tcmemo_2010_6 united_states tax_court johnny and jennifer rosser petitioners v commissioner of internal revenue respondent rosser enterprises inc petitioner v commissioner of internal revenue respondent docket nos filed date johnny rosser pro_se johnny rosser an officer for petitioner in docket no lynette mayfield for respondent memorandum findings_of_fact and opinion dawson judge in these consolidated cases respondent determined the following federal_income_tax deficiencies and accuracy-related_penalties petitioners year deficiency johnny jennifer rosser rosser enterprises inc dollar_figure big_number big_number accuracy- related penalty sec_6662 dollar_figure after concessions the issues remaining for decision are whether rosser enterprises inc the corporation is entitled to various claimed business_expense deductions in excess of those respondent allowed in the notice_of_deficiency for whether johnny and jennifer rosser petitioners received constructive_dividend income from the corporation in and whether petitioners made cash charitable_contributions for and in excess of the amounts allowed by respondent 1petitioners concede that their mortgage interest_deduction for is limited to dollar_figure petitioners also concede that jennifer rosser received unreported gross_receipts of dollar_figure from mary kay cosmetics sales in respondent concedes that petitioners did not receive unreported interest_income of dollar_figure in from webb group financial services whether petitioners or the corporation are entitled to deduct a claimed loss in with respect to investments placed with webb group financial services and whether petitioners are liable for accuracy-related_penalties pursuant to sec_6662 a for and findings_of_fact some of the facts have been stipulated and are incorporated in our findings by this reference the record consists of the stipulation of facts with attached exhibits additional exhibits admitted at trial and the testimony of johnny rosser petitioner and james clark an unenrolled tax_return_preparer who prepared the federal_income_tax returns for petitioners and the corporation for the years in issue petitioners resided in tennessee when they filed their petition the corporation was organized in tennessee and was doing business as a dry cleaning establishment in three locations in knoxville tennessee at the time its petition was filed petitioner is the corporation’s president and sole shareholder petitioners timely filed their joint federal_income_tax returns on form_1040 u s individual_income_tax_return for 2unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure and and the corporation timely filed its form_1120 u s_corporation income_tax return for on date respondent issued a notice_of_deficiency to petitioners with respect to their taxable years and on the same date respondent issued a notice_of_deficiency to the corporation with respect to its taxable_year no notice_of_deficiency was issued to the corporation with respect to its taxable_year because respondent determined upon audit that there was no deficiency for that year petitioners reported dollar_figure on line of their form_1040 for as personal_property rental income no personal_property rental transaction appears under equipment rental on the corporation’s profit and loss detail for and petitioners filed no schedule e supplemental income and loss with their federal_income_tax return during and the corporation paid dollar_figure and dollar_figure respectively in personal insurance premiums for petitioners during and the corporation paid petitioners’ personal medical_expenses of dollar_figure and dollar_figure respectively the corporation paid petitioners’ personal credit card expenses for and as follows credit card date payee amer exp chase amer exp chase aeronaves de mexico tsuen may trading miami four winds mfg mypaysystems com amount dollar_figure dollar_figure dollar_figure dollar_figure chase chase chase discover chase chase chase amer exp total dillards pellissippi state cash mypaysystems com derm assoc knoxville mtsu online registr banana republic amz superstore biltmore est tickets dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure credit card date payee amount tickets unlimited chase hmicz ring gifts chase target-knoxville chase blockbuster video amer exp blockbuster video amer exp etix com chase mbm limoges jewelry chase blockbuster video amer exp chase amz amazon paymts amer exp blockbuster video chase chase chase chase chase chase chase chase chase chase chase chase chase chase chase chase chase chase total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure paypal dollar_figure target dollar_figure free watch dollar_figure dermatology assoc dermatology assoc dollar_figure mullins family dentistry dollar_figure usairways dollar_figure usairways dollar_figure dermatology assoc dollar_figure atlantic jet sports dollar_figure ebay s half com dollar_figure mullins family dentistry dollar_figure berman investments dollar_figure bargain mart classifieds dollar_figure bargain mart classifieds dollar_figure dollar_figure paypal carlosm dollar_figure wcb grill parts dollar_figure berman investments dollar_figure the corporation made two cash payments of dollar_figure each to petitioner in which were not reported as wages the corporation made payments in the total_amounts of dollar_figure and dollar_figure for and respectively to fifth third bank on a loan for a ford van titled in petitioner’s name but used entirely for the corporation’s dry cleaning deliveries during and petitioners operated two automobiles a mitsubishi eclipse and a toyota solara primarily for their personal_use both automobiles were owned by the corporation on date petitioner as president and sole shareholder of the corporation wrote signed and received corporate check no for dollar_figure payable to himself which was deposited to his personal bank account on date in the notice_of_deficiency for respondent determined that the dollar_figure was a constructive_dividend includable in the total dividends petitioners received in petitioners claimed deductions on their federal_income_tax returns for cash charitable_contributions of dollar_figure in and dollar_figure in made to ridgeview baptist church of those amounts petitioners themselves actually paid dollar_figure for and dollar_figure for the remainder of the contributions to the church was paid_by the corporation in the amounts of dollar_figure in and dollar_figure in the church acknowledged that it received all the contributions respondent determined that petitioners’ charitable_contribution deductions for the amounts paid to the church were limited to dollar_figure for and dollar_figure for by agreement dated date the corporation acquired the assets of old capitol cleaners occ for a total price of dollar_figure with the closing to be effective as of the end of business on date the corporation made a downpayment of dollar_figure at the time occ was purchased during november and date the corporation began making regular payments of dollar_figure per month on the balance of the debt incurred for the occ purchase the occ assets acquired by the corporation in consisted inter alia of the entire right title and interest in and to the business as a going concern and thus were placed_in_service in on its income_tax return for the corporation claimed a depreciation deduction of dollar_figure of that amount dollar_figure was claimed as a sec_179 expense with respect to the corporation’s purchase of occ in and dollar_figure was claimed for ongoing depreciation of dry cleaning equipment and the corporation’s ford van respondent allowed the depreciation on the dry cleaning equipment but reduced the depreciation claimed on the ford van by dollar_figure because of the application of the accelerated_cost_recovery_system acrs respondent also disallowed dollar_figure claimed as a sec_179 expense in because the corporation did not purchase occ’s assets in that year but rather in for which the expense was previously allowed on its other deductions statement to its income_tax return the corporation claimed as deductions the following reimbursement amounts automobile reimbursements--rosser dollar_figure other reimbursements--rosser dollar_figure and additional sec_263a costs--reimbursements dollar_figure for a total of dollar_figure respondent determined in the notice_of_deficiency issued to the corporation for that only dollar_figure of the reimbursements was substantiated and that dollar_figure was unsubstantiated and therefore disallowed on its other deductions statement to its income_tax return the corporation claimed insurance expenses of dollar_figure paid in included in that amount was dollar_figure the corporation paid for petitioners’ personal insurance respondent disallowed dollar_figure and allowed the balance of dollar_figure on its other deductions statement to its income_tax return the corporation claimed medical_expenses of dollar_figure paid in that amount was for petitioners’ personal medical_expenses and respondent disallowed it during petitioners and the corporation made investments with webb group financial services webb group as early as date the webb group investors were notified that their investments might be in some financial jeopardy but a class action had been filed on date a receiver was appointed in the superior court of forsyth county north carolina on date the court entered an order authorizing the receiver to make some payments of attorney’s fees and distributions on or about date petitioner and the corporation filed proofs of claim with the receiver the corporation received a letter dated date from the receiver that informed it in part as follows the receiver has asked the court for permission to distribute on a pro_rata basis dollar_figure from the receiver’s trust account to the webb franklin disciple creditors the amount of distribution you are receiving on the enclosed check in the amount of dollar_figure is based upon a simple cash in less cash_out calculation for each creditor account and by comparing proof_of_claim forms submitted by each creditor with the financial records the receiver obtained for each webb franklin disciples creditor account that is subject_to participation in the settlement distributions see the distribution calculation sheet enclosed for this account records indicate that you loaned webb franklin total principal_amount s of dollar_figure and did not receive any distributions in the form of interest_paid or principal withdrawals leaving a net creditor account balance subject_to pro_rata distribution in the amount of dollar_figure your net creditor account balance is equal to a pro_rata distribution of percent of the aggregate webb franklin net creditor account balances which total dollar_figure the portion of the dollar_figure being distributed from the receiver’s trust account that is earmarked for webb franklin creditors is dollar_figure which when multiplied by your pro_rata distribution percentage factor equals the amount of the enclosed check of dollar_figure on or about date petitioner received a final settlement check of dollar_figure after payments of attorney’s fees and costs and the corporation received a check for dollar_figure as a final net payment the payments petitioner and the corporation received partially reimbursed them for their losses through the webb group i burden_of_proof opinion generally the commissioner’s determinations are presumed correct and taxpayers bear the burden of proving that those determination are erroneous rule a 290_us_111 deductions and credits are a matter of legislative grace and taxpayers bear the burden of proving entitlement to any deduction or credit claimed rule a 503_us_79 308_us_488 292_us_435 taxpayers also bear the burden of substantiating the amount and purpose of any claimed deduction see 65_tc_87 affd per curiam 540_f2d_821 5th cir under sec_7491 the burden_of_proof may shift from taxpayers to the commissioner if taxpayers in addition to satisfying other requirements produce credible_evidence with respect to any factual issue relevant to ascertaining their liabilities petitioners have not alleged that sec_7491 applies nor did they introduce the requisite evidence to invoke that section therefore the burden_of_proof remains on petitioners sec_7491 provides that the commissioner bears that burden of production with respect to a penalty or addition_to_tax to meet this burden the commissioner must introduce evidence indicating that it is appropriate to impose the relevant penalty or addition_to_tax 116_tc_438 once the commissioner meets this burden the taxpayer bears the burden to produce evidence regarding reasonable_cause id pincite ii corporate expense deductions disallowed a depreciation a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business may be deducted on a corporation’s return sec_167 a corporation may elect to expense certain depreciable business_assets sec_179 however the election must be made on the tax_return for the year in which the property is placed_in_service sec_179 116_tc_206 the corporation claimed a total depreciation deduction of dollar_figure on its income_tax return respondent disallowed dollar_figure which consisted of dollar_figure claimed as a sec_179 expense for the corporation’s purchase in of the occ assets as a going concern and a dollar_figure depreciation reduction under acrs for its ford van on date the corporation entered into an agreement to purchase all of the occ assets there was a dollar_figure downpayment made on that date the purchase agreement was effective at the close of business on date and the corporation was required to make monthly payments on the balance of the purchase_price the corporation began making dollar_figure monthly payments to occ during because the occ assets were purchased as a going concern and thus placed_in_service during we hold that the corporation is not entitled to the dollar_figure claimed sec_179 expense deduction in 3it is noted that for tax years after the statute and the regulations have been amended so that a taxpayer may make modify or revoke an election without the commissioner’s consent on an amended_return filed after the due_date of the original return sec_179 sec_1_179-5 income_tax regs however the amendments are of no use to the corporation because it had already been allowed to expense the cost of the occ assets for the year during which they were placed_in_service 4as previously indicated respondent allowed the corporation continued the corporation’s form_4562 depreciation and amortization contains a dollar_figure error in its claimed depreciation of its ford van the error relates to an incorrect calculation of third-year depreciation under acrs that amount is disallowed and should be reflected in the rule_155_computations b other reimbursements as reflected in our findings_of_fact respondent disallowed for lack of substantiation dollar_figure for other reimbursements claimed by the corporation as business_expense deductions petitioners offered no evidence on this issue and therefore they failed to carry their burden_of_proof we reject their contention that it was respondent’s burden to substantiate the claimed deductions on the basis of an unsigned unattributed form_4549 with addendums clearly the form_4549 income_tax examination changes is a vital part of the notice_of_deficiency which was signed and contained respondent’s determinations which are presumed correct accordingly we decide this issue for respondent c insurance expenses the corporation paid dollar_figure of petitioners’ personal insurance expenses in petitioners offered no evidence that the claimed deduction was a deductible corporate busine sec_4 continued a sec_179 expense deduction in the full amount dollar_figure of the occ purchase_price in expense respondent contends that the corporation’s payment of the personal insurance expenses benefited only petitioners and not the corporation and therefore the corporation is not entitled to the dollar_figure deduction we recognize that payments by an employer to defray personal expenses of an employee including payments for life accident_and_health_insurance covering an employee though of benefit primarily to the employee may be deducted by the employer under sec_162 in appropriate circumstances for example such payments may be deducted with the requisite intent to compensate for services actually rendered and in an amount that is reasonable when added to the rest of the employee’s compensation package cf 58_tc_1055 affd per curiam 474_f2d_1345 5th cir francis v commissioner tcmemo_2007_33 if the payment in the case of a reimbursement of an employee’s medical_expenses is to be excludable from the employee’s income under sec_105 as well as deductible to the employer under sec_162 it generally must be paid in accordance with a benefit plan to a payee who receives it in the capacity of an employee rather than in the capacity of a shareholder cf estate of leidy v commissioner tcmemo_1975_340 affd without published opinion 549_f2d_798 4th cir there is no evidence in this record showing the corporation had an insurance plan of any type covering its employees although its income_tax return for claimed a deduction for salaries and wages of dollar_figure paid to employees and compensation of dollar_figure paid to petitioner as its only shareholder accordingly we hold petitioners failed to prove that the corporation is entitled to deduct the claimed insurance expenses paid on their behalf for the payment was a constructive_dividend to them see benson v commissioner tcmemo_2004_272 d medical_expenses the corporation claimed a deduction for medical_expenses of dollar_figure on its income_tax return respondent disallowed it petitioners admitted that the corporation paid their personal medical_expenses the corporation’s payment of such expenses benefited petitioners and not the corporation therefore we hold that the corporation is not entitled to the deduction in addition the payment constituted a constructive_dividend to petitioners iii constructive dividends respondent asserts that constructive_dividend income should be imputed to petitioners for amounts paid_by the corporation to them or on their behalf petitioners dispute that they received the constructive dividends determined by respondent we agree with respondent that petitioners received numerous constructive dividends but not all of those determined a constructive_dividend arises when a corporation confers an economic benefit upon a shareholder without expectation of repayment and the corporation on the date of the deemed_distribution had current or accumulated_earnings_and_profits 496_f2d_1384 5th cir 89_tc_1280 constructive dividends are includable in a taxpayer’s gross_income under sec_61 gross_income includes income realized in any form whether in money property or services sec_1_61-1 income_tax regs a greater potential for constructive dividends exists in closely held corporations where dealings between stockholders and the corporation are characterized by informality benson v commissioner supra zhadanov v commissioner tcmemo_2002_ where as here the sole shareholder uses corporate property for a personal benefit which is not proximately related to corporate business the shareholder must include the value of the benefit as a constructive_dividend to the extent of the corporation’s earnings_and_profits furthermore to be a constructive_dividend to the shareholder a payment of money or property does not need to be made by the corporation directly to the shareholder benson v commissioner supra it is also well 5the corporation had accumulated_earnings_and_profits of at least dollar_figure in and settled that nondeductible payments made by a corporation to a third party on behalf of or for the economic benefit of its shareholders may constitute dividends taxable to those shareholders under sec_301 proctor v commissioner tcmemo_1981_436 the testimony and documentary_evidence in this record establish that petitioners did not separate their personal transactions and expenses from those of the corporation they paid personal expenses with corporate checks they paid personal credit card expenses with corporate funds they used corporate property for their personal_use consequently they received constructive dividends in the amounts of corporate funds spent for them and in the amounts of the lease value of corporate property used by them clearly petitioners received economic benefits for items not deductible by the corporation and those constructive dividends constitute gross_income to them for and we hold that the following expense items paid or provided by the corporation constitute petitioners’ constructive dividends for the years in issue personal insurance premium payments the corporation paid petitioners’ personal insurance premiums of dollar_figure in and dollar_figure in petitioners presented no evidence showing the insurance payments gave rise to a deductible corporate business_expense personal medical expense payments the corporation paid petitioners’ personal medical_expenses of dollar_figure in and dollar_figure in these payments benefited petitioners and no evidence was presented showing they were a deductible corporate business_expense see estate of leidy v commissioner supra personal credit card charges the corporation made payments of petitioners’ american express and chase credit card charges of dollar_figure in and dollar_figure in a corporation’s payment of a shareholder’s personal credit card charges may give rise to a constructive_dividend to the shareholder beck v commissioner tcmemo_2001_270 petitioner admitted at trial that the personal credit card charges were paid with corporate funds petitioners benefited from the payments and they were not deductible corporate business_expenses two corporate checks payable to petitioner at trial petitioner admitted that two payments of dollar_figure each were made to him by corporate checks nos and in he contends that these were rental payments for equipment he personally owned before the corporation was organized however there is no evidence in the record of any written rental agreement for the equipment in fact the check amounts do not agree with the rental income reported on line of petitioners’ federal_income_tax return for moreover there is no schedule e reporting rental income on their income_tax return for or and the alleged rental was not shown on the corporation’s profit and loss detail for in view of these facts we conclude that petitioner received a total cash benefit of dollar_figure in for which there was no corporate purpose thus resulting in a constructive_dividend to petitioner personal_use of corporate automobiles the parties stipulated and petitioner admitted at trial that petitioners used two vehicles a toyota solara and a mitsubishi eclipse owned by the corporation for their personal_use during the years at issue a taxpayer realizes constructive dividends in connection with personal_use of a corporate automobile in the amount of the fair rental value of the automobile sec_301 proctor v commissioner supra respondent determined that during the years at issue the annual fair market lease value of the toyota was dollar_figure per year and the annual fair market lease value of the mitsubishi was dollar_figure per year petitioner offered no evidence of corporate use of the automobiles and did not contest the reasonableness of the annual lease values in fact both automobiles were used primarily by petitioners accordingly we conclude that petitioners received constructive dividends from the corporation of dollar_figure and dollar_figure in the years and respectively contrary to respondent’s determination and the contentions and arguments made in his briefs we hold that the following two items are not taxable as constructive dividends to petitioners corporate payments on loan for van purchased in petitioner’s name the corporation made total payments to fifth third bank of dollar_figure in and dollar_figure in on a loan on a ford van purchased and titled in petitioner’s name but used exclusively by the corporation as a dry cleaning delivery vehicle the van did not benefit petitioner personally it was used only for business purposes we conclude that for financing reasons petitioner purchased the vehicle in his name and he held title to it as a nominee for the corporation therefore we hold that the payments are not includable in petitioners’ income in and corporate check no as stated in our findings_of_fact petitioner wrote signed and delivered to himself corporate check no dated date for dollar_figure it was deposited in his personal bank account on date respondent determined in his notice_of_deficiency that the dollar_figure was a constructive_dividend petitioner received in respondent strongly suggests in his brief that petitioner may have backdated the corporation’s check and that it was possibly written on or after date petitioner denies it we are not persuaded by respondent’s analysis for many years this court has favored and followed the cash-equivalent-upon-receipt rule enunciated in 18_tc_31 holding that a cash_basis taxpayer realized income in from a check dated and received on date but not cashed by him until date in that and similar situations the date of payment has been related back to the date of receipt see 926_f2d_383 5th cir 349_f2d_953 3d cir affg tcmemo_1963_344 stephens v commissioner tcmemo_1956_284 we find and conclude that petitioner received the dollar_figure as income in a year not before us and over which we lack jurisdiction accordingly we hold that petitioner did not receive constructive_dividend income in that amount in iv charitable_contributions petitioners and the corporation made charitable_contributions to ridgeview baptist church of dollar_figure in and dollar_figure in petitioners paid dollar_figure in and dollar_figure in and the corporation paid the remaining amounts of dollar_figure and dollar_figure respectively for those years as set forth in respondent’s notice_of_deficiency issued to petitioners they were allowed the amounts they actually paid to the church in those years and were disallowed the amounts the corporation paid in the notice_of_deficiency issued to the corporation for respondent allowed the dollar_figure the corporation paid the church in that year which was apparently reduced to dollar_figure because of the taxable_income limitations to which corporations are subject sec_170 petitioner offered nothing at trial that contradicts the evidence of record accordingly we hold that petitioners are entitled only to deductions for charitable_contributions paid to the church of dollar_figure in and dollar_figure in v claimed loss on investments with webb group petitioners and the corporation allege in their respective petitions that a loss was incurred in with respect to investments they placed through the webb group sec_165 provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise see also sec_1 a income_tax regs a loss is not sustained during the taxable_year if there is a reasonable_prospect_of_recovery sec_1_165-1 income_tax regs filing a lawsuit may indicate a 6petitioner has not asserted that the corporation was not allowed a charitable_contribution_deduction of dollar_figure made to the church in furthermore we note that the corporation’s profit and loss detail for shows that a charitable_contribution of that amount was paid and claimed in that year and apparently not disallowed by respondent reasonable prospect for reimbursement bacon v commissioner tcmemo_1989_90 to be allowable a loss must be evidenced by closed and completed transactions that are fixed by identifiable events sec_1_165-1 income_tax regs as reflected in our factual findings no loss could be determined in or the stipulated documents show that the webb group investors were informed that a class action would be filed and that a substantial recovery was anticipated on date petitioner and the corporation were informed that a written settlement agreement had been approved that would return a significant portion of the investors’ principal investment on january and date petitioners and the corporation received partial payments on their investments made through webb group financial services finally the litigation ended and on date petitioner received a final settlement check for dollar_figure and the corporation received a final settlement check for dollar_figure the stipulated documents and petitioner’s testimony show that there was no fixed and identifiable_event that established a deductible loss for petitioners or the corporation during the years at issue and that there was during those years a significant prospect of recovery_of the webb group loss through both litigation and the settlement agreement which were concluded after the years at issue accordingly we hold that neither petitioners nor the corporation are entitled to a deduction in for a loss regarding their investments with the webb group vi accuracy-related_penalties respondent determined that petitioners are liable for accuracy-related_penalties under sec_6662 for and respondent argues that petitioners are liable for the sec_6662 accuracy-related_penalties attributable to negligence or disregard of rules or regulations or to substantial understatements of income_tax as previously stated sec_7491 provides that the commissioner bears the burden of production with respect to the liability of any individual for penalties respondent has satisfied his burden of production by producing evidence establishing that petitioners were negligent in disregarding substantiation requirements for some of their claimed deductions for omitting some taxable_income for using corporate funds for their own personal expenses for commingling their own and corporate funds and for using corporate property for personal_use without properly accounting for the benefits they received sec_6662 imposes a penalty in an amount equal to percent of the portion of the underpayment_of_tax attributable to one or more of the items set forth in sec_6662 including negligence or disregard of rules or regulations and substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and is the failure to exercise due care or the failure to do what a reasonable and prudent person would do under the circumstances sec_6662 85_tc_934 sec_1_6662-3 income_tax regs disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 sec_1 b income_tax regs an understatement of income_tax is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return sec_6662 a substantial_understatement exists if the understatement exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure sec_6662 the sec_6662 accuracy-related_penalty does not apply with respect to any portion of an underpayment if the taxpayer proves that there was reasonable_cause for such portion and that he acted in good_faith with respect thereto sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability id petitioners conceded some items in the notice_of_deficiency such as a failure to report gross_receipts and an incorrect mortgage interest_deduction petitioner presented at trial no evidence that he used due care in claiming deductions that were subsequently adjusted in the notice_of_deficiency or in failing to report items as constructive dividends he also failed to keep corporate expenses and funds separate from his own or to keep adequate tax records to assist in the proper preparation of petitioners’ income_tax returns for and petitioners failed to prove that they had reasonable_cause for what they did or that they acted in good_faith in their briefs petitioners contend that the accuracy- related penalties should not be imposed because they provided sufficient information to and relied on their tax_return_preparer mr clark to prepare correct income_tax returns for them and the corporation we disagree petitioner had a responsibility to keep adequate_records and to substantiate items properly sec_1_6662-3 income_tax regs the negligence_penalty has been imposed for failure to keep accurate records as required benson v commissioner tcmemo_2004_272 petitioner admitted at trial that he lacked certain records necessary to substantiate his positions and he was unable to produce records supporting his positions thus petitioners were negligent in failing to keep accurate records and to substantiate items as required sec_6664 provides an exception to the accuracy- related penalty where there is reasonable_cause for the underpayment and the taxpayer acted in good_faith with respect to the portion of the underpayment for which there was reasonable_cause petitioners have failed to show reasonable_cause for the underpayments on their returns nor have they shown that they acted in good_faith with respect to any portion of the underpayments they simply seek relief from the penalties by casting all responsibility on their tax_return_preparer however the ultimate responsibility for a correct return lies with the taxpayer who must furnish the necessary information to his agent who prepared his return benson v commissioner supra the taxpayer has the burden of establishing that he at least provided the correct information to his tax_return_preparer and that the incorrect returns were the result of the preparer’s mistakes id the taxpayer also bears in some circumstances the consequences of any negligent errors committed by his agent generally the duty_of filing accurate returns cannot be avoided by placing the responsibility on a return preparer loftus v commissioner tcmemo_1992_266 in limited situations however reasonable_cause for negligence due to return preparer mistakes may be established if the taxpayer shows that he provided the return preparer with complete and accurate information from which the tax_return could be properly prepared that an incorrect return was the result of the return preparer’s mistakes and that the taxpayer in good_faith relied on the advice of a competent return preparer id even if a taxpayer established the above elements of a preparer error the taxpayer still has a duty to read and review the return and make sure that all income items are included id petitioners have not established the elements for relief from penalties on account of the return preparer’s errors on the basis of this record we hold that petitioners are liable pursuant to sec_6662 for the accuracy-related_penalties with respect to the resulting income_tax deficiencies for and in reaching our holdings herein we have considered all arguments made by the parties and to the extent not mentioned we conclude they are moot irrelevant or without merit to reflect the foregoing decisions will be entered under rule 7we note that in some respects petitioners may have been misguided by their return preparer’s advice because he is not an attorney a certified_public_accountant an accountant an enrolled_agent or a tax professional see martin v commissioner tcmemo_2009_234


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl plr-164897-01 date date taxpayer entity a entity b date sec_1 individual a cpa firm dear legend this replies to your letters dated date requesting that taxpayer be granted an extension of time under sec_301_9100-3 to file the election and agreement provided under sec_1_1503-2 with respect to entity a for the tax years ended on date and date and with respect to entity b for the tax_year ended on date and to file the annual certification provided under sec_1_1503-2 with respect to entity a for the tax_year ended on date with respect to the dual_consolidated_loss incurred in the tax_year ended on date and for the tax_year ended on date with respect to the dual consolidated losses_incurred in the tax years ended on date sec_1 and the information submitted for consideration is substantially as set forth below in re plr-164897-01 the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process entity a generated a net_operating_loss in the tax years ended on date and date entity b generated a net_operating_loss in the tax_year ended on date these losses were taken into account for u s federal_income_tax purposes cpa firm was responsible for preparing and signing the u s consolidated federal_income_tax returns for taxpayer for the years ended on date sec_1 and individual a is a tax partner in cpa firm the affidavit of individual a and the facts submitted describe the circumstances that led to the failure_to_file the agreements and annual certifications taxpayer is requesting relief before the failure_to_file the agreements and annual certifications as required by sec_1_1503-2 has been discovered by the internal_revenue_service sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the agreements and annual certifications are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file the election and agreement provided under sec_1_1503-2 with respect to entity a for the tax years ended on date and in re plr-164897-01 date and with respect to entity b for the tax_year ended on date and to file the annual certification provided under sec_1_1503-2 with respect to entity a for the tax_year ended on date with respect to the dual_consolidated_loss incurred in the tax_year ended on date and for the tax_year ended on date with respect to the dual consolidated losses_incurred in the tax years ended on date sec_1 and the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the agreements and annual certifications sec_301_9100-1 a copy of this ruling letter should be associated with the agreements and annual certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this letter is being furnished to your authorized representatives sincerely s allen goldstein allen goldstein reviewer office of the associate chief_counsel international


internal_revenue_service number release date index number --------------------------- --------------------------------- ------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b07 plr-155692-04 date date legend legend p -- a --- a ----------------------------------------date ------------------------b --- b date -------------------------c -- c ------------------------------------- dear ---- date d this letter is in response to your letter dated date submitted on behalf of c requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p's authorized representative are as follows p is a limited_liability_company treated as a partnership for federal_income_tax purposes p was formed for the purpose of producing solid synthetic_fuel from coal fines the production process is described in detail in p's letter_ruling request p entered into a contract on date for the construction of a facility to produce solid synthetic_fuel from coal fines the construction_contract included such essential features as a description of the facility to be constructed a completion date and a price the construction_contract is binding under applicable law and provides for liquidated_damages of at least five percent of the total_contract_price p owns the facility and has entered into agreements with c pursuant to which c will procure coal feedstock for the facility on behalf of p will be responsible for the day- to-day operation and maintenance of the facility and will act as an exclusive agent to market the synthetic_fuel to unrelated parties on behalf of p on date a acquired a a membership interest in p pursuant to a purchase plr-155692-04 and sale agreement on date c acquired a a membership interest in p pursuant to a purchase and sale agreement on date pursuant to agreements for purchase of membership interests c sold a b membership interest in p to b and acquired a c interest in p from a accordingly on date a and b each own a b interest and c owns a d interest in p p has supplied a detailed description of the process employed at the facility and the chemical reagent currently used in that process p has also proposed that from time to time one of three specified alternative chemical reagents may be used in the process for the production of product as described the facility and the process implemented in the facility including the chemical reagents meet the requirements of revproc_2001_34 2001_22_irb_1293 recognized experts in coal combustion chemistry have performed numerous tests on the coal used and the product produced at the facility and have submitted reports in which the experts conclude that significant chemical changes take place with the application of the process to the coal including the alternative chemical reagents p with use of the process expects to maintain a level of chemical change in the production of synthetic_fuel that is determined through similar analysis by experts to be a significant chemical change the rulings issued in p l r which you wish to be reconfirmed in this private_letter_ruling are as follows production from the facility will be attributable solely to p and p will be the construction_contract for the construction of the facility constitutes a p with use of the process and the chemical reagents described herein will produce a qualified_fuel within the meaning of sec_29 entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person binding written contract within the meaning of sec_29 the sec_29 credit attributable to p may be allocated to member a member b and member c in accordance with their respective percentage interests in p when the credit arises for the sec_29 credit each member’s percentage interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided that the fair_market_value of the original property is more than twenty percent of the facility’s total fair_market_value immediately following the relocation or replacement and relocation of the facility to a different location after date or plr-155692-04 partnership from claiming the sec_29 credit for the production of the synthetic_fuel from the facility that is sold to an unrelated_person any termination of p under sec_708 will not preclude the reconstituted the changes in facts since the issuance of p l r are the sale of membership interests in p to a b and c as described above the use of alternative chemical reagents in the process and the revisions to the agreements relating to the operation and maintenance of the facility and the sale of synthetic_fuel on behalf of p the rulings issued in p l r are not affected by these changes in facts as described in the ruling_request ruling_request sec_1 sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 consistent with its private_letter_ruling practice that began in the mid 1990's the service in revproc_2001_30 provided that taxpayers must satisfy certain conditions in order to obtain a letter_ruling that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 revproc_2001_30 as modified by revproc_2001_34 2001_1_cb_1293 the revenue_procedure requires taxpayers to present evidence that all or substantially_all of the coal used as feedstock undergoes a significant chemical change to meet this requirement and obtain favorable private letter rulings taxpayers provided expert reports asserting that their processes resulted in a significant chemical change plr-155692-04 in announcement 2003_30_irb_222 the service announced that it was reviewing the scientific validity of test procedures and results presented of significant chemical change in expert reports in announcement 2003_46_irb_1090 the service announced that it had determined that the test procedures and results used by taxpayers were scientifically valid if the procedures were applied in a consistent and unbiased manner however the service concluded that the processes approved under its long standing ruling practice and as set forth in revproc_2001_30 did not produce the level of chemical change required by sec_29 nevertheless the service announced that it recognized that many taxpayers and their investors have relied on its long standing ruling practice to make investments therefore the service announced that it would continue to issue rulings on significant chemical change but only under the guidelines set forth in revproc_2001_30 as modified by revproc_2001_34 this ruling is provided to p consistent with announcement and the service's long standing ruling practice accordingly based on the expert test results submitted by p we conclude that p with the use of the described process and one of four specified chemical reagents will produce a solid synthetic_fuel from coal constituting a qualified_fuel within the meaning of sec_29 because p owns the facility and operates and maintains the facility through its agent we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date provides for liquidated_damages of not less than six percent of the total_contract_price and includes such essential features as a description of the facility to be constructed a plr-155692-04 completion date and a price therefore we conclude that the construction_contract is a binding written contract in effect before date within the meaning of sec_29 ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable plr-155692-04 based on the information submitted and the representations made we conclude that the credit will be allowed to p and the credit may be passed through to and allocated among the members of p under the principles of sec_702 in accordance with each member’s interest in p as of the time the credit arises for purposes of the sec_29 credit a member's interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel ruling_request sec_29 and f of the code provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 of the code modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 such a facility is to be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 is to be applied by substituting for the date therein date to qualify for the sec_29 credit the facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than twenty percent of the facility's total value the cost of the new property plus the value of the used_property plr-155692-04 revrul_94_31 describes a windfarm that consists of an array of wind turbines towers pads transformers roadways fencing on-site power collection systems and monitoring and meteorological equipment notwithstanding that the windfarm consisted of all of these items the ruling concludes that the facility for purposes of sec_45 is confined to the property on the windfarm necessary for the production of electricity from wind_energy the present situation is similar to revrul_94_31 thus for purposes of determining the facility's total fair_market_value at the time of relocation or replacement a facility consists of the process equipment directly necessary for the production of the qualified_fuel starting at the immediate input of the coal and chemical reagents to the pug mills or mixers including any coal hoppers and reagent tanks directly feeding the pug mills or mixers through the output from the briquetters or other forming equipment including output hoppers if any hence the facility's total fair_market_value includes the process equipment such as pugmills or mixers the briquetters or other forming equipment the equipment necessary to interconnect such equipment the electrical instrumentation control systems and auxiliaries related to such equipment including the structures that house such electrical instrumentation and control systems the foundation platform s for the above-referenced equipment and an appropriate allocation of the engineering project management overhead and other costs assignable to the relocation of such equipment and construction the facility's total fair_market_value does not include costs associated with the purchase and installation of equipment that supports the operation of the facility but is not directly necessary for the production of the qualified_fuel such as coal beneficiation or preparation equipment eg crushers screens dryers or scales other material handling or conveying equipment eg stacking tubes transfer towers storage bunkers mobile equipment or conveyors certain site improvements eg fencing lighting earthwork paving separate office and bathhouse trailers for facility personnel and buildings if a building for purposes of sec_168 of the code and other administrative assets revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 provided p’s facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location or replacement of part of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than twenty percent of the facility's total fair_market_value at the time of relocation or replacement the cost of the new equipment included in the facility plus the value of the used_property ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after plr-155692-04 date and before date on property that first began production after date congress has extended the sec_29 credit four times the placed-in-service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide a tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that the extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of fifty percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date plr-155692-04 as discussed above the placed_in_service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed-in-service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the placed-in-service deadline under sec_29 and sec_29 is determined by reference to when the facility is first placed_in_service therefore provided the facility was placed-in-service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed-in-service date for the facility for purposes of sec_29 for the new owner further a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons accordingly based on the representations of p and p’s authorized production from the facility will be attributable solely to p and p will be the construction_contract for the construction of the facility constitutes a p with use of the process and the chemical reagents described herein will representative we conclude as follows produce a qualified_fuel within the meaning of sec_29 entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person binding written contract within the meaning of sec_29 the sec_29 credit attributable to p may be allocated to member a member b and member c in accordance with their respective percentage interests in p when the credit arises for the sec_29 credit each member’s percentage interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided that the fair_market_value of the original property is more than twenty percent of the facility’s total fair_market_value immediately following the relocation or replacement and partnership from claiming the sec_29 credit for the production of the synthetic_fuel from the facility that is sold to an unrelated_person any termination of p under sec_708 will not preclude the reconstituted relocation of the facility to a different location after date or the conclusions drawn and rulings given in this letter are subject_to the requirements that the taxpayer i maintain sampling and quality control procedures that conform to astm or other appropriate industry guidelines at the facility that is the subject of this letter ii obtain regular reports from independent laboratories that have analyzed the fuel produced in such facility to verify that the coal used to produce the plr-155692-04 fuel undergoes a significant chemical change and iii maintain records and data underlying the reports that taxpayer obtains from independent laboratories including raw ftir data and processed ftir data sufficient to document the selection of absorption peaks and integration points except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when the facility was placed-in-service for purposes of sec_29 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2004_1 i r b however when the criteria in dollar_figure of revproc_2004_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely s joseph h makurath senior technician reviewer branch passthroughs special industries cc


