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 corp b05 plr-116335-17 date november date taxpayer corporation a b c d dear --------------- -------------------------- ----------------------------------------------------------------------------------- ------------------------- ------- ----------- ----------- ----------- ----------- this letter responds to your authorized representative’s letter dated date requesting a ruling under sec_302 of the internal_revenue_code the code with respect to a transaction to which sec_304 applied the information provided in that request and in subsequent correspondence is summarized below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the ruling_request verification of the facts representations and other information may be required as part of the audit process plr-116335-17 facts on date taxpayer disposed of stock it owned in corporation in a taxable_exchange to which sec_304 applied to treat the receipt of property for stock as a redemption subject_to sec_302 the transaction taking into account applicable constructive_ownership rules immediately before the transaction taxpayer’s percentage interest in the i vote and ii current earnings accumulated surplus and net assets upon liquidation in corporation was a and b respectively and immediately after the transaction taxpayer’s percentage interest in the i vote and ii current earnings accumulated surplus and net assets upon liquidation in corporation was c and d respectively ruling based solely on the information submitted and the representations made we rule that taxpayer’s receipt of property in the transaction was not essentially_equivalent_to_a_dividend under sec_302 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely t ian russell branch chief branch office of associate chief_counsel corporate 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 psi plr-127639-17 date legend x ------------------------------------------------ ------------------------------------- country -------------------------- year ------ dear ----------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts the information submitted states that x was formed as a corporation under the laws of country and that x was treated as a partnership for u s federal tax purposes x intended to file an election under sec_754 to adjust the basis of partnership property with its return for its taxable_year ending in year however x inadvertently failed to file a properly executed sec_754 election x represents that it has filed returns for its taxable_year ended in year and subsequent years consistent with the election having been made and that all affected partners have also filed their returns consistent with the election having been made further x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election plr-127639-17 law and analysis sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the statement must i set forth the name and address of the partnership making the election ii be signed by any one of the partners and iii contain a declaration that the partnership elects under sec_754 to apply the provisions of sec_734 and sec_743 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure announcement or notice published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely upon the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make a sec_754 plr-127639-17 election for its taxable_year ended in year the election should be made in a written_statement filed with the appropriate service_center a copy of this letter should be attached to the sec_754 election a copy is enclosed for that purpose except as specifically ruled upon above no opinion is expressed or implied concerning the tax consequences of any facts discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter_ruling will be sent to your authorized representatives sincerely laura c fields laura c fields senior technician reviewer branch passthroughs special industries enclosures copy of letter copy of letter for sec_6110 purposes


t c memo united_states tax_court james j and linda j harford petitioners v commissioner of internal revenue respondent docket no filed date james j harford pro_se linda a neal for respondent memorandum opinion couvillion special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax for unless otherwise indicated section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure the sole issue for decision is whether dollar_figure received by james j harford petitioner husband as a result of the termination of his employment is excludable from petitioners' gross_income pursuant to sec_104 as damages received on account of personal_injury_or_sickness some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioners' legal residence was durham north carolina petitioner husband received a bachelor of science degree in electrical engineering from georgia tech university in that same year petitioner husband became employed by international business machines corp ibm in the company's kingston new york facility in petitioner husband moved to the raleigh-durham area of north carolina and remained employed with ibm following his move to north carolina and concurrent with his continued employment with ibm petitioner husband pursued and received a master's degree in computer science from the university of north carolina during date the manager of petitioner husband's division at ibm manager became concerned about the delay in completing a development project that petitioner husband's division was working on consequently the manager advised petitioner husband and the other members of his division that all vacation would be canceled through the end of date in order for the project to be completed petitioner husband informed his manager that he would be unable to comply with the cancellation of vacation as he was committed to attend a reunion of his extended family that had been planned and paid for several months prior thereto and had been previously approved by ibm management petitioner husband's manager warned him that if he followed through with his vacation plans and failed to report for work as required he would be dismissed due to insubordination petitioner husband defied the cancellation of leave and attended his family reunion failing to report for work for a week during late may and early june when petitioner husband returned to work following his vacation he was informed by his manager that he would not be dismissed however he was given two options regarding his employment with ibm petitioner husband was given the choice to either submit a voluntary resignation from ibm and obtain the benefits provided in a severance package created by ibm for employees who resigned or retired as a result of corporate downsizing or remain employed with ibm but sustain a demotion in performance evaluation ranking undergo a probationary period of months and engage in a significant amount of overtime work petitioner husband chose to voluntarily resign from ibm and accept the severance package pursuant to the termination of his employment petitioner husband received benefits under the networking hardware division and networking software division resource transition program nrtp established by ibm to induce employees to resign or retire early under a plan of corporate downsizing under the nrtp a participating employee was entitled to a lump-sum payment temporary medical and dental insurance which the employee could continue later at his or her own cost and career transition services the lump-sum payment was payable at the time of a participating employee's departure and was reduced by any advances or loans owed to ibm at the time of departure if a participating employee resumed his employment with ibm within a specified period a prorated amount of the lump-sum payment was required to be repaid in connection with his participation in nrtp petitioner husband executed on date a document entitled general release and covenant not to sue the release setting out the terms of his severance package the release stated in exchange for the sums and benefits which you will receive pursuant to the terms of the nrtp petitioner husband agrees to release international business machines corporation its subsidiaries and affiliates and its benefits plans hereinafter ibm from all claims demands actions or liabilities you may have against ibm of whatever kind including but not limited to those that are related to your employment with ibm the termination of that employment or other severance payments or your eligibility or participation in the retirement bridge leave of absence or any claims for attorneys' fees you agree that this also releases from liability ibm's agents directors officers employees representatives successors and assigns hereinafter those associated with ibm you agree that you have voluntarily executed this release on your own behalf and also on behalf of any heirs agents representatives successors and assigns that you may have now or in the future you also agree that this release covers but is not limited to claims arising from the age discrimination in employment act of as amended title vii of the civil rights act of as amended and any other federal state or local law dealing with discrimination in employment including but not limited to discrimination based on sex race national origin religion disability veteran status or age you also agree that this release includes claims based on theories of contract or tort whether based on common_law or otherwise petitioner husband was entitled to revoke his signature within days of signing the release however had he done so he would have been required to return his lump-sum payment and would have become ineligible for the other nrtp benefits petitioner husband received a lump-sum payment of dollar_figure in connection with his participation in nrtp petitioner husband suffered no injury or sickness at the time of his resignation neither prior nor subsequent to his resignation did petitioner husband file a complaint or claim with ibm or against ibm regarding any type of discrimination personal injury or wrongful termination on their federal_income_tax return petitioners failed to report as income the dollar_figure received by petitioner husband upon his termination of employment with ibm petitioners attached to their return a form_8275 disclosure statement explaining that they had not included the subject dollar_figure in their gross_income for because they believed such payment was not taxable under sec_104 of the internal_revenue_code because the payment was made as a consideration to the taxpayer for his release of his employer for any claim he might have against his employer for age discrimination and other potential tort claims in the notice_of_deficiency respondent determined that the subject dollar_figure was includable in petitioners' gross_income for this was the only adjustment in the notice_of_deficiency the sole issue is whether the dollar_figure received by petitioner husband as a result of the termination of his employment with ibm is excludable from petitioners' gross_income pursuant to sec_104 as damages received on account of personal_injury_or_sickness except as otherwise provided gross_income includes all income from whatever source derived sec_61 commissioner v glenshaw glass co ibm issued to petitioner husband a form_w-2 wage and tax statement for reflecting wages tips and other compensation of dollar_figure which included the dollar_figure paid to petitioner husband upon termination of his employment petitioners attached a copy of this form_w-2 to their return u s although sec_61 is to be broadly construed statutory exclusions from income must be narrowly construed 515_us_323 sec_104 excludes from gross_income the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness sec_1_104-1 income_tax regs provides that the term 'damages received whether by suit or agreement ' means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution thus in order to exclude damages from gross_income pursuant to sec_104 the taxpayer must prove the underlying cause of action is based upon tort or tort type rights and the damages were received on account of personal injuries or sickness commissioner v schleier supra pincite where amounts are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable from gross_income under sec_104 504_us_229 the crucial question is in lieu of what was the settlement amount_paid 105_tc_396 affd 121_f3d_393 8th cir determining the nature of the claim is a factual inquiry 102_tc_116 affd in part revd in part and remanded 70_f3d_34 5th cir petitioners have failed to demonstrate any personal_injury_or_sickness suffered by petitioner husband although petitioners' arguments are not entirely clear from the record the court surmises petitioners' contention to be that since petitioner husband signed the release in exchange for the dollar_figure payment petitioner husband must have had some potential claim against ibm petitioners are mistaken the execution of a general release against liability does not in and of itself confirm that the releasing party indeed possesses a bona_fide cause of action against the party released the record does not show that petitioner husband had a potential claim of any kind against ibm including that for personal injury sickness or wrongful termination in point of fact petitioner husband was not terminated but rather was given the option to remain with ibm on a probationary status for several months and be subject_to some discipline for his direct defiance of a company mandate instead petitioner husband chose to resign voluntarily from ibm and accept a severance package every indication in the record leads the court to conclude that the termination of petitioner husband's employment with ibm was purely voluntary and resulted directly from his own insubordination and had he complied with the company's cancellation of leave policy he would have avoided a confrontation with his supervisor and ultimately the company the lump-sum payment thus appears to be severance_pay rather than a payment for personal injury and severance_pay like the pay it replaces is taxable as income see brennan v commissioner tcmemo_1997_317 even if the court were to conclude that ibm paid petitioner husband the dollar_figure in settlement of a possible claim for wrongful termination from ibm the amount of lost wages received in such a situation is generally not linked to any personal injury and thus such an award would not qualify for the exclusion_from_gross_income provided in sec_104 commissioner v schleier supra pincite the court recognizes that mental distress may suffice as a personal_injury_or_sickness under the law applicable to the taxable_year in issue id pincite n however petitioners have failed to show that any inconvenience or stress experienced by petitioner husband as a result of his resignation from ibm constituted a personal_injury_or_sickness there is no evidence that petitioner husband's distress if any manifested itself as physical symptoms required him to seek medical help or incapacitated him in any manner even if petitioner husband sustained personal_injury_or_sickness petitioners failed to show what portion if any of the dollar_figure payment was allocable to tort or tort type claims the release contains broad language relieving ibm from liability for many potential claims some of which are not based in tort or tort type rights including contract claims claims under the age discrimination in employment act of adea publaw_90_202 81_stat_602 as amended u s c secs and claims under title vii of the civil rights act of publaw_88_352 78_stat_241 as amended u s c secs 2000e-1 to -17 see eg commissioner v schleier supra pincite holding that settlements for claims made under the adea are not based on tort or tort type rights for purposes of sec_104 united_states v burke supra pincite holding awards of back wages under title vii do not redress tort type personal injury within the meaning of sec_104 the release does not state that any portion of the amount petitioner husband received was for any specific potential tort or tort type claim against ibm thus on this record it would be impossible for where a settlement agreement lacks express language stating what the settlement amount was paid to settle then the most important factor is the intent of the payor 349_f2d_610 10th cir affg tcmemo_1964_33 the court is satisfied that it was not ibm's intent for any portion of the subject payment to be paid as a settlement of a tort or tort type claim on account of a personal_injury_or_sickness the court to determine a specific tort or tort type claim or claims that may have served as a basis for settlement if any a failure to show the specific amount of the payment allocable to the claims of tort or tort type damages for personal injuries results in the entire amount being presumed not to be excludable see 35_f3d_93 2d cir 91_tc_160 affd on this issue and revd on other issues 913_f2d_1486 9th cir the dollar_figure settlement payment petitioner husband received from ibm in does not satisfy the requirements for exclusion of the payment under sec_104 consequently on this record the court holds that such payment is includable in petitioners' gross_income for that year decision will be entered for respondent


t c memo united_states tax_court sandra j brannon petitioner v commissioner of internal revenue respondent docket no filed date j raymond karam for petitioner blizabeth a owen for respondent memorandum opinion couvillion special_trial_judge respondent determined deficiencies of dollar_figure and dollar_figure in federal income taxes and penalties under sec_6662' of dollar_figure and dollar_figure respectively for petitioner's and tax years unless otherwise indicated section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether a horse breeding activity conducted by petitioner was an activity_not_engaged_in_for_profit under sec_183 alternatively whether under sec_162 some of the expenses in connection with the activity were substantiated whether petitioner in an unrelated business activity established under sec_1012 a basis for an asset used in that activity upon which depreciation would be allowable under sec_167 and whether petitioner is liable for the penalties under sec_6662 some of the facts were stipulated those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioner's legal residence was san antonio texas the first issue is with respect to a horse breeding activity that petitioner commenced in with the purchase of one horse she purchased another horse in during and the years at issue petitioner had six horses the horses were guarter horses the activity was not successful from a financial standpoint petitioner amassed substantial losses over the years although the losses did not deter petitioner's continuing interest in and dedication to the activity the schedule c losses reported by petitioner on her federal_income_tax returns were dollar_figure and dollar_figure respectively for and the other years prior to and subseguent to the years at issue were not much better financially for these years petitioner reported the following losses dollar_figure big_number big_number big_number big_number big_number at trial petitioner testified she believed she would realize a net profit of dollar_figure for however she had no books_and_records to support that testimony and she had not yet filed her income_tax return for petitioner acknowledged she did not maintain accounting_records to reflect income expenses and profits or losses although she maintained a file folder in which she kept her receipts it appears that petitioner calculated her profits or losses for income_tax purposes only at or about the time such returns were due after graduating from high school in petitioner attended southwest texas state university at san marcos texas and earned a bachelor's degree in business with an emphasis in marketing after receiving her degree petitioner obtained full- time employment at or near san antonio texas and drove to her employment each day from her parents' home a distance of to miles although the nature of petitioner's employment and her employer's business were not established at trial neither the business nor petitioner's job related to horse breeding petitioner left that employment in date and did not thereafter accept any other employment she continued living with her parents devoting her entire time to the horse breeding activity petitioner has never paid rent or subsidized her parents for her living accommodations even during the period she was gainfully_employed in addition to providing petitioner with her room and board petitioner's father also provided her with some financial assistance petitioner's horses have always been on a tract of land of approximately acres located about miles from petitioner's parents' residence the property consisted of a pasture with some trees and a barn or shed petitioner and her father leased the property another individual cecil valdez used the same property for his horses mr valdez did not pay any rent for his use of the property as noted earlier petitioner commenced her activity with one horse then another and owned six horses during and based on the testimony at trial it appears that quarter horses can be bred and trained in certain categories which petitioner and her father described generally as western pleasure halter and trail and cutting petitioner directed her activity toward the first three named specialties although she later realized that her chances for profit would be greater with cutting horses she therefore changed her operation to that specialty it is that change that petitioner claims resulted in her realization of a net profit for petitioner regularly attended horse shows was a member of various associations related thereto had business cards and advertised in trade journals or newspapers petitioner's sales of horses however were minimal the purchaser of three horses was cecil valdez who owned other horses at the same location with petitioner another purchaser was an unrelated party petitioner was of the belief that a market for her horses would be in mexico however that did not materialize because of the decline in value of the mexican peso petitioner also attributed her losses to the fact that she did not have a sufficient number of brood mares and that the bloodlines of her horses were not of the quality that would be in demand she claimed that her chances of success would be enhanced by specializing with cutting horses rather than the other specialties stated above she acknowledged her goal was to produce a dollar_figure horse however to do that she would be reguired to pay breeding or stud fees of at least dollar_figure which she was not capable of doing during the years at issue petitioner paid dollar_figure for stud fees with respect to participation in horse shows participants were either professionals or amateurs petitioner always participated as an amateur although she acknowledged that participation as a professional would enhance her financial success in the business petitioner never attempted to qualify as a professional petitioner's sole motivation for engaging in her activity was her love for horses dating back to her childhood petitioner had no educational training or experience in the business of breeding and training horses she made no studies or consultations with professionals with respect to the business aspect of such an activity she did not maintain a separate bank account for her activity and she did not maintain formal books_and_records nor does the record establish that petitioner made any effort to change the direction of her operation although she recognized her need to do so sec_183 provides generally that if an activity is not engaged in for profit no deduction attributable to such activity shall be allowed sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 the standard for determining whether the expenses of an activity are deductible under either sec_162 or sec_212 or is whether the taxpayer engaged in the activity with the 'actual and honest objective of making a profit' 90_tc_74 quoting 85_tc_557 while a reasonable expectation of profit is not required the taxpayer's profit objective must be bona_fide see 91_tc_371 whether a taxpayer had an actual and honest profit objective is a question of fact to be resolved from all relevant facts and circumstances see id pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir the burden of proving such objective is on petitioner rule a see 290_us_111 in resolving this factual question greater weight is given to objective facts than to the taxpayer's after- the-fact statements of intent see 84_tc_1244 affd 792_f2d_1256 4th cir 78_tc_659 sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine objective factors relevant to the determination of whether an activity is engaged in for profit these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the history of income or losses with respect to the activity the amount of occasional profits earned if any the financial status of the taxpayer and the elements of personal pleasure or recreation involved these factors are not merely a counting device where the number of factors for or against the taxpayer is determinative but rather all facts and circumstances must be taken into account and more weight may be given to some factors than to others cf 70_tc_715 affd 615_f2d_578 2d cir not all factors are applicable in every case and no one factor is controlling see 86_tc_360 sec_1 b income_tax regs further the determination of a taxpayer's profit_motive is made on a yearly basis see 333_us_591 on this record the court is satisfied that petitioner's activity was not carried on with an actual and honest objective of making a profit it is fair to conclude among other things that the activity was not conducted in a businesslike manner although the court is satisfied that petitioner was dedicated to the activity her motivation was primarily her love for horses despite years of substantial losses petitioner had no formal or informal business plan and never sought the advice of experts on how to conduct the activity on a profitable basis see bessenvyey v commissioner 45_tc_261 the goal must be to realize a profit on the entire operation which presupposes not only future net_earnings but also sufficient net_earnings to recoup the losses which have meanwhile been sustained in the intervening years affd 379_f2d_252 2d cir respondent therefore is sustained on this issue having concluded that petitioner's horse breeding activity was not engaged in for profit the court finds it unnecessary to consider respondent's alternative determination that some of the expenses claimed in connection with the activity were not substantiated with respect to the third issue petitioner and her father began an emu breeding business in although the record is not clear it appears that this activity was also conducted on the same property with petitioner's horse breeding activity the only issue with respect to the emu activity is petitioner's claim to a depreciation deduction of dollar_figure on her federal_income_tax return with respect to four emus that were purchased in date the four emus two matched an emu is defined as any of various flightless birds including a swift-running australian bird with underdeveloped wings that is related to and smaller than the ostrich see webster's ninth new collegiate dictionary petitioner reported the emu activity on a separate schedule c of her and income_tax returns respondent did not challenge the activity as an activity_not_engaged_in_for_profit under sec_183 -- - pairs of male and female were purchased by petitioner's father for either dollar_figure or dollar_figure petitioner contends that she purchased a one-fourth interest in the four emus from her father and claimed a depreciation deduction of dollar_figure on her income_tax return with respect to that interest respondent disallowed the deduction on the ground that there was no evidence that petitioner had purchased any interest in the emus from her father respondent therefore determined that petitioner did not have a basis in the asset therefore petitioner could not claim a depreciation deduction there was no bill of sale offered into evidence to reflect the purchase of a one-fourth interest in the emus by petitioner petitioner's father agreed that no monetary consideration was paid to him by petitioner however he stated that petitioner was obligated to pay for her interest in the birds by taking care of them no promissory note or other evidence_of_indebtedness was executed by petitioner there was some reference at trial toa letter prepared by petitioner's father that stated that petitioner would pay the interest on an indebtedness but the document admittedly failed to state that petitioner was liable for the principal the document was not offered into evidence nor was any documentary_evidence presented to reflect what time or care petitioner expended on the emus under sec_167 the basis for the deduction for exhaustion wear_and_tear and obsolescence in respect of property is the adjusted_basis for determining gain_or_loss on the sale of such property as provided in sec_1011 sec_1011 provides generally that the adjusted_basis for determining gain_or_loss shall be as pertinent here the basis determined under sec_1012 sec_1012 provides generally that the basis_of_property is its cost on this record petitioner did not establish that she acquired an interest in the emus moreover the record does not establish that petitioner acquired an interest in the emus by gift the court therefore sustains respondent on this issue the final issue is whether petitioner is liable for penalties under sec_6662 for the years and sec_6662 provides that if that section is applicable to any portion of an underpayment in taxes there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies under sec_6664 no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith with respect to such portion of the underpayment sec_6662 provides that sec_6662 shall apply to any underpayment attributable to negligence or disregard of rules or regulations negligence is defined as lack of due care or failure to do what a reasonable and ordinarily prudent person would do under like circumstances 85_tc_934 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations the court is satisfied that petitioner not only engaged in the horse breeding activity solely because of her personal love of horses but also engaged in this activity with the knowledge that it was unrealistic to expect that any profit could be realized in the manner in which she conducted the activity such a conclusion is manifested by the fact that petitioner maintained no books_and_records commingled the meager income with her personal funds and never sought the advice of professionals who could have advised her on what she should do to make the activity profitable petitioner moreover had a degree in business and obviously had some knowledge albeit basic that her activity as described necessitated the maintenance of books_and_records the substantial losses petitioner claimed over the years from this activity and the manner in which she conducted this activity manifest a negligent or intentional disregard of rules or regulations respondent's determination on this issue also was based on the deficiency attributable to the disallowed depreciation on the emus the record shows that petitioner had no semblance of title to the emus either by purchase or by gift and the claim for depreciation on such asset likewise was a negligent or intentional disregard of rules or regulations respondent therefore is sustained on this issue decision will be entered for respondent


tax_exempt_and_government_entities_division release number release date uil code department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas date date tax_year ending december 20xx 20xx 20xx 20xx 20xx taxpayer_identification_number person to contact employee identification_number employee telephone number phone fax certified mail -- return receipt this is a final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in code sec_501 effective january 20xx your determination_letter dated october 20xx is revoked the revocation of your exempt status was made for the following reason s organizations described in sec_501 of the internal_revenue_code and exempt from tax under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inure to the benefit of private shareholders or individuals the transferors donors of business and property interest including limited_partnerships and limited_liability companies to you handled their business and property interests in substantially the same way both before and after the purported transfers donations to you also little or no actual economic benefits were transferred to you as a result of the purported transfers donations contributions to your organization are no longer deductible under sec_170 after january 20xx dear organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns and pay tax where applicable for further instructions forms and information please visit www irs gov if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven’t been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call 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 sincerely maria hooke director eo examinations enclosure publication a internal_revenue_service department of the treasury tax exempt and government entities irs exempt_organizations examinations date date eg taxpayer_identification_number fc orm tax_year s ended 20xx- 20xx person to contact id number contact numbers telephone fax manager’s name id number manager's contact number response due_date date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation letter rev catalog number 34809f if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may calli toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely mary a epps director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx issue whether the sec_501 exempt status of be revoked effective january 20xx should facts the 20xx the organization was granted exempt status under sec_501 as a publicly_supported_organization described in sec_509 and sec_170 per our etter dated october 20xx was organized as a sec_501 organization on january articles of incorporation states the organization is organized exclusively to support any and all selected c public supported organizations with the emphasis on church and religious based minstries wk without organized this direct payments from parents friends including would have no other business_purpose - local school - laborers but all significant decisions this tax-exempt_entity was created in20xx company is its registered agent and has been in control of this company over the years there have been individuals named as directors teacher and business activities are performed by promoting the gifting plan prepares all of the related tax-exempt returns forms directs payments from this entity to himself to this entity this entity accepts contributions of llc interests and receives cash distributions from the llc's it owns on its latest filed return form_990 schedule r it shows the percentage of ownership and interest values for over entities worth over dollar_figure million but it does not show that it owns form 886-a i-1994 catalognumber 20810wpage__publish no irs gov department ofthe treasury-internal revenue service form 886-a rev date schedule number or exhibit explanations of items name of taxpayer december 20xx- 20xx identification_number -tax form_1023 statements provided during the examination stated that forms for 20xx thru 20xx year were examined in primary goal is to support charitable organizations exclusively both locally and nationally funds are raised through distributions from lps and llcs wherein __ has been gifted an interest markets its services through financial planners who implement charitable giving plans for their clients they refer their clients to where certain donors can direct their gifts to their favorite charities or charitable causes all directed gifts are required to be distributed to organizations who qualify under one or more of the exempt categories _ as their designated charity in most situations has as a program only material expense is the marketing fundraising fees paid to financial advisors who refer donors to 20xx form_990 in its 20xx form_990 the organization reported dollar_figure as total contributions dollar_figure -came from arelated entity- and investment_income of dollar_figure total assets shown on the balance_sheet was dollar_figure as of 20xx it reported a total of dollar_figure in grants the forms for 20xx- 20xx were not complete the form_990 for 20xx omitted part iv list of officers directors trustees the return was signed by without indicating his title in the organization part v line 38a was answered incorrectly stated that he made a loan of dollar_figure to the organization the minutes of the organization and state of as the officers and board members of the organization they have been listed on the form_990 as officers from 20xx- 20xx returns was listed as vice president on the 20xx and 20xx has stated several times that he was not records reflect and his wife form 886-a i-1994 catalog number 10w page publish no irs gov department ofthe treasury-internal revenue service schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx involved in the day to day operations of the organization agent interviewed on april22 20xx and he stated that he just signs the checks as directed by and he hasn't been involved with the organization for the last years other than that agent also noted that signed all of the returns except for 20xx signed by 20xx signed by but name was typed in and 20xx return that was signed by is an attorney a certified_public_accountant and a certified valuation analyst he earns his revenue from high-wealth clients to which he assists in forming and administering various partnerships and llcs established to accomplish charitable giving he also provides valuation services he serves as the organization's accountant bookkeeper tax_return_preparer legal advisor spokesman and poa the board_of directors minutes provided by the organization indicated that he was not an officer of the organization during the examination years has organized several tax-exempt entities including and is aone- member llc under __ the recipient of the gifts of limited_partnership interests is involved inthe majority of the transactions required to set up the limited_partnership arrangements for his clients operations of - for profit these have been used as the organizations to which many of his clients ultimately donate portions of their llc interest to ie interest of the llc entities then distribute funds to the tax-exempt company and it then sends checks to various other charities such as churches after charging an administration management fee when the clients gift a portion of the created llc's a charitable deduction is created he receives income for his professional services and the related tax exempt entities serve as the charitable gifting avenue with respect to the limited_partnership arrangements of the required legal documents prepares the limited_partnership agreements including documents related to issuance of general and limited_partnership units the limited_liability_company operating agreements including documents related to the issuance of managing and non-managing member units the appraisals of the limited_partnership interests and non-managing member interests the required secretary of state filings as well as the preparation of the federal forms and schedules k-1 also prepares the documents related to the contribution of the limited_partnership interests to the exempt_organizations these documents include publish no irs gov department ofthe treasury-internal revenue service form 886-a i-1994 catalog number 10w page prepares the majority is involved in the day-to-day schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx the assignment of limited_partnership units the assignment of non-managing member units the consent to assignment of the limited_partnership_interest and the consent to the assignment of the non-managing member units established the exempt_organization and continues his with respect to involvement in all aspects of day-to-day operations worker for the the exempt_organization the internal_revenue_service for approval to create and operate the exempt_organization secretary of state exempt_organization is a maintenance is a school teacher for prepared and filed the form sec_1023 application with prepares and files the annual federal forms for the prepares and files all required state documents with school system and and_ according to the limited_liability_company operating is involved inthe majority of the transactions required to set up the limited_partnership arrangements for his clients operations of interests the limited_partnership interests and the non-managing member interests transferred to are not transferable partnership interests according to the limited_partnership agreement a limited_partner may transfer their limited_partnership_interest if certain conditions are satisfied one of the conditions requires the unanimous written consent of all the partners this condition would require not only the exempt organizations’ agreement to the sale but would also require the agreement of all partners agreement certain requirements must be met to transfer a membership interest one of the requirements is the unanimous approval of all members this condition would not only require the exempt organizations' agreement to the sale but would require the agreement of all members with respect to the limited_partnership arrangements of the required legal documents including documents related to issuance of general and limited_partnership units the limited_liability_company operating agreements including documents related to the issuance of managing and non-managing member units the appraisals of the limited_partnership interests and non-managing member interests the required secretary of state filings as well as the preparation of the federal forms and schedules k-14 limited_partnership interests to the exempt_organizations these documents include the assignment of limited_partnership units the assignment of non-managing member units the consent to assignment of the limited_partnership_interest and the consent to the assignment of the non-managing member units form 886-a i-1994 catalog number 20810w page___ publish no irs gov department ofthe treasury-internal revenue service also prepares the documents related to the contribution of the the recipients of the gifts of limited_partnership prepares the limited_partnership agreements is involved in the day-to-day prepares the majority form 886-a rev date schedule number or exhibit explanations of items name of taxpayer december 20xx- 20xx identification_number -tax with respect to involvement in all aspects of day-to-day operations for the exempt_organization prepared and filed the form sec_1023 application with the internal revenue established the exempt_organizations and continues his service for approval to create and operate the exempt_organizations prepares and files all required state documents with prepares and files the annual federal forms for the exempt_organizations secretary of state the limited_partnership interests and the non-managing member nterests transferred to are not transferable partnership interests according to the limited_partnership agreement a limited_partner may transfer their limited_partnership_interest if certain conditions are satisfied one of the conditions requires the unanimous written consent of all the partners this condition would require not only the exempt organizations' agreement to the sale but would also require the agreement of all partners according to the limited_liability_company operating_agreement certain requirements must be met to transfer a membership interest one of the requirements is the unanimous approval of all members this condition would not only require the exempt organizations’ agreement to the sale but would require the agreement of all members board meetings noted that on the 20xx form_990 required signature was actually prepared and signed the 20xx and 20xx form_990 returns it should be name was typed on the return the signature the only board meeting held was the annual meeting where officers were appointed no other issues were documented and no other actions were authorized the minutes for the meeting held on january 20xx indicated that over the last years there has been several audits of current donors to _ all of these audits were approved and validated and were given no changes by the irs the president stated that the irs may decide to audit the organization in an effort to revoke the exempt organization's tax status the president stated that the opinion of counsel from tax attorneys including tax litigators is that status based on no change audits of donors who gifted llc units to the organization also the overwhelming weight of legal authority which does not prohibit acceptance of llc units where the llc agreement is approved and the manager of the llc is required to comply with the fiduciary duty which ensures that the llc interest owned by _ should at no point voluntarily allow the irs to revoke its exempt __publish no irs gov department ofthe treasury-internal revenue service form 886-a catalog number 20810w page is protected from schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx board_of directors the organization stated correspondence letter 20xx that from 20xx- 20xx the directors were not related have been the directors of county schoo corporation revenue_agent confirmed this and that he is employed as a custodian during his interview of currently attending college and works for a local bank agent did not confirm this statement from 20xx to present works full time for on 20xx and his wife is stated in the interview that he has not been active with the organization for over years the filed form_990 indicates the following 20xx- - vp 20xx- - vp 20xx- president - vp - pres - pres 20xx- - vp 20xx- - pres - pres - activities and choose the the organization stated that their activities support local and nationwide charities as part of its mission the directors charitable organizations to support for 20xx- 20xx they could not explain how they selected the organizations to fund nor could they explain how they became aware of the organzations they were funding especially organizations located out of state they stated that there were no loans made prior to 20xx the organization contracts with professional fundraisers to help raise funds for the organization the fundraiser is paid a percentage of the gift amount received these fees are only paid after the gift has been received by the organization an examination of the organization's financial and operational records indicates that the organization had substantial donors who reside outside of the primary fundraisers live and work in twas noted that these fundraisers did not receive a form_1099 for the clients they provided during the examination years on august 20xx dollar_figure for o member units entity he created for dollar_figure consideration gifted customer lists contacts lists trade secrets systems and processes client agreements appraisal systems and accounting processes to became an officer of dollar_figure these are the same services he performs in his private business and reports on his individual tax_return he explained to his business associates financial planners and contacts that payments from new clients nov 20xx and forward requesting in 20xx for dollar_figure consideration he appraised this ip at gifts intellectual_property ip stated to be on august 20xx he transferred created the following transactions publish no irs gov department ofthe treasury-internal revenue service form 886-a catalog number 10w page on october 20xx was formed by and he paid units to who an schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx formation and administering services for their charitable gifting arrangements are to now be made payable to on october 20xx on october 20xx transferred the ip to was created was ssued llc to and units to in on on april 20xx transferred the o pays of its gross on october 20xx on january 20xx for_the_use_of the ip for dollar_figure consideration on february 20xx on october 20xx assigned any and all on october 20xx transferred his interest in entered into a trade secret and transferred the formed filed certificate of dissolution with the prepares all of the related entities tax returns units in for dollar_figure consideration this was not reported on of the membership interest units exchange for llc units of august 20xx and he paid dollar_figure for member units on august 20xx transferred to form_990 intellectual_property licensing agreement whereby revenues to for dollar_figure consideration interest of any kind currently owned in limited_partnerships or llcs to a c public charity secretary of state office voluntarily dissolved- 20xx adoption date- 20xx and effective date- 2-11-20xx domestic_corporation the examination of the financial and operational records presented showed that main activity was the promotion of a program where a donor creates an entity a llc entity with a non-voting interest owned by the donor and a voting interest owned by donor the donor contributes the non-voting interest or to creating a partnership or disregarded_entity through the agreement creating a partnership entity the general_partner retains full control of the partnership entity the non-voting interest cannot be sold transferred or substituted without the general partner's permission the general_partner can admit new non-voting interest members diluting ownership and the general_partner can dispose_of assets at will and on any terms and controls any distributions interest assigns a power_of_attorney to the general_partner the donor then donates the non-voting interest to form 886-a i-1994 catalognumber 20810wpage___ publish no irs gov department ofthe treasury-internal revenue service whik retaining the ownership of the general_partner the in some partnership agreements the non-voting onfebruary 20xx promotion of partnership -a for- profit created schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december3 20xx- 20xx donor never relinquishes control of the underlying assets there were and o partnerships returns form_1065 filed respectively for 20xx 20xx 20xx 20xx and 20xx has with its donors does not allow the partnership llc lp agreement that to have any control of the assets of the partnership the general_partner donor has complete control of the assets he can sell trade or use the assets for nonexempt purposes without consent of only receives the income generated from the assets as reported on the form 1065's and k-1's it was also noted that several identified financial planners had setup llc lp with will identify them also as an insider and therefore created a relationship that charges a fee to set up and maintain the partnerships and to appraise funds or fees for the private practice the account but it was not possible to income from the partnerships in 20xx- 20xx hecharges an additional annual fee based on the non-voting interest donated to the asset value appraisals are for around to of the book_value even though the appraisal states that non-voting interest is not transferable and has no control the llc and partnership interests accepted by _ that were reviewed included very few prepared by independent contractors the majority was prepared by and all that the agent reviewed were appraised by preparation and appraisals were deposited to the determine ff the funds were partof agreements do not allow sales or distributions and the appraisals note that the donated limited interests are completely controlled by the general_partner donations are exclusively non-voting interests in partnerships and llc's a small amount of cash distributions and fees investments are the maintained partnership and llc agreements and residual income during the years 20xx- 20xx _ failed to report on its form_990 all income from schedule k-1's the schedule k-1's arise from resulting from non-cash contributions the donors claim a charitable deduction for the amounts reported as contributions on partners that retain control_over the assets held by the partnerships the income reported on the schedule k-1's issued to organization also had income from disregarded entities agent was not able to determine the exact amounts due to the fact that these entities are not required to after donation from the partnership the general_partner receives of the income income as passive_income excluded from ubit receives k-1 forms for the allotted share usually of income treats the form 886-a i-1994 catalognumber 20810w page _ publish no irs gov department ofthe treasury-internal revenue service should be reported on its form_990 the form_990 the donors are the general limited_partnership interests schedule number or exhibit explanations of items form886-a rev date name of taxpayer -tax identification_number december 20xx- 20kx file income_tax returns and the organization did not maintain records to identify the sources of revenue and the related expenses in a past examination 20xx- 20xx irs successfully revoked the tax exempt status of a related_entity also created and operated by created and operated inthe exact same manner as agreed to the decision to revoke the entity's exempt status and stated in his response dated 20xx he would agree to our proposed revocation of of 20xx if we would offer a closing_agreement identical to the one the service entered with him on a related_entity that was revoked on the same issues this would be an obvious way to settle the case that entity was also tax exempt status as law sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual see sec_501 - sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes ff its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1501 -1 c ofthe income_tax regulations provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in sec_501 an organization must not engage insubstantial activities that fail to further an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations provides that in order for an organization to be exempt under sec_501 ofthe code it must be both organized and operated exclusively for one or more of the purposes specified insuch section ifan organization fails to meet either the organizational or operational_test itis not exempt sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than to meet this requirement it is necessary for an organization to establish that tis not organized or operated for the benefit of private interests sec_1_501_c_3_-1 defines the term charitable for sec_501 purposes as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions form 886-a i-1994 catalognumber20810wpage___publish no irs gov department ofthe treasury-internal revenue service a private interest explanations of items schedule number or exhibit form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education sec_1_501_c_3_-1 provides in part that the term educational for sec_501 purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 f the trade_or_business furthers an exempt_purpose and if the organization's primary purpose does not consist of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court stated that the presence of a single nonexempt purpose if substantial in nature will preclude exemption under sec_501 of the code regardless of the number or importance of statutorily exempt purposes thus the operational_test standard prohibiting a substantial nonexempt purpose s broad enough to include inurement private benefit and operations that further nonprofit goals outside the scope of sec_501 in best lock corporation v commissioner 31_tc_620 the court upheld the denial of an organization that baned funds to members of the founder's family even though the loans were repaid the court determined that loans to family members and unsecured loans to friends of the founder and his family promoted private rather than charitable purposes revrul_68_489 1968_2_cb_210 holds that an organization will notjeopardize its exemption under sec_501 of the code even though it distributes funds to nonexempt organizations provided it retains control and discretion over use of the funds for sec_501 purposes the revenue_ruling states that the exempt_organization ensures use of the funds for sec_501 purposes by limiting distributions to specific projects that are in furtherance of s own exempt purposes k retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for sec_501 purposes sec_6001 provides that every person lable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the publish no irs gov department ofthe treasury-internal revenue service form 886-a i-1994 catalognumber 20810wpage__ schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by irc 5110n its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax form 886-a i-1994 catalognumber 20810w page _publish no irs gov department ofthe treasury-internal revenue service form 886-a rev date explanations of items schedule number or exhibit name of taxpayer -tax identification_number december 20xx- 20xx benefiting private interests even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 it must demonstrate that its activities serve a public rather than a private interest within the meaning of reg sec_1_501_c_3_-1 revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of business operated by the individual who also controlled the organization the ruling reasoned that although providing housing for low-income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder's business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization's board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization's business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations activity the tax_court nevertheless upheld the commissioner's denial of exemption to the organization on the ground that the organization's operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of ku's activities was to benefit kj's place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning ku's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 an organization does not serve a public rather than a private interest within the meaning of reg c -1 d if any of its assets or earnings inure to the benefit of any insiders or disqualified persons sec_1_501_c_3_-1 although supporting charitable organizations may be a charitable publish no irs gov department ofthe treasury-internal revenue service form 886-a i-1994 catalognumber 20810wpage___ schedule number or exhibit explanations of items form 886-a rev date name of taxpayer -tax identification_number december 20xx- 20xx a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement 365_f2d_792 8th cir 318_f2d_632 7th cir church of scientology f 2d pincite- the provision of inurement can be direct or indirect in church of scientology f 2d pincite the organization transferred in excess of dollar_figure million to a for-profit corporation incorporated by the organization's founder and his wife the directors of the corporation were high-ranking members of the church of scientology the directors approved the founder's decision to transfer dollar_figure million from the corporation's account to the ship apollo aboard which the founder and his family lived the ninth circuit held that the funds funneled through the for-profit corporation constituted inurement to the founder and his family church of scientology f 2d pincite in 765_f2d_1387 91h cir the ninth circuit held that a church that conducted its activities by mail did not qualify for exemption under sec_501 because a substantial purpose of its activities was to benefit a for- profit corporation controlled by the church's insiders the church employed an advertising agency controlled by its insiders to provide all of the printing and mailing services for the church's mass mailings the advertising agency devoted approximately two-thirds of its time to the work for the church the majority of the church's income was paid to the advertising agency although the advertising agency claimed to have clients unrelated to the church it did not advertise its services and refused to identify its other clients the ninth circuit held that the church was operated for the substantial non exempt_purpose of providing a market for the advertising agency's services and thus primarily served the private interests of the advertising agency and its owners rather than a public purpose in so holding the ninth circuit rejected the church's argument that the income paid_by the advertising agency should not be included in the determination of reasonableness and treated this income as indirect inurement of the church's earnings to the church's insiders the prohibition on inurement in sec_501 is absolute the service has the authority to revoke an organization's exempt status for inurement regardless of the amount of inurement see spokane motorcycle club supra the founding church of scientology f 2d pincite - because it is not operated for an exclusive exempt_purpose it does not qualify as an organization described in sec_501 form 886-a i-1994 catalognumber 20810wpage__publish no irs gov department ofthe treasury-internal revenue service government's position form 886-a rev date explanations of items schedule number or exhibit name of taxpayer -tax identification_number december 20xx- 20xx substantially benefits private interests and its net_earnings inure to the benefit of private shareholders and individuals not operated for an exclusive exempt_purpose does not engage in any charitable activities the organization stated on its form_1023 that it will not make grants loans or other distributions to organizations during 20xx- 20xx the organization made distributions to various organizations and individuals the organization did not provide any documentation to support the claim that monies are awarded based on need the organization did not have any specific guidelines and procedures to determine whether an individual qualified as a charitable_class for a charitable or educational grant there was no independent group of individuals who were charged the task of making the grant selections the organization did not exercise due diligence in determining that the monies that the grants were being used for the intended exempt_purpose when agent interviewed the president __ and about the award procedures they stated that there were no specific procedures they would send checks to whomever told them therefore the grants awarded do not qualify as an exempt_function expense and is considered to be a private benefit to the individuals who received the funds received the assets of these assets were the same type of assets llcs main activity in 20xx- 20xx was the promotion of partnerships and disregarded entities with donors in 20xx a related c entity as a result of their voluntary termination with the state of partnerships disregarded entities that the organization is reporting on their form_990 the donors were never informed of the transfer by the organization continues to operate a program that allows individuals partnerships limited_partnerships and llc's to claim a sec_170 deduction for asset s donated to allows the donor to retain control and subsequently purchase the asset s back at a value that is substantially less than the chartable amount initially claimed these transactions do not exclusively serve an exempt_purpose described in sec_501 and provides substantial private benefit to persons who do not belong to a charitable_class including the organization's founder it is the service's position that the donor does have advisory and or control of monies assets contributed only by him not over the entire general fund and segregated as the organization seems to be stating and even though the organization claims there's no segregated fund recorded the facts are that the funds are identified when donated and checks were issued to the donor's named charity these transactions are structured to give the appearance that they are donor advised funds when in fact the organization has not provided any information to support the position that they control form 886-a i-1994 catalognumber 20810wpage__publish no irs gov department ofthe treasury-internal revenue service _ but fonn886-a rev date explanations of items _ schedule number or exhibit name of taxpayer -tax identification_number december 20xx- 20xx the distributions of the monies and they did not perform their due diligence in making sure that the funds were being used for exempt purposes this will allow the shifting_of_income from taxable entities to a tax exempt_organization for the purpose of deferring or avoiding taxes these transactions have the same economic_effect as the transaction described in notice_2004_30 irb date has with its donors does not allow the partnership llc lp agreement that to have any control of the assets of the partnership the general_partner donor has complete control of the assets he can sell trade or use the assets for nonexempt purposes without consent of as reported on the form 1065's and k-1's it was also noted that several identified financial planners had setup llc lp with identify them also as insiders only receives the income generated from the assets and therefore created a relationship that will it is our position that the partnership activities which were the main activities of substantial non-exempt purpose private benefit to the donors in addition the partnership activities provided a hada inurement _ and ip to when and was subsequently is considered to be inurement because he received a financial benefit the gifting of transferred to in the form of a deduction when he never gave up control of the ip the ip licensing agreement between fee for_the_use_of the ip is considered to be inurement because control of by the parties that the services offers could only be performed by promoting and_ developing charitable gift plans for high wealth individuals this entails creating llc's llp's trusts filing organization papers valuating client's properties working with other financial planners preparing tax and information returns has no other employees acknowledges he did all of the work and was the brains behind the business without him there would be no business he directed the financial planners and other contacts to write my fee to this income is reported on and therefore wouldn't show up as taxable_income gifted him his ownership and it was acknowledged tax_return which is consolidated with calling for a had complete stated that form taxpayer's position in a past examination 20xx- 20xx irs successfully revoked the tax exempt status of a related_entity also created and operated by form 886-a i-1994 catalognumber20810w page __ publish no irs gov department ofthe treasury-internal revenue service form 886-a rev date explanations of items schedule number or exhibit name of taxpayer -tax identification_number december 20xx- 20xx that was created and operated in the exactsame manneras agreed to the decision and stated in his response dated 20xx to our idr request that the revocation of the tax exempt status of would be an obvious way to settle the case conclusion it is the irs's position that -_ failed the operational_test as described in income_tax regulation sec_1_501_c_3_-1 d and c -1 d ii exclusively for an exempt_purpose it serves private rather than public interests its net_earnings inured to the benefit of private shareholders and individuals the service agreed to enter into a closing_agreement whereby the organization's exempt status will be revoked effective january 20xx and the remaining assets shall be returned to the donors the organization agreed and signed the form_906 was not operated form 886-a i-1994 catalog number 20810w page___publish no irs gov department ofthe treasury-internal revenue service


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 b01 plr-125372-17 date date legend x ------------------------------------------------------------ ------------------ trust ------------------------------------------------------------ ----------------------------------------------- state date date date --------------- -------------------- ----------------------- ----------------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by the authorized representative of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted and representations made within x was incorporated and made a valid s_corporation_election effective date under the laws of state plr-125372-17 on date trust acquired shares of x from an estate pursuant to the terms of a will x represents that trust has at all times since date met the requirements of an electing_small_business_trust esbt except that the trustees of trust did not make a timely esbt election under sec_1361 thus causing x’s s_corporation_election to terminate effective date x represents that x and its shareholders have treated x as an s_corporation at all relevant times x further represents that trust has filed its income_tax returns consistent with being an esbt x represents that the failure_to_file an esbt election for trust was inadvertent and was not motivated by tax_avoidance or retroactive tax planning further x represents that x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation that may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that a_trust may be an s_corporation shareholder with respect to stock transferred to it pursuant to a will but only for the year period beginning on the day on which such stock is transferred to it sec_1361 provides that for purposes of sec_1362 an esbt may be an s_corporation shareholder sec_1361 provides that an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an esbt does not include i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies plr-125372-17 to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 of the income_tax regulations provides in relevant part that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 generally only one esbt election is made for the trust regardless of the number of s_corporations whose stock is held by the esbt however if the esbt holds stock in multiple s_corporations that file in different service centers the esbt election must be filed with all the relevant service centers where the corporations file their income_tax returns this requirement applies only at the time of the initial esbt election if the esbt later acquires stock in an s_corporation which files in a different service_center a new esbt election is not required sec_1_1361-1 provides that the trustee of an esbt must file the esbt election within the time requirements prescribed in sec_1_1361-1 for filing a qsst election generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s election terminated on date because of the failure of trust to timely file an plr-125372-17 esbt election we further conclude that the terminations of x's s election was inadvertent within the meaning of sec_1362 therefore x will be treated as an s_corporation effective date and thereafter provided x's s_corporation_election is otherwise valid and not otherwise terminated under sec_1362 this letter_ruling is subject_to the condition that within days from the date of this letter an election to treat the trust as an esbt effective date must be made with the appropriate service_center a copy of this letter should be attached to the esbt election if this condition is not met then this ruling is null and void furthermore if this condition is not met x must send notification that its s election has terminated to the service_center with which its s election was filed except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x's eligibility to be an s_corporation this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives sincerely wendy l kribell wendy l kribell assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy of this letter for sec_6110 purposes