q aa s internal_revenue_service appeals date date number release date 4k kk 4k rk ok dear department of the treasury address any reply to rkkkk employer_identification_number kerkrk person to contact weeke contact telephone number kkkkk fax number rekkk uil certified mail this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code’ federal_income_tax under sec_501 of the code effective january 20xx it is determined that you do not qualify as exempt from our revocation was made for the following reasons is not operated exclusively for exempt purposes under sec_1_501_c_3_-1 an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose in addition you are operated for a substantial private purpose rather than a public purpose under sec_1_501_c_3_-1 an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests see sec_1_501_c_3_-1 example a substantial private rather than public purpose ’s agreement with shows that it is operated for contributions to your organization are not deductible under code sec_170 you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax years ending december 20xx december 20xx and december 20xx and for all tax years thereafter in accordance with the code processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code ‘we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you in a separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice 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 for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information is appeals team manager enc publication sincerely yours cc rekkk ' internal_revenue_service date date legend org name of organization ein ein of organization nn name of individual org department of the treasury taxpayer_identification_number ein form tax_year s ended december x 200x and december x 200x person to contact id number toennone fax certified mail - return receipt requested dear ’ we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter rev catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at 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 director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f faem rrba ___ explanation of items name of taxpayer department of the treasury - internal_revenue_service org schedule no or period emted- exhibit year december x 200x and december xx 200x legend orgi1 former name of organization org name of organization nlbb newsletter brochure book nn name of individual issue st state x number x year whether org is operated exclusively for exempt purposes described within internal_revenue_code sec_501 a whether org is engaged primarily in activities that accomplish an exempt_purpose b whether more than an insubstantial part of the activities of org are in furtherance of a non-exempt purpose c whether org was operated for the purposes of serving private rather than public interest facts 199x as org hereafter referred to as org was incorporated on october x articles were amended august x 200x to change the name the former name was org1 the stated purpose of the organization was a a domestic non-profit corporation in the st to help the public with financial problems as provision of debt management services as authorized by the debt management service act the 200x the organization filed form_1023 application on october x for recognition of exemption with the internal_revenue_service on march x 200x org received from the internal_revenue_service a determination_letter advising the organization of recognition of exempt status under sec_501 code per form_1023 the organization stated of the internal_revenue_code the organization's purpose is to educate the publicon a variety of financial issues with special attention to educating families and individuals on personal budgeting and the wise use of credit we will use trained professional counselor's to help families and individuals with current financial difficulties form 886-a rev department of the treasury - internal_revenue_service page -1- farm rrea department of the treasury - internal_revenue_service schedule no or _name-oftaxpayer year period ended dece and december x tx org explanation of items 200x through sound budget or spending planning and educate them on how to avoid future financial difficulties the counselors will help the clients complete a comprehensive budget analysis examining items such as gross household_income employment tenure mortgage rent payments automobile payments and unsecured debt levels using this information the counselor will try to establish a realistic and disciplined budget if having financial problems that are beyond the scope of sound budgeting techniques a counselor will set up a debt management plan for the orderly liquidation of the debt as a viable alternative to bankruptcy we will begin educating the general_public through advertising on a national level sometimes in the year 200x a family or an individual is during our second year of operation our goal is to develop an educational video based on our counseling program in addition to the counseling services described above the organization will increase its educational activities in the following manner as funding and financial support increase a all age for will need credit budget provide counseling organization group the group when advisory instruction to and there is with financial particular but to those in special and pressing need thereof through money management workshops will be conducted by trained professional counselors with and credit this service will be offered within the second x months of operation no exclusive reference extensive issues training it projected financial services that is in the organization will form a committee to determine research education and public information activities conducive to the general welfare with respect to budgeting financial matters and consumer credit proposed activities will include publishing informational brochures covering numerous financial topics including but not excluding form 886a rev department of the treasury - internal_revenue_service page -2- raew rrea department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no ot - ee tee december x 200x and december x 200x household budgeting how to re-establish credit and how to use credit these brochures will be provided to the public at no cost the organization will also publish a monthly newsletter designed to educate individuals and families on an ongoing basis in credit and financial issues the brochures and newsletters will be published in-house both paid and volunteered staff will actively contribute to the research writing and editing of the publications it newsletter will go into publication during this coming year is projected that the the organization will cooperate with public and private agencies organizations and associations engaged in the same and similar educational counseling programs nn is the former president of org currently owns and operates rr card processing services for org rr is responsible for providing all credit the board_of directors of nn and nn are all children of the former president for years ending 200x and 200x nn and creator nn nn-vice president the application list x initial officers president directors mentioned on the application the organization also stated on their application that they are not the outgrowth of does not have a special relationship with another organization by reason of interlocking directorates or other factors or successor to another organization or nn there were no nn rr provides consultation and creative placement of all the president of org nn is also an officer and employee of rr radio and television broadcasting and print advertising rr also creates and produces the monthly newsletter nlbb in addition rr is also responsible for form 886-a rev department of the treasury - internal_revenue_service page -3- the creation and production of all collateral materials and brochures activities during january x 200x-december x 200x org form_990 return of organization exempt from income_tax is under examination for the tax years ended december x 200x and december x 200x during the examination years orgactivities consisted of providing credit counseling and debt management services to individuals experiencing credit problems the credit_counseling_services orgprovides are by telephone it employs individuals to answer incoming calls from the general_public in response to advertising and marketing targeted at individuals experiencing credit problems the debt management services org provides consist of enrolling individuals into a debt management plan to payoff their unsecured debts the dmp enrollment process consist of preparing a budget plan for an individual negotiating with the individual's unsecured creditors to obtain lower payments reduce interest rates re-age accounts and provide waivers for late and over-the-limit fees once an agreement is reached with an individual's creditor he or she makes one monthly payment to oorg then orgdisburses the payment to the individual's creditors below is setting forth the maximum amounts of fees charged to individuals who enroll in debt management plans a table monthly fee monthly dmp payment sx-sx sx-sx sx-dollar_figurex sxx-xx sx start_up fee sx sx sx dollar_figurex sx sx sx sx sx sx credit counselors hereafter referred to as service employees and customer service representatives hereafter form 886-a rev department of the treasury - internal_revenue_service page -4- form 886a department of the treasury - internal_revenue_service schedule no or exhibit name of taxpayer year period ended - decemberx 200x and december x explanation of items org 200x referred to as csrs make up almost half of org's employees service employees are hired to perform personal financial management counseling and dmp enrollments dmp enrollments are conducted at org’s in-bound call center by service employees who are not paid on a commission basis however some calls were made by two independent contractors who were compensated on a total of dollar_figurex commission basis org also purchase leads to help increase dmp enrollments org claims that most in-bound calls are generated from the general_public in response to employee assistance programs and by word-of-mouth they also claim to only purchase up to x leads per month csrs are only responsible for clients that are enrolled into dmps csrs serve as a liaison between clients and creditors clients are assigned a specific csr who will research and answer all questions regarding their accounts during the examination year org employed the following number of service employees csr's and other employees at the end of the year credit counselors csr's administrative clerical emolovees total employees x x x x service employees are hired by org without any prior credit counseling experience during the examination years training consisted only of on-the-job training there was no training manuals or workshops provided to the employees in addition none of the service employees possess any certificates or licenses related to counseling as previously stated in-bound calls to org’s call center are generated by advertising marketing purchasing of leads and word-of-mouth org markets and advertises its services in a variety of media the media used include television radio yellow pages and the internet radio scripts pamphlets and brochures that described the services and benefits of org did not mention educational_services during the examination year ending december x 200x org expended the following amounts on advertising marketing and leads advertising sx form 886-a eev department of the treasury - internal_revenue_service page -5- form 886a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit org year period ended decemberx 200x and december x 200x marketing leads totals sx sx dollar_figurex asa result of the volume of in-bound calls to its call center generated by its advertising marketing and the purchasing of leads orgenrolled over x individuals into dmp's during the year ending december x 200x dmp enrollment activities during the examination year are provided below dmp clients at the beginning of year new clients enrolled during the year dmp clients at the end of the year xx x x during the examination year ending december x revenue was derived from five sources for a breakdown of those sources see 200x orgs the table below fee income fair share income credit report income commission income_interest income totals sx sx x x sx dollar_figurex excluding interest_income revenue from org's dmp services was its primary source_of_income the dmp services that org provided generated revenue from four sources when an individual enroll in a dmp they are required to pay for a copy of their credit report secondly they are requested to make a one-time setup fee to orrgwhile they are on the program they are then requested to make monthly fee payments to org one aspect of a dmp involves individuals making one monthly payment to organd in turn orgdisburses parts of the payment to each of the individual's creditors in the amount it negotiated for the individual for its efforts creditors return a percentage of the payments they receive through org back to org the amounts received back from the creditors are called fair share payments in the credit counseling form 886-a rev department of the treasury - internal_revenue_service page -6- farm 886a department of the treasury - internal_revenue_service schedule no or explanation of items year period-encted- name of taxpayer exhibit org december x 200x and december x industry the fair share payments from creditors is the fourth source of revenue org receives from its dmp services 200x during the examination year ending december x breakdown of org’s fee income is presented below 200x the client setup fees sx client monthly fees totals dollar_figurex sx org claims that its setup fees are waived if unable to pay however orgdid not or was not able to indicate the total number of clients who did not pay the initial set-up fee a client is educational activities during the examination years org conducted several educational activities the educational activities that were conducted during the year ending december x follows 200x were as -maintained a web site on credit and money management -nlbb newsletter beginning in september of 200x org began providing a monthly newsletter called nlbb to their existing client database and to recent inquires the newsletter focused on a timely subject that would be of great interest and education for the reader nlbb brochure in january of 200x org created and distributed a brochure called nlbb this was sent to their entire client database and to recent inquires the brochure focused on clients that were not appropriate for debt management plans -fannie mae's nlbb form 886-a rev department of the treasury - internal_revenue_service page 200x org became a recogni zed housing consultant through fannie_mae credit in addition to assisting clients purchase their first home they provided this free booklet to help individuals understand various credit terms and facts nlbb beginning in the year 200x org created a library of books in catalog form that was available to existing clients and recent inquiries at reduced prices the library consist of cover various topics ie spending saving investing and budgeting publications can be ordered by mail or phone - conducted seminars and provided educational literature x publications that over conducted seminars and provided educational literature to various employers of schools charities and numerous businesses through their employee assistance programs see attached summary of seminars and educational efforts on april x 200x a questionnaire developed by the te_ge credit counseling coordinator was given to xx service employees the results from the questionnaire concluded that org does not provide any workshops or seminars to the general_public seminars conducted through employee assistance programs are only held to sign individuals to dmp's some employees stated that they never viewed the website by org some service employees stated that they have never asked clients to review the website and they all stated that they are not required to do so law sec_501i a organization described in sec_501 exempt from income_tax sec_501 internal_revenue_code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational religious and of the code provides that an of the is page -8- department of the treasury - internal revenue name of taxpayer expl and december x form 886a service org schedule no or exhibit year period 200x scientific purposes no part of the net_earnings can inure to the benefit of any private_shareholder_or_individual sec_1 c of the income regulations provides the term charitable includes relief of the poor and distressed -1 d the term educational includes a instruction or training of the individual for the purpose of improving or developing his capabilities and subject useful to the individual and beneficial to the community regulation sec_1 c in other words the two components of education are public education and individual training b instruction of the public on -1 d of the regulations provides sec_1 c -1 a in order to be exempt as an organization described in that an organization must be both organized sec_501 and operated exclusively for one or more of the purposed specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1 c -l c 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test better business bureau of washington d c u s an exempt v educational_purposes include instruction or training of the individual for the purpose of improving or developing his capabilities and instruction of the public on useful and beneficial subjects regulation sec_1 c in better business bureau of washington d inc v united_states u s the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number of importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive -1 d c form 886-a rev department of the treasury - internal_revenue_service page -9- form 886a department of the treasury - internal_revenue_service name of taxpayer r org explanation of items schedule no or exhibit year period ended becember x 2002c- and december x 200x that distinguished its educational program from that carried out by a university ct 2d in american institute for economic research v united_states f cl the court considered that status of an organization that provided analysis of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non-exempt purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt the service has issued two rulings holding credit counseling organizations to be tax exempt revrul_65_299 1965_2_cb_165 granted exemption to a c organizations whose purpose was to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy its primary activity appears to have been meeting with people in financial difficulties to analyze the specific problems involved and counsel on the payment of their debts the organization also advised applicants on proration and payment of debts negotiated with creditors and set up debt repayment plans it did not restrict its services to the needy it made no charge for the counseling services indicating they were separate from the debt repayment arrangements it made a nominal charge for monthly prorating services to cover postage and supplies for financial support it relied upon voluntary contributions from local businesses lending agencies and labor unions granted c revrul_69_441 c b status to an organization with two functions it educated the public on personal money management using films speakers and publications and provided individual counseling to low-income individuals and families as part of its counseling it established budget plans ie debt management plans management services were provided without charge the organization was supported by contributions primarily from creditors by virtue of aiding low income people without for some of its clients the debt form 886-a rev department of the treasury - internal_revenue_service page -10- ‘ form 886a department of the treasury - internal_revenue_service nameof-faxpayer org explanation of items schedule no or exhibit year period ended decemt and december x charge as well as providing education to the public the organization qualified for sec_501 status 200x i b -1 d for this in the case of consumer credit counseling service of alabama inc v u s a f t r 2d -5052 d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community regulations it charged no fee c the court found that the counseling programs were also educational and charitable the debt management and creditor intercession activities were an integral part of the agencies' counseling function and thus were charitable and educational even if this were not the case viewed the debt management and creditor intercession activities as incidental to the agencies' principal functions as only approximately percent of the counselors' time was applied to debt management programs and the charge for the service was nominal the court also considered the facts that the agency was publicly supported and that it had a board dominated by members of the general_public as factors indicating a charitable operation see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts and legal analysis were virtually identical to those in consumer credit counseling centers of alabama inc v united_states discussed immediately above the court the organizations included in the above decision waived the monthly fees when the payments would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather that those connected with the debt management programs the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows rev form_886 a rev department of the treasury - internal_revenue_service page -11- schedule no or exhibit form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org year period ended december x 200x and december x 200x rul c b free counseling and english instructions for immigrants revrul_73_569 c b free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering free marriage drugs revrul_70_640 counseling rev career planning education through free vocational counseling and publications sold at a nominal charge overwhelmingly the counseling activities described in these rulings were provided free contributions from the public rul c b and the organizations were supported by c b taxpayer's position at the time of issuance of the report no position statement had been provided by the taxpayer government's position the purpose of org's activities differs substantially from those of the organizations in revrul_65_299 revrul_69_441 and consumer credit counseling service of alabama inc v u s in this case org engages in minimal activities which further an exempt_purpose its counseling activity is nothing more than a sales activity org markets and sells debt management plans to any consumer there is no actual counseling provided to consumers who contact or are contacted by org in addition employees received no training on how to provide educational counseling to clients on personal money management there are no training manuals or special courses given to employees counselors employees are only trained to sell debt management plans whether the consumers' situation warranted it or not in fact the training employees counselors received did not enable an employee to determine whether a dmp would serve the best interests of a potential client org also paid independent contractors to sell debt management plans on there own time counseling organizations described in the revenue_ruling referred to above and in consumer credit counseling service of alabama inc v u s education to its clients in their own homes unlike the credit org provides no counseling or org claimed to provide education through their pamphlets brochures and through their website however during the years of examination it was learned that their pamphlet and form 886-a rev department of the treasury - internal_revenue_service brochure are rarely updated and their website is updated semi-annually and contains very little educational information in addition some service employees have never visited the company website and clients are never required to visit the website the minimal amount of activity that was verified involved the president marketing the debt_management_plan_services of org there was no evidence that a substantial amount of the organization's activities were anything other than to market and sell the debt management plan product org has a substantial non-exempt purpose of selling a product the dmp business to rr org is not furthering any charitable or educational purpose when it mass markets debt management plans org advertises and purchases leads in order to increase its business and of providing et croa u s c an exempt seq croa was enacted to protect the reason why org which is related to rr through common officers is organized as organization is to avoid the regulatory scheme of the credit repair organizations act section consumers by banning certain deceptive practices in the credit counseling industry if org was a for- profit entity the croa would prohibit it from charging fees in advance of fully providing services in addition federal_law would prohibit it from purchasing leads and making cold calls to potential customers because sec_501 c organizations are exempt from the provisions of croa org is able to engage in deceptive business practices that congress intended to prohibit when it passed the croa law as such for a substantial non-exempt purpose of carrying on a business while avoiding federal regulations in addition org could not collect fair share payments from creditors if status the entire debt management plan business depended on the organization having tax-exempt status it did not have tax-exempt org is operated conclusion in summary org is not operated exclusively for tax- exempt purposes because it did not engage primarily in activities that accomplish an exempt_purpose more than an insubstantial part of org's activities are in furtherance of a non-exempt purpose accordingly it organization described in sec_501 and is not exempt from federal_income_tax under sec_50l a effective january x is determined that org is not an 200x


t c memo united_states tax_court gerald e johnson and dorothy johnson petitioners v commissioner of internal revenue respondent docket no filed date garry a pearson jon j jensen and alexander f reichert for petitioners blaine c holiday for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined deficiencies of dollar_figure dollar_figure and dollar_figure in petitioners’ federal_income_tax tax for and respectively we must decide1 whether certain amounts reduced by the deductions attributable to such amounts that petitioners re- ceived during the years at issue and that they characterized as rent are subject_to self-employment_tax under sec_1402 we hold that they are not findings_of_fact some of the facts have been stipulated and are so found at the time petitioners filed the petition in this case they resided in hector minnesota in gerald e johnson mr johnson began farming in dorothy johnson ms johnson began farming with mr johnson prior to petitioners farmed big_number acres of land acres of which they owned third parties owned the remaining acres from the time mr johnson began farming in he under- took everything pertaining to running a crop farm by performing the following farm-related activities in the production of agricultural commodities purchasing crop inputs selling planting and harvesting crops hiring managing and firing 1in addition to the issue that we address herein there are other determinations in the notice_of_deficiency notice that are computational in that their resolution flows automatically from our resolution of that issue 2all 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 employees assisting with computer bookkeeping driving trucks securing the farmland and making the business profitable from the time ms johnson began farming in she performed the following farm-related activities in the production of agricul- tural commodities maintaining the books and preparing monthly reports for the accountant preparing payroll paying employees depositing employment_taxes banking preparing food for employ- ees picking up supplies driving trucks and tractors hauling employees from field to field monitoring the radio and respond- ing to communications maintaining the farmyard by mowing lawns and other farm help as needed in date petitioners formed g e johnson inc and each of them owned percent of the stock of that corporation at all relevant times g e johnson inc engaged in the farming_business specifically the production of cash crops during each of the years at issue g e johnson inc farmed big_number acres of land acres of which petitioners owned third parties owned the remaining big_number acres after the formation of g e johnson inc that company hired mr johnson and ms johnson pursuant to an oral arrangement oral employment arrangement under which they were to serve as its chief_executive_officer ceo and chief financial officer 3during the years at issue petitioners had no written employment agreement with g e johnson inc cfo respectively and were to perform in such respective capacities the same farm-related activities in the production of agricultural commodities that they had been performing since they began farming in the early 1960's petitioners’ farm-related activities pursuant to that arrangement at all relevant times including during the years at issue mr johnson as ceo and ms johnson as cfo performed those activities at all relevant times before and after petitioners incorpo- rated their farming operations the success of those operations depended upon petitioners’ farm-related activities during the years at issue g e johnson inc did not pay any wages or other compensation to petitioners in exchange for petitioners’ farm-related activities in the production of agri- cultural commodities except for dollar_figure of wages paid to mr johnson and dollar_figure of compensation paid to mr johnson and or ms johnson during and respectively during each of the years at issue petitioners leased to g e johnson inc pursuant to an oral arrangement oral rental 4g e johnson inc did not interview any other individuals to perform the farm-related activities that it hired petitioners to perform 5at all relevant times mr johnson spent virtually percent of his time working for g e johnson inc 6at all relevant times ms johnson spent percent of her time working for g e johnson inc arrangement farmland7 and certain personal_property that they owned petitioners’ farmland and personal_property located in renville minnesota pursuant to that arrangement at all relevant times including during the years at issue that company paid rent to petitioners for the lease of petitioners’ farmland and personal_property irrespective of whether or not that company had a good farming year or had income during the years at issue petitioners did not believe that they were and they were not obligated or compelled to perform petitioners’ farm- related activities in the production by g e johnson inc of agricultural commodities as a condition to that company’s being obligated pursuant to the oral rental arrangement to pay rent to petitioners petitioners jointly filed form_1040 u s individual_income_tax_return for each of their taxable years petitioners’ return petitioners’ return and peti- tioners’ return in petitioners’ return petitioners 7g e johnson inc also leased certain other farmland from third-party landlords pursuant to oral rental arrangements with those third-party landlords 8during the years at issue petitioners had no written rental agreement with g e johnson inc 9even if during the years at issue petitioners became sick or incapacitated or otherwise were unable to perform for g e johnson inc petitioners’ farm-related activities in the production of agricultural commodities that company was nonethe- less obligated pursuant to the oral rental arrangement to pay rent to them reported that mr johnson received dollar_figure of wages salaries tips etc from hector public schools and dollar_figure of wages salaries tips etc from buffalo lake-hector schools in that return petitioners did not report any wages or other compensation_for services from g e johnson inc in schedule e supplemental income and loss schedule e included as part of petitioners’ return petitioners reported dollar_figure in rent received from the rental of petitioners’ farmland and personal_property claimed rent dollar_figure in expenses and dollar_figure in total rental real_estate income in petitioners’ return petitioners reported that mr johnson received dollar_figure of wages salaries tips etc from ind school district in that return petitioners reported that ms johnson did not receive any wages or other compensation_for services from g e johnson inc and that mr johnson received dollar_figure of wages from g e johnson inc in schedule e included as part of petitioners’ return petitioners re- ported dollar_figure in rent received from the rental of petitioners’ farmland and personal_property claimed rent dollar_figure in expenses and dollar_figure in total rental real_estate income in petitioners’ return petitioners reported that they received no wages or compensation from any source in schedule e included as part of petitioners’ return petitioners re- ported dollar_figure in rent received from the rental of petitioners’ farmland and personal_property claimed rent dollar_figure in expenses and dollar_figure in total rental real_estate income immediately prior to the trial in this case petitioners conceded that dollar_figure of the dollar_figure of the claimed rent was not received for the lease of petitioners’ farmland and personal_property pursuant to the oral rental arrangement and is subject_to self-employment_tax for convenience we shall refer to the dollar_figure balance dollar_figure minus dollar_figure of such claimed rent as the modified claimed rent the claimed rent the claimed rent and the modified claimed rent that petitioners received during the respective years at issue from g e johnson inc pursuant to the oral rental arrangement represented fair market rents and are consistent with the rents paid during those years by g e john- son inc to other third-party landlords g e johnson inc filed form_1120 u s_corporation income_tax return for each of its taxable years ended date g e johnson inc ’s return date g e johnson inc ’s return date g e johnson inc ’s return and date g e johnson inc ’s return in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure of compensation to mr johnson as an officer of that company10 and that it did not pay any compensation to ms johnson as an officer in that return g e johnson inc reported that it paid dollar_figure of salaries and wages although it did not identify in that return the person or persons to whom it paid those wages in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure in rent although it did not specify in that return the amount of such rent that it paid to petitioners during its taxable_year ended date in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure of compensation to mr johnson as an officer of that company and that it did not pay any compensation to ms johnson as an officer in that return g e johnson inc reported that it paid dollar_figure of salaries and wages although it did not identify in that return the person or persons to whom it paid those wages in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure in rent although it did not specify in that return the amount of such rent that it paid to petitioners during its taxable_year ended date 10as discussed above petitioners’ return did not report any wages or other compensation received from g e john- son inc although not clear from the record we presume that g e johnson inc paid to mr johnson sometime during the last two months of the dollar_figure of compensation that it reported it paid to him as an officer during its taxable_year ended date in g e johnson inc ’s return g e johnson inc reported that it did not pay any compensation to mr johnson or ms johnson as officers of that company in that return g e johnson inc reported that it paid dollar_figure of salaries and wages although it did not identify in that return the person or persons to whom it paid those wages in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure in rent although it did not specify in that return the amount of such rent that it paid to petitioners during its taxable_year ended date in g e johnson inc ’s return g e johnson inc reported that it did not pay any compensation to mr johnson or ms johnson as officers of that company in that return g e johnson inc reported that it paid dollar_figure of salaries and wages although it did not identify in that return the person or persons to whom it paid those wages in g e johnson inc ’s return g e johnson inc reported that it paid dollar_figure in rent although it did not specify in that return the amount of such rent that it paid to petitioners during its taxable_year ended date on date respondent issued a notice to petition- ers with respect to their taxable years and in that notice respondent determined that the claimed rent the claimed rent and the claimed rent reduced by the deductions attributable to such respective rents are subject_to self-employment_tax for the respective years at issue because they constitute net_earnings_from_self-employment under sec_1402 opinion petitioners bear the burden of proving that the determina- tions in the notice that remain at issue are erroneousdollar_figure see rule a 290_us_111 the ultimate dispute between the parties that we must resolve is whether the claimed rent the claimed rent and the modified claimed rent reduced by the deductions attributable to such respective rents are subject_to self- employment_tax because they constitute net_earnings from self- employment under sec_1402 as applicable here sec_1402 defines the term net_earnings_from_self-employment to mean the gross_income derived by an individual from any trade_or_business carried on by such individual less the deductions allowed by this subtitle which are attributable to such trade_or_business except that in computing such gross_income and deductions -- there shall be excluded rentals from real sec_7491 is not applicable in the instant case that is because respondent issued the notice to petitioners on date and a fortiori the examination of the years at issue would have commenced before date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 estate and from personal_property leased with the real_estate together with the deductions attributable thereto except that the preced- ing provisions of this paragraph shall not apply to any income derived by the owner or tenant of land if a such income is derived under an ar- rangement between the owner or tenant and another individual which provides that such other indi- vidual shall produce agricultural commodi- ties on such land and that there shall be material_participation by the owner or tenant in the production or the management_of_the_production of such agricultural commodities and b there is material_participation by the owner or tenant with respect to any such agricultural commodity the regulations under sec_1402 and we refer to the farm rental income that is included under that section in the definition of net_earnings_from_self-employment as includible farm rental income the regulations under sec_1402 elaborate on the meaning of includible farm rental income as follows b special rule for includible farm rental income -- in general there shall be included in determining net_earnings_from_self-employment for taxable years ending after any income derived by an owner or tenant of land if the following require- ments are met with respect to such income i the income is derived under an arrangement between the owner or tenant of land and another person which provides that such other person shall produce agricultural commodities on such land and that there shall be material_participation by the owner or tenant in the production or the management_of_the_production of such agricultural commodities and ii there is material_participation by the owner or tenant with respect to any such agricultural commodity income so derived shall be referred to in this section as includible farm rental income requirement that income be derived under an arrangement in order for rental income received by an owner or tenant of land to be treated as includible farm rental income such income must be derived pursu- ant to a sharefarming or other rental arrangement which contemplates material_participation by the owner or tenant in the production or management of production of agricultural commodities nature of arrangement i the arrangement between the owner or tenant and the person referred to in subparagraph of this paragraph may be either oral or written the arrangement must impose upon such other person the obligation to produce one or more agricultural commodities on the land of the owner or tenant in addition it must be within the contemplation of the parties that the owner or tenant will participate in the production or the management_of_the_production of the agricultural commodities required to be produced by the other person under such arrangement to an extent which is material with respect either to the production or to the management of pro- duction of such commodities or is material with respect to the production and management of production when the total required participation in connection with both is considered actual participation in order for the rental income received by the owner or tenant of land to be treated as includible farm rental income not only must it be derived pursuant to the arrangement described in subparagraph of this paragraph but also the owner or tenant must actually participate to a material degree in the production or in the management_of_the_production of any of the commodities required to be produced under the arrangement or he must actually participate in both the production and the management_of_the_production to an extent that his participation in the one when combined with his participation in the other will be considered participation to a material degree sec_1_1402_a_-4 income_tax regs the parties agree that during the years at issue petitioners were to and did participate materially within the meaning of sec_1402 in the production by g e johnson inc of agricultural commodities by performing petitioners’ farm-related activities they disagree over whether the claimed rent the claimed rent and the modified claimed rent were derived under an arrangement within the meaning of sec_1402 and sec_1_1402_a_-4 income_tax regs between petitioners and g e johnson inc which provided or contemplated that g e johnson inc was to produce agricultural commodities on petitioners’ land and that petitioners were to participate materially in the production of such commodities it is petitioners’ position that the claimed rents at issue were not derived under such an arrangement and that consequently such claimed rents reduced by the deductions attributable to such respective rents are not subject_to self-employment_tax because they do not constitute includible farm rental income under sec_1402 and the regulations thereunder in support of their position petitioners rely on the opinion of the court_of_appeals for the eighth circuit in 236_f3d_410 8th cir revg and remanding bot v commissioner tcmemo_1999_256 hennen v commissioner tcmemo_1999_306 and mcnamara v commissioner t c memo dollar_figure in reliance on mcnamara ii petitioners contend that the johnsons are receiving fair_market_value rental payments although this may result in little or no other compensation being paid to the taxpayers for the services they provide to the corporation this does not establish the required nexus between the rental pay- ments and the material_participation required to trig- ger the inclusion of the payments within the definition of self-employment_income to the contrary adoption of the commissioner’s position would compel the conclu- sion that the taxpayers as landlords are required to rent property to the corporation at below fair_market_value and below the rates paid to third parties the missing link in the commissioner’s argument is the same as in the mcnamara case the corporation’s obli- gation to make the rental payments is separate and distinct from the taxpayers’ participation in the farming operation respondent counters that mcnamara ii does not require the result advocated by petitioners in the instant case respondent argues that the eighth circuit in mcnamara created a judicial exception for fair rental value when the landlord has two independent arrangements with the lessee for rent and wages and there is no nexus between the two arrangements petitioners fail to meet the eighth circuit’s standard because they failed to enter into a separate employment agreement with their corporation and to the extent they did it was so inextricably interrelated with the oral lease that the nexus is obvious and cannot be overlooked petitioners’ classification of all funds from the corporation as rent and none as wages demonstrates that there were not independent arrangements with respect to real_estate rentals and compensation_for services moreover the transaction 12we shall refer to our respective opinions that the court_of_appeals for the eighth circuit reversed and remanded as bot i hennen i and mcnamara i and to the opinion of that court as mcnamara ii does not pass muster given the strict scrutiny applied to such related-party transactions and given that exceptions from self-employment_tax under sec_1402 are narrowly construed bot i hennen i and mcnamara i involved taxpayers who pursuant to certain agreements or arrangements were to and did participate materially in the production of agricultural commodi- ties involved in those respective cases in bot i and hennen i the taxpayer-owners of the farmland in question entered into employment agreements or arrangements with their respective taxpayer-spouses and rental agreements or arrangements with those spouses in mcnamara i the taxpayer-owners of the farm- land in question entered into an employment agreement or arrangement with their wholly owned corporation and a rental agreement or arrangement with that corporation in bot i and hennen i the taxpayer-owners of the farmland in question contended that the respective rental agreements or arrangements involved in those cases did not require their material_participation in the production of the agricultural commodities in question we found that the respective taxpayer- owners in bot i and hennen i played a material role in the production of such commodities under an agreement or arrangement with their taxpayer-spouses we further found in bot i and hennen i that the income received from the rental of the respec- tive taxpayer-owners’ farmland in question was derived under an arrangement between the taxpayer-owners of the farmland and their taxpayer-spouses which provided that those spouses were to produce agricultural commodities on that land and that the taxpayer-owners were to participate materially in the production of such commodities we held in bot i and hennen i that the rents at issue in those cases reduced by the deductions attrib- utable to such respective rents were subject_to self-employment_tax because they constituted includible farm rental income under sec_1402 in mcnamara i the taxpayer-owners of the farmland in question contended that the rental agreement or arrangement involved in that case did not require their material participa- tion in the production of the agricultural commodities in ques- tion we found that the taxpayer-owners played a material role in the production of such commodities under an agreement or arrangement with their wholly owned corporation we further found in mcnamara i that the income received from the rental of the taxpayers’ farmland in question was derived under an arrange- ment between the taxpayer-owners and their wholly owned corpora- tion which provided that that corporation was to produce agri- cultural commodities on that land and that the taxpayer-owners were to participate materially in the production of such commodi- ties we held in mcnamara i that the rent at issue in that case reduced by the deductions attributable to such rents was subject_to self-employment_tax because it constituted includible farm rental income under sec_1402 the taxpayers in bot i hennen i and mcnamara i appealed our respective decisions in those cases to the court_of_appeals for the eighth circuit that court decided those appeals in one opinion in mcnamara ii in mcnamara ii the court_of_appeals for the eighth circuit concluded we cannot say the tax_court clearly erred in conclud- ing as a factual matter that mrs mcnamara mrs bot and mrs hennen were required--by their respective employment agreements or by more informal arrange- ments --to materially participate in agricultural production and management and that all three did in fact materially participate in those activities see sec_1_1402_a_-4 as amended in more promising however is taxpayers’ argument that the lessor-lessee relationships should stand on their own apart from the employer-employee relation- ships to this end taxpayers insist that the rents in question were consistent with market rates for agricul- tural land in fact the transcripts of each trial contain uncontradicted testimony that the rents were at or slightly below fair_market_value the tax court’s decision however contains no factual finding in this regard moreover the commissioner apparently did not pursue the issue at trial because as it con- tended at oral argument the amount of the rent is irrelevant we disagree what is missing from both the commissioner’s and the tax court’s analyses is any mention of a nexus between the rents received by taxpayers and the ar- rangement that requires the landlords’ material par- ticipation we believe this omission overlooks sec_1402’s requirement that rents be derived under such an arrangement that is to say the mere exis- tence of an arrangement requiring and resulting in material_participation in agricultural production does not automatically transform rents received by the landowner into self-employment_income it is only where the payment of those rents comprise part of such an arrangement that such rents can be said to derive from the arrangement rents that are consistent with market rates very strongly suggest that the rental arrangement stands on its own as an independent transaction and cannot be said to be part of an arrangement for participation in agricultural production although the commissioner is correct that unlike other provisions in the code sec_1402 contains no explicit safe-harbor provision for fair_market_value transactions we conclude that this is the practical effect of the derived under language mcnamara v commissioner f 3d pincite the court_of_appeals for the eighth circuit remanded bot i hennen i and mcnamara i in order to provide the commissioner of internal revenue the opportunity to show that a connection existed between the respective rents and the respective employ- ment agreements or arrangements involved in those cases id on remand the respective parties in bot i hennen i and mcnamara i declined our invitation to conduct additional trials as a result we found that the rent at issue in each of those cases was at or below market rates and decided that no deficiency in self-employment_tax existed in any of those cases in 54_tc_742 affd 445_f2d_985 10th cir we concluded that we would follow a court_of_appeals opinion which is squarely in point where appeal from our decision would lie to that court_of_appeals and to that court alone in the instant case during the years at issue petitioners had two arrangements with g e johnson inc an oral employment arrangement under which petitioners were to and did participate materially in the production by g e johnson inc of agricultural commodities by performing peti- tioners’ farm-related activities and an oral rental arrange- ment under which petitioners leased to g e johnson inc petitioners’ farmland and personal_property there were two identical types of arrangements involved in mcnamara ii the issue presented here is whether the claimed rents at issue reduced by the deductions attributable to such respective rents are subject_to self-employment_tax because they constitute includible farm rental income under sec_1402 that was the identical issue presented in mcnamara ii we conclude that mcnamara ii is squarely in point moreover the court to which an appeal in this case would normally lie is the court_of_appeals for the eighth circuit we shall follow mcnamara ii golsen v commissioner supra as required by mcnamara ii we must determine whether there was a nexus between the claimed rent the claimed rent and the modified claimed rent that petitioners re- ceived pursuant to the oral rental arrangement and the oral employment arrangement under which petitioners were to and did participate materially in the production by g e johnson inc of agricultural commoditiesdollar_figure in making that determination we 13we note that in mcnamara i there is no indication that the parties advanced and the court did not address any argument continued bear in mind the conclusions of the court_of_appeals for the eighth circuit in mcnamara ii that rents that are consistent with market rates very strongly suggest that the rental arrangement stands on its own as an independent transaction and cannot be said to be part of an arrangement for participation in agricultural production although the commissioner is correct that unlike other provisions in the code sec_1402 contains no explicit safe-harbor provision for fair_market_value transactions we conclude that this is the practical effect of the derived under language continued that because the taxpayer-owners of the farmland in that case materially participated within the meaning of sec_1402 in the production of agricultural commodities as employees of their wholly owned corporation and not in their individual capacities the analysis under sec_1402 should be different from the analysis in bot i and hennen i where the taxpayer-owners of the farmland involved in those two cases materially participated within the meaning of sec_1402 in the production of agricultural commodities in their individual capacities in mcnamara ii there is no indication that the taxpayers appealing mcnamara i advanced and the court_of_appeals for the eighth circuit did not address any argument that the analysis under sec_1402 with respect to such taxpayers should be any different from the analysis with respect to the taxpayers appeal- ing bot i and hennen i in the instant case neither petitioners nor respondent advances any argument that the analysis under sec_1402 should be different from the analysis in mcnamara ii because petitioners materially participated within the meaning of sec_1402 in the production by g e johnson inc of agricul- tural commodities as employees of g e johnson inc and not in their individual capacities indeed petitioners rely solely on the analysis in mcnamara ii to support their position in the instant case consequently we shall not address whether our analysis would be different in the instant case because petition- ers materially participated within the meaning of sec_1402 in the production of agricultural commodities by g e johnson inc as employees of g e johnson inc and not in their individual capacities mcnamara v commissioner f 3d pincite we have found based on the stipulation of the parties that the claimed rent the claimed rent and the modified claimed rent represented fair market rents and are consis- tent with the rents paid during those years by g e johnson inc to other third-party landlords on the record before us we further find that petitioners have established that during each of the years at issue there was no nexus between the claimed rent the claimed rent and the modified claimed rent that petitioners received pursuant to the oral rental arrangement and the oral employment arrangement under which petitioners were to and did participate materially in the production by g e johnson inc of agricultural commodities pursuant to the oral rental arrangement during the years at issue g e johnson inc paid rent to petitioners for the lease of petitioners’ farmland and personal_property irrespective of whether or not that company had a good farming year or had income moreover during those years petitioners did not believe that they were and they were not obligated or compelled to perform petitioners’ farm-related activities in the production by g e johnson inc of agricultural commodities as a condition to that company’s being obligated to pay rent to petitioners pursuant to the oral rental arrangement based upon our examination of the entire record in this case we find that petitioners have shown that the claimed rent the claimed rent and the modified claimed rent were not derived under an arrangement within the meaning of sec_1402 and sec_1_1402_a_-4 income_tax regs between petitioners and g e johnson inc which provided or contemplated that g e johnson inc was to produce agricul- tural commodities on petitioners’ land and that petitioners were to participate materially in the production of such commodities on that record we hold that the claimed rent the claimed rent and the modified claimed rent reduced by the deductions attributable to such respective rents are not subject_to self-employment_tax because they do not constitute includible farm rental income and therefore are not net_earnings from self- employment under sec_1402 we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing and the concession of petitioners decision will be entered under rule


t c memo united_states tax_court audrey carlisle petitioner v commissioner of internal revenue respondent docket no filed date audrey carlisle pro_se ngquyen-hong hoang for respondent memorandum opinion nameroff special_trial_judge by separate notices of deficiency dated date respondent determined deficiencies in petitioner’s and federal_income_tax of dollar_figure and dollar_figure respectively unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue this matter is before the court on the parties’ cross-- motions to dismiss for lack of jurisdiction petitioner’s motion - - is premised on the ground that respondent failed to send valid notices of deficiency to her last_known_address respondent’s motion is premised on the ground that petitioner failed to file a timely petition in response to a valid notice because the jurisdiction of this court is limited by statute and attaches only upon the issuance of a valid notice_of_deficiency and the timely filing of a petition this case must be dismissed for lack of jurisdiction the only question is on whose motion it will be dismissed where jurisdiction is lacking because of the commissioner’s failure to issue a valid notice_of_deficiency we dismiss on that ground rather than on the ground that the taxpayer failed to file a timely petition see 63_tc_193 62_tc_543 34_tc_58 see also 69_tc_999 the court has jurisdiction to decide issues regarding its jurisdiction background petitioner’s tax returns for and were under examination by the internal_revenue_service irs in petitioner’s case was assigned to vicki murdock a tax-examining assistant at the irs ogden utah service_center ms murdock handled petitioner’s case from date to date before date petitioner resided pincite crescent avenue apartment buena park california the crescent avenue address which was her brother’s residence the crescent avenue address was the address on petitioner’s federal_income_tax return filed in by letter dated date petitioner informed the irs that she had moved to north oak street orange california the oak street address respondent made this address change in the irs taxpayer address database on date respondent received a letter from petitioner dated date the letterhead of this letter reflects petitioner’s address a sec_130 west adele street apartment f anaheim california the adele street address there is no statement in petitioner’s letter that there was a change_of address respondent did not make an address change in the database for petitioner’s address on date ms murdock received another letter’ from petitioner dated date which also reflects the adele street address in petitioner sent this letter to the irs service_center in fresno california and it was transferred to ms murdock this letter was also sent to the service_center in fresno california and refers to petitioner’s disagreement with the changes proposed by respondent in this letter petitioner states her disagreement with the examination_report - the letterhead there is no statement in the letter indicating a change_of address and respondent did not make such a change according to notes taken by ms murdock she attempted to call petitioner three times in date and twice in date the number she called was that of petitioner’s brother on date ms murdock left a message on the answering machine for petitioner in her notes ms murdock wrote left message if she does not contact us by we’1ll send day letter by letter dated date the irs sent petitioner a form letter to the crescent avenue address thanking her for her correspondence dated date the letter stated that the irs had not yet reviewed the information she sent but would contact her within days to let her know what action would be taken the letter was signed by the chief of the fresno service_center examination branch in early date petitioner received her form 1040a instructions booklet tax booklet this tax booklet was mailed to the adele street address on date respondent mailed and notices of deficiency to the oak street address by certified mail these ms murdock testified that petitioner identified herself on the outgoing answering machine greeting petitioner believes that she received her tax booklet between jan and - - notices were returned to respondent in late february as unclaimed on date respondent received petitioner’s income_tax return which reflected the adele street address at that time respondent updated his database to show the adele street address for petitioner in date petitioner’s case was sent back to ms murdock while looking through petitioner’s file ms murdock noticed the adele street address on the letterhead of petitioner’s prior letters ms murdock checked the database and noticed that petitioner’s address had been updated on date ms murdock caused a letter to be sent to petitioner at the adele street address transmitting copies of the notices of deficiency and explaining that the 90-day statutory period for filing a petition with the tax_court was not extended the day period within which to timely file a petition with this court expired date petitioner filed her petition on date petitioner alleges that on date she sent another letter to respondent stating a change_of address to the adele street address respondent claims that letter was never received petitioner’s copy of that purported letter appears to have been written on stationery or notepaper which is different from all her other correspondence in the file moreover the -- - formatting and style of the message contained therein is likewise different from her previous letters petitioner further alleges that she called ms murdock’s office in date and was told that ms murdock was no longer handling her case petitioner claims that when she spoke to the secretary who answered the phone she identified herself with her social_security_number and the adele street address lastly petitioner contends that since she received her tax booklet in early january at the adele street address respondent knew of this address before the notices of deficiency were issued in february respondent contends that the notices of deficiency were sent to petitioner’s last_known_address and petitioner failed to petition the court within the statutory period respondent argues that petitioner’s date and date letters did not provide clear and concise notice of an address change testimony of mitchell farah during the first hearing on this matter the court questioned how respondent was able to send the tax booklet for to petitioner’s adele street address respondent subseguently moved to reopen the record to answer this concern which motion was granted and a second hearing was held respondent called mitchell farah mr farah as a witness mr farah is the manager of the mailouts and composition section of - the tax products branch of the irs in washington d c as part of his job mr farah supervises the employees who are responsible for the administration of contracts with private print vendors vendors the irs contracts with the vendors to mass produce and mail to taxpayers the tax forms and instructions booklets such as the one received by petitioner pursuant to these contracts the taxpayers’ addresses are downloaded from the irs’s master_file database at martinsberg w va this information is stored on cassettes and sent to the vendors the vendors contract with a national change_of address ncoa licensee which has access to the ncoa file that the u s postal service maintains in memphis tennessee the ncoa licensee matches the names and addresses from the irs master_file with the ncoa database old addresses are replaced with new addresses that were submitted to the post office and they are stored on the cassette mr farah testified that neither the ncoa licensee nor the vendor notifies the irs about the changed addresses the vendors use the new addresses for the mailing of the tax booklets and the new addresses are printed on labels inside the booklets for the taxpayers’ use in filing their returns each label is coded to reflect that a change_of address has occurred when the irs receives a return with a preprinted label reflecting a new address it makes the address change in its master_file --- - all of the tapes with the updated addresses used by the vendor are returned to the irs within days of the last mailing of the booklets the irs does not use the tapes to update its taxpayer address database mr farah stated that the irs deletes the information and reuses the tapes when this occurs is not included in the record but he further testified that on rare occasions the irs may check its database to locate a taxpayer’s address and ask the vendor to which address the vendor sent the tax booklet if a taxpayer who did not receive a tax booklet notifies a congressperson who in turn makes an inquiry to the irs according to mr farah this is the only time that the irs considers the information from the ncoa for a change_of address the record includes a document entitled specifications for contract printing and binding of the individual income_tax package sec_1040a-1 sec_1040a-2 the contract paragraph of the contract entitled furnished cartridges states irs will furnish the contractor with address cartridges sorted by zip code contractor is responsible for taking the irs raw data file and passing the file against the national change_of address ncoa file using standard matching logic providing the irs with magnetic cartridges containing the following a separate listing of new move addresses and incomplete addresses nixies nixies are not to be mailed each new move address must be referenced with its corresponding old address including the check digit social_security_number service code number and package code to allow comparison by the irs in addition contractor must provide all applicable ncoa reports by irs service_center and provide a printout of records any service_center for moves and nixies for analysis - paragraph entitled new move address indicators states as follows image on the taxpayer’s name and address label symbols horizontally and vertically to identify each new move address petitioner’s preprinted label attached to her income_tax return was imaged with the symbols to indicate a new move address according to the schedule in the contract delivery of the tax booklets to the post office called phase was to occur date with phase to occur date mr farah testified that the tapes were returned to the irs around the end of february discussion sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer's last_known_address sec_6212 81_tc_42 if a notice_of_deficiency is mailed to the taxpayer's last_known_address actual receipt of the notice is immaterial see 857_f2d_676 9th cir affg 88_tc_1042 89_tc_806 frieling v commissioner supra pincite the taxpayer in turn ha sec_90 days from the date the notice_of_deficiency was mailed to file a -- - petition in this court for a redetermination of the deficiency see sec_6213 neither the internal_revenue_code nor the regulations promulgated thereunder define the phrase last_known_address however this court has defined the phrase to mean the taxpayer’s last permanent address or legal residence known by the commissioner or the last known temporary address of a definite duration to which the taxpayer has directed the commissioner to send all communications during such period 78_tc_215 in general that address will be the address reflected on the taxpayer’s most recently filed federal_income_tax return absent clear and concise notification of a different address see 91_tc_1019 74_tc_430 62_tc_367 affd without published opinion 538_f2d_334 9th cir the taxpayer has the burden of proving that the notice_of_deficiency was not sent to her last_known_address see yusko v commissioner supra pincite once the commissioner becomes aware of an address other than the one on the taxpayer’s return the commissioner must exercise reasonable care and due diligence in ascertaining the correct address see 83_tc_626 whether the commissioner has done so is a question of fact see weinroth v commissioner supra although the commissioner must exercise reasonable diligence in ascertaining the taxpayer’s correct address the burden necessarily falls upon the taxpayer to keep the commissioner informed of her correct address see 87_tc_643 alta sierra vista inc v commissioner supra as we have stated when a taxpayer changes his address it is he who must notify the commissioner of such change or else accept the consequences alta sierra vista inc v commissioner supra pincite in this case petitioner timely notified respondent of her change_of address from crescent avenue the address on her tax_return to oak street the address to which the notices of deficiency were mailed the first question to be resolved is whether the october and november letters effected a change_of address because of the adele street address appearing in the handwritten letterhead this court has held that an address written in the letterhead of a taxpayer’s correspondence without more will not constitute a clear and concise notification to the irs of a change_of address see id sanderson v commissioner tcmemo_1987_81 the taxpayer must advise the irs that the new address is to be used in the future therefore respondent properly mailed the notices of deficiency to petitioner’s last_known_address we have considered petitioner’s contentions that she advised respondent of her adele street address in her date letter and by telephone and conclude that she has not established those facts by a preponderance_of_the_evidence finally we are not persuaded that respondent knew or should have known about the adele street address as a result of the procedures pertaining to the mailing of the tax booklets for inasmuch as the undisputed evidence reflects that the updated tapes were not returned to the irs until the end of date similarly petitioner’s filing of her return reflecting her adele street address was too late to affect the mailing of the notices of deficiency moreover the fact that respondent sent petitioner copies of the notices of deficiency in date does not invalidate the february mailing constitute a new mailing or enlarge the period for timely filing a petition with this court although petitioner cannot pursue her case in this court she is not without a remedy in short petitioner may pay the tax file a claim_for_refund with the internal_revenue_service and if the claim is denied sue for a refund in the u s district_court or the u s commissioner 55_tc_138 court of federal claims see mccormick v an order will be entered qranting respondent’s motion to dismiss for lack of jurisdiction and denying petitioner’s motion to dismiss


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date conex-153213-08 sec_25d -- residential energy efficient property residential energy efficient property the honorable herb kohl united_states senate washington dc attention ------------------- dear senator kohl i am responding to your inquiry dated date on behalf of a constituent who is constructing a new home and installing solar panels your constituent requested information about tax_credits for the solar panels a taxpayer can claim a credit for expenditures_for solar electric property and solar water heating property that he or she installed in a new home located in the united_states and used as a residence sec_25d of the internal_revenue_code solar water heating property qualifies for the credit if at least half of the energy the taxpayer uses for water heating in his or her home is derived from the sun solar electric property that qualifies for the credit must generate electricity for use in a taxpayer’s home the amount of the credit i sec_30 percent of a taxpayer’s expenditures_for solar electric property and percent of a taxpayer’s expenditures_for solar water heating property during the year when the taxpayer makes the expenditures during construction of a home the law treats the expenditures as made when the taxpayer originally begins to use the home the limit of the credit for solar water heating property is dollar_figure for the limit of the credit for solar electric property was dollar_figure but the dollar amount of the credit is not limited for solar electric property expenditures made in taxable years beginning after date these credits also are limited for any taxable_year beginning after to the excess of the sum of the regular_tax_liability plus the alternative minimum conex-153213-08 tax over the sum of certain other credits if this limit applies to a taxpayer he or she may be able to take the unused portion of the credit in a following year you also asked when we will publish information on this credit in publication highlights of tax changes we provide highlights of the tax changes for the year the version of publication will be available soon this publication will provide more detail about changes to the tax_credit for solar property that occurred in i hope this information is helpful if you have any questions please contact ---------------- ----------------------- identification_number ------------- or me at ---------------------for further assistance sincerely yours charles b ramsey chief branch office of associate chief_counsel passthroughs special industries


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-122140-18 date date legend s_corporation -------------------------------------------------------------- ---------------------------------------------------- llc -------------------------------------------------------------- ---------------------------------------------------- shareholders ---------------------------- -------------------------- ------------------------------------------------------------------------------ -------- ---------------------- ------------------------------------------------------------------------------ --------------------------- ------------------------ ------------------------------------------------------------------------ -------------------------- -------------- -------------------------- -------------------- ------------------- purchaser state a date date date plr-122140-18 company official ---------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------- tax professional ------------------------------------------------------------------------------------- ------------------------------------------ dear -------------------- this letter responds to a letter dated date submitted on behalf of llc as successor of s_corporation purchaser and shareholders collectively the parties requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the parties are requesting an extension of time to file the election statement under sec_1_336-2 the election statement with respect to purchaser’s acquisition of all of the stock of s_corporation from shareholders on date the material information submitted is summarized below on date purchaser a state a limited_liability_company that is taxed as a partnership for federal_income_tax purposes acquired all of the stock of s_corporation a state a corporation that elected to be treated as an s_corporation for federal_income_tax purposes from shareholders in exchange for cash the disposition it has been represented that the disposition qualified as a qualified_stock_disposition as defined in sec_1_336-1 on date s_corporation converted to an llc under the laws of state a llc is a disregarded_entity for federal_income_tax purposes whose sole owner for federal_income_tax purposes is purchaser prior to date the due_date for s corporation’s tax_return for the taxable_year that included date the parties entered into a written binding agreement providing that a sec_336 election would be made with respect to the disposition however for various reasons the election statement was not timely filed subsequently a request was submitted under sec_301_9100-3 of the procedure and administration regulations for an extension of time to file the election statement the parties each represented that they are not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 regulations promulgated under sec_336 permit certain_sales exchanges or distributions of stock of a corporation to be treated as asset dispositions if the disposition is a qualified_stock_disposition as defined in sec_1_336-1 and a sec_336 election is made plr-122140-18 sec_1_336-2 provides that a sec_336 election for an s_corporation target is made by i all of the s_corporation shareholders including those who do not dispose_of any stock in the qualified_stock_disposition and the s_corporation target entering into a written binding agreement on or before the due_date including extensions of the federal_income_tax return of the s_corporation target for the taxable_year that includes the disposition date to make a sec_336 election ii the s_corporation target retaining a copy of the written_agreement and iii the s_corporation target attaching the sec_336 election statement described in sec_1_336-2 and to its timely filed including extensions federal_income_tax return for the taxable_year that includes the disposition date under sec_301_9100-1 the commissioner has discretion to 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 internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the time for filing the election statement is fixed by the regulations ie sec_1 h iii therefore the commissioner has discretionary authority under sec_301 to grant an extension of time to file the election statement provided the parties acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by the parties company official and tax professional explain the circumstances that resulted in the failure to timely file the election statement the information establishes that the parties reasonably relied on a qualified_tax professional who failed to timely file or to advise them to timely file the election statement and the request for relief was filed before the failure_to_file the election statement was discovered by the internal_revenue_service see sec_301 b i and v based on the facts and information submitted including the representations made we conclude that the parties have acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter to file the election statement plr-122140-18 within days of the date on this letter llc as successor of s_corporation must file the election statement in accordance with sec_1_336-2 the election statement must be attached to s corporation’s tax_return for the taxable_year including date in addition a copy of this letter must be attached to s corporation’s return alternatively if s_corporation files its return electronically it may satisfy the requirement of attaching a copy of this letter to the return by attaching a statement to its return that provides the date on and control number plr-122140-18 of this letter_ruling within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction consistently with the making of a sec_336 election for the taxable_year in which the transaction was consummated and for any other affected_taxable_year the above extension of time is conditioned on the parties’ tax_liabilities if any being not lower in the aggregate for all years to which the sec_336 election applies than it would have been if the election statement had been timely filed taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liabilities for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion as to whether the disposition qualifies as a qualified_stock_disposition or any other tax consequences arising from the sec_336 election in addition we express no opinion as to the tax consequences of filing the return or making the sec_336 election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the sec_336 late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we have relied on certain statements and representations made by the parties company official and tax professional however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the sec_336 election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-122140-18 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _ken cohen__________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate