internal_revenue_service number release date index number ---------------------------------------------------- --------------------------------------- ---------------------------------------- ------------------------------------ ----------------------------------------- legend legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ---------------- ----------------- telephone number --------------------- refer reply to cc fip plr-150800-09 date may taxpayer --------------------------------------------------------------------------------------- ----------------------------------------- state x date date date resort a b c d e f g h ------------ -------------------------- ------------------- -------------------------- ----------------------------- ----- -------- --------- ----- ----- ---- -- ----- tenant ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ plr-150800-09 tenant affiliate year dear ----------------- -------------------------------- ------- this is in reply to a letter dated date in which taxpayer requests a ruling concerning an election to treat certain property owned by taxpayer as foreclosure_property pursuant to sec_856 of the internal_revenue_code in addition taxpayer requests a ruling that certain property owned by taxpayer represents an interest in a qualified_lodging_facility as that term is defined in sec_856 facts taxpayer is a state x corporation that elected to be taxed as a real_estate_investment_trust reit for its tax_year ended date taxpayer is engaged in the business of owning and investing in a diversified portfolio of real_estate investments taxpayer primarily invests in ---------- properties located in the united_states and abroad and generally leases the properties on a long term basis to tenants or operators who are significant industry leaders on date taxpayer acquired the lodging and ski areas of resort the resort property the resort property includes a four season hotel an inn and a lodge collectively the lodging_facilities the lodging_facilities provide a rooms for lodging other facilities and amenities acquired as part of the resort property include a freestanding b square-foot restaurant a c square-foot ski lodge and a d-acre ski area that includes e acres f miles of groomed trails and g chairlifts upon acquisition of the resort property taxpayer entered into two long-term triple-net leases with tenant tenant engaged a resort management company to operate the resort property at the time taxpayer acquired the resort property an entity affiliated with tenant tenant affiliate acquired the remaining h acres of the resort these h acres included two golf courses equestrian stables a golf clubhouse ski center a sports club utilities and other undeveloped land tenant affiliate resort property tenant affiliate provided guests of the lodging_facilities with access to all of the facilities and amenities included in the tenant affiliate resort property the resort property and tenant affiliate resort property were operated and offered to the public as a single resort destination tenant defaulted on its lease and on date taxpayer terminated tenant’s lease and took possession of the resort property in order to continue to allow guests of the lodging_facilities to use all of the resort’s amenities taxpayer intends to either acquire or lease the tenant affiliate resort property from tenant affiliate as part of plr-150800-09 the lease termination taxpayer also acquired from tenant affiliate the following assets all of which have always been used in connection with the operation of the resort tenant affiliate assets lease on overflow parking lot used in winter lease for golf course clubhouse used for ski operations during winter lease on office space used for overflow sales marketing snowmaking ponds land and improvements equipment taxpayer intends to make an election pursuant to sec_1_856-6 on or before the due_date of taxpayer’s year income_tax return to treat the resort property as foreclosure_property under sec_856 taxpayer does not intend to consider any income derived from the tenant affiliate resort property or from the tenant affiliate assets as income derived from foreclosure_property for purposes of sec_856 taxpayer further intends to form a new taxable_reit_subsidiary trs and will lease the resort property and tenant affiliate resort property to the trs the trs will engage an eligible_independent_contractor to operate and manage both the resort property and tenant affiliate resort property so that the resort can continue to operate as a single unified property taxpayer represents that the amenities included in both the resort property and tenant affiliate resort property are customary amenities for other properties of a similar size and class law and analysis issue sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that the term foreclosure_property means any real_property including interests_in_real_property and any personal_property incident to such real_property acquired by the reit as the result of such trust having bid on such property at foreclosure or having otherwise reduced such property to ownership or possession by agreement or process of law after there was a default or default was imminent on a lease of such property or on an indebtedness which such property secured under sec_856 property is treated as foreclosure_property only if a reit makes an election to treat it as such prior to the due_date for the reit’s tax_return for plr-150800-09 the taxable_year in which it acquires such property upon default or as a result of the imminence of default sec_856 provides that any foreclosure_property shall cease to be such on the first day occurring on or after the day on which the reit acquired the property on which any construction takes place on such property other than completion of a building or completion of any other improvement where more than percent of the construction of such building or other improvement was completed before default became imminent sec_1_856-6 provides that foreclosure_property which a reit owned and leased to another is acquired for purposes of sec_856 on the date on which the reit acquires possession of the property from its lessee sec_1_856-6 provides that personal_property including personal_property not subject_to a mortgage or lease of the real_property will be considered incident to a particular item of real_property if the personal_property is used in a trade_or_business conducted on the property or the use of the personal_property is otherwise an ordinary and necessary corollary of the use to which the real_property is put sec_1_856-6 provides that under sec_856 all real_property and any incidental personal_property for which a particular election has been made shall cease to be foreclosure_property on the first day occurring on or after the day on which the trust acquired the property on which any construction takes place on the property other than completion of a building or completion of any other improvement where more than percent of the construction of the building or other improvement was completed before default became imminent sec_1_856-6 notes that construction includes the renovation of a building such as the remodeling of apartments or the conversion of apartments into condominiums direct costs of construction include amounts paid for labor and for building materials_and_supplies consumed sec_1_856-6 provides that construction does not include repair and maintenance of a building or other improvement architect’s fees administrative costs of the developer or builder lawyers’ fees and expenses_incurred in connection with obtaining zoning approval or building permits are not direct costs of construction the legislative_history of sec_856 reflects a concern to provide relief for situations where a reit inadvertently acquires property on foreclosure and risks becoming disqualified involuntarily or taking action which is not economically sensible to remain qualified s rep no pincite under the foreclosure rules a reit will be able to complete construction of a project where there has been so much construction that it would be difficult to dispose_of the property unless the project is plr-150800-09 completed id pincite this is necessary for a reit to make a project economically viable and for the reit to preserve its investment id although the term construction is not expressly defined in either sec_856 or the regulations thereunder the terminology used in the regulations indicates that the term should be given its ordinary meaning in the instant case taxpayer is not performing any construction within the ordinary meaning of the term for example taxpayer has not incurred expenses for building materials or supplies nor has taxpayer engaged in building remodeling or renovations in this case taxpayer is merely acquiring or leasing additional real_property or acquiring personal_property incident to such real_property previously used in connection with the resort to protect its investment without these acquisitions the value of the resort would decrease because guests of the lodging_facilities would be denied access to many of the amenities customary for a resort of this size and class this result would be contrary to the legislative intent that led to the enactment of sec_856 the acquisition or lease of the tenant affiliate resort property and the acquisition of the tenant affiliate assets supplement the use of the lodging_facilities and are necessary for the lodging_facilities to be utilized in the manner intended therefore taxpayer’s acquisition or lease of the tenant affiliate resort property and the acquisition of the tenant affiliate assets do not fit within the definition of construction and do not affect the status of taxpayer’s foreclosure_property election issue sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 excludes certain amounts from the definition of rents_from_real_property specifically except as provided in sec_856 sec_856 provides that the term does not include any amount received or accrued directly or indirectly from a corporation if the reit owns directly or indirectly stock of such corporation possessing percent or more of the total combined voting power of all classes of stock entitled to vote or percent or more of the total value of shares of all classes of stock of such corporation sec_856 provides that in certain situations amounts paid to a reit by a trs shall not be excluded from the definition of rents_from_real_property sec_856 provides that the requirements of sec_856 are met with respect to an interest_in_real_property which is a qualified_lodging_facility as defined in plr-150800-09 sec_856 leased by a reit to a trs of the reit if the property is operated on behalf of such subsidiary by a person who is an eligible_independent_contractor sec_856 provides that the term eligible_independent_contractor means with respect to any qualified_lodging_facility any independent_contractor if at the time such contractor enters into a management agreement or similar service_contract with the trs to operate such qualified_lodging_facility such contractor or any related_person is actively engaged in the trade_or_business of operating qualified lodging_facilities for any person who is not a related_person with respect to the reit or the trs sec_856 defines the term qualified_lodging_facility to mean any lodging_facility unless wagering activities are conducted at or in connection with such facility and the term lodging_facility means a hotel motel or other establishment more than one-half of the dwelling units in which are used_on_a_transient_basis sec_856 provides that the term lodging_facility includes customary amenities and facilities operated as part of or associated with the lodging_facility so long as such amenities and facilities are customary for other_property of a comparable size and class owned by other owners unrelated to such reit the resort property and the tenant affiliate resort property comprising the entire resort include the lodging_facilities as well as supplementary amenities and facilities that are customary for other properties of similar size and class therefore both properties together meet the definition of a qualified_lodging_facility the resort property and the tenant affiliate resort property will together be operated as the resort by a single eligible_independent_contractor consequently rents paid_by the trs to taxpayer with respect to the lease of the resort property and tenant affiliate resort property qualify as rents_from_real_property under sec_856 except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under subchapter_m of chapter of the code nor do we rule on whether any party acting as an eligible_independent_contractor qualifies as such for purposes of sec_856 plr-150800-09 this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that this ruling may not be used or cited as precedent sincerely alice m bennett___________________________ alice m bennett chief branch office of associate chief_counsel financial institutions and products


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date 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 because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date legend c name of state d date e name of director f name of director g name of director h address dear contact person identification_number contact number fax number employer_identification_number vil we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do you qualify for exemption under sec_501 of the code no for the reasons explained below facts you are a corporation formed on d under the laws of the state of c your articles of incorporation indicate the purposes for which you were formed are educational and any purpose permitted to be exempt from taxation under sec_501 or sec_501 of the united_states internal_revenue_code as now in or hereafter amended letter cg catalog number 47630w your governing body is comprised of three individuals all listed as directors e f and g e and f are husband and wife and g is their daughter g is the executive director works an average of hours weekly and oversees your operations you provide daily child care services from 6am through 30pm you list as part of a mission statement partnering with families to promote health growth and development of children the use of creative curriculum for family child care programs at the child care center and individualized care and experience for the children f provides care for the children and maintains general operations e is a licensed foster parent and his responsibilities include upkeep of grounds and maintaining a safe environment it is not known if care is or will be provided for any of e’s foster children your bylaws indicate officers of your organization to be a president vice president secretary and treasurer however these positions are not distinguished among your listed directors all of whom are related family members a daily schedule was provided showing activities in addition to your handbook outlining policies and procedures for day to day operations you state you have a contract with a state_agency for child care services as per this contract you will assess and collect fees or co-payments from parents payment rates are set by the state_agency you will not accept personal checks for the fees and co-payments all payments must be in cash or by money order made payable to f for those who do not qualify under the state agency's program the handbook lists your fee schedule which shows rates for infants children age sec_2 to children ages and for your after schoo program your operations are conducted at h which is owned by e and is the personal_residence of e and f two of the children in the program are the children of g two other children in the program are grandchildren of e and f you care for children of which are related to board members f provides care for the children and receives a salary the capacity of the home as per license granted is your license to operate the child care is in the personal name of f not in yourname you are a home based childcare facility and your state will not issue a license in a business name unless they operate from a center subsidies received from the state_agency are paid directly to the childcare provider who is f for income was received from state_agency subsidies parent’s co-payments and service fees more than of the income received was paid to f as salary the balance was paid for general_expenses including utilities food furniture and equipment for the child care and the child_care_facility as well as fuel for transportation costs to and from school for attendants you also pay of all utilities for the facility which is the home of e f you are receiving state subsidies for qualified child care a significant portion of the subsidy payments paid to you is used to pay the salary of the care provider f who is related to four of the six children receiving care at your facility and a portion of the utilities and expenses for food and transportation for these related children f is essentially receiving a salary which is paid from subsidy payments received from the state_agency to watch her grandchildren in her own residence letter cg catalog number 47630w law sec_501 of the code provides for exemption from federal_income_tax for organizations that are organized and operated exclusively for charitable educational religious or scientific purposes no part of the income of which inures to the benefit of private individuals sec_1_501_a_-1 of the income_tax regulations defines private_shareholder_or_individual to mean persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the income_tax regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_69_175 cb a nonprofit organization formed by parents of pupils attending a private school that provides schoo bus transportation for its members’ children serves a private rather than a public interest and does not qualify for exemption under sec_501 of the code in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 477_f2d_340 cir cert_denied 413_us_910 the fourth circuit held that operating for the benefit of private parties constitutes a substantial nonexempt purpose application of law you are not described in sec_501 of the code because you are not organized and operated exclusively for sec_501 exempt purposes specifically the facts above indicate that you are not operated for exempt purposes but rather for the private benefit to e f letter cg catalog number 47630w and g by providing child care services for their children and grandchildren providing compensation to f to take care of f’s own grandchildren and operating out of the residence of e and f for which you pay a share of the costs in addition you did not amend your articles of incorporation in order to meet organizational tests as requested therefore you do not meet the organizational_test under c you are not described in sec_1_501_c_3_-1 because your organizing document your articles of incorporation fails the organizational_test for exemption under sec_501 c because the language is not limited to sec_501 purposes and assets upon dissolution are not dedicated for c purposes you do not meet the operational_test for exemption because your income inures to your directors and you are operated for the private benefit of your directors you are not described in sec_1_501_c_3_-1 because you are operated for the private benefit of e f and g and your earnings inure to them you provide home six children of which four are related to your governing body you are receiving you are not described in sec_1_501_c_3_-1 of the regulations child care to state subsidies for qualified child care a significant portion of the subsidy payments paid to you is used to pay the salary of the care provider f who is related to four of the six children receiving care at your facility and to pay a portion of the utilities and expenses for food and transportation for these related children you provide care from the home of e f essentially receiving a salary which is paid from subsidy payments received from the state_agency to watch her grandchildren in her own residence you are therefore serving private rather then public interests f is you are like the organization in revrul_69_175 supra four of the six children receiving care at your facility are related to board members two are children of g and all four are grandchildren of e and f the children and grandchildren of the directors and not the public at large in this instance the provision of child care services basically services you are also like the organizations in better business bureau of washington dc because your operations include substantial non-exempt purposes specifically private benefit as noted above you were formed to provide child care services to relatives of the board members you are like old dominion box co because you are operating for the benefit of private parties specifically e f and g your directors conclusion based on the above we conclude that you are not organized and operated for exempt purposes under sec_501 of the code you do not meet the organizational_test for exemption under sec_501 of the code since your organizing document does not contain the necessary purpose and dissolution clauses required to pass the organizational_test for exemption under sec_501 of the letter cg catalog number 47630w code the facts show that you operate primarily for the benefit of your founders board members of the six children who attend the child care four are related to the board members the day care is operated out of the personal_residence of a board member and the governing body consists of a husband and wife and their daughter the facts show that you were formed by e f and g specifically to receive state subsidies for the childcare of children and grandchildren of e f and g therefore we conclude based on these facts that you are operated for private rather then public purposes and do not qualify for exempt status under sec_501 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 if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal must be accompanied by the following declaration the statement of facts item under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete 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 letter cg catalog number 47630w if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter enclosure publication sincerely lois g lerner director exempt_organizations rulings agreements letter cg catalog number 47630w


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 scaf-119247-04 uilc date date to marion k mortensen associate area_counsel salt lake city small_business self-employed cc sb slc from ashton p trice branch chief administrative provisions judicial practice division branch procedure administration cc pa apjp b02 subject request for reconsideration of advice on sec_6702 and its application to returns by military personnel who claimed a foreign_earned_income_exclusion this chief_counsel_advice responds to your request that we reconsider our date advice concerning the review of your draft opinion relating to returns in which the taxpayer is a member of the united_states military and inappropriately claimed a foreign_earned_income_exclusion this advice may not be used or cited as precedent issue whether there is a reasonable_cause exception to the imposition of the frivolous_return penalty under sec_6702 conclusion no scaf-119247-04 facts your draft opinion involves certain united_states military taxpayers who have inappropriately claimed a refund by using form_2555 foreign_earned_income to claim a foreign_earned_income_exclusion under sec_911 this exclusion allows u s taxpayers to exclude foreign_earned_income from taxation in the united_states if the taxpayer earned that income for services performed in a foreign_country the taxpayers returns show that the taxpayers are clearly members of the united_states military and thus their income is not foreign_earned_income however these taxpayers claimed a refund of withheld taxes based on the foreign_earned_income_exclusion specifically you asked us to clarify part of our prior analysis regarding any possible reasonable_cause exception under sec_6702 in light of some additional factual information that was not previously available to us regarding return preparers that may have been involved in the preparation of these returns law and analysis we have considered the additional factual information that you provided to us we agree with your analysis provided in your draft opinion and the request for reconsideration that there is no reasonable_cause exception under sec_6702 we therefore also agree with your proposed handling of this matter case development hazards and other considerations there are no hazards or other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views if you have any further questions please call


t c memo united_states tax_court deja vu inc petitioner v commissioner of internal revenue respondent docket no filed date edith s thomas and robert e miller for petitioner alexandra e nicholaides and eric r skinner for respondent memorandum findings_of_fact and opinion laro judge deja vu inc petitioned the court to redetermine respondent’s determination of the following deficiencies in federal income taxes addition_to_tax under sec_6651 and accuracy-related_penalties under sec_6662 taxable_year ended may deficiencies addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number big_number dollar_figure dollar_figure --- big_number --- big_number following concessions we must decide whether funds advanced by petitioner to a related corporation are deductible under sec_166 as a bad_debt we hold they are not whether petitioner is liable for the addition_to_tax for delinquency determined by respondent under sec_6651 we hold it is whether petitioner is liable for the accuracy-related_penalties determined by respondent under sec_6662 we hold it is unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar we refer to petitioner’s taxable_year ended date as the taxable_year we refer to petitioner’s taxable_year ended date as the taxable_year we refer to petitioner’s taxable_year ended date as the taxable_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference petitioner's principal_place_of_business was in lansing michigan when it petitioned the court it filed a form_1120 u s_corporation income_tax return for each year in issue using a fiscal_year ended may and an accrual_method of accounting its and forms were filed on date date and date respectively at all times relevant herein petitioner was a member of an organization of over businesses that were engaged in the adult entertainment industry all of these businesses were wholly or partially owned by harry v mohney mr mohney either directly or indirectly through various trusts in mr mohney began acquiring and operating as sole proprietorships numerous enterprises that were primarily engaged in adult entertainment in the early 1970's mr mohney organized each aspect of his businesses as a separate corporation mr mohney also established five domestic trusts of which he and his four children were beneficiaries each of these trusts owned an interest in another domestic_trust the durand trust which owned all the stock of dynamic industries ltd which owned many of mr mohney's operating companies mr mohney together with three family members and a business_associate elizabeth l scribner was also a beneficiary of a foreign_trust that owned all the stock of several foreign holding_companies which owned all the stock of various foreign and domestic operating companies including adult fun center inc adult fun a domestic_corporation prior to the years in issue adult fun was an adult novelty store with its principal_place_of_business in phoenix arizona petitioner operated a live entertainment night club in toledo ohio petitioner also provided operational management and consulting services to adult entertainment clubs doing business as deja vu donald krontz mr krontz who served as petitioner's president during the subject years made all of petitioner's executive decisions in consultation with mr mohney in adult fun relocated to a store adjoining petitioner in toledo ohio to sell adult lingerie adult fun solicited funds from petitioner to remodel its new location and to start-up its business there beginning on date petitioner made unsecured cash advances to adult fun that were evidenced by the following promissory notes notes date amount interest rate repayment schedule date date date date date big_number dollar_figure dollar_figure month month big_number month big_number big_number month previously agreed total big_number the advances were not in all instances contemporaneous with the execution of a note for example petitioner paid dollar_figure to a construction firm on date and it paid an additional_amount to the same firm on date these funds which were paid to remodel adult fun’s new location were reflected in the note dated date petitioner also advanced dollar_figure to adult fun on date for remodeling this advance was reflected in the date note in addition to the advances above petitioner made the following cash advances to adult fun date date date date amount dollar_figure total petitioner added these three cash advances onto the note dated date petitioner did not require collateral take back liens or personal guarantees or request to examine adult fun's books tax returns or financial statements before or after making any of the advances on its books petitioner recorded the advances as loans adult fun recorded the advances as debts adult fun did not make any payments on the notes adult fun began a business under the name deja vu boutique sometime in may or date shortly after it opened adult fun’s taxable_year ended on feb with the exception of the advances and a dollar_figure payable for state income taxes adult fun’s balance_sheet on date listed no liabilities the balance_sheet on date listed assets of dollar_figure which were the leasehold improvements mentioned below those improvements were the only asset that adult fun had reported on a yearend balance_sheet since date adult fun’s balance_sheet on date listed total assets of dollar_figure and total liabilities of dollar_figure adult fun listed paid- in capital of dollar_figure on each of its yearend balance sheets from date to date petitioner's management determined that adult fun was not doing well and petitioner made further advances to adult fun by date adult fun ceased its payroll and released its employees in early adult fun closed its store and discontinued its business activities on date petitioner and adult fun agreed that petitioner would be assigned adult fun's leasehold improvements on account of the dollar_figure in advances dollar_figure dollar_figure made by petitioner to adult fun the parties agreed that the value of the assigned_property was dollar_figure for federal_income_tax purposes adult fun reported net operating losses nol’s of dollar_figure and dollar_figure for its and taxable years respectively for its taxable_year adult fun reported taxable_income before application of any net_operating_loss_deduction of dollar_figure all of this income was attributable to cancellation of debt for its and taxable years adult fun reported no gross_receipts and no taxable_income for its taxable_year adult fun reported total income of dollar_figure and a taxable loss before application of any net_operating_loss_deduction of dollar_figure petitioner engaged modern bookkeeping services inc mbs another mohney related_entity to provide it with bookkeeping and tax preparation services mbs retained david shindel mr shindel a certified_public_accountant to prepare petitioner’s federal_income_tax returns mr shindel prepared all of petitioner’s federal_income_tax returns that are in issue herein bad_debt opinion we must decide whether for the taxable_year sec_166 lets petitioner deduct the excess advances of dollar_figure dollar_figure - dollar_figure or whether the advances were contributions to adult fun’s capital whether a payment represents debt or equity is a question of fact roth steel tube co v commissioner supra pincite rule a 290_us_111 a taxpayer may deduct worthless debts sec_166 the term debt connotes a true debtor-creditor relationship that obligates the debtor to pay the creditor a fixed or determinable sum of money sec_1_166-1 income_tax regs capital contributions are not debt capital contributions are equity 800_f2d_625 6th cir affg tcmemo_1985_58 511_f2d_185 6th cir 95_tc_257 courts refer to numerous factors to determine whether a payment represents debt or equity the court_of_appeals for the sixth circuit to which appeal in this case lies refers primarily to factors see roth steel tube co v commissioner supra pincite these factors are the names given to the instruments if any evidencing the indebtedness the presence or absence of a fixed maturity_date and schedule of payments the presence or absence of a fixed interest rate and interest payments the source of repayments the adequacy or inadequacy of capitalization the identity of interest between the creditor and stockholder the security if any for the advances the corporation's ability to obtain financing from outside lending institutions the extent to which the advances were subordinated to the claims of outside creditors the extent to which the advances were used to acquire capital assets and the presence or absence of a sinking_fund to provide repayment id raymond v united_states supra pincite 432_f2d_741 6th cir 404_f2d_119 6th cir affg tcmemo_1967_102 370_f2d_178 6th cir affg tcmemo_1964_278 in distinguishing debt from equity the economic_substance of the transaction prevails over form 286_f2d_285 6th cir we turn to these factors to determine whether petitioner and adult fun intended to create a debt and whether their intention comported with the economic reality of a debtor-creditor relationship i name of certificate we look to the name of the certificate evidencing purported debt to determine the debt’s true label the issuance of a note weighs toward debt 464_f2d_394 5th cir the mere fact that a taxpayer issues a note however is not dispositive of debt an unsecured note with no payments made thereon until long after the due_date weighs toward equity 730_f2d_634 11th cir affg tcmemo_1982_314 although adult fun issued the notes with respect to the advances and the notes bore a stated_interest rate of percent we give these facts little weight the notes were unsecured and adult fun did not repay the amounts reflected therein according to the notes’ terms petitioner focuses on the fact that it recorded debt on its books in connection with the transfer we are not impressed under the facts herein petitioner’s accounting entry lends little if any support for a finding of debt see raymond v united_states supra pincite this is especially so given the fact that the parties were dealing at other than arm's length this factor is neutral ii fixed maturity_date the presence of a fixed maturity_date weighs toward debt but is not dispositive of a debtor-creditor relationship 97_tc_579 the presence of a fixed maturity_date may be offset by other facts in the record the notes had a set repayment schedule the presence of this schedule however is downplayed by the fact that adult fun made no payments in accordance therewith petitioner also did not pursue collection or inquire as to payment until adult fun was defunct the facts at hand indicate that a debtor-creditor relationship was not contemplated by petitioner or adult fun the actions of the parties to the notes speak louder than words their actions are uncharacteristic of a bona_fide debtor-creditor relationship this factor weighs toward equity iii interest rate and payments the presence of a fixed rate of interest and actual interest payments weigh toward debt the absence of payments in accordance with the terms of a debt_instrument weighs toward equity american offshore inc v commissioner supra pincite although the notes bore an interest rate of percent adult fun made no principal or interest payments to petitioner ignoring for the moment the transfer of the leasehold improvements the record also indicates that petitioner took no meaningful steps to enforce any amounts that were due under the terms of the notes this factor weighs toward equity iv repayment repayment that is dependent upon corporate earnings weighs toward equity repayment that is not dependent on earnings weighs toward debt roth steel tube co v commissioner f 2d pincite 742_f2d_1311 11th cir american offshore inc v commissioner supra pincite purported debt is usually equity when repayment is at the whim of the vagaries of the business 89_tc_816 repayment of the advances was dependent solely on the financial success of adult fun immediate repayment was not available from adult fun's existing assets as adult fun had virtually no assets at the time petitioner made its advances adult fun had not yet begun operations and had regularly sustained losses in essence petitioner gambled that adult fun's operations would be successful and lost advances made under these conditions are not bona_fide debt this factor weighs toward equity v capitalization thin or inadequate capitalization weighs toward equity advances made to a corporation with an excessive debt to equity ratio are indicative of equity rather than debt roth steel tube co v commissioner supra pincite the record indicates that adult fun had virtually no assets this factor weighs toward equity vi identity of interest advances made by stockholders in proportion to their respective stock ownership weighs toward equity a sharply disproportionate ratio between a stockholder’s ownership percentage in the corporation and the debt owing to the stockholder by the corporation generally weighs toward debt roth steel tube co v commissioner supra pincite 464_f2d_394 american offshore inc v commissioner supra pincite family solidarity and other legal or economic affiliations may neutralize the significance of any disproportionate ratio see 49_tc_649 although petitioner did not have a direct stock interest in adult fun petitioner and adult fun shared a legal and economic relationship as parts of mr mohney's larger enterprise indeed petitioner's president testified that all of petitioner’s executive decisions were made in consultation with mr mohney this factor weighs toward equity vii presence or absence of security the absence of security for purported debt weighs toward equity roth steel tube co v commissioner supra pincite 742_f2d_1311 11th cir 511_f2d_185 6th cir austin village inc v united_states supra pincite petitioner did not receive nor did it attempt to receive any type of security_interest or personal guarantees for its advances if adult fun’s business did not prosper petitioner could only recover its advances from its share of the proceeds which remained after obligations to secured creditors were satisfied indeed when petitioner accepted an assignment from adult fun in all that remained were various leasehold improvements mr krontz explained that he did not require security because of the relationship between adult fun and petitioner as members of mr mohney's enterprises their physical proximity to each other and his business relationship with adult fun's president we find this testimony unpersuasive of a bona_fide debtor-creditor relationship we do not believe that an outside lender would have loaned substantial sums to adult fun in an arms-length transaction under the facts at hand once again the actions of the parties to the notes speak louder than words and those actions do not support a true debtor-creditor relationship with respect to the advances this factor weighs toward equity viii inability to obtain financing the question of whether a transferee could have obtained comparable financing is relevant in measuring the economic reality of a transfer estate of mixon v united_states f 2d pincite 308_f2d_39 2d cir remanding 35_tc_268 evidence that the taxpayer could not obtain loans from independent sources weighs toward equity calumet indus inc v commissioner t c pincite we look to whether the terms of the purported debt were a patent distortion of what would normally have been available to the debtor in an arms-length transaction see 61_tc_367 petitioner presented no evidence on whether it could have obtained financing from an unrelated party at the time of the transfer given the facts however that the purported debts were completely unsecured and that adult fun did not have a profitable history at the time of the advances we are left unpersuaded that an unrelated third party would have entered into financing with adult fun under the terms that petitioner alleges were entered into between it and adult fun indeed we read the record to indicate that it would have been unreasonable for petitioner to have expected repayment of the advances at the time they were made petitioner made no attempt to evaluate adult fun's prospects for success it did not request any financial statements or tax returns in order to evaluate adult fun's financial condition it did not ask to examine adult fun's books and if it had it would have seen that adult fun's tax returns reported a pattern of losses the advances were placed at the risk of adult fun’s business and the terms of the advances were a patent distortion of what would normally have been available in an arm’s-length transaction this factor weighs toward equity ix subordination subordination of purported debt to the claims of other creditors weighs towards equity roth steel tube co v commissioner supra pincite stinnett's pontiac serv inc v commissioner f 2d pincite raymond v united_states f 2d pincite austin village v commissioner supra pincite petitioner presented no evidence on the order of priority of adult fun’s debts given the fact however that the advances were unsecured petitioner's right to repayment would have been subordinate to the interests of the secured creditors if any at best petitioner and the other unsecured creditors could have shared in the proceeds that remained after the secured creditors were satisfied this factor weighs toward equity x use of funds the transfer of funds from a shareholder to a corporation in order to meet the corporation’s daily business needs weighs toward debt the transfer of funds from a shareholder to a corporation in order to purchase capital assets weighs toward equity roth steel tube co v commissioner f 2d pincite stinnett's pontiac serv inc v commissioner supra pincite raymond v united_states supra pincite the purported notes represented a long term commitment that was payable mainly from future income while some of the advances were presumably intended to meet adult fun's daily needs the majority of the funds were used for remodeling expenses this factor weighs toward equity xi presence or absence of a sinking_fund the failure to establish a sinking_fund for repayment weighs toward equity roth steel tube co v commissioner supra pincite lane v united_states f 2d pincite raymond v united_states supra pincite austin village v commissioner f 2d pincite the record does not indicate that adult fun established a sinking_fund for the repayment of the purported notes to the contrary repayment was to come solely from adult fun's earnings this factor weighs toward equity xii conclusion the advances were contributions to adult fun's equity accordingly petitioner may not deduct any loss on the advances under sec_166 sec_6651 respondent determined an addition_to_tax under sec_6651 asserting that petitioner failed to file a timely federal_income_tax return for the taxable_year in order to avoid this addition_to_tax petitioner must prove that its failure_to_file timely was due to reasonable_cause and not due to willful neglect sec_6651 rule a 469_us_241 81_tc_8 a failure_to_file timely is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence and nevertheless was unable to file the return within the prescribed time sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference united_states v boyle supra pincite petitioner filed its return for its taxable_year almost months past the due dates prescribed in sec_6072 and sec_6081 petitioner has provided no evidence to overcome respondent's determination that it is liable for the addition_to_tax for failure_to_file timely we sustain respondent on this issue sec_6662 respondent also determined accuracy-related_penalties under sec_6662 for petitioner’s and taxable years sec_6662 imposes an accuracy-related_penalty equal to percent of the portion of the underpayment that is attributable to negligence sec_6662 for purposes of sec_6662 negligence includes a failure to make a reasonable attempt to comply with the internal_revenue_code and disregard includes careless reckless or intentional disregard sec_6662 sec_1_6662-3 income_tax regs sec_6664 of the internal_revenue_code provides a reasonable_cause exception to the accuracy-related_penalty petitioner argues that it is within the exception under sec_6664 petitioner argues that it held an honest and good_faith belief about the deductibility of its unrecovered advances based on its reasonable reliance on mbs to ensure tax compliance petitioner also argues that it was unsophisticated in tax laws and that it relied on mbs to provide mr shindel with enough information to ensure proper compliance with those laws although mbs failed to do its job properly petitioner concludes petitioner’s reliance on them to do a proper job was consistent with ordinary business care and prudence under the circumstances we do not agree reasonable reliance on a tax adviser is consistent with ordinary business care and prudence only in certain cases in those cases the taxpayer must establish that the adviser had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see eg ellwest stereo theatres of memphis inc v commissioner tcmemo_1995_610 mr shindel prepared and signed petitioner’s tax returns for the years in issue his experience and qualifications were sufficient to warrant reliance upon his judgement although we find that petitioner has met the first prong we find that it has failed to satisfy the remaining prongs petitioner did not exercise due care and it failed to do what a reasonable and ordinarily prudent person would have done under the circumstances petitioner knew it was required to file timely a federal_income_tax return for each year in issue but it neglected to do so for its taxable_year given the fact that taxpayers have a statutory duty to file timely income_tax returns we believe that a reasonable and ordinarily prudent person would have complied with the statutory duty to file timely such a return we also believe that breach of this duty is evidence of negligence 98_tc_203 affd in part revd in part 78_f3d_1355 9th cir 92_tc_342 affd 898_f2d_50 5th cir the fact that petitioner was negligent in the instant case is also supported by the fact that petitioner erroneously claimed deductions for the interest_expenses and its shareholder’s legal fees see condor intl inc v commissioner supra pincite emmons v commissioner supra pincite we sustain respondent on this issue we have considered all of petitioner's arguments for contrary holdings and to the extent not addressed above find them to be without merit to reflect concessions by respondent decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division u i l kekkrerereeerekrkerer kekrekrerereereerere krekrkekkkerereeerere legend taxpayer a krkkekkikkeerekererer taxpayer b rkeekeererekrkererererere ira x krekekkeeekkeeerereeker company m rekrkekeekeeekekereekreekkk amount d rekekekkerhekeererereere individual c krkkereekrerererererere individua g hrkerereeeerererereerer state p krrkrekrerekrekererereere company f krekkekekereeeererereree company h krekrkekeeekeekeererereekk ra y raekkekekkekerekrerereker company r krrkkkekekrerekrrererererer dear kerekekerereerererere this is in response to your letter dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code kekkerekkeerkekrkeeeereeerererer the following facts and representations have been submitted under penalties of perjury in support of your requested -_ at the time of his taxpayer a's husband taxpayer b died on january death taxpayer b maintained ira x with company m it has been represented that taxpayer a is the primary beneficiary of ira x taxpayer a asserts that after taxpayer b's death she was advised by individual c a professional financial advisor with company f to withdraw the funds from ira x and to reinvest those assets in new life_insurance contracts taxpayer a withdrew and purchased four new life_insurance amount d from ira x in april policies with company f and company h taxpayer a states that she relied on individual c to invest amount d into tax deferred accounts and that she believed that such amount had been invested in tax deferred accounts taxpayer a states that she did not become aware that amount d had not been placed in tax deferred accounts until she received a form 1099-r in february from company h to taxpayer a company h cancelled in after discovering that amount d had not been invested in tax deferred accounts contacted individual g an employee with the taxpayer a in the spring of state p department of insurance to help her correct the distribution error letter dated may the insurance_policy and refunded the premiums plus interest to taxpayer a a letter dated may cancelled the insurance policies and refunded the premiums plus interest to taxpayer a according to account statements submitted with this ruling_request taxpayer a to show her intent to keep amount d in a tax deferred account deposited amount d into ira y a rollover ira she established with company r on may from company f to taxpayer a company f in a based on the following facts and representations taxpayer a requests that the service waive the 60-day rollover requirement with respect to the distribution of amount d from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defined and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is jenn hhs n re dnnednieenieiie paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or ii the entire amount received including any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the dsay rollover requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date sec_408 of the code are eligible for the waiver under revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred in life_insurance policies with company f and company h taxpayer a as the the information submitted in this case indicates that in owner ira x withdrew amount d from ira x and on the advice of individual c invested amount d taxpayer a assumed that amount d had been invested in tax deferred accounts and did not discover that such amount had not been invested in tax deferred accounts until she received a form 1099-r as soon as taxpayer a discovered this mistake she contacted individual g to correct the distribution kkk ik kek kik ei aererieaeerer company f and company h cancelled the insurance policies and documentation submitted with taxpayer a's request for a ruling indicates that in may refunded the premiums plus interest to taxpayer a documentation submitted also indicates that taxpayer a established ira y a rollover ira with company r on may invested in ira y where she deposited amount d amount d remains therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x documentation submitted with this ruling_request indicates that on may provided all of the other requirements of sec_408 of the code except the 60-day rollover requirement are met with respect to amount d this amount will be considered a rollover_contribution within the meaning of code sec_408 taxpayer a deposited amount d into ira y at company r no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling does not authorize the rollover of amounts that are required to be distributed by code sec_401 this ruling assumes that ira x met the requirements of the sec_408 of the code at all time relevant to this ruling this ruling also assumes that ira y meets the requirements of code sec_408 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling is being sent to your authorized representative pursuant to a power_of_attorney form on file in this office if you have any questions concerning this ruling please contact kkkkkrrerrererereeerrer ees e ‘t e_p ral dee rear er rarer ree rrr ek sincerely yours ‘elgned 20tca b yloyd joyce e floyd manager employee_plans technical group enclosures


t c summary opinion united_states tax_court cheryl lynn ireland petitioner v commissioner of internal revenue respondent docket no 5649-14s filed date cheryl lynn ireland pro_se michael e d’anello and janet f appel for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by unless otherwise indicated section references are to the internal revenue continued any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for year in issue petitioner filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed petitioner resided in maine this case was submitted fully stipulated under rule the stipulation of facts and the accompanying exhibits are incorporated herein by this reference the issues for decision are whether petitioner is liable for federal_income_tax on an unreported distribution from her individual_retirement_account ira and the additional tax on early distributions prescribed in sec_72 background in petitioner wa sec_47 years old she was employed at a hospital that year and earned wages of dollar_figure the hospital withheld federal_income_tax of dollar_figure from petitioner’s pay continued code code as amended and in effect for and rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar in petitioner also received a distribution of dollar_figure from an ira that she maintained at td bank the bank which reported the distribution on form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc withheld federal_income_tax of dollar_figure from the distribution petitioner timely filed a form_1040 u s individual_income_tax_return for electing head_of_household filing_status and claiming a personal_exemption deduction for herself and a single dependency_exemption deduction for her daughter although she included the wages that she earned in in gross_income and claimed a credit for the income_tax that the hospital withheld from her pay she did not report the ira distribution that she received from td bank or the related_income tax withholding discussion the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 petitioner does not contend and the record does not establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact sec_61 provides that gross_income means all income from whatever source derived distributions from a qualified_retirement_plan normally constitute gross_income subject_to federal_income_tax see sec_61 and b a e d see also 111_tc_250 sec_408 provides several exceptions to the general_rule that distributions from an ira shall be included in gross_income eg for rollover_contributions transfers incident_to_divorce and distributions for charitable purposes see sec_408 there is no exception to the general_rule however for medical_expenses or ordinary living_expenses sec_6201 provides that the internal_revenue_service in certain circumstances cannot rely on information returns alone to establish unreported income but shall have the burden of producing reasonable and probative information in addition thereto this provision applies only where the taxpayer asserts a reasonable dispute with respect to any item_of_income reported on an information_return and only if the taxpayer has fully cooperated with the secretary petitioner does not deny that she received a distribution from her ira in the amount determined in the notice_of_deficiency by definition a qualified_retirement_plan includes an ira see sec_72 sec_4974 uscinski v commissioner tcmemo_2005_124 generally if a taxpayer receives a distribution from a qualified_retirement_plan before attaining age sec_72 imposes an additional tax equal to of the portion of the distribution which is includible in the taxpayer’s gross_income sec_72 and the additional tax is intended to discourage taxpayers from taking premature distributions from retirement plans--actions that frustrate public policy encouraging saving for retirement see 106_tc_337 citing and discussing the legislative_history underlying sec_408 the statutory predecessor to sec_72 milner v commissioner tcmemo_2004_111 sec_72 provides an exception to the imposition of additional tax to the extent that retirement_plan distributions do not exceed the amount allowable as a deduction under sec_213 to the employee for amounts paid during the taxable_year for medical_care determined without regard to whether the employee itemizes deductions for such taxable_year sec_213 in turn allows as a deduction the expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer his spouse or a dependent as defined in sec_152 determined without regard to subsections b b and d b thereof to the extent that such expenses exceed percent of adjusted_gross_income although petitioner does not dispute that she received a premature_distribution from her ira in she maintains that her accountant informed her that there was no need to include the distribution in taxable_income because she used the funds to pay her son’s medical_expenses as discussed above there is no exception in the code that would permit petitioner to exclude the ira distribution from her taxable_income because it was used to pay her son’s medical_expenses likewise sec_72 limits the imposition of additional tax to the extent that retirement_plan distributions do not exceed the amount allowable as a deduction under sec_213 ie the expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer his spouse or a dependent as defined in sec_152 the record reflects that petitioner did not claim her son as a dependent for the year in issue and fails to demonstrate that her son met the definition of a dependent provided in sec_152 consequently we conclude that petitioner is not eligible for the exception for taxable years beginning after date sec_213 provides that eligible medical_expenses may be deducted to the extent they exceed of adjusted_gross_income see patient protection and affordable_care_act pub_l_no sec_9013 sec_124 stat pincite under sec_72 b --even assuming that she used the funds in question to pay her son’s medical_expenses petitioner’s alleged reliance on the mistaken advice of her accountant does not excuse her from the obligation to include the ira distribution in her taxable_income for the year in issue or to pay the appropriate amount of federal_income_tax and additional tax related thereto see 469_us_241 de aycardi v commissioner tcmemo_1997_308 slip op pincite reasonable reliance on an agent may constitute a possible defense to penalties but not to the underlying tax_liability petitioner maintains that it would be inequitable to hold her liable for the additional tax due we have considered similar claims in the past and have observed that there is no authority in the code the legislative_history or caselaw for a general financial hardship exception to the imposition of the additional tax on early distributions see arnold v commissioner t c pincite dollander v commissioner tcmemo_2009_187 milner v commissioner tcmemo_2004_111 while we are sympathetic to petitioner’s position the court may not add an exception to the code by judicial fiat and we are obliged to apply the law as written see 270_us_245 consequently respondent’s determinations in this case are sustained to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si 2-plr-102739-00 date date x date date year year dear this letter responds to a date letter that x’s authorized representative submitted on behalf of x concerning relief under sec_1362 of the internal_revenue_code the information submitted states that x incorporated on date of year x’s corporate minutes indicate that x and its shareholder intended x to be an s_corporation for year x’s attorney sent x’s secretary treasurer a blank form_2553 election by a small_business_corporation with instructions that the form be filed no later than date of year however because x’s in-house accounting and legal staff were heavily involved in other business for x x failed to file form_2553 by date of year when x realized that it had not filed a form_2553 timely for year x immediately filed the form effective for year upon the advice of its accountant x filed a form_1120s u s income_tax return for an s_corporation for year subsequently x received a letter from its service_center indicating that it could not process x’s form_1120s for year because x’s filed form_2553 had an effective date for year sec_1362 of the code provides that if-- a an election under sec_1362 for any taxable_year is made after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year mr david c nesbitt and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely yours j thomas hines acting chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca_2011051909444237 --------- number release date from -------------------- sent thursday date am to ------------------- cc -------------------------------------- subject re sec_6103 clarification pertaining to partnerships --------------------------- section of the mortgage forgiveness debt relief act of enacted new sec_6103 limiting the disclosure of partner information to other partners in the same partnership it did not change sec_6103 which is an exception to the general disclosure limitations and allows such information to be disclosed to other partners in the same partnership as part of a tefra_audit or litigation sec_6103 provides that taxpayer information may be disclosed to all parties in a federal judicial or administrative_proceeding all direct and indirect partners in a tefra partnership are parties to the administrative_proceeding ie the audit and the subsequent litigation the 9th circuit so held in 323_f3d_1210 a f t r 2d ustc p big_number so while we will have to be more careful for disclosures outside of tefra under the amendment to sec_6103 the new legislation should not affect our disclosures made as part of a tefra_audit and litigation thus we may continue to issue the form 886-z under sec_6103 since this provides an exception to e --------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip 4-plr-101004-03 date date legend taxpayer parent date a date b year a state a x policy form a number number number number number number number number system a system b department a department b dear this is in response to your letter of date a requesting a waiver pursuant to sec_7702 of the internal_revenue_code for number insurance contracts issued by taxpayer that failed to meet the requirements of sec_7702 plr-101004-03 facts the information submitted indicates that taxpayer is a stock_life_insurance_company organized and operated under the laws of state a taxpayer is licensed to do business in x taxpayer represents that it qualifies as a life_insurance_company under sec_816 taxpayer is a wholly-owned subsidiary of parent and files a consolidated_return with parent on an accrual accounting calendar_year basis all of the life_insurance contracts hereinafter referred to as policies that are the subject of this request are flexible premium universal_life_insurance contracts issued by taxpayer on policy form a all of the policies were issued after date b and were intended to comply with sec_7702 by both satisfying the guideline premium requirements of sec_7702 and c and falling within the cash_value corridor of sec_7702 and d taxpayer issued over number policies and has number policies in-force the policy provides for the payment of an initial premium and of planned premiums the amount and interval of the planned premium are set forth in a schedule attached to the policy although the policy form allows the policyholder to change the frequency as well as increase or decrease the amount of the planned premiums policyholders generally only pay the premium set forth on the schedule the policies allow taxpayer to limit any increase in the planned premium and to limit the number and amount of any additional payments to maintain the compliance of the policies with the requirements of sec_7702 the policies provide for the payment of a death_benefit prior to maturity the death_benefit provided by the policy varies depending on the death_benefit option selected by the policyholder and in effect at the death of the insured the policy provides two death_benefit options the first option is that the death_benefit is the greater of the specified amount or the applicable_percentage as set forth in sec_7702 of the policy’s cash_value the second option is that the death_benefit is the greater of the specified amount plus the policy’s cash_value or the applicable_percentage as set forth in sec_7702 of the policy’s cash_value taxpayer’s compliance procedures for the policies include the use of system a and system b and the accompanying manual procedures as part of the policy application process taxpayer’s procedures require policyholders to identify the amount of the planned premium they will pay for the policy employees in department a use system a to calculate the guideline_premium_limitation within the meaning of sec_7702 for the policy and to determine whether the sum of the planned premiums will always be less than the guideline_premium_limitation for the policy taxpayer also uses system b to generate billing statements for the planned premiums when each policy is issued taxpayer’s procedures require employees in department a to determine the date as of which the planned premiums for the policy and the bill for the planned premium will be modified or terminated the policy change_date a policy change_date may be needed for a variety of reasons such as the plr-101004-03 expiration of a benefit or the termination of a temporary substandard extra employees in department a calculate the policy change_date for a policy using a specific formula different formulas are used for the various types of life_insurance policies employees in department a are provided with a procedure manual that contain directions regarding the manner in which the policy change_date should be calculated additionally supervisors in department a train employees in their department to enter the policy change_date into the policy change_date field in system b if the planned premium will need to be reduced or terminated by a certain date to continue a policy’s compliance with the guideline_premium_limitation the policy change_date would be that date rather than the date produced by the applicable formula for the policy once the policy change_date is determined senior employees in department a are required to enter it into the policy change_date field of taxpayer’s system b with a code indicating the reason for the policy change if the planned premium will need to be modified or terminated to continue the policy’s compliance with the guideline_premium_limitation the current procedure is to use code g system b generates three times a month a list of all the policies with policy change dates in the following month the policy change_date notice the policy change_date notice also sets forth a code for each policy change_date that explains the nature of the modification required after the policy change_date notice is generated it is sent to department b for processing department b reviews the policy change notice in order to determine whether a specific code is identified for each policy if a specific code is identified for example code g-- change needed to maintain compliance with the guideline_premium_limitation department b modifies the planned premium to maintain the policy’s compliance however if the code is identified on the policy change_date notice is miscellaneous code the file for the policy must be reviewed by department b in order to determine the nature of the modification required department a can enter only one policy change_date into system b for each policy if a policy will require more than one change_date in its planned premium or other aspects of its coverage since use of the policy change_date field is not restricted only to premium changes the date of the first policy change is coded with the appropriate code for that change or if there is no specific code a miscellaneous code is used with respect to certain policies multiple policy change dates are required for example in the case of a policy issued with a temporary substandard extra that expires after a certain number of years the policy change_date would be coded with a miscellaneous code this would inform department b that the policy file must be reviewed in order to determine the nature of the modification required and whether a subsequent policy change_date is required approximately one year ago taxpayer discovered that certain of the policies it issued failed to meet the requirements of sec_7702 these policies are referred to hereafter as failed policies described below are the nature of the errors and the steps plr-101004-03 that taxpayer is taking or will take to correct these errors and to prevent them from reoccurring clerical processing errors resulted in the noncompliance of number failed policies these clerical processing errors stemmed from the inadvertent failure of employees to follow taxpayer’s established procedures there are four types of clerical processing errors the first type of error stemmed from the failure of employees in department a to follow taxpayer’s procedures from for determining the policy change_date and entering the date into system b taxpayer’s procedures require employees in department a to determine the policy change_date using one of the formulas provided once a policy change_date is determined senior employees in department a are required to enter it into system b employees in department a inadvertently used an incorrect formula in certain instances to determine the policy change_date in other instances employees in department a after correctly determining the policy change_date did not enter the date into system b as a result the policy change_date notices generated by system b did not correctly reflect the policy change_date for these policies since the employees in department b were not provided the correct policy change_date they did not correctly modify the planned premium for these policies with the result that premiums in excess of the guideline_premium_limitation excess premiums were paid this resulted in the noncompliance of number policies the second error resulted from the failure of employees in departments a and b to follow taxpayer’s procedures for entering the policy change_date into system b when each policy is issued taxpayer’s procedures require senior employees in department a to enter the policy change_date into the system b contrary to taxpayer’s procedures employees in department a did not enter the policy change_date into system b in certain instances as a result the policy change_date notices generated by system b did not contain the policy change_date for these policies consequently employees in department b were not aware that the planned premium had to be modified in order to prevent excess premiums from being paid the error resulted in the noncompliance of number policies after a policy change notice is generated taxpayer’s procedures require employees in department b to review the policy file of all the policies on the policy change_date notice that are identified with a miscellaneous code for these policies taxpayer’s procedures also require employees in department b to determine based on the policy file the nature of the planned policy change required and whether a subsequent policy change_date should be entered into system b for the policies in certain instances when a subsequent policy change_date needed to be entered into system b employees in department b did not do so as a result any policy change_date notice generated by system b did not contain the subsequent policy change_date for these policies and employees in department b were not aware that the planned premium had to be modified a second time in order to prevent excess premiums from plr-101004-03 being paid this error resulted in the noncompliance of number policies the third clerical processing error stemmed fro the failure of employees in department b to follow taxpayer’s procedures with respect to policy change_date notices as described above taxpayer’s procedures require employees in department b to review the policy change_date notices and modify the planned premium accordingly in certain instances employees in department b did not follow taxpayer’s procedures and did not change the planned premium as indicated on the policy change_date notices consequently policyholders paid excess premiums which were not refunded within days of the end of the contract_year in which they were paid this error resulted in the noncompliance of number policies the fourth clerical_error involved a mistake in inputting certain information into systems a and b specifically for number policies with respect to which the insured was a female the planned premium and the guideline premiums were calculated for a male of the same age as a result premiums were paid in excess of the correct guideline_premium_limitation as a short term solution to correct its procedures taxpayer is comparing the premiums_paid for a policy which are not equal to the billed premium and or are received prior to the due_date to the policy’s guideline_premium_limitation on a monthly basis to determine whether the premium can be accepted a report is also generated on a monthly basis indicating all policies that had excess premiums_paid in the preceding month employees of taxpayer review each policy on the report in order to determine whether in fact premiums have been paid in excess of the guideline_premium_limitation for the policy if excess premiums have been paid such premiums are returned to policyholders with interest within days after the end of the contract_year in which they are received pursuant to sec_7702 taxpayer also has implemented some additional procedures designed to prevent noncompliance specifically employees in department a use in conjunction with system a a detailed spreadsheet to calculate the guideline_premium_limitation for a policy to determine whether the sum of the planned premiums will always be less than the guideline_premium_limitation of the policy taxpayer’s procedures also require a supervisor in department a to review the determination of the guideline_premium_limitation for a policy before it is sent to the policyholder in order to reduce the likelihood that the errors described above will recur taxpayer is in the process of converting the policies to a new administrative system taxpayer expects the conversion to be completed by the end of year a the new administrative system will compare premiums_paid under the policy with the guideline_premium_limitation applicable to the policy each time a premium payment is received additionally the new administrative system will not allow premiums in excess of the guideline_premium_limitation to be applied to a policy such excess premiums will be returned with interest to policyholders within days after the end of the contract_year plr-101004-03 in which they were paid pursuant to likelihood that the errors described above will recur f b these actions will reduce the law and analysis sec_7702 defines the term life_insurance_contract for all purposes of the code under sec_7702 a life_insurance_contract must qualify as such under the applicable law and must satisfy either the cash_value_accumulation_test of sec_7702 and sec_7702 or both the guideline premium requirements of sec_7702 and sec_7702 and the cash_value corridor of sec_7702 and sec_7702 with respect to the guideline premium requirements sec_7702 requires that the premium paid under the contract at any time must not exceed the greater of the guideline_single_premium or the sum of the guideline level premiums to that date the guideline_single_premium is the single premium at issue that is needed to fund the future_benefits under the contract determined on the basis of the following three elements enumerated in sec_7702 i - iii i reasonable mortality charges which meet the requirements if any prescribed in regulations and which except as provided in regulations do not exceed the mortality charges specified in the prevailing_commissioners’_standard_tables as defined in sec_807 as of the time the contract is issued ii any reasonable charges other than mortality charges which on the basis of the company’s experience if any with respect to similar contracts are reasonably expected to be actually paid and iii interest at the greater of an annual effective rate of percent or the rate or rates guaranteed on issuance of the contract the guideline_level_premium means the level annual amount payable over a period not ending before the insured attains age computed on the same basis as the guideline_single_premium except sec_7702 shall be applied by substituting percent for percent accordingly the amount of both the guideline_single_premium and guideline_level_premium is proportional to the amount of future_benefits under the contract the computational rules of sec_7702 and the definitions of sec_7702 apply to both the guideline_single_premium and the guideline_level_premium under sec_7702 the secretary_of_the_treasury may waive the failure to satisfy the requirements of sec_7702 if the taxpayer establishes that the requirements were not satisfied due to reasonable error s and that reasonable steps are being taken to remedy the error s taxpayer proposes to remedy the compliance failure of each failed policy that is in-forced on the effective date of the waiver and under which the sum of the premiums_paid as of that date exceeds the guideline_premium_limitation for the failed policies as of plr-101004-03 that date specifically taxpayer proposes to refund to the policyholders the amount by which the sum of the premiums_paid exceed the guideline_premium_limitation for the policy as of the effective date of the waiver with interest on such amount at the contract crediting rate with respect to failed policies that terminate by reason of the death of the insured at the time when the premiums_paid exceed the guideline_premium_limitation for the failed policies taxpayer will pay the policyholders the policyholders’ estates or the beneficiaries such excess with interest at the contract crediting rate taxpayer is prepared to implement these corrective measures within days from the effective date of the requested waiver after considering all the facts and circumstances we find that failure of number policies to satisfy the requirement of sec_7702 was due to reasonable errors and taxpayer is taking reasonable steps to remedy the errors conclusion accordingly based on the information submitted the failure of number contracts to satisfy the requirements of sec_7702 is waived pursuant to sec_7702 provided that the excess premiums are refunded with interest calculated equal to the contract crediting rate as of the date of the cure any contracts that are not cured within days of the date of this letter are not covered by this waiver the rulings contained in this letter are based on information submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination except as 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 s requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer sincerely yours mark s smith chief branch office of associate chief_counsel financial institutions and products


internal_revenue_service number info release date index number --------------------- ------------------------------------------- ------------------------ ------------------------ taxpayer dear --------------- --------------------- department of the treasury washington dc person to contact -------------id no ------------- telephone number --------------------- refer reply to cc psi b01 - genin-151268-04 date nov we are responding to a letter on behalf of the taxpayer dated date requesting a late s election effective date although we are unable to respond to the request as submitted this letter provides useful information relating to the request according to the information provided it appears that the taxpayer may apply for relief pursuant to revproc_2003_43 with the appropriate service_center we have included a copy of revproc_2003_43 please follow the instructions in sec_4 of the revenue_procedure to receive relief for the late s_corporation_election the irs has a small_business website which provides information and various useful links visit this special site at www irs gov smallbiz additionally you can order a single free copy of the small_business resource guide cd-rom by calling the cd-rom provides critical tax information including forms instructions and publications as well as valuable information from a variety of government agencies non-profit organizations and educational institutions we hope that the above information proves helpful enclosure revproc_2003_43 cc sincerely yours dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries