t c memo united_states tax_court earl m hasbrouck and donna m hasbrouck petitioners v commissioner of internal revenue respondent docket no filed date earl m hasbrouck and donna m hasbrouck pro sese joan s dennett for respondent memorandum findings_of_fact and opinion carluzzo special_trial_judge this case was assigned pursuant to sec_7443a of the internal_revenue_code as amended and in effect when the petition was filed and rule sec_180 sec_181 and sec_182 unless otherwise indicated section references are to the internal_revenue_code as amended and in effect for the relevant period rule references are to the tax_court rules_of_practice and procedure this case is before the court on petitioners’ motion for litigation and administrative costs pursuant to section and rule in a notice_of_deficiency issued on date respondent determined deficiencies in petitioners’ and federal income taxes in the amounts of dollar_figure dollar_figure and dollar_figure respectively the petition was filed on date and on date respondent's answer was filed on date a stipulated decision was entered in which the parties agreed there were no deficiencies in federal income taxes for any of the years in issue petitioners thereafter filed the motion here under consideration seeking an award of litigation and administrative costs in the amount of dollar_figure of which dollar_figure is attributable to their own time the stipulated decision was vacated and filed as a stipulation of settled issues on date respondent's response to the motion wa sec_1 references to sec_7430 are to that section as amended by sec_1551 of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 effective for proceedings commenced after date and by sec a of the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 102_stat_3342 effective with respect to proceedings commenced after date filed on date a hearing on petitioners’ motion was conducted on date in helena montana the issue for decision is whether petitioners are prevailing parties within the meaning of sec_7430 findings_of_fact petitioners are husband and wife they filed timely joint federal_income_tax returns for the years in issue at the time the petition was filed they resided in ulm montana references to petitioner are to earl m hasbrouck petitioner has been employed as an independent_contractor in the construction industry since donna m hasbrouck is and was during the relevant periods a professional bookkeeper on their and federal_income_tax returns petitioner listed his occupation as self-employed and donna m hasbrouck listed her occupation as bookkeeper sometime in petitioner injured his back on their federal_income_tax return petitioner listed his occupation as disabled and donna m hasbrouck again listed her occupation as bookkeeper in date petitioners purchased an 80-acre tract of land located in ulm montana the property before purchasing the property petitioners had never been engaged in the trade_or_business_of_farming petitioners purchased the property with the intention eventually to raise livestock at the time they purchased the property petitioners lived approximately miles away in great falls montana a few sheds were on the property at the time of its purchase approximately acres of the property had been placed in the conservation reserve program crp by the previous owner the crp is a program implemented by the agricultural stabilization and conservation service ascs and the commodity credit corporation ccc on behalf of the u s department of agriculture usda the purpose of the crp is to preserve and improve the soil and water resources of erodible cropland under the crp the usda enters into a long-term_contract with the owner or operator of highly_erodible_cropland to convert the cropland which is normally devoted to the production of an agricultural commodity to a less intensive use the less intensive use is outlined in a conservation plan developed by the soil conservation service and the local ascs and typically requires the owner or operator to establish a permanent vegetative cover on the land as well as to control noxious weeds on the crp acreage in exchange for the owner's implementation of the conservation plan the ccc agrees to pay the owner or operator an annual rental payment for the period of years specified in the contract share with the owner or operator the cost of establishing the conservation practices specified in the conservation plan and provide technical assistance to assist the owner or operator in carrying out the contract on date petitioners signed a form crp-1 conservation reserve program contract the contract to continue the enrollment of the acre sec_2 in the crp the contract provided for an annual rental rate of dollar_figure per acre and was to be effective until a representative of the ccc signed the contract on date an appendix to the contract lists the eligibility requirements for participation in the crp in pertinent part the appendix provides eligibility requirements a in order for any person to be eligible for payments under this contract such person must be an owner or operator of eligible cropland and -- if an owner of eligible cropland must have owned such cropland for not less than years prior to the close of the applicable_period for entering in contracts with ccc unless c it is determined that the new owner of such there is evidence in the record that at some later time acres rather than acres were placed in the crp cropland did not acquire such cropland for the purpose of placing it in the crp in order for a producer3 to qualify for payments under the crp an annual determination is made by the local ascs regarding whether the producer is actively engaged in farming for this purpose petitioners submitted on an annual basis a form ccc- 502a farm operating plan for payment eligibility review for an individual farm operating plan form or form to the cascade county ascs office4 outlining their implementation of the conservation plan the farm operating plan form provides that the information collected will be used in applying statutory payment eligibility and limitation provisions the form defines active personal labor as follows active personal labor - is personally providing physical activities necessary in a farming operation including activities involved in land preparation planting cultivating harvesting and marketing of agricultural commodities in the farming operation other physical activities include those physical activities required to establish and maintain conserving cover crops or conserving use acreages and those physical activities necessary in livestock operations a producer is defined as a person who as owner landlord tenant or sharecropper would have shared in the risk of producing the crop on the land to be placed in the crp or shares in the proceeds therefrom at some point in the 1990's the cascade county agricultural stabilization and conservation service became known as the cascade county farm service agency petitioners submitted a completed farm operating plan form each year of the crp contract to the cascade county ascs as a representative example petitioners submitted to the court their completed farm operating plan form for the year in response to question a on the form what estimated percent or hours of active personal management do you provide petitioners indicated petitioners also indicated that they owned percent of the equipment used in the farming operation the cascade county ascs made an annual review of the information provided by petitioners in their farm operating plan forms and issued what petitioners termed a farm status determination each year as a representative example petitioners submitted to the court the farm status determination they received from the cascade county ascs on date which states the cascade county asc committee has completed its review of your farm operating plan for based on the information submitted the committee determined that you are actively engaged in a farming operation as an individual separate and apart from any other individual or entity it also understands that you are separately responsible for your interest in the operation based on these findings the committee has determined that you are one person for payment limitation purposes separate and distinct from any other individual or entity this determination is based on the facts as submitted any unrevealed circumstances could require the application of a more restrictive rule in fulfilling the terms of the crp contract petitioners among other things planted approximately big_number trees prepared the land and planted the grasses specified by the soil conservation service built fences purchased seeders tractors and water tanks and kept several goats to prevent the spread of noxious weeds on their federal_income_tax returns petitioners reported wages salaries tips etc of dollar_figure dollar_figure and dollar_figure for taxable years and respectively petitioners also reported gross_receipts from petitioner's schedule c construction business in the amounts of dollar_figure for and dollar_figure for consistent with petitioner's disabled status petitioners did not attach a schedule c for his construction business to their federal_income_tax return on schedules f attached to their federal_income_tax returns for the years in issue petitioners reported as income the dollar_figure received pursuant to the crp contract as well as cooperative distributions petitioners deducted the following schedule f expenses petitioners reported cooperative distributions of dollar_figure and dollar_figure for taxable years and respectively dollar_figure big_number big_number big_number depreciation feed purchased gasoline fuel and oil insurance mortgage interest other interest labor hired repairs and maintenance seeds and plants purchased big_number supplies purchased taxes utilities big_number veterinary fees and medicine other expenses legal acct miscellaneous advertisement office supplies road expenses windbreak exp total expense sec_222 big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number petitioners’ schedules f reflected net losses of dollar_figure dollar_figure and dollar_figure for and respectively in date petitioners received notification from respondent that their and taxable years were to be examined in date donna m hasbrouck accompanied by brian bras an accountant with the firm that prepared petitioners’ tax returns traveled to respondent's offices in great falls montana and met with sue e mcconaughy ms mcconaughy the tax_auditor responsible for the examination ms mcconaughy had previously requested information from petitioners regarding the deductions and losses reflected on the schedules f although certain books_and_records relating to the property were provided to ms mcconaughy it is unclear from the record whether the farm status determination letters from cascade county ascs had been provided to her at the initial meeting ms mcconaughy issued her examination_report by letter dated date the 30-day_letter insofar as relevant for our purposes the 30-day_letter proposed to disallow the losses claimed on schedules f of petitioners' and federal_income_tax returns the following explanation for the proposed disallowance was provided because the amount of income you receive each year is fixed by the federal government no amount of effort or management skill on your part can increase it therefore it has been determined that at this point in your operation you are not yet in business in order to report income and expenses on schedule f you must be in the_business_of_farming because you are not the use of schedule f is not appropriate the examination_report reclassified the crp income and expenses as rental income the report explained the adjustments as follows previous court rulings have determined that when crp income is not farm income it is reported as rental income your crp income for the three years shown has been reclassified as rental income and the allocable expenses reclassified as rental expenses the expenses allocated to the rental income are only the ones that are directly connected with the maintenance of the real_estate in a six-page letter dated date the protest letter mr bras disputed ms mcconaughy’s findings the protest letter covered in detail petitioners’ acquisition of the property in date and their subsequent use of the land under the crp contract the statement of facts portion of the protest letter states pursuant to the crp contract as signed by taxpayers on taxpayers must meet strict conditions in order to initially qualify and continue to qualify under the crp among those conditions are the following based upon their obligation under the crp contract taxpayers have actively maintained their property using conservation practices and other farm management techniques as stated above taxpayers’ farming activities are subject_to an annual review by the local ascs office taxpayers have purchased seeders tractors water tanks and built fences to prevent adjoining farmers’ cattle from grazing upon their land seeding the land with grass seed and building shelter belts is required by the crp contract taxpayers also have purchased water tanks and haul water since they do not have water available on a yearlong basis they have also purchased a few goats to prevent the spread of noxious weeds such as leafy spurge and knapweed the state of montana currently is attempting to eradicate the spread of these and other noxious weeds again these expenditures are dictated by the terms of the crp contract in the initial years of operation taxpayers paid wages to employees for the building of the fence and other farm related work taxpayers filed the appropriate payroll reports with both state and federal authorities on the employees’ wages no expenses have been incurred since the purchase of the land which do not specifically relate to the use of the property as prescribed by the crp contract taxpayers have not incurred costs of a nature which are only for the future use of their farm after they are no longer being paid_by the crp in the protest letter petitioners requested that the matter be transferred to the appropriate appeals officer if the examination_division did not agree with petitioners’ position in addition to a form_2848 power_of_attorney and declaration of representative and the examination_report the protest letter listed as enclosures the following crp contract letter from ascs office dated letter from ascs office dated letter from ascs office dated letter from ascs office dated discussion of crp payments from the farm income_tax workbook page of irs publication the letters from the ascs office listed above refer to the farm status determination letters petitioners received annually from the cascade county ascs sometime in date respondent requested that petitioners sign a waiver of the limitations_period in a letter dated date to mark murray operations manager at respondent's great falls office petitioners declined to sign the waiver stating there is no need for an extension of time this matter was appealed to higher authority three months ago it should not even be in your office it especially should not be on the desk of sue mcconaughy i feel there is ample time remaining until date in which to get the matter before an appeals officer before any statute_of_limitations expires to that end this is a demand that you forward the hasbrouck appeal to the next level your excuse we need the original documents with which to send the matter to appeal is in my opinion self-serving nonsense your tax examiner made a determination and issued subsequent findings based on what is available there is no logical reason an appeal cannot be accomplished using the same documents request for any extension of time is denied the and ‘94 federal_income_tax returns of hasbrouck stand as submitted we have a right to an appeal we demand that right and we demand it be accomplished before an day letter is issued in a letter dated date petitioners requested the previous court rulings mark murray responded to this letter in a letter dated date which states in relevant part i am responding to your letter dated date in which you requested all pertinent data citations of law and or authority and detailed referenced support data regarding the examination of your and federal_income_tax returns i am unable to comply with your request at this time because at your request the case files and their contents have been forwarded to the appeals_division in denver and now fall within that office’s jurisdiction i will however forward your request so that appropriate reference information from the file can be sent to you petitioners’ case was assigned to anita teichrow an appeals officer in the helena appeals_office in a letter dated date ms teichrow again requested that petitioners sign a consent to waive the limitations_period ms teichrow’s date letter referenced the following taxable periods and in response to ms teichrow’s date letter petitioners stated in a date letter ms teichrow this writer has no sympathy for the irs’ position you assert in your letter s given the fact that the irs has via it’s own internal action deliberately intentionally delayed adjudication of the hasbrouck appeal your excuses are understandable - but they are still merely excuses we believe you are attempting to justify five months of irs delays by imposing unreasonable time constraints on the taxpayer we are also without sympathy to the irs’ position because in your letter you threaten i cannot proceed with consideration of your case unless i receive the extension forms within ten days from the date of this november letter that caveat pretty much ends our relationship no matter how you sugar-coat your comments we believe they can be interpreted no other way than to be a blatant attempt at intimidation simply stated we will not be intimidated by threats - or any other form of unprofessional conduct no unjustified extension of time will be forthcoming the tax deadline is still five months away we suspect a reasonable appeals officer will be able to see the whimsical nature of the tax examiner’s so-called decisions within fifteen minutes of responsible review by any mathematical standard that still leaves five months time in which to dispose_of the appeal also on date petitioners wrote to paul thornton in helena montana whom they identify as respondent's regional_director_of_appeals in that letter petitioners stated inasmuch as teichrow did voluntarily remove herself from the hasbrouck tax matter after december 10th this correspondence is intended to request that you personally intervene and take the appropriate administrative action to ensure that the hasbrouck appeal is placed into the hands of another irs officer who will have the time for a responsible review sometime in early december petitioners spoke with greg loendorf ms teichrow’s supervisor on the basis of this conversation petitioners wrote a letter dated date to ms teichrow and stated to begin with i acknowledge that your supervisor wants you to remain on the hasbrouck tax matter as the appeals officer i have no objections your supervisor stated that you would be able to schedule an appeals_conference sometime during early january you may schedule it at your convenience just give us sufficient warning so that we may include brian bras it is my understanding that the conference is to be held prior to the time any ninety day letter is issued it is also my understanding that prior to the time the conference is held some responsible individual is going to see to it that brian bras and i finally have the opportunity to review the citations of law and or authority we requested long long ago in support of the tax examiner’s so-called findings it is of extreme urgency we have the opportunity to review this data prior to the time of any conference because not one person involved in this dispute really understands that basis for mcconaughy’s allegations please see to it we receive the irs support data in a letter dated date ms teichrow responded to petitioners’ date letter as follows i spoke with my supervisor greg loendorf yesterday since my understanding of your conversation with him was not the same as recited in your letter dated date he advised me that if you do not sign a consent the 90-day letter will be issued the letter will not be issued until the first part of january because of the processing time necessary for us to do so however mr loendorf told me he agreed i would hold a conference during the 90-day period in an attempt to resolve the case i have not had the opportunity to review your case in depth however it appears you received copies of the examiner’s workpapers along with her audit report therefore at this time you will not receive anything further from me regarding citations of law and or authority i reserved a room in the great falls irs office for thursday date in order to hold the conference by letter dated date petitioners responded as follows to ms teichrow's letter of the previous day the tenor of your remarks indicates you intend no co- operation what is the point of scheduling a meeting if the irs intends to withhold the evidence necessary to resolve the dispute we did receive copies of the examiner’s workpapers and her report as you suggest the irs has already been notified that none of us who has reviewed the examiner’s work papers and report even remotely understands what basis mcconaughy could possibly have used to make the determinations she did it is our right to know and understand that basis before any meeting is scheduled because it is our right to know and understand that basis - and also because none of us can draft an intelligent reply to the examiner’s allegations in our own defense because we do not know and understand that basis - this paragraph constitutes notice to the irs that until such time as the support data we have repeatedly requested are furnished there will be no meeting there is nothing to meet about i feel it will be fair to stipulate that before consideration be given to future meetings the irs will be required to have the citations of law and or authority and support data we requested delivered into our hands at least two weeks prior to the time any meeting is scheduled days will be considered a reasonable_time in which to furnish the citations of law and or authority and support data on date petitioners requested from ms teichrow a complete copy of respondent's administrative file ms teichrow responded by letter dated date as follows in response to mr hasbrouck’s request for a copy of the entire file i am enclosing a complete copy of the examiner’s report including workpapers showing the adjustments made for and i have not copied the entire file as much of the remainder is correspondence i acknowledge receipt of your letter dated date it is my understanding from this communication that you have declined to meet with me on date i will not be responding to your request for citations of law and or authority and support data within days as previously advised my work is managed on a first-in_first-out basis as such i have not had an opportunity to make an in-depth review of your case in a letter to ms teichrow dated date petitioners acknowledged receipt of the copy of the examiner’s report and stated the irs steadfastly refuses to furnish any proof that the deficiency it claims is based on law or fact in spite of telling us previous court ruling s have determined what previous court rulings court rulings have designations so we can look them up what are those designations i do decline to meet with you until such time as you comply with the request made by this taxpayer on date to furnish data in support of irs argument s in a letter dated date petitioners again wrote to ms teichrow’s supervisor greg loendorf in this letter petitioners requested that mr loendorf see to it that some responsible individual within your department furnishes us with a list of personnel as it pertains to the appeals_division 'chain of command ' beginning with the name of the assigned appeals officer all the way to the top petitioners also claimed that ms teichrow refused to provide the citations of law and or authority and support data that petitioners had previously requested as indicated on date respondent issued a notice_of_deficiency to petitioners in which deficiencies in their and federal income taxes were determined relevant for our purposes the adjustments that gave rise to the deficiencies were explained as follows the dollar_figure and the dollar_figure shown on the a and returns respectively as schedule f farm_losses are not allowed because it has not been established that any amount of loss was sustained in a trade_or_business however certain of these deductions are allowable as rental expenses below therefore taxable_income is increased dollar_figure for and dollar_figure for of the losses addressed above dollar_figure for b and dollar_figure for were expended for the production maintenance or conservation of income the remainder of the losses are not allowable since they were not sustained in a trade_or_business and were not expended for the production conservation or maintenance of income therefore taxable_income is decreased dollar_figure for and dollar_figure for c due to an increase in the amount of adjusted_gross_income for as computed at exhibit a no amount of net_operating_loss_deduction is available to be carried from to consequently the tentative allowance for is recaptured in full in a letter dated date petitioners wrote respondent and again demanded copies of all evidence and support data previously requested petitioners noted that their previous requests for the court rulings referenced in ms mcconaughy’s report have been ignored and denied by irs action and that the previously requested data supporting the irs position was required for the effective presentation of petitioners’ case in a letter dated date to john rigler problem_resolution_officer with respondent's helena office petitioners again requested information regarding the chain of command for respondent's appeals_office petitioners stated that this information was necessary for the preparation of our defense in seeking adjudication petitioners wrote another letter on date to john rigler again outlining their position for the complaint before the ombudsman regarding the professional protocol of the appeals section actions petitioners also requested the appeals_division technical operations manual outlining one-by- one the procedural steps required of irs personnel in appeals resolution in another letter to john rigler dated date petitioners further requested that they be given more information from respondent's technical manual regarding the administration of the irs operations department for case preparation on date petitioners retained thomas e towe to represent them in this case in a letter dated date john rigler responded to petitioners’ april april and april letters mr rigler stated you clearly have been frustrated in your efforts to find out what court rulings were referred to in the examination_report proposing an adjustment to rental income and expenses on your income_tax return to rectify this problem an irs attorney researched this matter and provided me with the following information to give you under the conservation reserve program crp the farmer receives a yearly rental payment from the government in return for implementing a ten year conservation program the farmer is barred from harvesting any crops from the land or utilizing it for grazing purposes other than planting cover and eradicating noxious weeds the land must be left alone see 86_br_582 bankr w d wis c f_r sec_704 et seq in 120_br_81 bankr s d tex the court explained crp as follows under farm programs like the crp owners and operators on date mr towe filed a motion to withdraw as counsel of record for petitioners mr towe’s motion was granted on date of highly_erodible_cropland may enter into a long- term contract with the secretary of agriculture providing for conversion to a less intensive use of that cropland by contracting with the u s department of agriculture agriculture stabilization conservation service ascs not to place farm_land into production the farmer foregoes the possibility of generating farm income by growing crop and selling 74_br_401 bankr s d ohio 75_br_501 bankr n d ohio title of the u s code specifically designates these payments as rental payments once the crp contract is in place the regulations require that if the property is sold or transferred the new owner of the property has the right to terminate the crp contract see c f_r sec_704 90_br_946 bankr n d iowa the next question however is whether an individual is in a trade_or_business in a similar situation an individual owned acres of farm_land of which approximately acres was tillable the farmer then placed acres in the crp program in this case the service determined that the individual had retired from farming private_letter_ruling thus absent any other facts should an individual purchase farm_land already in the crp program and owns no other operating farm_land the service will more than likely determine that the individual is not in the trade_or_business_of_farming since there is not material_participation occurring with respect to such commodity there is nothing further i can do for you as i explained in my date letter to you the irs problem_resolution_program cannot take the place of normal appeals channels since you chose not to resolve this matter with irs appeals officer anita teichrow you must decide if you wish to petition the u s tax_court you must do so within the 90-day statutory period if you petition the u s tax_court irs district_counsel will again attempt to resolve this disputed tax_deficiency with you short of going to court the petition in this case was filed on date in their petition petitioners allege that they were actively engaged in the trade_or_business_of_farming because they have a contract with the cascade county ascs committee representing the united_states department of agriculture for the crp program which requires that they actively participate in the farming operation they have in fact fulfilled the terms of their agreement and have pursuant to that end done considerable farming activity each year in order to fulfill their obligations under the crp contract in addition they have actively managed the balance of the 80-acre tract ie they have taken care of the animals which the agricultural land sustains in his answer filed on date respondent denies petitioners’ allegation that they were actively engaged in the trade_or_business_of_farming during the years in issue on june and date mr towe made written requests for a conference with helena district_counsel for the purpose of settling petitioners’ case in a letter dated date to mr towe respondent conceded the deficiencies against petitioners respondent explained the concession as follows on date the tax_court decided the case of ray v commissioner t c memo which dealt with crp payments and whether they are received in the taxpayer’s trade_or_business the facts are very similar to your clients’ case the only difference however is that in ray the taxpayer was a farmer at the time he acquired the land in your case your clients were not farmers when the crp land was purchased prior to the determination of the ray case our research failed to locate any other cases directly dealing with the issue currently in dispute in light of the court’s recent decision in ray we have reconsidered our position and we are conceding the case in full opinion a taxpayer who is a prevailing_party in an administrative or court_proceeding is entitled to an award of reasonable litigation and administrative costs incurred in such proceedings sec_7430 to be a prevailing_party a taxpayer must establish that the position_of_the_united_states in the proceeding was not substantially justified the taxpayer substantially prevailed with respect to either the amount in controversy or the most significant issue or set of issues presented and the taxpayer met the net_worth requirements of u s c sec d b on the date the petition was filed sec_7430 additionally the taxpayer must also establish that all available administrative remedies have been exhausted insofar as litigation costs are concerned sec_7430 that the taxpayer has not unreasonably protracted the administrative or judicial proceedings sec_7430 and that the costs claimed are reasonable in amount sec_7430 and all of the foregoing requirements must be satisfied 88_tc_492 in response to petitioners' motion respondent argues that petitioners are not prevailing parties because the position_of_the_united_states was substantially justified that petitioners have failed to exhaust their administrative remedies and that the costs claimed are not reasonable respondent concedes that petitioners have satisfied the other requirements of sec_7430 we first consider whether respondent’s position was substantially justified for the following reasons we find that it was a position is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis in both fact and law 487_us_552 interpreting similar language in the equal_access_to_justice_act u s c sec 55_f3d_189 5th cir affg tcmemo_1994_182 106_tc_76 the determination of reasonableness is based on all of the facts and circumstances surrounding the proceedings nalle v commissioner supra pincite a position has a reasonable basis in fact if there is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion pierce v underwood supra pincite a position is not substantially justified in law if legal precedent does not provide substantial support for the commissioner’s position given the facts available to the commissioner 94_tc_685 respondent has taken the position that petitioners have failed to establish that they were actively engaged in the trade_or_business_of_farming during the years in issue respondent took this position in the administrative_proceeding when the statutory_notice_of_deficiency was issued to petitioners on date sec_7430 and in the court_proceeding when the answer to the petition was filed on date we may consider the reasonableness of respondent's position in the administrative_proceeding separately from respondent's position in the judicial proceeding huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding on another issue tcmemo_1991_144 in this case however because the positions are the same we consider them in a single analysis petitioners argue that respondent's position was not substantially justified either in fact or in law in petitioners' view the fact that the property was subject_to the crp contract conclusively establishes that they were actively engaged in the trade_or_business_of_farming for purposes of sec_162 during the years in issue they point out that the usda and the internal_revenue_service irs are both agencies of the united_states and suggest that because the former agency determined that they were actively engaged in farming respondent's position that they were not actively engaged in the trade_or_business_of_farming cannot be considered substantially justified in addition they argue that respondent's concession of the underlying deficiencies is in effect tantamount to a concession that his position was not substantially justified we disagree with petitioners on both points as pointed out by respondent the determination made by the usda through the cascade county ascs that petitioners were actively engaged in farming is not a determination for federal_income_tax purposes that petitioners were actively engaged in a trade_or_business for purposes of sec_162 it is clear to us that different criteria are taken into account in making such determinations for example a profit_motive is necessary to support a deduction claimed under sec_162 nothing in the record suggests that a profit_motive is necessary to qualify for crp payments furthermore the fact that the commissioner ultimately concedes all or part of a case is not sufficient to establish that the commissioner’s position was unreasonable 92_tc_760 89_tc_79 affd 861_f2d_131 5th cir but is merely a factor to be considered 931_f2d_1044 5th cir deductions such as those claimed by petitioners on their schedules f are a matter of legislative grace a taxpayer claiming such deductions must prove entitlement to them 503_us_79 in particular for a taxpayer to claim a deduction on a schedule f the taxpayer must establish that the farming activity constitutes a trade_or_business the supreme court has stated that to be engaged in a trade_or_business the taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit a sporadic activity does not qualify 480_us_23 the question of whether a taxpayer is engaged in a trade_or_business requires an examination of all the relevant facts id pincite in applying the facts_and_circumstances_test courts have focused on three factors indicative of whether a trade_or_business exists first the taxpayer must undertake the activity intending to make a profit 86_tc_1326 affd 113_f3d_670 7th cir 83_tc_667 second the taxpayer must be regularly and actively involved in the activity 674_f2d_1359 10th cir third the taxpayer’s business operations must have actually commenced 75_tc_424 affd without published opinion 691_f2d_490 3d cir respondent developed his position in this case on the basis of his examination and investigation of petitioners’ returns cf 100_tc_457 affd in part revd in part and remanded 43_f3d_172 5th cir other than the information relevant to the qualification of the property for the crp contract petitioners failed or refused to provide complete information to respondent regarding whether they were actively engaged in the trade_or_business_of_farming during the years in issue some of the factors respondent took into account in determining that petitioners were not engaged in the trade_or_business_of_farming include petitioners had not engaged_in_the_business_of_farming prior to their purchase of the property in petitioners' only activities with respect to the property during the years in issue were those undertaken pursuant to the crp contract petitioners planned to start a cattle operation on the land after the expiration of the crp contract petitioners resided approximately miles from the property during the years in question petitioner was employed in the construction industry and donna m hasbrouck was employed as a bookkeeper during the years in issue petitioner sustained a back injury in which resulted in his listing his occupation as disabled on petitioners' tax_return petitioners earned substantial amounts of income from sources other than their farming activity for the years in issue and petitioners incurred significant losses from their farming activity during the years in issue which they used to offset their other income from the foregoing facts we do not consider it unreasonable for respondent to have concluded that petitioners' activities in connection with the property did not constitute a trade_or_business during the years in issue accordingly we find that respondent’s position had a reasonable basis in fact petitioners also contend that respondent's position was not substantially justified in law because it is inconsistent with positions taken by the commissioner in two private letter rulings and ray v commissioner tcmemo_1996_436 the rulings consider whether crp payments were includable in the taxpayers' net_earnings_from_self-employment and therefore subject_to the self-employment_tax imposed by sec_1401 the commissioner's conclusions regarding the nature of the crp payments as articulated in the rulings were dependent upon factual determinations focusing on whether the taxpayers materially participated in the trade_or_business_of_farming during the relevant years the private letter rulings do not stand for the proposition that a taxpayer is actively engaged in the trade_or_business_of_farming merely because the taxpayer is eligible to receive crp payments with respect to certain property nor do we agree as petitioners suggest that ray v commissioner supra supports a finding that respondent’s position was not substantially justified in law as in the private letter rulings the issue in ray was whether crp payments were includible in the taxpayer's net_earnings from self- employment and therefore subject_to the self-employment_tax imposed by sec_1401 to be income subject_to the self- employment_tax we stated that the income in question must derive from a trade_or_business carried on by an individual and that there must be a nexus between such trade_or_business and the income that the individual has received in ray however the parties stipulated that the taxpayer was engaged in the active trade_or_business_of_farming and or cattle grazing thus the 7in revrul_60_32 1960_1_cb_23 respondent took the position that payments attributable to the acreage reserve program described in the soil bank act title i of the agricultural act of ch 70_stat_188 formerly u s c constitute net_earnings_from_self-employment to the recipient unless the recipient does not operate or materially participate in the operation of a farm but see wuebker v commissioner t c ___ rejecting the reasoning of the revenue_ruling and holding that crp payments as rental payments are not subject_to the self-employment_tax imposed by sec_1401 neither party made reference to this revenue_ruling in connection with the motion here under consideration because the revenue_ruling contemplates an examination of facts and circumstances we do not consider respondent's position in this proceeding to be contrary to the position stated in the revenue_ruling inquiry in that case was not whether the taxpayer had entered in the trade_or_business_of_farming but whether the crp payments had a direct nexus to the taxpayer’s existing trade_or_business_of_farming and or cattle grazing on this issue we found that since the crp acreage was added to his existing farmland and since petitioner connie ray was already in the_business_of_farming and ranching this was a payment to him in connection with his ongoing trade_or_business ray v commissioner supra the issue in dispute in ray was obviously different from the issue originally in dispute in this case given the different issues and the factual distinctions between the two cases we consider ray to be of limited application here notwithstanding respondent's concessions of the deficiencies in reliance upon that case furthermore we do not consider the position originally taken by respondent here to be in conflict with the position taken by the commissioner in ray on the basis of the facts available to respondent at the relevant time we find that respondent's position had a reasonable basis in fact and law it follows and we hold that we went on to hold that the crp payments in question were subject_to the self-employment_tax ray v commissioner tcmemo_1996_436 but see wuebker v commissioner t c ___ petitioners' attack on the reasonableness of respondent's position is undermined by their failure to take full advantage of the opportunities to meet with irs officials in order to discuss respondent’s adjustments and present additional information in support of the disallowed deductions respondent's position in the administrative and litigation proceedings was substantially justified because the requirements of sec_7430 are conjunctive minahan v commissioner t c pincite our holding that respondent’s position was substantially justified results in the denial of petitioners’ motion consequently we need not address respondent’s other objectionsdollar_figure to reflect the foregoing and the stipulation of settled issues filed on date an appropriate order and decision will be entered we note that petitioners have requested an award for costs incurred before the issuance of the notice_of_deficiency administrative costs are those costs incurred in connection with an administrative_proceeding within the irs sec_7430 c sec_7430 for present purposes limits recoverable administrative costs to those incurred on or after the date of the notice of the deficiency and up to the time the petition is filed sec_7430 see huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding tcmemo_1991_144 petitioners have also requested an award for fees for their own time at an hourly rate of dollar_figure sec_7430 operates to cover actual expenditures made with regard to representation consequently pro_se taxpayers are not entitled to an award for the value of their services because no fee is paid_or_incurred 27_f3d_436 9th cir 840_f2d_244 4th cir 87_tc_838


internal_revenue_service number release date index number -------------------------------- ------------------------------ ------------------------------------------- -------------------------- ---------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-120352-04 date date legend x ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ a b ------------------------- ------------------------------------------------------------------------------------------------------ ------------------------- state -------- d1 -------------------------- ---------------------- this letter responds to a letter dated date and subsequent d2 dear -------------------- correspondence from x’s authorized representative requesting a ruling under ' b of the internal_revenue_code facts spouse b who owns a community_property interest in x a and b intended for x to be x was incorporated under state law on d1 the shareholders of x are a and a’s sec_1362 provides if a a small_business_corporation makes an sec_1_1362-6 of the income_tax regulations provides that when sec_1362 provides that a small_business_corporation may elect to be an sec_1362 provides an election under sec_1362 may be made by a small plr-120352-04 an s_corporation beginning d2 however x’s form_2553 election by a small_business_corporation was not filed timely law and analysis s_corporation stock of the corporation is owned by husband and wife as community_property or the income from the stock is community_property each person having a community interest in the stock or income therefrom must consent to the election business corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the 3d month of the taxable_year election under sec_1362 for any taxable_year and b such election is made after the 15th day of the 3d month of the taxable_year and on or before the 15th day of the 3rd month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d2 within days following the date of this letter the election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes except as expressly provided herein we express or imply no opinion concerning pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer who requested it sec_6110 plr-120352-04 being sent to x’s authorized representative provides that it may not be used or cited as precedent s sincerely yours christine ellison chief branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date contact person identification_number date date contact number uiil code tax years employer_identification_number form required to be filed 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 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 at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely karen schiller acting director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date date uil code legend applicant business date founder state dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were formed as a not-for-profit corporation under state law in you amended and restated your articles of incorporation in to include the following purpose clause applicant is formed exclusively for educational and scientific purposes within the meaning of sec_501 of the internal_revenue_code or corresponding section of any future federal tax code your amended and restated articles do not include any other language relating to sec_501 although you included a clause directing assets to a sec_501 organization in the event of a dissolution in your original articles your amended and restated articles superseded the original articles the amended articles thus do not include a dissolution clause your bylaws and your form_1023 narrative description of activities state that you are a non-profit non-partisan alliance of community leaders organizations community activists families and individuals that serves as a national institutional catalyst for positive social change and political advancement in healthcare and educational issues and concerns your primary purpose is to analyze healthcare and education issues of common concern to consumer communities especially the family network and develop strategies for espousing and advocating an informed perspective before the various levels of government the private sector and other relevant healthcare and educational institutions your initial information submission describes two primary types of activities the first involves conducting surveys of local health_plans medical groups and educational organizations information from the surveys will be used to assist such organizations in advancing the practice of patient- and family-centered care and advancing the practice of research-based best practices in instituting quality education at the elementary and secondary levels you state that based on the survey findings you will be able to offer a variety of assistance including consulting webinars and networking opportunities securing organizations’ participation at national seminars with patient family leaders providing start-up funds for special projects advancing the practice of research-based best practices in instituting quality education at the elementary and secondary level sec_1 establishing partnerships with you describe the second primary activity as focusing on healthcare organizations and educational organizations and disparities in health and education-similarities in quality needs in this effort you describe your role as hosting patient self-management sessions distributing consumer family-centered materials convening workshops and seminars recruiting and training fellows who will function as advisors to healthcare and educational organizations and serve as a stream for your potential board members developing a healthy eating program for schools and developing a quality-healthcare related program your initial application stated that your goals are to e e e e e establish a one-day conference of workshops and seminars designed to promote a national agenda on healthcare and education establish a web-based faq to give consumers the ability to develop specific questions targeting health and education concerns develop coordinate and convene workshops and trainings to consumer communities about varied healthcare and educational issues and concerns function as a center-based program for consumers to preventative information about heaithcare and education needs employ and or train healthcare and education staff and volunteers in you provided additional information about your actual past and present activities which include e e e e e providing brochures about health literacy to participants at a conference on infant mental health providing financial sponsorship for a week-long health wealth and wellness week where founder also conducted two presentations providing financial support for healthy refreshments to participants in a weekly meeting to promote healthy lifestyles of african american women between the ages of providing financial and script support for a documentary run by another organization in state corresponding with another organization about its work improving education overseas you also provided updated information about your planned activities including speaking about childhood obesity at an annual public health conference acting as support group coordinator for biweekly meetings for young offenders serving as project coordinator for a high school essay contest about childhood obesity serving as project coordinator for a film documentary about childhood obesity your bylaws state that you are governed by a board_of directors of at least three but no more than six vacancies are filled by the board with the recommendation of the executive director your bylaws inciude additional conflict of interest provisions any member of the board_of applicant who has a financial personal or official interest in or conflict or appearance of a conflict with any matter pending before the board_of such nature that it prevents or may prevent that member from acting on the matter in an impartial manner will offer to the board to voluntarily excuse him herself and will vacate his seat and refrain from discussion and voting on said item you acknowledge that you share an office address telephone fax and email address with business a taxable entity you also submitted a letter on date using business’s letterhead however you represented that none of your officers directors or employees has a business or other connection to business and that you do not receive funding or other sources of support from business you state you intend to receive your funding primarily through gifts grants and contributions from the general_public your application anticipated revenue from contracts and fees for services at the time of your application you did not have any official plan of targeted grant organizations but you state in later correspondence that you intend to target potential local grantors that have a common focus on health and education policy advocacy and literacy your most recent financial information does not mention contracts or fees for service but does include receipts from membership fees later correspondence states that you are not pursuing adding members at this time your organizing documents do not mention any classes of members or membership law sec_501 of the code provides an exemption for corporations organized and operated exclusively for religious charitable scientific literacy or educational_purposes no part of the net_earnings of which inures to the benefit of any shareholder or individual sec_1_501_a_-1 of the income_tax regulations defines private_shareholder_or_individual as persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 states that to be described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section not exempt if an organization fails to meet either the organizational_test or the operational_test it is sec_1_501_c_3_-1 states that an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of the organization to one or more exempt purposes and do not expressly empower the organization to engage other than as an insubstantial part of its activities in activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 states that an organization is not organized exclusively for one or more exempt purposes if its articles of organization expressly empower it to carry on as more than an insubstantial part of its activities activities which are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be regarded as exempt if more than an insubstantial part of its activities further a non- exempt_purpose sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 provides that an organization may be recognized as exempt under sec_501 if charitable scientific testing for public safety literary educational or prevention of cruelty to children or animals it is operated exclusively for one or more of the following purposes religious sec_1_501_c_3_-1 provides 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 to meet the requirements of this subsection an organization must 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 sec_1_501_c_3_-1 includes in the definition of educational activities the instruction or training of the individual for the purpose of improving or developing his capabilities and the instruction of the public on subjects useful to the individual and beneficial to the community revrul_56_304 1956_2_cb_306 states that a sec_501 organization can make a distribution to an individual provided such distribution is made on a true charitable basis in furtherance of the organization’s charitable purposes however such organizations should maintain adequate_records and case histories to show the name and address of each recipient of aid the amount distributed to each the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either in order that any or all distributions made to individuals can be substantiated upon request by the internal_revenue_service section dollar_figure of revproc_2010_9 r b provides that exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere restatement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that its proposed activities will be exempt the service will generally issue a proposed adverse determination_letter or ruling tax exemptions are matters of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions 470_f2d_849 10th cir cert_denied 414_us_864 citing 346_us_389 74s ct 98_led_132 the tax_court has stated that an application_for tax-exempt status calls for open and candid disclosure of all facts bearing upon an applicant's organization operations and finances to assure that there is not abuse of the if such disclosure is not made the logical inference is that the facts if disclosed revenue laws would show that the applicant fails to meet the requirements of sec_501 74_tc_531 see also 412_f2d_1197 cert_denied 397_us_1009 furthermore the courts have repeatedly upheld the service's determination that an organization has failed to establish exemption where the organization fails to provide requested information applicant has for the most part provided only generalizations in response to repeated requests by the service for more detail on prospective activities such generalizations do not satisfy us that applicant qualifies for the exemption peoples prize v comm’r t c memo in the 71_tc_102 the tax_court determined that an organization did not provide sufficient information for the irs to determine whether grants to individuals were made in an objective and nondiscriminatory manner and whether the distribution of such grants was made in furtherance of an exempt_purpose the petitioner organization was unable to furnish any documented criteria that would demonstrate the selection process of a deserving recipient the reason for specific amounts given or the purpose of the grant in share network foundation v commissioner t c memo the court provided that an organization has the burden of providing sufficient documentation or other substantive information regarding its activities and operations which would establish entitlement to tax exempt status in solution plus inc v commissioner 95_tcm_1097 the tax_court provided that a charitable organization’s programs must benefit the members of a recognized charitable_class in a nonselect manner in ohio disability association v commissioner t c memo the tax_court held that the taxpayer’s responses to service requests for additional information failed to clarify its purposes and activities and the generalizations did not provide sufficient detail to determine that it would be operated exclusively for exempt purposes therefore the service was justified in denying exempt status _ analysis you have asked us to recognize you as an organization described in sec_501 but before we can conclude that you are organized and operated exclusively for one or more exempt purposes described in sec_501 we must have a clear and unambiguous understanding of your activities under the standard described in dollar_figure of revproc_2010_9 we will recognize your exempt status only if you operations are described in sufficient detail to permit a conclusion that you will meet the requirements of sec_501 see also ohio disability association v commissioner t c memo you have not described your activities clearly or unambiguously and consequently we are unable to conclude that you meet the requirements of sec_501 furthermore your actual activities diverge from your stated purposes and neither establishes that you are operated for exclusively exempt purposes the activities described in your initial submission vary greatly from your actual activities described in subsequent correspondence rather than focusing on health-related educational activities your primary activities are focused on grantmaking to other organizations although grantmaking is permitted by sec_501 organizations it must be done in accordance with established precedent see the church in boston supra and solution plus have not provided any evidence of whether your grants were made to exempt_organizations whether the decisions were made in an objective and nondiscriminatory manner whether such grants furthered an exempt_purpose whether they benefited your officers and directors or whether you have kept adequate_records inc supra you although you did provide some general information about your potential sources of grant income your financial information does not meet the specificity required by revproc_2010_9 for example you state you do not have any members but list membership fees as actual revenues received in your most recent financial information the more recent information contains different categories of revenue and expenses and neither appears to correspond with your activities most importantly you have not established that you will operate exclusively for exempt purposes sec_1_501_c_3_-1 while analyzing healthcare and education issues as you said you planned to do in your application could be an exempt_purpose you do not appear to have conducted any analysis an exempt_organization is permitted to conduct some lobbying and grassroots lobbying as you aspired to do in advocating an informed perspective before various levels of government but you have not conducted such lobbying you also listed many activities that are not exclusively exempt such as conducting surveys of health_plans and medical groups using the results to assist those organizations by consulting presenting networking opportunities and providing start-up funds for special projects all of these are commercial activities regularly engaged in by for-profit entities your actual activities have been different from those you described in your application and do not necessarily promote exempt purposes the conferences and meetings to which you gave financial support were not clearly educational or charitable the information you provided consisted of generalizations that did not enhance our understanding of your activities and were not sufficient to determine that you are operated exclusively for exempt purposes see revproc_2010_9 supra and ohio disability supra conclusion based on the above we have concluded that you have not shown that you are operated exclusively for charitable purposes under sec_501 therefore we cannot recognize you as an exempt_organization under sec_501 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs if you and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc if you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely karen schiller acting director rulings and agreements


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-125760-08 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective ------------------- -------------------------------------- ------------------------------ -------------------------------------------------------- ------------------------ -------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that --------------------------------------became an employer under the railroad_retirement_tax_act effective ------------------- please take the appropriate action regarding this business _____________________________ janine cook cc


internal_revenue_service number release date index number --------------------- ------------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no -------------- telephone number ---------------------- refer reply to cc intl b02 plr-104428-13 date date ty ------- legend taxpayer fc country a year year year corp b ---------------- ------------------ -------------------------------------------- ------------ ------- ------- ------- -------------------------------- ----------------- tax firm c ------------------------------------------ tax firm d --------------- ---------------------- dear --------------------- this is in response to a letter dated date and supplemental documentation submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc plr-104428-13 the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by his authorized representatives and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is a u s citizen who acquired an interest in fc a publicly-traded foreign_corporation incorporated in country a that constitutes a pfic within the meaning of sec_1297 of the code taxpayer initially acquired his interest in fc in year taxpayer also acquired additional shares in fc since his initial acquisition in year taxpayer transferred all of his shares in fc to corp b a domestic limited_liability_company since year taxpayer has engaged tax firm c for the preparation of his u s tax_return tax firm c is qualified to provide tax_advice on international tax matters including issues related to pfics tax firm c advised taxpayer with regard to u s federal_income_tax matters including with respect to taxpayer’s ownership of fc taxpayer relied on tax firm c to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment tax firm c did not identify fc as a pfic and as such did not advise taxpayer regarding any potential pfic reporting requirements or available elections in year another shareholder in fc contacted taxpayer about the potential pfic status of fc which led him to consult further with tax firm c after discussing the issue with his tax advisors taxpayer retained tax firm d to help him come into compliance based on the determination that fc had likely been a pfic since before year taxpayer requested tax firm d to submit a private_letter_ruling request on his behalf to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year taxpayer has submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the role of tax firm c taxpayer provided information regarding his ownership of fc to tax firm c and tax firm c had access to all relevant information with respect to fc taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive any advice regarding the availability of a qef election with respect to fc taxpayer has also submitted an affidavit from tax firm c corroborating the representations made by taxpayer with respect to the discovery of fc’s pfic status plr-104428-13 taxpayer has paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of an inability to file amended returns in accordance with a closing_agreement between taxpayer and the commissioner further taxpayer filed an amended_return for each of his subsequent taxable years affected by the retroactive election if any taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 of the code provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel plr-104428-13 international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election we will accordingly approve a closing_agreement with taxpayer with respect to those issues affecting his tax_liability on the basis set forth above the necessary closing_agreement for taxpayer has been prepared in triplicate and is enclosed in pursuance of our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-104428-13 a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely jeffery g mitchell branch chief branch international