department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n form tax years contact person telephone number identification_number employer_identification_number number release date se t eo ra t date date uil numbers dollar_figure dear ------------ this letter constitutes a final adverse_ruling with respect to your claim of exemption from federal income_taxation under sec_501 of the internal_revenue_code we make our ruling for the following reason s in sec_501 of the code part of your net_earnings has inured to the benefit of private shareholders or individuals more than an insubstantial part of your activities furthers private purposes rather than purposes described in sec_501 never executed they are therefore not effective lapham foundation inc v commissioner tcmemo_2002_293 private_foundation because you failed to establish that you meet the requirements under sec_509 b and c of the code donors may not deduct contributions to your organization under sec_170 of the code the code and the regulations issued thereunder require that you file federal_income_tax returns based upon the financial information that you furnished you should file returns on the form and for the tax years indicated above within days from the date of this letter unless you request and are granted an extension of time to file the returns you should attach a copy of this letter to the returns you file questions concerning the filing of returns should be directed to the ohio tax exempt and government entities te_ge office pincite-5500 a toll free number you have failed to establish that you are organized and operated exclusively for purposes described the organizational_test was not satisfied in this case because the amended trust documents were we also rule that even if you did qualify under sec_501 of the code you would be a if you decide to contest this ruling under the declaratory_judgment provisions of sec_7428 of the code you must initiate a suit in the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia before the 91st day after the date that we mailed this ruling to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment the filing of a declaratory_judgment suit under sec_7428 does not stay the processing of income_tax returns and assessment of any taxes in accordance with sec_6104 of the code we will notify the appropriate state officials of this action this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you have any questions concerning the reasons for this ruling please contact the person whose name and telephone number appear in the heading of this letter enclosure notice martha sullivan director exempt_organizations bill brockner sincerely


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date contact person uil code identification_number telephone number employer_identification_number se t eo- lrt egen r o y n i e o u z we have considered your request for rulings under sec_501 sec_509 and sec_513 of the internal_revenue_code acts n m y was formed as a non-stock non-profit corporation to establish and operate a blood banking facility in city a state x the internal_revenue_service recognized y as an organization described in sec_501 of the code and as a public charity under sec_509 y solicits the donation of blood from volunteer donors collects analyzes and processes the blood and supplies blood products to hospitals and outpatient facilities as well as improving and advancing the science and practice of blood transfusion therapy y operates under a license granted by the united_states food and drug administration fda to comply with fda regulations y developed appropriate management and information systems and therefore developed considerable expertise in such systems y’s amended articles of incorporation state that its purposes include a b c d soliciting and facilitating the donation of human blood by volunteer donors in state x states contiguous to state x and throughout the united_states analyzing and processing donated blood and supplying blood products to hospitals and outpatient treatment facilities in state x states contiguous to state x and throughout the united_states improving and advancing the science and practice of blood transfusion therapy in state x states contiguous to state x and throughout the united_states and managing human blood bank programs in state x states contiguous to state x and throughout the united_states x was incorporated as a non-stock non-profit organization to support the charitable educational and scientific activities of y of which x is the sole member the internal_revenue_service recognized x as an organization described in sec_501 of the code and as a supporting_organization under sec_509 x provides various services to y including policy-making long-range strategic planning accounting financial reporting marketing and public relations human resources legal and professional purchasing and billing and information_technology x is funded through payments from y for the services x provides to y x either distributes or loans its income to y or invests in assets that will ultimately be used to benefit y x does not hold any significant assets other than its membership interest in and loans to y the same people serve on the board_of directors and are senior officers of both x and y z is an unrelated non-stock non-profit corporation that was formed through a collaboration of hospitals in city b state y to ensure a safe and cost-effective alternative to the american red cross as a blood banking facility the internal_revenue_service recognized z as an organization described in sec_501 of the code and as a public charity under sec_509 on date a y entered into a three-year agreement with z management agreement’ under which y agreed to assist z in developing and operating a new blood banking facility in city b state y y agreed to manage z’s fda regulated blood banking and related activities at this facility until z is able to operate independently under its own fda license because z does not have its own fda license to operate a blood banking facility it operates under y's license the management agreement provides that as soon as reasonably practicable z will obtain its own fda license hire its own staff and be independently responsible for its operations and activities furthermore to facilitate a transition to independent operation y will prepare and submit to the board_of directors a transition plan that outlines how z will transition to independent operation under the management agreement y has total control_over all of z’s activities in accordance with fda regulations both parties agree that z will not take any_action or direct y to take any_action that would jeopardize y’s fda license y represents that if the fda finds a deviation as part of its inspection of z the penalty would be levied against y’s entire blood banking system furthermore y represents that it is unaware of any organization other than itself that allows another blood center to operate under its fda license n addition y states that it does not believe an integrated package of management services provided under an fda license is commercially available to z from any source other than y under the management agreement y provides z with various fda-related management clinical services and technology services y also provides z with access to all of y’s fda-mandated regulatory documents and policies and procedures as listed in the management agreement y receives compensation from z for providing these services y represents that the payment for services by z has declined since the inception of the contract based upon the continuing reduction of services provided by y x is not a party to the management agreement however x supports y in its performance of certain contractual obligations under the management agreement such as providing financial and budgetary reporting accounting marketing and public relations purchasing and billing and human resources services accordingly x will be providing services and receiving compensation attributable to the contract with z rulings requested of y's provision of services to z under the management agreement does not adversely affect either x’s or y’s current tax-exempt status as an organization described in sec_501 of the code y’s provision of services to z under the management agreement does not constitute an unrelated_trade_or_business to y and x’s provision of services to y does not constitute an unrelated_trade_or_business to x within the meaning of sec_513 of the code y’s income from the provision of services to z under the management agreement does not adversely affect its current status as a public charity described in sec_509 of the code y's provision of services to z under the management agreement does not adversely affect x’s current status as a supporting_organization under sec_509 of the code y’s provision of services to z under the management agreement does not adversely affect the ability of donors to either x or y to deduct contributions under sec_170 of the code sec_170 of the code provides a deduction for charitable_contributions to or for_the_use_of corporations organized under the laws of the united_states and operated exclusively for religious charitable scientific or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual if it is used within the united_states sec_501 of the code describes organizations that are organized and operated exclusively for charitable and other exempt purposes no part of the net_earnings of which inure to the benefit of any private_shareholder_or_individual sec_509 of the code provides in part that the term private_foundation includes a domestic organization described in sec_501 other than an organization which normally receives more than one-third of its support in each taxable_year from gross_receipts from the performance of services in an activity which is not an unrelated_trade_or_business within the meaning of sec_513 sec_509 provides that the term private_foundation means a domestic or foreign organization described in sec_501 other than an organization which a is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or b is - i operated supervised or controlled by one or more organizations described in sec_509 or supervised or controlled in connection with one or more such organizations or ii iii operated in connection with one or more such organizations and c is not controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in sec_509 or sec_2 sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities are not in furtherance of an exempt_purpose sec_1_513-1 of the regulations states that for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes revrul_66_323 1966_2_cb_216 held that a blood bank organized and operated to provide a community with facilities to collect store and distribute human blood may be recognized as exempt under sec_501 of the code however the sale of blood and blood products to commercial laboratories constitutes income from an unrelated_trade_or_business and is taxable under sec_511 revrul_72_369 1972_2_cb_245 held that an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption because the provision of these services constitute a trade_or_business ordinarily carried on for profit analysis ruling no operating a blood banking facility furthers an exempt_purpose under sec_501 of the code because it promotes the health of the community revrul_66_323 supra here y assists z in developing and operating a new blood banking facility in city b state y until z is able to operate independently under its own fda license y has total control_over all of z’s activities in accordance with fda regulations y provides z with various fda-related management and clinical services under y’s fda license as well as access to all of y’s fda mandated regulatory documents and policies and procedures the fda treats z as a collection and production site of y and any deviation from fda standards would negatively impact y's entire blood banking system not just the deviating center z will be considered a part of y’s operations until z is able to operate independently y’s establishment and operation of its fda licensed blood banking facility furthers its tax-exempt charitable purpose of promoting health the operation of a new fda licensed blood banking facility in another location will help meet the needs of that community and benefit the public therefore y’s provision of services to z under the management agreement will not adversely affect y’s current tax-exempt status as an organization described in sec_501 of the code and sec_1_501_c_3_-1 of the regulations since x will continue to support y in y’s performance of its obligations under the management agreement x will also continue to be described in sec_501 ruling no we concluded above that y’s operation of z’s blood banking facility furthers an exempt_purpose under sec_501 of the code because it promotes the health of the community the fda-mandated services that y provides to z under the management agreement constitute a unique package of related_services not otherwise available to z in particular these services are distinguishable from the commercial services provided by the organization described in revrul_72_369 supra which was formed to provide management and consulting services to unrelated exempt_organizations accordingly we conclude further that y’s services to z under the management agreement are substantially related to the achievement of y’s exempt purposes within the meaning of sec_1_513-1 of the regulations and do not constitute an unrelated_trade_or_business to y within the meaning of sec_513 of the code the exempt_purpose of x is to support the charitable educational and scientific activities of y the various management and administrative services x provides to y are substantially related to the achievement of x’s exempt_purpose within the meaning of sec_1_513-1 of the regulations therefore x’s provision of these services to y does not constitute an unrelated_trade_or_business to x within the meaning of sec_513 of the code ruling no public support under sec_509 of the code includes gross_receipts from the performance of services in an activity that is not an unrelated_trade_or_business within the meaning of sec_513 but only to the extent that the gross_receipts from any person in a year do not exceed the greater of dollar_figure or one percent of the organization’s support for that year we concluded above that y’s provision of services to z under the management agreement does not constitute an unrelated_trade_or_business to y within the meaning of sec_513 of the code thus the fees y receives from z for providing services to z under the management agreement constitute public support under sec_509 but only to the extent that the fees from z in any year do not exceed the greater of dollar_figure or one percent of y’s total support for that year ruling no the internal_revenue_service recognized x as an organization described in sec_501 of the code and as a supporting_organization under sec_509 by x providing various services to y x continues to be organized and operated to support or benefit y addition x continues to be supervised or controlled in connection with y an organization described in sec_509 of the code accordingly x continues to meet the requirements under sec_509 as a supporting_organization in ruling no we have concluded that y’s provision of services to z under the management agreement does not adversely affect either x’s or y’s current tax-exempt status under sec_501 of the code because x and y continue to be described in sec_170 donors may continue to deduct contributions to x and y in accordance with the law ruling sec_1 y’s provision of services to z under the management agreement does not adversely affect either x’s or y’s current tax-exempt status as an organization described in sec_501 of the code y’s provision of services to z under the management agreement does not constitute an unrelated_trade_or_business to y and x’s provision of services to y does not constitute an unrelated_trade_or_business to x within the meaning of sec_513 of the code y’s income from the provision of services to z under the management agreement does not adversely affect its current status as a public charity described in sec_509 of the code y’s provision of services to z under the management agreement does not adversely affect x’s current status as a supporting_organization under sec_509 of the code y's provision of services to z under the management agreement does not adversely affect the ability of donors to either x or y to deduct contributions under sec_170 of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely steven b grodnitzky manager exempt_organizations technical group


t c memo united_states tax_court estate of leon spear deceased jeanette spear harvey spear and robert spear administrators and jeanette spear petitioners v commissioner of internal revenue respondent docket nos filed date barry a furman patrick w kittredge and michael s paul for petitioners michael p corrado ruth m spadaro and james c fee jr for respondent this opinion supplements estate of spear v commissioner tcmemo_1993_213 vacated and remanded 41_f3d_103 3d cir cases of the following petitioners were consolidated estate of abe spear deceased morris spear executor docket no estate of leon spear deceased jeanette spear administrator robert spear administrator and harvey spear administrator docket no supplemental memorandum opinion colvin judge this matter is before the court on remand from the u s court_of_appeals for the third circuit in spear v commissioner 41_f3d_103 3d cir vacating and remanding tcmemo_1993_213 the issues for decision on remand are whether petitioners had any cash on hand on date we hold that petitioners had dollar_figure cash on hand on date instead of zero as determined by respondent whether petitioners are liable for the addition_to_tax for fraud we hold that they are not whether if petitioners are not liable for the addition_to_tax for fraud respondent is barred from assessing tax for the years in issue we hold that respondent is barred from assessing tax for but not for and references to petitioner are to jeanette spear section references are to the internal_revenue_code in effect during the years in issue rule references are to the tax_court rules_of_practice and procedure discussion a estate of spear v commissioner tcmemo_1993_213 jeanette and leon spear filed joint federal_income_tax returns for and respondent determined that petitioners are liable for deficiencies in income_tax and additions to tax for fraud as follows additions to tax_year deficiency dollar_figure dollar_figure dollar_figure sec_6653 dollar_figure dollar_figure dollar_figure using the net_worth plus expenditures method respondent determined that petitioners had unreported income in and petitioner did not comply with an order of this court to testify at trial as a result we sanctioned petitioners by deeming that respondent made a prima facie showing of certain facts alleged by respondent in paragraph of the amended answer the deemed facts estate of spear v commissioner tcmemo_1993_213 we upheld most of respondent's deficiency determinations and held that petitioners were liable for the additions to tax for fraud b 41_f3d_103 3d cir petitioners appealed our decision in docket no the court_of_appeals vacated our decision and remanded the case with instructions that we decide it without treating respondent as having made a prima facie showing as to the deemed facts estate of spear v commissioner f 3d pincite the court_of_appeals said there are many other places in the opinion that make it appear that the tax_court found sufficient evidence of net_worth and of fraud without relying on the deemed facts nonetheless because we are unsure whether the court relied on these facts and shifted the burden_of_proof and because the consequences to the taxpayers are so significant we must assume that the court did rely on these facts we will thus treat the sanction as one that essentially shifted the burden_of_proof and production on net_worth and on fraud id pincite the court_of_appeals limited its discussion of the record mainly to the facts bearing on the sanctions issue estate of spear v commissioner f 3d pincite the court also said the tax_court may of course elect to retry the case in that event it might be well advised to rely upon jeanette's videotaped deposition in lieu of her testimony although perhaps her emotional state is now better on the other hand the court may simply prefer to decide the case on the basis of the existing record but absent the deeming and its consequences which we have declared invalid id pincite the court_of_appeals also said with respect to petitioner's videotaped deposition that it is difficult to see how anything more would be forthcoming at a trial id pincite we agree neither side has requested further trial we conclude that further trial is unnecessary c whether the absence of deemed facts or the finding by the u s court_of_appeals for the third circuit relating to petitioner’s deposition alters our decision relating to the deficiencies or the net_worth_method for and deemed facts we did not consider the deemed facts in our prior opinion with respect to the deficiencies the net_worth_method or any issue other than fraud estate of spear v commissioner tcmemo_1993_213 slip op pincite thus the decision of the court_of_appeals in estate of spear v commissioner supra that we may not consider the deemed facts affects only our findings and conclusions relating to fraud we decide the effect of that opinion on our fraud finding below at paragraph d jeanette spear's deposition a net_worth_method respondent used the net_worth plus expenditures method to determine that petitioners had unreported income in and as part of that determination respondent concluded that petitioners had no cash on hand on date an essential condition in net_worth cases is that the commissioner establish with reasonable certainty an opening net_worth to serve as a starting point from which to calculate future increases in the taxpayer’s assets 348_us_121 although holland is a criminal case it also applies to use of the net_worth_method in civil tax cases see 298_f2d_784 3d cir affg in part on this issue tcmemo_1960_160 where the commissioner has determined a deficiency by using the net_worth_method we may adjust a determination of opening net_worth shown by the trial record to be unrealistic hoffman v commissioner supra 251_f2d_311 9th cir affg tcmemo_1956_112 22_tc_912 affd sub nom 230_f2d_336 7th cir errors in the net_worth_method do not invalidate the presumption of correctness attaching to other aspects of the commissioner’s deficiency determination if the determination was not arbitrary hoffman v commissioner supra pincite we may apply the cohan_rule enunciated in 39_f2d_540 2d cir if appropriate to decide the amount of cash on hand at the beginning of the period to which the net_worth_method is applied 230_f2d_336 7th cir affg 22_tc_912 the court_of_appeals stated based on our viewing of the deposition we find jeanette's testimony as to the dollar_figure cash hoard quite straightforward and it seems to be credible estate of spear v commissioner f 3d pincite in response to that finding we have carefully reviewed petitioner's videotaped deposition testimony and the entire record to enable us to reconsider whether petitioners had any cash on hand on date petitioner’s testimony gives two possible sources of petitioners’ cash on hand on date one is a cash hoard from the other is their parking lot business they have conducted since petitioner testified in the deposition that she and her husband had a large cash hoard she testified that one night in her husband came home with a bag of money which he said his father abe spear had given to him petitioner's husband's father died soon thereafter she did not remember whether the bag was bigger or smaller than a grocery bag she said that she helped him count the money but he did most of the counting she testified that the next night he came home with a second bag of money she said that combined both bags contained a bout or or something that was it she said that in less than year they put some of the money in a safety deposit box she said she did not remember how long the rest of the money was in their house another possible source of petitioners’ cash on hand on date based on petitioner’s deposition is petitioners’ parking lot and other businesses petitioner testified in her deposition that her husband leon spear routinely handled cash and received cash from petitioners' parking lot business and used cash to pay for expenses such as parking lot maintenance and improvements petitioners began to operate parking lots in estate of spear v commissioner tcmemo_1993_213 slip op pincite petitioner’s husband sold used cars before that id petitioner testified that her husband dealt extensively in cash in connection with the parking lots we believe that petitioners accumulated cash from the parking lot business and used it to conduct their business petitioner testified that she and her husband used cash from the cash hoard for their parking lot business she said they used a lot of the cash to develop and expand their parking lot pinciteth and race streets she also said they used some of the cash for the parking lot petitioners created after they bought and demolished the skipper hotel and for the penndot lots that petitioners acquired in petitioner also testified that they bought a few properties between and petitioner had no written records of how she and her husband used the cash she testified that she only took money from and never put money into the cash hoard she said that she had no idea how much of the cash was left at the beginning of but she said there was some money left she testified that a rough guess was that the corporation owed petitioners a couple of hundred thousand dollars in she said the cash hoard was pretty well down by the court_of_appeals limited its discussion of the record primarily to the facts bearing on the sanctions issue estate of spear v commissioner f 3d pincite thus in evaluating petitioner's testimony we must also consider other evidence in the record abe spear borrowed dollar_figure from one of his daughters in date to give to another daughter to help her with a downpayment to buy a house estate of spear v commissioner tcmemo_1993_213 slip op pincite abe spear had about dollar_figure in mortgages on properties which were worth about dollar_figure when he died id he paid some of his bills late and he died with some of his deceased wife's jewelry in a pawn shop estate of spear v commissioner tcmemo_1993_213 slip op pincite abe spear named leon spear's brother and brother-in-law not leon spear as executors of his will which suggests that he did not favor leon spear over them to the extent of making a secret dollar_figure cash gift to him as petitioners claim estate of spear v commissioner tcmemo_1993_213 slip op pincite leon spear filed exceptions to the accounting of his father's estate alleging missing items estate of spear v commissioner tcmemo_1993_213 slip op pincite petitioner testified that petitioners applied for a mortgage and did not list cash as an asset petitioners first claimed that they had a cash hoard in date several years after their first interview with respondent's agent in estate of spear v commissioner tcmemo_1993_213 slip op pincite petitioners claim that they did not deposit the cash in banks because they distrusted banks however they used banks extensively id pincite giving appropriate weight to the finding of the court_of_appeals that petitioner’s testimony relating to the cash hoard was quite straightforward and appeared to be credible f 3d pincite and the entire record we conclude that petitioners used a considerable amount of cash throughout the years before to operate their business and that they had a significant amount of cash on hand on date we think the parking lots and petitioners' other businesses provided a likely source of a significant amount of cash on hand on date based on the foregoing discussion and the entire record we find that petitioners had dollar_figure cash on hand on date however the lack of records showing the amount of petitioners’ cash on hand the evidence in the record suggesting that abe spear was not wealthy the fact that abe spear chose one of leon spear's brothers to be the executor of his will and the fact that leon spear contested his father's will lead us to conclude that petitioners did not receive dollar_figure in cash from abe spear in petitioners argue that some of the money they received from their corporations during the years at issue are repayments of loans they made to the corporations before the years at issue petitioner testified in her deposition in this case that the loans existed however she testified in an earlier deposition in petitioners’ lawsuit against their accountant gil brown that she did not recall any specific incidents of lending money to the corporation estate of spear v commissioner tcmemo_1993_ slip op pincite petitioners had no documents which corroborate their contention that the loans were made there are no notes evidencing the loans or records of payments on the loans the loans were not shown in the books_and_records of petitioners’ corporations and there is no evidence that collateral was requested or interest was charged estate of spear v commissioner tcmemo_1993_213 slip op pincite to show that funds received were loan repayments petitioners must show that the loans were bona_fide this depends on all the facts and circumstances generally no one fact is determinative 326_us_521 petitioner did not testify that petitioners intended their expenses for their parking lots to be loans there is no evidence that there were any fixed maturity dates for repayment of the money petitioners gave to the corporations considering petitioner’s testimony and the entire record we continue to conclude that petitioners did not make bona_fide loans to their corporations we do not conclude that our finding that petitioners had dollar_figure in cash on date means that respondent’s determination of petitioners’ opening net_worth failed to be made with the requisite reasonable certainty 348_us_121 the commissioner’s use of the net_worth_method may be valid even though the commissioner did not properly recognize the taxpayer’s opening net_worth so long as the determination was not arbitrary 298_f2d_784 3d cir 251_f2d_311 9th cir 230_f2d_336 7th cir respondent was not arbitrary in applying the net_worth plus expenditures method here d whether petitioners are liable for fraud without consideration of the deemed facts in our prior opinion we considered the deemed facts and the entire record in holding that respondent clearly and convincingly proved that petitioners are liable for the addition_to_tax for fraud under sec_6653 for and estate of spear v commissioner tcmemo_1993_213 slip op pincite the mandate of the court_of_appeals instructs us not to treat respondent as having made a prima facie showing with respect to the deemed facts as a sanction for petitioner's failure to testify at trial this changes our analysis significantly we no longer find as facts the allegations in subparagraphs k l o p r s t u v w y aa ab ac ad and ae of paragraph of respondent's amended answer because they are not adequately supported by the record assertions in the paragraphs k l o p r s t u v w y aa ab ac continued continued ad and ae of paragraph of respondent's amended answer provide k petitioners refused to make available to agents of the respondent any records concerning their individual income_tax liabilities for the taxable years or l petitioners furnished only incomplete records of their corporations ezy parks inc tumble down inc and ezy parks ii inc to agents of the respondent for the taxable years and o petitioners did not have available on date any cash on hand which was not deposited in one of petitioners' bank accounts p there is attached hereto as exhibit a which is incorporated herein by reference and made a part hereof a statement summarizing petitioners sic net_worth increases and non-deductible expenditures_for each of the taxable years and r petitioners owned all of the stock and completely controlled jay faunce inc s jay faunce inc did not actively conduct any business activities at any time t the sole function of jay faunce inc was to acquire and hold title to real_estate properties acquired by petitioners with unreported income u petitioners used unreported income to acquire eight real_estate properties in their names or the name of a wholly owned nominee corporation v during the taxable years and petitioners acquired at least six real_estate properties which they concealed by holding title for these properties in the name of their nominee corporation jay faunce inc continued other subparagraphs in paragraph seven are amply supported by the record continued w petitioners deposited unreported income into bank accounts in twelve different banks during the taxable years and y petitioners' adjusted_gross_income as determined by petitioners' net_worth increases and non- deductible expenses was dollar_figure for dollar_figure for and dollar_figure for aa petitioners' correct taxable_income was dollar_figure for dollar_figure for and dollar_figure for ab petitioners with fraudulent intent to evade tax substantially understated their income for the taxable years and ac petitioners fraudulently with intent to evade tax failed to report dollar_figure of taxable_income for dollar_figure of taxable_income for and dollar_figure of taxable_income for ad petitioners fraudulently with intent to evade tax understated their tax_liabilities by dollar_figure on their income_tax return by dollar_figure on their income_tax return and by dollar_figure on their income_tax return ae a part of the underpayment_of_tax required to be shown on the petitioners sic income_tax returns for their and taxable years is due to fraud the following subparagraphs of paragraph seven are supported by the record and the findings_of_fact in our prior opinion a petitioners leon spear and jeanette spear were married individuals during the years and continued continued b during the years and petitioners owned and controlled two corporations known as ezy parks inc and tumble down inc c ezy parks inc was incorporated in pennsylvania on date and at all times was wholly owned and controlled by petitioners d tumble down inc was incorporated in pennsylvania on date and was at all times wholly owned and controlled by petitioners e during the years and ezy parks inc and tumble down inc each leased numerous parking lots which they in turn operated and managed in a business whereby cash fees were received from customers who parked their cars on the parking lots operated by ezy parks inc and tumble down inc f ezy parks ii inc was incorporated on date in pennsylvania and was at all times wholly owned and controlled by petitioners g ezy parks ii inc was also engaged in the operation and management of parking lots and received cash fees from customers who parked their cars on these lots h petitioner leon spear supervised and managed the operations of ezy parks inc tumble down inc and ezy parks ii inc during the taxable years and i the parking lots operated and managed by petitioners through their wholly owned corporations were businesses in which receipts from customers were predominantly in cash j petitioner jeannette spear maintained the business records and handled the banking transactions for ezy parks inc tumble down inc and ezy parks ii inc during the taxable years and continued and thus the court of appeals' instruction concerning the treatment of the deemed facts does not affect our analysis to that extent in our prior opinion several badges_of_fraud were present estate of spear v commissioner tcmemo_1993_213 slip op pincite we now conclude that the badges_of_fraud without the deemed facts enumerated in supra note do not clearly and convincingly establish petitioners' fraudulent intent continued m the three corporations ezy parks inc tumble down inc and ezy parks ii inc which were owned and operated by petitioners generated substantial cash receipts for each of the years and n the respondent has determined the petitioners sic correct taxable_income for the taxable years and on the basis of petitioners sic net_worth increases and non-deductible expenditures during each of the years and q on date petitioners incorporated an entity known as jay faunce inc x petitioners made investments and expenditures far in excess of the amounts of income they reported on their tax returns for the taxable years and z petitioners reported on their respective income_tax returns adjusted_gross_income of only dollar_figure for dollar_figure for and dollar_figure for implausible or inconsistent explanations of behavior in finding that petitioner’s explanations were implausible or inconsistent we stated that petitioner’s testimony about the cash hoard was not believable estate of spear v commissioner tcmemo_1993_213 slip op pincite the court_of_appeals found her testimony to be quite straightforward and to appear to be credible estate of spear v commissioner f 3d pincite and we have modified our earlier findings to what we believe is an appropriate extent based on her testimony especially relating to petitioners’ dealing in cash before we conclude that this badge of fraud is no longer present large understatements of income the discrepancies between petitioners' actual net_income and the income they reported is reduced to the extent of their cash on hand on date this badge of fraud is less compelling than before inadequate records failure to supply complete information to return preparer these two badges are not affected by removal of the deemed facts from our consideration diversion of corporate funds dealings in cash petitioner testified that her husband dealt extensively in cash as a matter of course in conducting their parking lot business these two badges_of_fraud are less compelling without the deemed facts we conclude that without the deemed facts that are not otherwise supported by the record and based on our reevaluation of petitioner's testimony and the entire record fraud has not been proven by clear_and_convincing evidence we hold that petitioners are not liable for the addition_to_tax for fraud under sec_6653 for and e statute of limitation sec_1 background petitioners timely filed joint federal_income_tax returns for and petitioners reported gross_income of dollar_figure for and dollar_figure for twenty-five percent of those amounts are dollar_figure for and dollar_figure for more than but less than years after petitioners' returns for and were due to be filed petitioners signed form sec_872 consent to extend time to assess tax for and which extended the time to assess tax to date petitioners did not consent to extend the time to assess tax for respondent mailed a notice_of_deficiency for and on date that date was more than years after petitioners filed their return generally the commissioner must assess tax within years after the due_date of a timely filed return sec_6501 respondent bears the burden of proving that an exception to the 3-year limit on the time to assess tax applies if as here the notice_of_deficiency was mailed more than years after the filing_date 10_bta_1069 statute_of_limitations for respondent contends that no limit on the time to assess tax applies for because respondent proved fraud sec_6501 respondent does not argue that any exception other than fraud under sec_6501 applies to we have concluded that respondent did not prove fraud for or see par d above thus assessment of the deficiency and addition_to_tax for is barred by the statute_of_limitations a statute_of_limitations for and respondent contends that assessment and collection for and are timely because petitioners omitted a substantial amount of income sec_6501 sec_6501 provides in part if the taxpayer omits_from_gross_income an amount properly includible therein which is in excess of percent of the amount of gross_income stated in the return the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time within years after the return was filed respondent bears the burden of proving that the 6-year limit on the time to assess tax applies 1_tc_9 affd 142_f2d_900 6th cir b six-year requirement less than years after the due_date for petitioner's and returns petitioners signed form sec_872 to extend the time to assess tax to date respondent issued the notice_of_deficiency on date petitioners concede that respondent issued the notice_of_deficiency in time to qualify under sec_6501 if more than percent of gross_income was omitted from each return c twenty-five_percent_omission from gross_income respondent must prove that petitioners omitted more than percent of gross_income from their and returns sec_6501 25_tc_859 petitioners contend that respondent does not meet the percent requirement petitioners contend that respondent may not rely on the general presumption of correctness of a deficiency_notice to meet this burden and that the mere existence of bank_deposits does not establish that the deposits were taxable reis v commissioner supra kavoosi v commissioner tcmemo_1986_ easton v commissioner a memorandum opinion of this court dated date see also 22_tc_1256 affd 233_f2d_177 6th cir we said above at par a that respondent may use the net_worth_method in this case if we find that the net_worth_method shows that petitioners omitted more than percent from gross_income then respondent has met the burden of proving that sec_6501 applies see eg 28_tc_658 harris v commissioner tcmemo_1977_222 micciche v commissioner tcmemo_1966_138 bynum v commissioner tcmemo_1958_19 smith v commissioner tcmemo_1957_171 boatsman v commissioner tcmemo_1957_93 estate of williams v commissioner tcmemo_1955_321 respondent did so here petitioners reported gross_income of dollar_figure for and dollar_figure for twenty five percent of those amounts is dollar_figure for and dollar_figure for petitioners failed to report more than these amounts for and petitioners argue that respondent may not establish that they omitted percent of their gross_income by the net_worth_method because it is arbitrary petitioners contend that respondent omitted cash on hand and loans receivable and did not show that petitioners had a likely taxable source_of_income or negate all nontaxable sources of income we decided this issue in our prior opinion without using the deemed facts we now find that petitioners had dollar_figure cash on hand on date we adjust the net_worth analysis to account for that fact 298_f2d_784 3d cir affg in part on this issue tcmemo_1960_160 251_f2d_311 9th cir 230_f2d_336 7th cir 22_tc_912 thus respondent is barred from assessing tax for but is not barred from assessing tax for and to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------- --------------------------------------------- ---------------------------------------------------- ------------------------ -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-109940-05 date date ----------------------------------------------------------------------------------------------------- ----------------------- --------------- ------------------------- -------------------- ----------------------- -------------------------- ---------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ------------------------ ------------------------ ------------------------ ------------------------ - x a b c d1 d2 d3 trust trust trust trust a an officer of x represents that an election was made for x to be an s this letter responds to a letter dated date submitted on behalf of x plr-109940-05 dear -------------- by its authorized representative requesting relief under ' f of the internal_revenue_code corporation effective d1 the shareholders of x include trust sec_1 through collectively the trusts each of which is represented to be an electing_small_business_trust esbt within the meaning of sec_1361 and sec_1361 and which is not an eligible s_corporation shareholder under another provision of sec_1361 under the terms of each of the trusts b and b’s spouse are eligible to receive current distributions of trust property pursuant to a power_of_appointment held by the primary beneficiary of each trust b was not married at the time of the creation of the trusts on d2 which was in a taxable_year beginning on or before date b married c a nonresident_alien b and c have not filed an election under sec_6013 or h to treat c as a resident_of_the_united_states for any taxable_year as b’s spouse c became a potential_current_beneficiary of each of the trusts as a nonresident_alien c is not an eligible s_corporation shareholder therefore x’s s_corporation_election terminated on d2 when x discovered that the ability of c to receive distributions from the trusts terminated x’s s_corporation_election it contacted the beneficiaries of the trusts who each executed a substantially identical release represented as being valid under local law providing that the beneficiary irrevocably and permanently released the right to exercise the power_of_appointment during that beneficiary’s lifetime or upon that beneficiary’s death in favor of any i non-resident alien within the meaning of sec_1361 ii nonresident_alien who has made an election pursuant to sec_6013 or h to be treated as a resident_of_the_united_states or iii other person who if that person were a permissible appointee of the power_of_appointment would cause any s_corporation in which the trust owns stock to cease to be a small_business_corporation as defined in sec_1361 the last of the four releases was executed d3 which was in a taxable_year beginning on or before date by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation a represents that the termination of x’s s_corporation_election was not motivated sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year plr-109940-05 sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in ' c or an organization described in sec_1361 who is not an individual sec_1362 provides that in general an election to be treated as an s_corporation shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1361 provides that for purposes of ' b b an esbt may be a shareholder of an s_corporation sec_1361 provides that in the case of an esbt each potential_current_beneficiary pcb of such trust shall be treated as a shareholder for purposes of ' b except that if for any period there is no pcb of such trust such trust shall be treated as the shareholder during such period sec_1361 defines an esbt sec_1361 prior to its modification by of the american_jobs_creation_act_of_2004 p l provided that for purposes of ' e the term apotential current beneficiary meant with respect to any period any person who at any time during such period is entitled to or at the discretion of any person may receive a distribution from the principal or income of the trust this definition applied to taxable years beginning on or before date sec_1_1361-1 of the income_tax regulations provides that if the holder of a power_of_appointment permanently releases the power in a manner that is valid under the applicable local law the persons that would be pcbs solely because of the power will not be pcbs after the effective date of the release sec_1362 provides that if an election under ' a by any corporation a was not effective for the taxable_year for which made determined without regard to ' b by reason of a failure to meet the requirements of ' b or to obtain shareholder consents or b was terminated under ' d or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to ' f agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary plr-109940-05 a citizen or resident_of_the_united_states may be treated as a resident_of_the_united_states for purposes of chapter of subtitle a of title_26 if the nonresident_alien and spouse so elect sec_6013 and h provide in general that a nonresident_alien married to based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 when c became a pcb of the trusts we further conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 to d3 and thereafter provided x’s s_corporation_election was otherwise valid and provided that the election was not otherwise terminated under sec_1361 the trusts will be treated as trusts described in sec_1361 and sec_1361 c will not be treated as a pcb of any of the trusts subsequent to the effective date of the releases executed by the trust beneficiaries unless and until c becomes a united_states citizen the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void we further rule that any election by b and c under sec_6013 or h or any subsequent termination of such election will not have any effect on the relief granted above no other opinion is expressed or implied concerning the effect or validity of any election under sec_6013 or h or subsequent termination of such election except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code specifically no opinion is expressed whether x is otherwise eligible to be an s_corporation or whether the trusts are otherwise eligible to be esbts this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent plr-109940-05 pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely j thomas hines chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court joel dellon and evangeline deleon petitioners v commissioner of internal revenue respondent docket no 24345-07s filed date joel dellon and evangeline deleon pro sese chong s hong and james a whitten for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure this case arose when petitioners filed a petition seeking review of respondent’s determination that a notice_of_federal_tax_lien filed with respect to petitioners’ and tax_liabilities would not be withdrawn at that time petitioners resided in california respondent moved for summary_judgment and petitioners failed to respond to respondent’s motion respondent’s motion will be granted background petitioners’ and joint federal_income_tax returns were examined and respondent determined that petitioners were liable for additional tax in each year after the issuance of a notice_of_deficiency the additional taxes were assessed on date on date respondent sent petitioners notification of the filing of a notice_of_federal_tax_lien with respect to the assessed additional tax_liabilities petitioners on date requested a hearing and appeals officer paul sivick agreed with petitioner joel dellon that the hearing would be conducted by correspondence on date petitioner dellon argued that respondent should withdraw the lien because petitioners had requested an installment_agreement to pay the outstanding tax_liabilities the appeals officer in a date letter explained to petitioners why respondent had decided not to withdraw the tax_lien in that letter the history of the administrative_proceeding and the hearing was outlined in effect petitioners had sought alternatives to collection such as offers-in-compromise or installment payments but did not provide complete financial information respondent determined using the available information about petitioners’ assets and income that their offers and proposed installment payments were less than they were able to pay it was also explained that respondent is not legally prohibited from filing and maintaining a tax_lien during the pendency of an installment_agreement accordingly petitioners’ offer and or installment_plan had been rejected under those circumstances respondent refused to withdraw the lien discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials see fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if there is no genuine issue as to any material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir there is no genuine issue as to any material fact in this case and summary_judgment may be rendered in respondent’s favor as a matter of law petitioners did not petition respondent’s determination in the notice_of_deficiency that additional taxes were due for and accordingly petitioners may not question the underlying tax_liabilities see 129_tc_107 we review respondent’s determination not to withdraw the notice_of_federal_tax_lien under an abuse_of_discretion standard see 114_tc_176 under sec_6330 an appeals officer must take the following matters into consideration regarding the filing of a notice_of_federal_tax_lien verification of whether the requirements of applicable law and administrative procedures have been met the issues raised by the taxpayer and whether the proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary in this case the appeals officer considered all of the sec_6320 requirements and decided that the notice of tax_lien should not be withdrawn all arguments petitioners raised were considered and collection alternatives were explored and thoroughly considered petitioners were found to have assets or resources that exceeded the amounts they were willing to pay with respect to collection alternatives under these circumstances we hold that there was no abuse_of_discretion in the determination not to withdraw the notice of tax_lien respondent’s motion for summary_judgment will be granted to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 7-plr-106742-00 date date legend p q w x y z agreement date date dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representatives requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p's authorized representatives are as follows p is a limited_liability_company taxable as a partnership x and y are the members in p w is the sole member of x because x is disregarded as an entity for federal_income_tax purposes w is treated as owning x’s member interest in p y is a wholly-owned subsidiary of w z is the indirect parent_corporation of w p acquired the facility from q pursuant to an agreement dated as of date q was the original owner of the facility which was constructed pursuant to a construction_contract dated date that was assigned to q the construction_contract does not provide for liquidated_damages or any other limitation on the maximum amount of damages available should either party fail to perform the construction_contract includes a description of the facility to be constructed a completion date and a price p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract the facility is a movable facility that can be moved from one site to another depending on the availability price and location of coal feedstock subsequent to the purchase p relocated the facility to a leased site owned by an indirect subsidiary of w following the relocation the fair_market_value of the original property was more than percent of the facility’s total value the cost of the new property plus the value of the original property p operates and maintains the facility p purchases coal feedstocks for the facility from a variety of sources and also uses coal fines from a screening plant the feedstock coal is thoroughly mixed with a heated chemical reagent in a pugmill after leaving the pugmill the mixture is carried by conveyor belt to a conveyor from which it is distributed to one of three briquetters by an arrangement of diverters and chutes each briquetter is equipped with a short conveyor belt running under it that receives the resulting solid synthetic_fuel product and carries it to a common collection belt and then out of the facility to a storage area in p’s production process the combination of the chemically reactive agent the mixing process the retention time and the compression pressure used in the roll briquetter process results in the formation of a solid synthetic_fuel product the synthetic_fuel produced is currently sold to steel producers power generators and other third party users the facility utilizes coal feedstock and chemical reagents that meet the requirements of revproc_2001_34 2001_22_irb_1293 in the past the facility has used various feedstock sources chemical reagents and chemical reagent concentrations as described in p’s letter_ruling request p has had recognized experts in coal and chemical analysis conduct numerous tests on synthetic_fuel samples produced by p using each reagent identified in the request for rulings these tests are described in detail in p's letter_ruling request and subsequent correspondence from p’s authorized representatives based on this testing of the reagents the experts have concluded that there was a measurable significant change in the chemical composition of the resulting synthetic_fuel compared to the unreacted coal feedstocks and chemical reagent p’s amended and restated limited_liability_company agreement allocates receipts from the sale of synthetic_fuel among its members in accordance with their membership interests the rulings requested by p are as follows p with use of the process produces a qualified_fuel within the meaning of sec_29 the contract for construction of the facility constitutes a binding written contract in effect before date for purposes of sec_29 the facility is placed_in_service for purposes of sec_29 on the date that the facility was first placed in a condition or state of readiness and availability to produce qualified_fuel as provided in sec_1_46-3 and sec_1_167_a_-11 production of qualified_fuel from the facility will be attributable solely to p within the meaning of sec_29 of the code and p will be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to unrelated persons if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement the credit allowed under sec_29 may be passed through to and allocated among all the members in p in accordance with the principles of sec_702 if the facility was placed_in_service prior to date within the meaning of sec_29 the facility will continue to be treated as placed_in_service before date if sold to a new owner after such date a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel to unrelated persons ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations is relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 of the income_tax regulations in revproc_2001_30 2001_19_irb_1163 the service announced that it will resume issuance of rulings under sec_29 for processes that do not go beyond the processes approved in the rulings issued prior to sec_3 of revproc_2001_34 provides that the service will issue rulings that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 if the conditions set forth below are satisfied and evidence is presented that all or substantially_all of the coal used as feedstock undergoes a significant chemical change the conditions are that the feedstock coal consists of coal fines or crushed coal comprised of particles the majority of which by weight are no larger than inch the feedstock coal is thoroughly mixed in a mixer a with styrene or other monomers b with quinoline c9h7n or other organic resin and left to cure for several days c with ultra heavy hydrocarbons or d with an aluminum and or magnesium silicate binder following heating to a minimum temperature of degrees fahrenheit and the treated feedstock is subjected to elevated temperature and pressure that results in briquettes pellets or an extruded fuel product or the taxpayer represents that the omission of this procedure will not significantly increase the production of the facility over the remainder of the period during which the sec_29 credit is allowable based on the representations of p and p's authorized representatives including the test results submitted by p we conclude that the conditions of revproc_2001_34 are met and that the process and reagents used in the facility as described in p's ruling_request and subsequent correspondence produces a significant chemical change to the coal transforming the coal feedstock into a solid synthetic_fuel from coal ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date does not provide for liquidated_damages and includes such essential features as a description of the facility to be constructed a completion date and a price p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract therefore we conclude that the construction_contract is a binding written contract for purposes of sec_29 ruling requests and sec_29 and f of the code provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 of the code modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 such a facility is to be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 is to be applied by substituting for the date therein date to qualify for the sec_29 credit the facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1 d ii of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 the relocation of the facility after date or replacement of parts of the facility after that date will not prevent the relocated facility from continuing to be treated as originally placed_in_service prior to date for purposes of sec_29 if the fair_market_value of the original property is more than percent of the facility's total fair_market_value at the time of relocation or replacement ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer under sec_7701 taxpayer means any person subject_to any internal revenue tax furthermore sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof person will be construed to mean and include an individual trust estate partnership_association company or corporation p is the taxpayer for purposes of sec_29 of the code because a limited_liability_company such as p may be treated for tax purposes as either a partnership or a corporation either of which is a taxpayer under sec_7701 p will own and operate the facility and will produce and sell the resulting qualified_fuel all production of qualified_fuels by the facility therefore will be attributable solely to p within the meaning of sec_29 and p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to unrelated persons ruling_request sec_29 allows a credit for qualified_fuels solid by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 b ii provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 b example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that assuming the solid synthetic_fuel produced and sold qualifies for the sec_29 credit the credit will be allowed to p and the credit may be passed through to and allocated to the members of p under the principles of sec_702 in accordance with each member's interest in p as of the time the tax_credit arises for the sec_29 credit a member's interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 credit qualified_fuel ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date on property that first began production after date congress has extended the sec_29 credit four times the placed-in-service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service if sec_29 were read as requiring facilities producing qualified_fuels to be placed_in_service by the taxpayer facilities placed_in_service before that are sold or transferred to a new taxpayer after would not entitle the purchaser transferee to claim the sec_29 credit it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer therefore if the facility was placed_in_service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 for the new owner ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in- service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons conclusions accordingly based on the representations of p and ps authorized representatives we conclude as follows p with use of the process and reagents described in the request for rulings produces a qualified_fuel within the meaning of sec_29 the contract for construction of the facility constitutes a binding written contract within the meaning of sec_29 the facility is placed_in_service for purposes of sec_29 on the date that the facility was first placed in a condition or state of readiness and availability to produce qualified_fuel as provided in sec_1_46-3 and sec_1_167_a_-11 we express no opinion on when the facility was placed_in_service production of qualified_fuel from the facility will be attributable solely to p within the meaning of sec_29 of the code and p will be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to unrelated persons if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement the credit allowed under sec_29 may be passed through to and allocated among all the members in p in accordance with the principles of sec_702 if the facility was placed_in_service prior to date within the meaning of sec_29 the facility will continue to be treated as placed_in_service before date if sold to a new owner after such date a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel to unrelated persons except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when the facility was placed_in_service for purposes of sec_29 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2001_1 2001_1_irb_1 however when the criteria in dollar_figure of revproc_2001_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p's authorized representative sincerely yours joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes