internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 6--plr-152906-01 date date taxpayer plant d1 d2 d3 d4 d5 dear this letter responds to your request dated d1 submitted on behalf of taxpayer requesting under sec_301_9100-3 of the procedure and administration regulations an extension of time to file a request for a revised schedule of ruling amounts for plant under sec_1_468a-3 of the income_tax regulations for the period beginning d2 and ending d3 taxpayer was required to file the request for a revised schedule of ruling amounts for plant under sec_1_468a-3 on or before d4 taxpayer did not file the request until d5 taxpayer has submitted a new request for a schedule of ruling amounts for the period beginning d2 and ending d3 at the same time that it submitted this request for an extension of time 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 sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in plr-152906-01 the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 based solely on the facts and the representations made the requirements of sec_301_9100-1 and sec_301_9100-3 have been met consequently taxpayer’s request dated d1 for a revised schedule of ruling amounts for plant under sec_1_468a-3 for the period beginning d2 and ending d3 will be treated as timely filed except as specifically ruled upon above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent we are sending a copy of this letter to the industry director natural_resources lm nr in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your representative sincerely yours paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division release date date date uniform issue list dollar_figure dollar_figure dollar_figure legend o i d i m i - i a i x i k i s z i o i v i d m o i b ' e f dear we have considered your ruling_request dated date in which you requested certain rulings related to a proposed transaction in the manner and for the purposes described below statement of facts x was established in aa and is exempt from federal_income_tax under sec_501 of the internal_revenue_code and is a private_foundation within the meaning of sec_509 of the code following the deaths of a and his wife the trustees of x were c an employee of a and d a relative of a on cc c and d signed an m to move the situs of the x for administration and for all other purposes from the state of j to the state of k on dd y was incorporated by c and d as a k nonprofit corporation on ee the y received a determination_letter from the internal_revenue_service that it is exempt from federal income taxes under sec_501 of the code and is a private_foundation within the meaning of sec_509 on ff c as managing trustee of x and as a director of the y and d as a director of y executed an n which authorized the x to transfer all of its assets to y prior to the transfer x obtained a ruling from the internal_revenue_service that the transfer met the requirements of b of the code on qq the y accepted receipt of all of the assets of the x as c and d resigned from their roles as trustees the j court appointed e as trustee of the x in order to protect the trust property for the benefit and interest of the beneficiaries the j court instructed e to undertake to secure recognition by the service of the x’s status as an organization described in sec_901 the internal_revenue_service confirmed that the x is an organization exempt from federal_income_tax pursuant to sec_501 and is a private_foundation pursuant to sec_509 subsequent litigation involving x and y and conflicting judicial orders kept the assets intact awaiting an ultimate decision by the courts or the parties as to the proper persons to own and control the use of the assets the parties to the litigation including the attorneys general of j and k have entered into a settlement agreement and the j and k courts have approved the settlement agreement as a result of the judicially-approved settlement agreement the assets will be allocated between x and y assets valued at a the settlement allocation will be under the control of x the balance of the assets will be under the control of y judicial approval was granted for a partial allocation of b to x subject_to return if the rulings requested are not granted the remaining allocation of c to the x will take place upon the issuance by the internal_revenue_service of favorable rulings requested by x and y x and y have represented that the distribution will not consist of ownership interests in any s they have further represented that there is no limitation or material restrictions on the use of the distributions by x except for certain charitable pledges within the purposes of x which have been assumed by x as part of the settlement agreement rulings requested you have requested the following rulings the distribution of a from y to x will not jeopardize the tax-exempt status of either the x or y under sec_501 of the internal_revenue_code the distribution of a is not a transfer of assets within the meaning of sec_507 of the code and the distribution of a from y to x will not result in the imposition of excise_taxes under sec_4941 sec_4942 sec_4943 sec_4944 or sec_4945 of the code law sec_501 of the internal_revenue_code provides in part for the exemption from federal_income_tax for organizations organized and operated exclusively for religious charitable scientific and educational_purposes sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more exempt purposes specified in sec_501 revrul_67_149 1967_1_cb_133 provides that an organization that makes distributions to organizations described in sec_501 c of the code is furthering exclusively exempt purposes within the meaning of sec_501 sec_509 of the code provides that the term private_foundation includes organizations described in sec_501 other than organizations described in sec_509 or sec_507 of the code provides that the status of any organization as a private_foundation shall be terminated only if it notifies the secretary of its intent to accomplish a termination or there have been either willful repeated acts or failures to act or a willful flagrant act or failure to act giving rise to chapter liability for tax and the secretary notifies such organization that it is liable for the tax imposed by subsection c and either such organization pays the tax or pays any portion not abated under subsection g sec_507 of the code provides that in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_1_507-1 of the foundation and similar excise_taxes regulations provides that if a private_foundation transfers all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 of the code such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_4941 sec_4942 sec_4943 sec_4944 and sec_4945 of the code apply excise_taxes to certain transactions involving private_foundations including taxes on self-dealing failure to distribute income excess_business_holdings jeopardizing investments and taxable_expenditures rationale since the distribution of assets from y a sec_501 organization to x as provided by revrul_67_149 supra a distribution from one charitable_organization to another is an activity that furthers exempt purposes within the meaning of sec_501 of the code another sec_501 organization is without restriction that could limit the ability of x to accomplish its purposes and is undertaken as part of a judicially-approved settlement for which the attorneys general of both states are in agreement the distribution from y to x is consistent with the charitable purposes for which these organizations were formed and will not adversely affect their tax-exempt status the judicially-approved settlement for which the attorneys general of both states are in agreement provides effectively that in exchange for x and y ceding certain of their interest in the assets currently held by y there will be a distribution of a to x this distribution from y to x is more in the nature of a restoration of funds to x rather than a transfer of funds from one private_foundation to another foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization for purposes of sec_507 of the code having concluded that the distribution will not adversely affect the tax-exempt status of x or y and that it does not constitute a transfer of assets under sec_507 we can find no basis to apply the excise_tax provisions under sec_4941 sec_4942 sec_4943 sec_4944 or sec_4945 to the distribution undertaken pursuant to the judicially-approved settlement holdings accordingly based on the information submitted we rule that the distribution of a from y to x pursuant to the settlement agreement is consistent with the charitable purposes for which these organizations were formed and it will not adversely affect the tax-exempt status of x or y the distributions are not a transfer of assets for which transferee_liability applies under sec_507 of the code the distribution of a from y to x will not result in the imposition of excise_taxes under sec_4941 sec_4942 sec_4943 sec_4944 or sec_4945 of the code we express no opinion as to whether any other transactions or activities would jeopardize your tax-exempt status or result in the imposition of excise_taxes applicable to private_foundations this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely theodore r lieber acting manager exempt_organizations technical group enclosure notice


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date release number release date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number 47632s if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number vil tax_exempt_and_government_entities_division date date legend b board member e name of supported_organization n name of llc o location p city q date r name of llc s date b dollars dollar_figure amount c dollars dollar_figure amount d dollars dollar_figure amount e dollars dollar_figure amount f dollars dollar_figure amount g dollars dollar_figureamount h dollars dollar_figure amount j dollars dollar_figure amount k dollars dollar_figure amount m dollars dollar_figure amount n dollars dollar_figure amount o dollars dollar_figure amount p dollars dollar_figure amount q dollars dollar_figure amount dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below letter cg issues do you qualify for exemption under sec_501 of the code no for the reasons stated below if you are exempt are you a supporting_organization described in sec_509 no for the reasons stated below facts you submitted form_1023 application_for exemption under sec_501 of the internal_revenue_code on s information submitted with your application indicates that you were incorporated in o on q you are requesting tax exemption as a type_iii_functionally_integrated_supporting_organization described in sec_509 of the code schedule d of your application states you will be operated in connection with one or more supported organizations described in sec_509 or sec_509 and lists the supported_organization as e a public charter school article of your articles of incorporation state in pertinent part the corporation is formed exclusively for charitable scientific educational and literary purposes within the meaning of sec_501 of the internal_revenue_code_of_1986 as the same may be amended or modified or replaced by any future united_states internal revenue law the code including without limitation distributing funds to organizations that qualify as exempt_organizations under sec_501 of the code or the corresponding section of any future federal tax code the specific objectives of the corporation shall be to support e provided e is a governmental entity or an organization described in sec_501 of the code by but not in limitation of the following helping e secure sources of financing including funding from new market tax_credits nmtc financing fundraising and holding endowments on behalf of e making or holding loans to for-profit landlords that charges below market lease rates to e supporting e in any other allowable manner article also stated the corporation is intended to be a type_iii_supporting_organization operated for the benefit of but not functionally integrated with e within the meaning of sec_509 and sec_509 of the code and the treasury regulations thereunder in connection with its status as a type_iii_supporting_organization that is not functionally integrated with e the corporation intends to distribute annually to and for_the_use_of e an amount equal to at letter cg least five percent of the aggregate fair_market_value of its assets to the extent such distribution is required by the code we requested that you amend the purpose clause of your articles of incorporation to state that you were formed exclusively for e you stated that you are in the process of amending the purpose clause and a certified copy will be forwarded under a separate cover to date the amended articles of incorporation have not been received article of your articles of incorporation provided the number of directors constituting the initial board_of directors was three and they will serve as the directors until the first annual meeting or until their successors are elected the names and addresses of the initial board members were specified in the articles of incorporation your application lists four board members the three initial board members and b article of your bylaws state the corporation’s primary purpose is to support e and any other organizations as may be supported by the corporation from time to time collectively the ‘supported organizations’ pursuant to the corporation’s articles of incorporation article sec_1 of your bylaws state in pertinent part the number of directors shall be three until increased pursuant to the following provisions but shail never be less than three e shall have the sole exclusive authority and discretion to appoint remove and reappoint one person as one of the directors of the corporation's board_of directors b shall serve as the initial e director although not appointed by e and shall be subject_to confirmation or replacement when e has its first opportunity to appoint the initial e appointed director the directors other than the e appointed director shall be elected at the annual meeting of the board_of directors and each director elected shall hold office until the next succeeding annual meeting or until his or her successor is elected and shall qualify you amended your bylaws to state your primary purpose is to exclusively support e and e has the sole exclusive authority and discretion to appoint remove and reappoint one person as one of the directors of the corporation’s board_of directors signed by any of the board members however the amendment was not in addition to the purposes described in article of the articles of incorporation you will also assist e in securing new market tax_credit financing to help e refinance the acquisition construction and equipping of its new school located in p this will include serving as a nonmember manager of a joint_venture between e and a so-called new market tax_credit community development entity you stated new market tax_credits can only be claimed by for profit entities that invest in qualified community development entities cde’s and then only if the cde‘s make investments and loans to eligible qualified_low-income_community businesses qalicb's you stated you informed e by letter that you incorporated in o and are established as a supporting_organization to e you offered to act as manager of n letter cg you entered into an operating_agreement as a non-member manager with e as the regular member and r as the investor member to form n you are the non-member manager of n which is a limited_liability_company treated as a partnership between e and a for profit investor lender e is the regular member of n and has a interest member and hold sec_34 interest n receives both an equity_investment and loan from a cde at terms better than standard in the market sec_1 of the operating_agreement provides that n will manage qualified low income community investment loans qlici lease the qalicb premise and manage the financing of n no provision in the operating_agreement requires n to make any charitable_contribution to you e or any other charitable_organization r is the investor you initially stated you will assist e by fundraising and holding endowments on behalf of e making or holding loans to landlords that charge below market lease rate to e and supporting e in any other allowable manner you later dropped the proposed activity of making or holding loans to landlords that charge below market lease rates to e e is the maker of a promissory note for b dollars and the payee is n ris the maker of a promissory note for c dollars and the payee is n you initially stated you will receive d dollars in edollars in notes and loans you will receive you stated that the figures are in error in accrued interest when we asked you to describe the andfdollarsin as the manager of n you are formed to benefit both e and r the initial capital_contribution by e was g dollars and the initial capital_contribution by r was h dollars your operating_agreement does not specify the type of assets contributed by each member schedule d of the operating_agreement shows projected cash distributions of p dollars for each of the first six years and j dollars in year seven for r e is to receive a cash distribution of k dollars in year seven there were no contributions shown for the last three years sec_4 of the operating_agreement describes the cash allocations and distributions the first distribution is to be made to r r is also the first to receive distributions of capital proceeds article sec_5a of the operating_agreement states that the manager has the right whether or not directed by the investor member to cause n to make a charitable_contribution to an operating business foundation or another nonprofit of any company property including cash or a portion of any interest_in_real_property owned by n however one of the stipulations is that the cash_flow after all charitable_contributions of cash is at least sufficient to pay expenses and make distributions required under sec_4 of the agreement sec_5 of the operating_agreement states the manager may engage in or possess interest in other business ventures of every kind and description for its own account including without limitation serving as general_partner or managing member of other partnerships or limited_liability companies respectively that own either directly or through interest in other partnerships or limited_liability companies the operating_agreement provided in pertinent part the purpose of n is to a negotiate and enter into the qlicb loan b lease the qalicb premises to operating business pursuant to letter cg the site lease c sublease the qalicb premises to operating business pursuant to the facility lease d pay transaction cost e deposit the qalicb working_capital cash reserves in qalicb working_capital cash reserve investment contract f take any and all other actions necessary or appropriate to further the purposes of the n within the scope of this agreement and g pursue the above purposes in a manner consistent with the tax exempt status of you as manager and e under code sec_501 in the event of a conflict between you as manager and e's charitable purpose and profit_motive of n the charitable purpose shall take precedence the foregoing notwithstanding although it is contemplated that n shall make certain charitable_contributions neither n you as manager nor any member is required to make any charitable_contribution or a pledge of any charitable_contribution to the you e or any charitable_organization n will own real_estate that is leased by n to e and used as a traditional school building for its academic programs you will carry out all of the day-to-day management duties as manager of n and if certain conditions are met you are authorized to cause n to make donations of net operating income to you to support additional academic programs your initial financial data showed q dollars in revenue for the first three years this included m dollars in accrued interest on loans notes receivable and n dollars in guaranty fee income the total expenses for that same period were o dollars in professional fees submitted revised budgets showing n dollars in gross_receipts for the only expenses were for professional fees equal to the gross_receipts your financial data did not show any contributions paid to e you subsequently indicated you do not know how much revenue you will receive because you are a start_up entity however you state the annual income for e is approximately dollar_figure million dollars you later and your initial schedule d of your application indicated that you will conduct activities that would otherwise be carried out by e this contradicts with your statement requesting to be a non- functionally integrated supporting_organization when clarified you submitted a revised schedule d indicating you will not conduct activities that would otherwise be carried out by e and you will not distribute of your annual income to e but your narrative description states that you will give of your income to e as previously stated your financial data reflects no contributions paid to e issue - sec_501 law sec_501 of the code provides in part for the exemption from federal_income_tax organizations organized and operated exclusively for charitable religious or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations states in order to qualify under sec_501 of the code an organization must be both organized and operated exclusively for one or more letter cg exempt purposes if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 of the regulations states the term exempt_purpose or purposes means any purpose or purposes specified in sec_501 of the code sec_1_501_c_3_-1 of the regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose it engages primarily in activities in revrul_58_547 1958-2c b the service rules that a lease to which the parties are both exempt from tax under sec_501 of the code and which constitutes a business_lease within the meaning of sec_514 of the code will not be considered substantially related to the charitable educational etc purposes of the lessor solely because the lessor is likewise an exempt_organization section dollar_figure of revproc_2010_9 reads in part as follows exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere restatement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that it qualifies for exemption pursuant to the section of the internal_revenue_code under which exemption is claimed the service will generally issue a proposed adverse determination_letter or ruling in 326_us_279 the supreme court stated that the presence of a single nonexempt purpose if substantial in nature will preclude exemption under sec_501 of the code regardless of the number of importance of statutorily exempt purposes thus the operational standard prohibiting a substantial nonexempt purpose is broad enough to include inurement private benefit and operations that further nonprofit goals outside the scope of sec_501 in the schoger foundation v commissioner of internal_revenue_service 76_tc_380 the court held if one of the purposes of an organization’s activities is substantial and non- letter cg exempt eg commercial the organization will be denied exempt status under sec_501 even if the activity also furthers an exempt_purpose in plumstead theatre society inc v commissioner f cir the ninth circuit_court of appeals affirmed a decision by the tax_court holding that a c arts organization's participation in a partnership with for-profit partners would not disqualify it from tax exemption merely because some investors made a profit from the production of a play the court found that participation by the investors was necessary for the organization to achieve its exempt_purpose the court also found particularly relevant the investors were not shareholders in or officers or directors of the organization and the agreement gave full control_over the operations to the organization and not to the investors in salvation navy v commissioner t c m the court found that one of the reasons why the organization did not qualify for exemption from federal_income_tax was because it could not prove that its net earning would not inure to the benefit of a private individual application of law sec_501 of the code and sec_1_501_c_3_-1 of the regulations sets forth two main tests for qualifications for exempt status an organization must be organized and operated exclusively for purposes describe in sec_501 of the code you pass the organizational_test because your articles of incorporation state that you are formed for purposes described in sec_501 and that upon dissolution all assets will go to organizations that are exempt under sec_501 of the code you must however satisfy the operational_test the key requirement is that an organization be operated exclusively for one or more purposes described in sec_501 of the code the facts submitted show that the activities you conduct are not activities described in sec_501 of the code sec_1_501_c_3_-1 of the regulations clarifies that an organization is not operated exclusively for exempt purposes if its net_earnings inure to the benefit of private individuals based on the information you submitted r the investor member will benefit equally as much if not more than e managing a limited_liability_company in which one of the members is a tax exempt_organization under sec_501 of the code does not constitute a tax exempt activity simply because both parties are tax exempt see revrul_58_547 and revproc_2010_9 not only are you the manager of a limited_liability_company but sec_5 of the operating_agreement allows you the manager to engage in or possess interest in other business interests of every kind including serving as the general_partner in a partnership or limited_liability_company and to make charitable distributions but only after expenses and distributions are made to r the investor member letter cg you entered into an operating_agreement as a non-member manager with e and r to form n you have not demonstrated that you have a charitable or educational purpose as stated in sec_1 of the operating_agreement you will manage qlici loans lease the qalicb premise and manage the financing of n to you e or any other charitable_organization n is not required to make any charitable_contribution your purpose is to manage n a limited_liability_company n’s purpose is to negotiate and enter into a qlici loan and lease and sublease the qalicb premises similar to the organization described in the schoger foundation v commissioner supra you do not satisfy the not more that an insubstantial part of its activities standard of sec_1 c -1 c of the regulations you have a non-charitable purpose that is substantial in nature see better business bureau v united_states supra unlike plumstead theatre society v commissioner supra the court also found particularly relevant the investors were not shareholders in or officers or directors of the organization the agreement gave full control_over the operations to the organization and not to the investors unlike plumstead theatre society supra r the investor member has a significant voice in how n is operated furthermore your letter to e appears that of an arrangement with e as a business deal rather than an agreement between two nonprofit_corporations once you informed e that you were incorporated as a nonprofit you and e entered into the operating_agreement along with r the investor member similar to salvation navy v commissioner supra you have not supplied enough evidence to show that r will not benefit significantly from the activities you conduct determination - issue based on the information provided on your form_1023 and supporting documentation we have concluded that you are not operated exclusively for purposes described in sec_501 of the code you have not shown that your activities are exclusively for purposes described in sec_501 of the code you are formed for the purpose of managing a limited_liability_company therefore you do not qualify for exemption under sec_501 of the code because you are not operated exclusively for c purposes letter cg issue - sec_509 introduction we have also considered your application_for supporting_organization status non-private foundation status under sec_509 of the code in the event that you would qualify for exemption under sec_501 of the code foundation classification under sec_509 is based on a number of factors discussed in the following materials our conclusion regarding your private sec_509 of the code provides the term private_foundation does not include an organization which a is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or b is operated supervised or controlled by or in connection with one or more organizations described in sec_509 or and c is not controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in sec_509 or sec_509 in effect describes as a public charity an organization which is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or carry out the purposes of one or more specified organizations described in sec_509 or sec_509 in our discussion of these issues we are cognizant of the fact that at all times you are asserting qualification under sec_509 under the operated in connection with relationship provided in sec_1_509_a_-4 of the regulations for an organization to qualify as a supporting_organization it must pass the organizational and operational_test a a relationship_test a b and a control test a c you do not pass the operational_test and relationship_test operational_test sec_509 of the code provides that in order to qualify under sec_509 an organization at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or reg a -4 b provides that in order to qualify as a supporting_organization an organization must be both organized and operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one of more specified publicly supported letter cg organizations if it fails to meet either the organizational_test or operational_test it cannot qualify as a supporting_organization reg a -4 e provides that a supported_organization will be regarded as operated exclusively to support one or more specified public supported_organization only if it engages solely in activities which support or benefit the specified publicly supported organizations application of operational_test you are not operated exclusively for the benefit of specified publicly supported organizations as the only activity that you are conducting is managing n a required by sec_509 limited_liability_company you have not demonstrated that you will provide any income to e and you are not conducting any activities on behalf of e furthermore you are also formed to benefit r you have not demonstrated that you are operated exclusively to support e the publically supported_organization as required in sec_1_509_a_-4 of the regulations relationship_test reg a -4 i i provides that generally a supporting_organization will be considered as being operated in connection with one or more publicly supported organizations only if it meets the responsiveness test and the integral part test this relationship rest upon the finding that the supporting_organization is responsive to the needs or demands of the supported organizations and maintains an integral part or significant involvement in the supported organizations affairs you do not meet the responsiveness test or the integral part test responsiveness test reg a -4 i i provides that a supporting_organization will meet the responsiveness test if the organization is responsive to the needs or demands of the publicly supported organizations see sec_1 i ii of the regs states an organization will pass the responsiveness test if a one or more officers directors or trustees of the supporting_organization are elected or appointed by the board members of the supported_organization or b one or more board members of the governing body of the supported_organization are also officers directors or trustees of or hold other important officers in the supporting_organization or c the supporting organization’s officers directors or trustees maintain a close and continuous working relationship with the officers directors or trustees of the supported_organization once the relationship has been established the supporting_organization must demonstrate that because of the relationship the officers directors or trustees of the publicly supported letter cg organization have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making grants and otherwise directing the use of the supporting organization’s income or assets application of responsiveness test you do not meet the responsiveness test because none of your officers are appointed by the specified supported_organization your initial bylaws stated the number of directors shall be three until increased pursuant to the following provisions but shall never be less than three e shall have the sole exclusive authority and discretion to appoint remove and reappoint one person as one of the directors of the corporation’s board_of directors b shall serve as the initial e director although not appointed by e and shall be subject_to confirmation or replacement when e has it first opportunity to appoint the initial e appointed director we requested that you amend your bylaws to state that e will appoint the e director we did receive the amendment to your bylaws but it was not signed by any of your officers you did not submit any documentation that e would have a significant voice in the use of the income or assets furthermore your bylaws state that the board members who are not e appointed members will be selected by the board_of directors your bylaws and articles of incorporation state that there will be three board members however your application lists four members the initial three board members and b you do not meet the responsiveness test integral part test it maintains a significant involvement in the operations of one or more reg a -4 i i provides that a supporting_organization will be considered to meet the integral part test if publicly supported organizations and such publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides a supporting_organization may satisfy the integral part test by meeting either the functional support_test also known as the but-for test or the attentiveness test reg a -4 i ii provides that a supporting_organization will meet the functional support_test if the activities engaged in for or on behalf of the publicly supported organizations are activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves reg a -4 i iii a provides that a supporting_organization will meet the attentiveness test if the supporting_organization makes payments of substantially_all of its income to or for_the_use_of one or more publicly supported organizations and the amount of support received by one or more of such publicly supported organizations is sufficient to insure the attentiveness of such organizations to the operations of the supporting_organization in addition a substantial amount of the total support of the supporting_organization must go to those publicly supported organizations which meet the attentiveness requirement of this subdivision with respect to such letter cg supporting_organization generally the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization's total support so as to insure such attentiveness however if such supporting_organization makes payments to or for_the_use_of a particular department or school of a university hospital or church the total support of the department or school shall be substituted for the total support of the beneficiary organization sec_1243 of the pension_protection_act ppa effectively added sec_4943 to the code this section defines a functionally integrated type iil supporting_organization and a non- functionally_integrated_type_iii_supporting_organization a functionally integrated supporting_organization is one that is not required to make payments to supported organizations due to the fact that the activities of the organization are related to directly performing the functions of or carrying out the purposes of the supported_organization a non-functionally integrated supporting_organization is one that makes payments to the supported organizations application of integral part test you provided conflicting information if you are a non-functionally integrated or functionally_integrated_type_iii_supporting_organization based on the information that was submitted you do not qualify as a non-functionally integrated or a functionally_integrated_type_iii_supporting_organization you do not meet the requirements for a non-functionally integrated supporting_organization because you do not meet the payout requirement thus far you have not distributed any funds to e and you have no immediate plans to do so the revised financial data that you submitted shows total income of n dollars and professional expenses for the same amount even if you were to contribute all n dollars to e this would not be enough to warrant their attentiveness since the annual income for e is approximately dollar_figure million dollars thus the amount contributed to e is not sufficient to warrant e’s attentiveness therefore you do not meet the attentiveness testing in order to satisfy the integral part test you do not meet the requirements for a functionally integrated supporting_organization because you are not conducting an activity that is normally conducted by the supported_organization your only activity is managing n this is not an activity that is normally carried on by the supported_organization therefore you do not meet the but for test in order to satisfy the integral part test conclusion based on the facts you have failed to meet the relationship_test of sec_509 of the code you have failed to demonstrate that you will maintain a significant involvement in the operations of the publicly_supported_organization as described in sec_1_509_a_-4 of the regulations letter cg control test sec_509 of the code in effect provides that public charity status under sec_509 is precluded for an organization that is controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in paragraph and sec_4946 of the code defines a disqualified_person as a substantial_contributor to the foundation sec_4946 includes in its definition of a substantial_contributor an owner of more than i the total combined voting power of a corporation ii the profits interest in a partnership or iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation sec_1_509_a_-4 of the regulations provides that if a person who is a disqualified_person with respect to a supporting_organization such as a substantial_contributor to the supporting_organization is appointed or designated as a foundation_manager of the supporting_organization by a publicly supported beneficiary organization to serve as the representative of such publicly_supported_organization then for purposes of this paragraph such person will be regarded as a disqualified_person rather than as a representative of the publicly_supported_organization an organization will be considered controlled for purposes of sec_509 if the disqualified persons by aggregating their votes or positions of authority may require such organization to perform any act which significantly affects its operations or may prevent such organization from performing such act this includes but is not limited to the right of a substantial_contributor or his spouse to designate annually the recipients from among the publicly supported organizations of the income attributable to his contribution to the supporting_organization application of control test you are not controlled directly or indirectly by one or more disqualified persons you meet the control test determination - issue based on our analysis of your actual and proposed activities you have failed the operational_test and the relationship_test as a result of our analysis and in light of the applicable law we have determined you do not qualify for exclusion from private_foundation_status under sec_509 of the code conclusion letter cg in conclusion we have determined you do not qualify for tax exemption as an organization described in sec_501 of the code even if we determined that you were described in sec_501 you would be a private_foundation and not a supporting_organization under sec_509 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination f your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication declaration the statement of facts item must be accompanied by the following under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs letter cg if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lots lerner lois lerner director exempt_organizations enclosure publication letter cg


internal_revenue_service number release date index number -------------------------------------------- --------------------------------------------------------- ----------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication n a person to contact -------------------------- id no ----------------- telephone number -------------------- refer reply to cc ita b04 plr-148337-11 date date ty -------------------- ty -------------------- legend -------------------------------------------------------------------------------- ------------------------------------------ -------------------------------------------------------- ---------------- -------------------- taxpayer --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------- tqi financeco finance trust manufacturer manufacturer finance ------------------------------------------------------- manufacturer dealers college shareholder a trustco state a state b state c x y year year year year year year date date date ------------------------------------------------ ---------------------- ---------------------- ------------------------------------ ------------ --------------- ------------- --- -- ------- ------- ------- ------- ------- ------- ------------------ ----------------------- -------------------- plr-148337-11 dear ---------------- this responds to your request for a private_letter_ruling dated date submitted on behalf of taxpayer that tqi is not a disqualified_person as to exchange services it was organized to perform for taxpayer’s shareholders taxpayer also requests a ruling that earnings by tqi for services provided to taxpayer’s shareholders will be patronage source income eligible for distribution as deductible patronage_dividends facts taxpayer is a non-exempt cooperative c_corporation subject_to subchapter_t sec_1381 et seq of the internal_revenue_code code organized under the laws of state a its principal_place_of_business is in state b taxpayer keeps its books and files its tax returns using an accrual_method of accounting and an annual_accounting_period beginning april and ending march taxpayer is owned by x independent manufacturer dealers y of which are foreign_corporations shareholders taxpayer was organized to give its shareholders a lower cost alternative to bank financing for a portion of their working_capital needs taxpayer began issuing commercial paper cp and making loans to its shareholder-patrons during year it charged interest rates to its borrowers based on its cost of funds plus add-ons to cover its operating costs including premiums for credit enhancement it organized as a cooperative to return any excess add-on charges and distribute net_earnings to its borrowers as patronage_dividends in year taxpayer organized financeco to address the short-term credit needs of taxpayer’s shareholders who did not meet certain underwriting standards financeco is a special purpose bankruptcy remote state b corporation not related to taxpayer within the meaning of sec_267 and sec_707 of the code finance trust a_trust for the benefit of college and other educational institutions owns all the stock of financeco trustco is the trustee of finance trust financeco’s sole director is also a member of taxpayer’s board the same four individuals serve as president vice president secretary and treasurer of taxpayer and financeco financeco has no separate office space or employees taxpayer has continually managed financeco’s cp issuance loan operations and day to day activities pursuant to a management agreement between taxpayer and financeco entered into in year financeco’s loan programs were very similar to those of taxpayer however financeco’s loans are credit enhanced by manufacturer finance a subsidiary of manufacturer and are generally secured because financeco is a corporation taxpayer did not treat management fees charged to financeco as patronage sourced and financeco borrowers did not receive patronage_dividends from taxpayer or financeco plr-148337-11 on date because of adverse business conditions in the financial sector of the united_states economy taxpayer ceased its direct issuance of cp and loan operations the last outstanding taxpayer cp matured and was repaid on date taxpayer transitioned its borrowers to the financeco program in the middle of year currently taxpayer’s primary business activity is the management of financeco’s cp program and the processing of loans from financeco to taxpayer’s shareholders and other eligible borrowers financeco enters into loan agreements only with borrowers that have applied to and been approved by manufacturer finance as eligible to borrow from financeco taxpayer is not a party to the loan agreements between financeco and taxpayer’s shareholders some of taxpayer’s shareholders engage in like-kind_exchanges to defer gain from the sale of property used in their rental businesses in year taxpayer’s board directed taxpayer’s staff to start a pilot program to offer qi services to taxpayer’s shareholders in the middle of year taxpayer formed tqi its single-member wholly-owned state c limited_liability_company to provide intermediary services to taxpayer’s shareholders or their affiliates who maintain like-kind_exchange programs using the safe harbors in the income_tax regulations under sec_1031 of the code and revproc_2003_39 2003_1_cb_971 tqi is a disregarded_entity for federal_income_tax purposes and is treated as a branch or division of taxpayer it has not and will not file an election to be treated as a corporation for federal tax purposes under sec_301_7701-3 of the procedure and administration regulations tqi became the qi in taxpayer’s pilot program for shareholder a on date tqi became the qi for a second shareholder before the end of year if successful tqi will begin offering its qi services to all of taxpayer’s shareholders and their affiliates if requested and if eligible under state and local law tqi may instead act as the escrow holder of a qualified_escrow_account or the trustee of a qualified_trust both as defined in sec_1_1031_k_-1 of the income_tax regulations regulations for taxpayer’s shareholders and their affiliates who choose to use a qi other than tqi as taxpayer implements its exchange program of providing exchange services through tqi it will continue to operate on a cooperative basis it will return any net_income from qi operations to the customers of tqi based on the relative amount_paid by each for qi services taxpayer will also distribute net_income from trustee and escrow holder services in this manner in year taxpayer will create another wholly-owned disregarded_entity newco for a new cp loan program newco will meet the requirements of the nationally recognized statistical rating organizations for special purpose entities and of a credit enhancement agency newco will begin cp issuance and loan operations in the middle of year as plr-148337-11 a disregarded_entity newco will be treated as a division of taxpayer for tax purposes taxpayer will be treated as issuing cp and making loans to its own shareholders law analysis part taxpayer’s eligibility to serve as a qi under sec_1_1031_k_-1 sec_1031 of the code provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment however gain is recognized if a taxpayer actually or constructively receives money or other non-like-kind property even though the taxpayer may ultimately receive like-kind replacement_property see sec_1_1031_k_-1 of the regulations to assist taxpayers in structuring exchanges that avoids actual or constructive receipt of money or other non- like-kind_property the regulations establish various safe harbors these include the qualified_escrow_account the qualified_trust and the qualified_intermediary or qi see sec_1_1031_k_-1 and of the regulations sec_1_1031_k_-1 iii a and iii a of the regulations provide in part that a qi and a trustee of a qualified_trust or escrow holder of a qualified_escrow_account is a person who is not the taxpayer or a disqualified_person sec_1_1031_k_-1 of the regulations generally provides that a disqualified_person is - an agent of the taxpayer at the time of the transaction a person related to the taxpayer under sec_267 or sec_707 of the code substituting for each place it appears or a person related to an agent of the taxpayer under sec_267 or sec_707 substituting for each place it appears sec_1_1031_k_-1 of the regulations provides in part that a person is treated as an agent of the taxpayer if that person at the time of the transaction has acted as the taxpayer's employee attorney accountant investment banker or broker or real_estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties however solely for purposes of this paragraph k the following services do not count - i services for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition_of_gain_or_loss under sec_1031 of the code and ii routine financial title insurance escrow or trust services for the taxpayer by a financial_institution title insurance_company or escrow company plr-148337-11 in bollinger v 485_us_340 the supreme court reaffirmed its agency analysis previously articulated in 336_us_422 the supreme court’s agency analysis has four factors and two requirements the sum of which has become known as the ‘six national carbide factors ’ the four factors include whether the party in question operates in the name and for the account of the principal binds the principal by its actions transmits money received to the principal and whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal the two requirements provide that the agency-principal relationship cannot be founded solely on the fact that the principal owns the agent and the business_purpose of the party in question must be the carrying on of the normal duties of an agent bollinger v commissioner u s pincite since tqi is a disregarded_entity and its business consists entirely of rendering service intended to qualify transactions for nonrecognition of gain under sec_1031 of the code tqi’s status as a disqualified_person depends entirely on attribution of activities and relationships of taxpayer if taxpayer is not a disqualified_person then taxpayer’s status as the sole owner of tqi will not make tqi a disqualified_person taxpayer’s activities in managing financeco do not make it an agent for its shareholders or other borrowers further when taxpayer reinstates its cp and loan program in year by issuing cp to investors and lending the proceeds to its shareholders directly or through newco in the normal course of its business it will not become an agent for its shareholders or other eligible borrowers accordingly taxpayer is not a disqualified_person as defined by sec_1_1031_k_-1 of the regulations with respect to its shareholders and their affiliates by reason of its activities as the manager of the operations of financeco also taxpayer will not become a disqualified_person as defined by sec_1_1031_k_-1 with respect to its shareholders and their affiliates if it reinstitutes its own cp issuance and shareholder loan program either directly or through newco part treatment of tqi income as patronage source income sec_1381 of the code provides that subchapter_t shall apply to any corporation operating_on_a_cooperative_basis with certain exceptions sec_1 a of the regulations states that subchapter_t of the code applies to any corporation operating_on_a_cooperative_basis and allocating amounts to patrons on the basis of business done with or for such patrons plr-148337-11 sec_1382 of the code provides in part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as patronage_dividends to the extent paid in money qualified written notices of allocation or other_property with respect to patronage occurring during such taxable_year sec_1_1382-2 of the regulations provides in part that there is allowed as deduction from the gross_income of any cooperative to which part i of subchapter_t applies amounts paid to patrons during the payment period for the taxable_year as patronage_dividends with respect to patronage occurring during such taxable_year but only to the extent that such amounts are paid in money qualified written notices of allocation or other_property other than nonqualified written notices of allocation sec_1388 of the code defines the term nonqualified written notices of allocation as meaning a written_notice_of_allocation other than a qualified_written_notice_of_allocation or a qualified_check that is not cashed on or before the 90th day after the close of the payment period for the taxable_year sec_1382 of the code provides in part that the payment period for any taxable_year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or done for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 of the code provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the regulations defines income from sources other than patronage nonpatronage income to mean incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association such as income derived from lease of premises from investment in securities or from the sale_or_exchange of capital assets in revrul_69_576 c b a nonexempt farmers’ cooperative borrowed money from a bank for cooperatives itself a cooperative to finance the acquisition of agricultural supplies for resale to its members the bank for cooperatives allocated and paid interest from its net_earnings to the nonexempt farmers’ cooperative which it in turn allocated to its members plr-148337-11 in determining whether the allocation was from patronage sources the ruling states the classification of an item_of_income as from either patronage or nonpatronage sources is dependent on the relationship of the activity generating the income to the marketing purchasing or service activities of the cooperative if the income is produced by a transaction which actually facilitates the accomplishment of the cooperative's marketing purchasing or service activities the income is from patronage sources however if the transaction producing the income does not actually facilitate the accomplishment of these activities but merely enhances the overall profitability of the cooperative being merely incidental to the association's cooperative operation the income is from nonpatronage sources revrul_69_576 pincite the ruling concluded that inasmuch as the income received by the nonexempt_cooperative from the bank for cooperatives resulted from a transaction that financed the acquisition of agricultural supplies which were sold to its members thereby directly facilitating the accomplishment of the cooperative’s marketing purchasing or service activities the income was patronage sourced in st louis bank for cooperatives v united 624_f2d_1041 cl_ct the court held that interest on demand deposits in farm credit banks or on loans to brokerage funds received by st louis bank for cooperatives was patronage- sourced income the court stated that a particular item_of_income is patronage sourced when the transactions involved are directly related to the marketing purchasing or service activities of the cooperative association f 2d pincite taxpayer has represented that it has operated on a cooperative basis since its inception and intends to continue to do so if taxpayer performed the qi services directly for its patrons the services would be a patronage activity because taxpayer represents that tqi is a disregarded_entity for federal_income_tax purposes the result is the same accordingly the net_earnings of taxpayer attributable to the services provided to its shareholders or their affiliates by tqi as a disregarded_entity will be treated as taxpayer patronage source income as if earned from business done directly by taxpayer with its patrons subject_to compliance with sec_1382 and sec_1388 of the code and will be eligible for distribution as deductible patronage_dividends except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-148337-11 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christina m glendening assistant to the branch chief branch office of associate chief_counsel income_tax accounting cc


t c memo united_states tax_court antonio rosarto and joyce rosario petitioners v commissioner of internal revenue respondent docket no filed date robert j fedor for petitioners katherine lee kosar for respondent memorandum opinion vasquez judge this case is before the court on petitioners’ motion for award of administrative and litigation costs pursuant to sec_7430 and rule ' neither party unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure all references to sec_7430 are to that section as in continued - - requested a hearing and we see no reason for a hearing on this matter rule a accordingly we rule on petitioners’ motion on the basis of the parties’ submissions and the existing record rule a we incorporate by reference portions of rosario v commissioner tcmemo_2002_70 rosario i our opinion on the merits in the instant case that are relevant to our disposition of this motion after concessions ’ the issue for decision is whether petitioners are the prevailing_party in the underlying tax case background antonio rosario petitioner an orthopedic surgeon executed a professional practice agreement the practice agreement with the jesse holman jones hospital the hospital which provided that petitioner would receive funds from the hospital to ensure a monthly income of dollar_figure guarantee payment during pursuant to the practice agreement petitioner received dollar_figure in guarantee payments from the hospital in rosario i the issue was whether the dollar_figure continued effect at the time the petition was filed in respondent’s response to petitioners’ motion for administrative and litigation costs respondent concedes that petitioners meet the net_worth requirements as provided by law petitioners have exhausted the administrative remedies available within the internal_revenue_service and petitioners have not unreasonably protracted the litigation petitioner received from the hospital in was taxable_income to him in we held that the guarantee payments petitioner received were not includable in his income in because those payments were a loan discussion sec_7430 provides for the award of administrative and litigation costs to a taxpayer in an administrative or court_proceeding brought against the united_states involving the determination of any_tax interest or penalty pursuant to the internal_revenue_code an award of administrative or litigation costs may be made where the taxpayer is the prevailing_party exhausted available administrative remedies ’ did not unreasonably protract the administrative or judicial proceeding and claimed reasonable administrative and litigation costs sec_7430 b and c these requirements are conjunctive and failure to satisfy any one will preclude an award of costs to petitioners 88_tc_492 to be a prevailing_party the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and at the time the petition in the case is filed this requirement applies only to litigation costs sec_7430 b - the taxpayer must meet the net_worth requirements of u s c sec d b sec_7430 a a taxpayer however will not be treated as the prevailing_party if the commissioner establishes that the commissioner’s position was substantially justified sec_7430 b for purposes of the administrative proceedings respondent’s position is that which was articulated in the notice_of_deficiency sec_7430 b huffman v commissioner 978_f2d_1139 9th cir affg in part and revg in part tcmemo_1991_ 108_tc_430 for purposes of the court proceedings respondent’s position is that which was set forth in the answer sec_7430 a huffman v commissioner supra pincite8 maggie mgmt co v commissioner supra pincite the substantially justified standard is essentially a continuation of the prior law’s reasonableness standard 106_tc_76 a position is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis in both fact and law 487_us_552 although the dispute in 487_us_552 arose under the provisions of the equal_access_to_justice_act baja u s c sec d the relevant provisions of the eaja are almost identical to the language of sec_7430 109_tc_227 n we therefore consider the holding in pierce v underwood continued --- - huffman v commissioner supra pincite swanson v commissioner supra pincite a position that merely has enough merit to avoid sanctions for frivolousness will not satisfy this standard pierce v underwood supra pincite the determination of reasonableness is based on all of the facts and circumstances surrounding the proceeding and the legal precedents relating to the case 94_tc_685 a position has a reasonable basis in fact if there is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion pierce v underwood supra pincite a position is substantially justified in law if legal precedent substantially supports the commissioner’s position given the facts available to the commissioner coastal petroleum refiners inc v commissioner supra pincite determining the reasonableness of the commissioner’s position and conduct requires considering what the commissioner knew at the time 88_tc_1329 85_tc_927 the fact that the commissioner loses on the merits or concedes the case does not establish that a position was not substantially justified however it is a factor to be continued supra to be applicable to the case before us cozean v commissioner supra -- - considered 100_tc_457 affd in part and revd in part 43_f3d_172 5th cir respondent contends that petitioners are not the prevailing_party because his position is substantially justified in that he had a reasonable basis in both fact and law ’ petitioners argue that they substantially prevailed with respect to the amount in controversy as well as with regard to the most significant issue whether moneys petitioners received constituted additional income or qualified as loan proceeds in rosario i we were required to examine and interpret the practice agreement in order to resolve the issue we did not have any testimonial evidence to aid in interpreting the practice agreement because the parties submitted the case fully stipulated although we ultimately held for petitioners our holding was not easily reached the relevant language in the practice agreement regarding the guarantee payments was not clear the agreement provided in part to the extent that physician’s gross_income in any month during the term of this agreement is less than dollar_figure the hospital will pay physician by the tenth day of the closing of the physician’s books for that month any amount sufficient to raise physician’s income for that month to dollar_figure such payment by respondent alternatively argues that the amounts of costs claimed by petitioners are unreasonable because we find that respondent’s position was substantially justified we need not reach respondent’s alternative argument - jj - hospital will be referred to as a gross guarantee payment if during any month of the term of this agreement physician’s income is greater than dollar_figure physician will pay to hospital by the tenth day after the closing of physician’s books for the month the excess over dollar_figure to the extent necessary to reimburse hospital for gross guarantee payments previously paid such payments by physician will be made to the hospital during the term of this agreement until the total amount of gross guarantee payments made by hospital have been repaid in full the main ambiguity in the practice agreement was that the above language could have been construed to favor respondent’s view that petitioner would have to repay the hospital only to the extent his monthly income were over dollar_figure therefore the guarantee payments would not be characterized as a loan because there would not be an unconditional obligation for petitioner to pay them back 375_f2d_36 5th cir 229_f2d_703 7th cir affg tcmemo_1954_243 88_tc_604 affd without published opinion 855_f2d_855 8th cir the above language also could have been construed to favor petitioner’s view that it required petitioner to pay back the guarantee payments in all events which would support characterizing the payments as a loan on date petitioner and the hospital signed an amended practice agreement that provided hospital intended that physician upon expiration of the income guarantee be required to repay that portion of the income guarantee not repaid pursuant to the guarantee payback regardless of the level of physician’s gross_income it was not clear whether the amended practice agreement which was not signed until after the year in issue changed or instead merely clarified the parties’ intentions in the practice agreement to resolve the ambiguity we examined all stipulated documents and concluded that the evidence weighed in favor of treating the guarantee payments as a loan although we did not agree with respondent’s interpretation in the final analysis we believe that respondent’s position had a reasonable basis in law and in fact given the ambiguity of the language in the practice agreement accordingly we hold that petitioners are not entitled to an award of administrative or litigation costs to reflect the foregoing an appropriate order will be issued and a decision will be entered for petitioners


t c memo united_states tax_court vincent m lorusso petitioner v commissioner of internal revenue respondent docket no 21964-16l filed date vincent m lorusso pro_se ardney j boland iii christopher d davis and gerard mackey for respondent memorandum opinion vasquez judge in this collection_due_process cdp case petitioner seeks review pursuant to sec_6330 of a determination by respondent to proceed with collection of his unpaid federal_income_tax for respondent has moved for summary_judgment under rule contending that his determination to sustain the proposed collection action was proper as a matter of law respondent also moved to impose a penalty against petitioner pursuant to sec_6673 petitioner moved to dismiss the case seeking to withdraw his petition for the reasons stated below we will deny respondent’s motions and grant petitioner’s motion background the following facts are based on the parties’ pleadings and motions including the attached declaration and exhibits see rule b petitioner resided in pennsylvania when he filed his petition he is a practicing attorney who specializes in criminal_law in an effort to collect petitioner’s unpaid federal_income_tax for tax_year respondent issued petitioner a final notice_of_intent_to_levy and notice of your right to a hearing petitioner timely submitted form request for a collection_due_process or equivalent_hearing seeking an installment_agreement a settlement officer so responded to petitioner by letter scheduling a cdp unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure hearing for date in this letter the so informed petitioner that in order to qualify for collection alternatives petitioner needed to submit the following financial information before the hearing form 433-a collection information statement for wage earners and self-employed individuals a signed federal_income_tax return for and proof that estimated_tax payments were paid in full for the current_year petitioner did not participate in the scheduled cdp hearing and did not submit any of the requested documentation following the scheduled time for the cdp hearing the so sent petitioner a last chance letter stating that he would soon make a determination in the matter in this letter dated date the so allowed petitioner an additional days to submit the requested financial information petitioner did not respond to the so on date the so issued a notice_of_determination to petitioner sustaining respondent’s proposed collection action petitioner timely filed a petition with the court challenging the notice_of_determination on date respondent filed a motion for summary_judgment and a motion to impose a penalty under sec_6673 to which the court directed petitioner to respond petitioner did not directly respond to respondent’s motions instead petitioner filed a motion to dismiss to which respondent objected discussion i penalty under sec_6673 this court may require a taxpayer to pay a penalty not to exceed dollar_figure if the taxpayer takes a frivolous position in the proceeding or institutes the proceeding primarily for delay since petitioner has initiated four distinct cases with similar factual backgrounds two of these cases were decided in favor of respondent on his motions for summary_judgment the other two cases include the instant case and another pending case not presently before us in both of these cases respondent filed motions for summary_judgment and petitioner filed motions to dismiss petitioner’s history of litigation with the court may merit the imposition of a penalty under sec_6673 however respondent has not moved for such penalties against petitioner in the past nor has the court issued petitioner a warning regarding these penalties therefore we decline to impose a sec_6673 penalty against him at this time instead we take this opportunity to caution petitioner that the court may impose a penalty pursuant to sec_6673 if he returns to the court and proceeds in a similar fashion in the future see 115_tc_576 ii motion to dismiss a taxpayer who files a petition asking the tax_court to review a collection action may have the option to withdraw that petition 118_tc_330 however in deciding whether to grant a motion to dismiss in the cdp context we must also consider whether the nonmoving party will suffer clear legal prejudice other than the mere prospect of a subsequent lawsuit as a result of the dismissal id pincite quoting 781_f2d_855 11th cir see fed r civ p a the crucial question to be determined is would the defendant lose any substantial right by the dismissal wagner v commissioner t c pincite quoting 385_f2d_366 5th cir thus before ruling on such a motion we must give the commissioner the in deciding that the taxpayers could withdraw their petition in a collection action in 118_tc_330 we considered the federal rules of civil procedure which we may consult when our rules do not contain an applicable rule see rule b the purpose of fed r civ p a which requires court approval of a voluntary dismissal is to protect the nonmovant from unfair treatment 583_f3d_948 6th cir grover by 33_f3d_716 6th cir in deciding whether to grant a motion to dismiss pursuant to fed r civ p a a court must exercise its broad equitable discretion to weigh the relevant equities and do justice between the parties in each case 781_f2d_855 11th cir see also wagner v commissioner t c pincite opportunity to oppose the motion and show any prejudice that granting the motion might cause vigon v commissioner t c __ __ n slip op pincite date as noted above respondent objects to the dismissal of petitioner’s case respondent argues that he would be prejudiced by a dismissal because it would deprive him of the only opportunity to pursue a sec_6673 penalty against petitioner in this case however we have already stated our intention to deny respondent’s motion for a sec_6673 penalty therefore we conclude that no prejudice will result to respondent in dismissing this case thus we will grant petitioner’s motion to dismiss we have considered all other arguments made by the parties and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing an appropriate order and order of dismissal will be entered as we will grant petitioner’s motion to dismiss we will deny respondent’s motion for summary_judgment as moot


t c memo united_states tax_court denson c and linda c brumley petitioners v commissioner of internal revenue respondent docket no filed date lorenzo w tijerina for petitioners franklin r hise for respondent memorandum opinion goldberg special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 in a notice_of_deficiency dated date respondent determined a deficiency in petitioners’ federal_income_tax for the taxable all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure year and an addition_to_tax under sec_6651 in the amounts of dollar_figure and dollar_figure respectively petitioners’ attorney lorenzo w tijerina mr tijerina filed a timely petition on their behalf on date disputing the entire amount of the deficiency and addition_to_tax at the time of the filing of their petition petitioners resided in san antonio texas respondent filed an answer on date and the issues were joined at that time on date the clerk of the court served the parties with a notice setting the case for trial on the date trial session in san antonio texas the court’s standing pre-trial order was also served at the same time the standing pre-trial order among other things required the parties to stipulate all facts to the maximum extent possible mark all documents and written evidence identify all documents or materials which either party expects to utilize in the event of trial and exchange said document sec_15 days before the first day of the trial session prepare a trial memorandum substantially in the form attached to the order and submit it to the special_trial_judge assigned to the session and the opposing party not less than days before the first day of the trial session and identify all witnesses in the trial memorandum with a brief summary of the anticipated testimony of such witnesses the pre-trial order also provided for appropriate sanctions for noncompliance the court received respondent’s trial memorandum on date petitioners’ counsel did not submit a trial memorandum the case was called from the calendar on monday date counsel for petitioners and respondent appeared and were heard the parties reported that no basis of settlement was reached and no stipulation of facts had been agreed to and signed respondent stated that he had no contact with mr tijerina and had not received a trial memorandum from petitioners and orally moved that this case be dismissed respondent did not state the grounds for his motion mr tijerina made no objection to respondent’s oral motion counsel for petitioners stated that he would meet with respondent’s representatives in an attempt to settle the case and in the event the case was not settled petitioners would be ready for trial on wednesday date the case was recalled for trial on wednesday date counsel appeared and offered a bare bones stipulation of facts into evidence with two exhibits namely petitioners’ federal_income_tax return and the notice_of_deficiency the stipulation of facts together with exhibits was received into evidence respondent’s trial memorandum received in washington d c on date was also filed at trial respondent did not pursue his oral motion to dismiss respondent then orally moved for summary_judgment which we treated as a motion for entry of decision based upon the fact that no further issues remained to be heard in this case petitioners’ counsel did not dispute the unreported income determined by respondent but argued that petitioners are entitled to be heard on the issue of deductible business_expenses petitioners filed their joint federal_income_tax return for on date included as wages on line of the return was the amount of dollar_figure paid_by preneed marketing associates to petitioner linda brumley ms brumley this amount was reported on a form 1099--misc issued to ms brumley by the payor respondent determined in the notice_of_deficiency that petitioners were subject_to self-employment_tax for on the dollar_figure received by ms brumley and liable for the addition_to_tax for failure to timely file their joint federal_income_tax return for this is the only adjustment to petitioners’ federal_income_tax return for made by respondent in the notice_of_deficiency in his opening statement on wednesday date mr tijerina conceded that ms brumley was self-employed in and her income was subject_to self-employment_tax however he claimed for the first time that ms brumley is entitled to certain business_expense deductions incurred in earning her income as an independent insurance agent the effect of which if determined to be deductible would reduce her self-employment_income and the resulting self-employment_tax it was at this point that respondent orally moved for a motion for entry of decision we deal first with the question of whether we should allow petitioners to raise for the first time on the date set for trial the issue regarding their entitlement to deduct certain business_expenses in computing net_income subject_to self- employment_tax we must look at the pleadings to see if this issue is indeed a new issue and if it is consider whether trying this new issue places respondent at an unfair disadvantage petitioners argue that the issue of petitioners’ entitlement to business deductions is not a new issue because their petition implicitly raises the issue since they have contested the whole amount of the deficiency therefore petitioners contend that respondent had knowledge of the issue and has not been placed at a disadvantage petitioners further assert that even if we find that this is a new issue they should be permitted to amend the petition and raise the issue respondent strongly objects to petitioners’ attempt to raise this issue contending that it is a new issue raised for the first time on the day of the trial we believe respondent’s objection to be well taken this court has held on numerous occasions that it will not consider issues which have not been pleaded 92_tc_376 affd per curiam 920_f2d_1196 5th cir 64_tc_989 and cases cited therein pincite whether an issue has been properly raised depends upon whether the opposing party has been given fair notice of the matter in controversy rule a rule requires that the petition contain clear and concise assignments of each and every error alleged and statements of facts on which petitioner relies to sustain each assignment of error rule b and paragraph of the form petition t c form filed by mr tijerina states taxpayers are taking exception to the dollar_figure increase in tax and the penalty of dollar_figure taxpayer has a good_faith belief based on his related tax_year schedules that he does not owe the cited deficiencies and penalties other than contesting the full amount of the deficiency and addition_to_tax the above statement is the only allegation in the petition we find that petitioners did not raise the issue of their entitlement to business_expense deductions in their petition filed with the court further there are no other statements or allegations in the petition which raise the issue of offsetting business deductions in the event this court should determine that ms brumley’s income was subject_to self-employment_tax rule a provides that a pleading may be amended once as a matter of course at any time before a responsive pleading is served and thereafter amendment may be made by leave of the court or by written consent of the adverse_party prior to trial petitioners had never requested leave of this court to amend their petition and did not raise this new issue until the date set for trial of this case at this late date we will not permit petitioners to amend their pleading this case is not one where an issue has been tried by express or implied consent of the parties in which event we treat the issue as if raised in the pleadings rule b this case presents a situation in which respondent’s counsel was faced on the date of trial with trying an issue not known to him further mr tijerina has failed to comply with our standing pre-trial order he did not meet with respondent to stipulate facts and exhibits after service of our standing pre-trial order and has not submitted a trial memorandum when asked by the court why he failed to comply with the requirements of the standing pre-trial order mr tijerina offered no satisfactory explanation not only did he fail to raise the issue in a trial memorandum so that the court and respondent would be apprised of it before calendar call he did not raise it even at the call of the calendar mr tijerina met with respondent for the first time on monday date he had no substantiation for any alleged business_expenses on the following wednesday however mr tijerina claimed that petitioners provided him with some documentation for purported expenses in connection with their self-employment_income this court has an interest in promoting respect for the judicial process and encouraging orderly disposition of cases the court expects the litigants to respect the judicial process through even-handed enforcement of its rules which are designed to serve the just speedy and inexpensive determination of each case see rule b see also sec_7453 if a party is permitted to disregard the procedures established by this court unfairness to others and disruption of the court’s processes occur attorneys admitted to practice before our court are presumed to know our rules_of_practice and procedure and must comply with our orders in a timely manner we shall not permit petitioners to present evidence in support of the new issue raised at trial pursuant to the stipulation of facts the attached exhibits and concessions of petitioners we find that the dollar_figure ms brumley received in was self-employment_income subject_to self-employment_tax and petitioners’ federal_income_tax return due to be filed on or before date was filed on date and therefore was untimely furthermore petitioners offered no evidence whatsoever that their failure to timely file their return was due to reasonable_cause and not due to willful neglect in view of the above respondent is sustained on these issues inasmuch as we have sustained respondent on these two issues respondent’s oral motion for entry of decision is deemed moot to reflect the foregoing decision will be entered for respondent