in issue reporting her remuneration as compensation also notable is the fact that each form_w-2 indicated that petitioner was an active_participant in a retirement_plan sponsored by washington hospital center participating in a retirement_plan is a further indicium of an employment relationship id at moreover washington hospital center’s forms reported no monetary grants or other assistance to individuals for its fiscal years covering the calendar years at issue in the instant case petitioner in contending that she received a grant and not compensation_for her services claims that certain donations to washington hospital center were specifically earmarked for her salary however the record would not support such a finding rather although petitioner’s research may have helped to motivate the generosity of certain donors the record shows only that donations were made to washington hospital center for cancer research and not that those donations were for petitioner’s personal benefit or even that they were contingent on petitioner’s participation in such research petitioner also contends that as a research fellow she was not providing services to washington hospital center instead petitioner contends that her position allowed her to gain scientific expertise the court does not doubt that petitioner’s professional development was meaningfully advanced by her work at washington hospital center and that such work enhanced her career however the fact that an individual may gain experience and greater knowledge through work does not mean that the individual is not also providing a service to the organization for which the individual works or that compensation paid is not a quid pro quo for the service see 71_tc_477 51_tc_918 given that washington hospital center has n ationally respected programs in cancer diabetes and endocrinology it would be hard to conclude that petitioner was not providing services to washington hospital center or that her research activities were not of importance to it in summary the court holds that petitioner has failed to prove that she was the recipient of a grant allowance or award under article a iii of the convention see rule a accordingly the remuneration that petitioner received during and from washington hospital is not exempt from taxation by the united_states for those years under that article b article the pertinent part of article teachers provides as follows where a resident of one of the contracting states is invited by the government of the other contracting state a political_subdivision or a local authority thereof or by a university or other recognized educational_institution in that other contracting state to come to that other contracting state for a period not expected to exceed years for the purpose of teaching or engaging in research or both at a university or other recognized educational_institution and such resident comes to that other contracting state primarily for such purpose his income from personal services for teaching or research at such university or educational_institution shall be exempt from tax by that other contracting state for a period not exceeding years from the date of his arrival in that other contracting state the phrase recognized educational_institution is not defined in the convention in the instance of an undefined term paragraph of article general definitions of the convention provides in relevant part any term used in this convention and not defined in this convention shall unless the context otherwise requires have the meaning which it has under the laws of the contracting state whose tax is being determined both parties cite sec_170 in an effort to define the term recognized educational_institution sec_170 defines educational_organization as an organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on under sec_1_170a-9 income_tax regs an educational_organization does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities emphasis added petitioner contends that the payments she received for the years in issue from washington hospital center are exempt from u s taxation under article because washington hospital center is a teaching hospital and therefore a recognized educational_institution although respondent might very well concede that washington hospital center has medical education programs and styles itself an academic medical center see https medstarwashington org our- hospital respondent nevertheless contends that petitioner fails to qualify for benefits under article because she did not establish that washington hospital center is a recognized educational_institution the court agrees with respondent on the basis of the record in this case there is insufficient evidence to conclude that washington hospital center is a recognized educational_institution indeed the available evidence points in the other direction ie that patient care is not merely incidental to the educational activities see sec_1_170a-9 income_tax regs rather as documented by washington hospital center’s form_990 and its mission statement patient care is the predominant purpose and activity of washington hospital center see proskey v commissioner t c pincite a university hospital was not operated primarily as an institution for teaching and research in conjunction with the university’s medical school but rather was primarily engaged in the care and treatment of patients bayley v commissioner 35_tc_288 a teaching hospital did not qualify as an educational_institution notable also is the fact that on its forms for all relevant years washington hospital center expressly stated that it is not a school described in sec_170 accordingly the court holds that payments made to petitioner by washington hospital center in and do not qualify for exemption from federal income_taxation under article of the convention see rule a conclusion finally the court has considered all of the arguments advanced by petitioner and to the extent not expressly addressed above concludes that those arguments are insufficient to support a decision in her favor to reflect the court’s disposition of the disputed issue as well as respondent’s concessions see supra note decision will be entered under rule


internal_revenue_service number release date index number ------------------------- ------------------------ ---------------- ------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-112156-08 date september x a b c legend ------------------------- ---------------------------------------------- ------------------------ ------------------------- ------------------------------ --------------------- country --------- --------------------- --------------------- d1 d2 dear ---- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_301_9100-3 of the procedure and administration regulations facts x was formed under the laws of country x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x was a wholly-owned subsidiary of a a country corporation b a country corporation acquired a through a subsidiary entity c on d1 upon b’s acquisition of a it was plr-112156-08 intended that x would be treated as a disregarded_entity effective d2 however due to inadvertence a form_8832 entity classification election to treat x as a disregarded_entity effective d2 was not timely filed law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an entity separate from its owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed if an election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections plr-112156-08 sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301 and sec_301_9100-3 as a result x is granted an extension of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center to elect to be classified as a disregarded_entity effective d2 a copy of this letter should be attached to the form_8832 except as specifically set forth above we express no opinion concerning the federal tax consequences of the above described facts under any other provision of the internal_revenue_code in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service p o box cincinnati oh number release date department of the treasury employer_identification_number contact person - id number date date contact telephone number legend x location y location z number dear uil you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your mission is to support talented individuals with great potential and high aspirations in the arts and sciences you plan to launch a social investment program as an incubator of ideas and an accelerator of social impact ventures you will provide grants for social innovation as part of an eight month program months residency months non residency to propel and rapidly accelerate small but successful social enterprises by combining expert mentorship business support and social investment you will connect talented and high-aspiring young individuals who are leading thinkers and doers and who are determined to make social change happen you will award fellowships for the purpose of educating individuals and improving their entrepreneurial and leadership capabilities and skills your program helps accomplish your educational_purposes and furthers your mission by promoting social ventures that have potential to create lasting positive change for the world you will provide grants in the form of complimentary accommodation and office space at x in y for the first four months of the program you will also provide strategic advisory legal pr training and executive coaching for the duration of the program additionally you will help social ventures secure the additional financing they need to grow through intervention and support early in their formation this may be through social investment government contracts or grant funding you will publicize your program through your website newsletters social media emails and through the network of advisory committee members your board_of directors other existing networks and partner organizations partner organizations will include other nonprofit_organizations and governmental entities eligibility criteria to be selected as a fellow for your program are as follows applicant must be at least twenty one years of age or twenty one by the beginning date of entering the program venture must be the original idea of the applicant or the applicant's team venture must be in start-up phase to be considered start-up the venture may not have been organized or may have been in operation for up to but no longer than to two years venture must be independent and autonomous applicant must make a full-time commitment minimum forty hours per week to the organization's development for the duration of the eight month fellowship partnerships ventures co-founded and led by two individuals may apply both partners must meet all eligibility requirements and make a full-time commitment of no fewer than forty hours per week to the development of the venture applicant must have legal status to work in the united_states if applicant is authorized to work in the united_states but this status is granted through a current employer and applicant is only authorized to work for that employer applicant is not eligible to apply for the program applicant must complete the online application form and submit it with all required documents applicant must be able to demonstrate evidence of good health physical examination you will select fellowship recipients based upon specific subject matter focus as determined each year by you in collaboration with an advisory committee potential subject matter may include healthcare innovation in government education and energy fellows will be young visionaries with deep domain expertise in fields relating to the specific 21st century challenges addressed by their early-stage social ventures which may become for-profit businesses or non-profit organizations in addition to the subject matter specific criteria the committee will concentrate its selection on the capabilities of the founder the scalability of the model and the potential impact of the organization on the world your project manager and his her designee will conduct an initial screening of each applicant which will include a review of the application package for completeness verifying credentials and contacting any person who has provided a letter of recommendation for the application the project manager will then notify each committee letter catalog number 58222y member that the applications are available for review and either provide each member with electronic access to the applications or transmit the applications to the members by regular express or electronic mail committee members will be subject matter experts and stakeholders from government academia non-profit and for-profit organizations with a strong interest and involvement with social impact ventures or programs a pitch day will then be scheduled where applicants will pitch their ideas and answer questions from the committee immediately following the pitch day the committee will meet to select the awardee and transmit the decision to your project manager via email your leadership and board will be given ten business days to review and confirm the decision of the committee if your leadership and board do not object to the selection of any candidate within the ten- day period the committee's decision shall be final if there is an objection to the selection of any candidate within the ten-day period the committee your leadership and board shall cooperate in resolving any disagreement regarding the selection of an applicant if the disagreement is not resolved within fifteen business days of the end of the ten-day period the decision of the committee shall be final your board_of directors upon the advice of the advisory committee will determine the number of fellowships to be provided each year fellowship grants will be awarded on an objective and nondiscriminatory basis and recipients will be selected from a group that is sufficiently broad you will not award more than z fellowships each year your fellowship grants will not be renewable to maintain the fellowship the fellows must make a full-time commitment minimum forty hours per week to the organization's development for the duration of the eight month fellowship your staff and board_of directors have the responsibility to keep permanent records of the meetings and actions of the advisory committee account for all funds and disburse the funds on your behalf your staff and board_of directors will also investigate any diversions of funds from their intended purpose and take all reasonable and appropriate steps to recover any diverted funds you represent you will maintain all records relating to individual grants including information obtained to evaluate grantees you will identify whether a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis letter catalog number 58222y the irs approves in advance the procedure for awarding the grant the grant is - a scholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or - a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or - to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary letter catalog number 58222y please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y