tax_exempt_and_government_entities_division release number release date uil code department of the treasury internal_revenue_service commerce street mc dal dallas tx date jul person to contact identification_number contact telephone number telephone number fax ein certified mail - return receipt requested dear this is a final_determination that your exempt status under sec_501 of the internal_revenue_code is revoked recognition of your exemption under internal_revenue_code sec_501 is revoked effective january 20xx for the following reason s sec_501 of the code provides that charitable or educational_purposes is exempt from federal_income_tax provided no part earnings inures to the benefit of any private_shareholder_or_individual an organization organized and operated exclusively for of its net sec_1_501_c_3_-1 states that 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 exempt purposes specified in sec_501 an organization will not be so regarded if more than in insubstantial part of its activities is not in furtherance of an exempt_purpose had been inactive during the conduct of an examination the president stated that conducted no training of any kind and since sometime during 20xx during 20xx provided no facilities for services to anyone as it stated it would do in its articles and in its form_1023 neither were these activities conducted during the year ended december 20xx as such you failed to meet the requirements of internal_revenue_code sec_50 1i c and sec_1_501_c_3_-1 in that you failed to establish that you were operated exclusively for an exempt_purpose contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code effective january 20xx you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all subsequent years processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code 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 withindollar_figure days from the date this determination_letter was mailed to you please contact the clerk of the respective court for rules and the appropriate forms regarding filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses u s district_court for the district of columbia constitution ave n w us court of federal claims madison place nw washington dc washington dc united_states tax_court second street nw washington dc you may also be eligible for help from the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you qualify for tas assistance which is always free if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours enclosures publication maria hooke director eo examinations department of the treasury internal_revenue_service tax exempt and government entities irs exempt_organizations examinations pate e taxpayer_identification_number ea form tax_year s ended dec 20xx person to contact id number contact numbers telephone fax manager’s name id number manager’s contact number response due_date date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years letter rev catalog number 34809f what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely margaret a von lienen director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number dec 20xx year period ended explanations of items issue should the income_tax exemption of sec_501 be revoked since the organization fails the operational_test on the grounds that the failure to conduct any activities violates the requirement that it be operated exclusively for exempt purposes facts c and as a a public charity revenue service on april 19xx received its exemption from the internal herein referred to as is recognized as an irc the amended articles of incorporation filed on april 19xx state in article iv that the purpose of the organization is to provide training facilities for hearing impaired individuals who are in need of job training or supervision services to the deaf etc part il of form_1023 states that since 19xx has provided a residential treatment facility for chemically dependent hearing impaired individuals and that since 11-1-19xx they have provided interpreter services for hearing impaired these activities were all included in the application form_1023 this examination disclosed that there had been no activities the 20xx form_990 was marked in its’ during the year under exam during the conduct of the examination the president stated that since sometime during 20xx provided no facilities for services to anyone as it stated it would do in its articles and in its’ form_1023 neither were these activities conducted during the year ended december 20xx had been inactive conducted no training of any kind and during 20xx told agent organization any of the steps towards termination agent performed an examination of form_990 filed by for the year ended dec 20xx conducted by heading as a final return’ form 886-a catalog number 20810w page information_document_request dated april 20xx was provided to completing the steps required to terminate the organization managing director during the examination that he wished to terminate the to assist in as of june 20xx no reply had been received to show that he had completed the reply was due on may 20xx showed income from investments of dollar_figurexxx xx but showed no the final return of investments on the balance_sheet upon inquiry statements from october 20xx account statement was shown as dollar_figurexxx xxx xx showed me a cumulative list of earnings and losses for the organization to show that it had lost money over its’ life agent stated that such losses did not carry forward and obviate the need to donate all funds to another public charity in connection with its proposed termination where they maintain a savings account the balance on the provided selected monthly the managing director publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number dec 20xx year period ended explanations of items law sec_501 of the internal_revenue_code irc exempts from federal_income_tax organizations which are organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual tax reg sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt tax reg sec_1_501_c_3_-1 states that an organization may be exempt as an organization described in sec_501 if it is organized and operated exclusively for one or more of the following purposes religious charitable scientific testing for public safety literary educational or prevention of cruelty to children or animals reg c -1 c provide that an organization is operated exclusively for charitable purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 reg c -1 b provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization's assets will be considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes or to the federal government or to a state_or_local_government for a public purpose or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized however an organization does not meet the organizational_test if its articles or the law of the state in which it was created provide that its assets would upon dissolution be distributed to its members or shareholders sec_509 of the irc specifies such public_charities normally receive more than one- third of its support in each taxable_year from any combination of gifts grants contributions or membership fees and from gross_receipts from admissions sales of merchandise performance of services or furnishing of facilities revproc_90_27 1990_1_cb_514 date states that a ruling or determination_letter recognizing exemption may be revoked or modified by a notice to the taxpayer to whom the ruling or determination_letter originally was issued enactment of legislation or ratification of a tax_treaty a decision of the united_states supreme court issuance of temporary or final regulations or issuance of a revenue_ruling revenue_procedure or other statement published in the internal_revenue_bulletin the revocation or modification may be retroactive if the form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service e schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number dec 20xx year period ended explanations of items organization omitted or misstated a material fact operated in a manner materially different from that originally represented or in the case of organization to which sec_503 applies engaged in a prohibited_transaction with the purpose of diverting corpus or income of the organization from its exempt_purpose and such transaction involved a substantial part of the corpus or income of such organization where there is a material_change inconsistent with exemption in the character the purpose or the method of operation of an organization revocation or modification will ordinarily take effect as of the date of such material_change govt position since the organization has failed to carry on exempt operations since january 20xx through the present this constitutes a failure to meet the operational_test and thus it does not qualify for tax exemption under section sec_501 of the irc taxpayer position the taxpayer has stated that they wish to terminate the organization but has not shown any progress towards meeting the requirements for termination as to their funds on hand it is not clear if the organization believes that prior period losses reduce the amount of net assets to be given to a qualifying charity conclusion the organization does not qualify for exemption under sec_501 therefore its tax exempt status should be revoked effective january 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


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 january cc ita b04 conex-152170-08 number info release date uil ------------------------------ ------------------------ ------------- ------------------------------- dear ----------------- i am responding to your letter to president george w bush dated date which was referred to this office by the white house and the commissioner of internal revenue your letter pertains to the time available to complete deferred like-kind_exchanges under sec_1031 of the internal_revenue_code sec_1031 provides that no gain_or_loss is recognized on the exchange of property held for productive use in a trade_or_business or for investment if the property is exchanged solely for property of like_kind that is to be held either for productive use in a trade_or_business or for investment sec_1031 allows taxpayers to structure deferred like-kind_exchanges under sec_1031 property may be treated as like-kind_property if it is a identified as property to be received in the exchange replacement_property on or before the day that i sec_45 days after the date on which the taxpayer transfers the property relinquished in the exchange relinquished_property and b received before the earlier of the date that i sec_180 days after the date on which the taxpayer transfers the relinquished_property or the due_date determined with regard to extensions for the transferor's federal_income_tax return for the taxable_year in which the transfer of the relinquished_property occurs in your letter you suggest that the time period to complete a sec_1031 exchange be changed to permit a taxpayer to obtain a 1-time automatic_extension of an additional days to complete the exchange you request this change be made either by the internal_revenue_service or by congress and provide suggested statutory language that would amend sec_1031 in a recent telephone conversation you and ----- --------------------------- of this office both concluded that the change you suggest to sec_1031 would require congressional rather than administrative action accordingly pursuant to that conversation we will refer your letter to the office_of_tax_legislative_counsel tlc of the united_states department of conex-152170-08 the treasury for that office’s consideration as you requested we will inform tlc that you would be happy to discuss your suggestion further with them either by letter or by tlc calling you at ----- ------------- thank you for your interest in this matter if we can assist you further please call ---------- --------------or me at -------------------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting


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 fip b02 plr-108241-13 date date legend taxpayer lp state a year y percent state b -------------- ----------------------------------- -------------- -------------------------------------------- --------------- -------------- dear ------------------- this is in reply to a letter dated date requesting a ruling that pursuant to sec_857 of the internal_revenue_code the gain taxpayer realizes from the sale of its assets pursuant to a plan_of_liquidation will not be net_income derived from a prohibited_transaction as defined in sec_857 facts taxpayer is a state a corporation that has elected to be taxed as a real_estate_investment_trust reit under sec_856 beginning in year and for each taxable_year thereafter through subsidiary entities that are generally taxed as disregarded entities for federal_income_tax purposes taxpayer primarily owns and leases residential real_estate to third parties lp a state b limited_partnership owns a y percent interest in taxpayer in order to facilitate the winding down and dissolution of lp taxpayer intends to adopt a plan_of_liquidation pursuant to which it will dispose_of all of its assets and liquidate plr-108241-13 law and analysis sec_857 imposes a percent tax on a reit’s net_income from prohibited_transactions sec_857 defines the term prohibited_transaction as the sale_or_other_disposition of property described in sec_1221 that is not foreclosure_property sec_1221 property in turn consists of property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business sec_857 provides that losses attributable to prohibited_transactions are not taken into account in determining the amount of net_income_derived_from_prohibited_transactions sec_857 excludes certain_sales from the definition of a prohibited_transaction under sec_857 the term prohibited_transaction does not include the sale of property which is a real_estate asset as defined in sec_856 and which is described in sec_1221 if -- i the reit has held the property for not less than years ii the aggregate expenditures made by the reit or any partner of the reit during the 2-year period preceding the date of sale that are includible in the basis of the property do not exceed percent of the net selling_price of the property iii i during the taxable_year the reit does not make more than sales of property other than sales of foreclosure_property or sales to which sec_1033 applies or ii the aggregate bases as determined for computing earnings_and_profits of property other than sales of foreclosure_property or sales to which sec_1033 applies sold during the taxable_year does not exceed percent of the aggregate bases of all the assets of the reit as of the beginning of the taxable_year or iii the fair_market_value of property other than sales of foreclosure_property or sales to which sec_1033 applies sold during the taxable_year does not exceed percent of the fair_market_value of all the assets of the reit as of the beginning of the taxable_year iv in the case of property which consists of land or improvements not acquired through foreclosure or deed in lieu of foreclosure or lease termination the reit has held the property for not less than years for production of rental income and v if the requirement of clause iii i is not satisfied substantially_all of the marketing and development_expenditures with respect to the property were made through an independent_contractor as defined in sec_856 from whom the reit itself does not derive or receive any income the legislative_history underlying sec_857 which was added to the code by the tax reform act of indicates that the purpose of that section was to prevent a reit from retaining any profit from ordinary retailing activities such as sales to plr-108241-13 customers of condominium units or subdivided lots in a development project s rep no 84th cong 2d sess vol c b to determine whether a taxpayer holds property primarily_for_sale_to_customers in the ordinary course of its trade_or_business the tax_court has held that several factors must be considered none of which is dispositive among those factors are the nature and purpose of the acquisition of the property and the duration of the ownership the extent and nature of the taxpayer’s efforts to sell the property the number extent continuity and substantiality of the sales the extent of subdividing developing and advertising to increase sales and the time and effort the taxpayer habitually devoted to the sales generally it is the purpose for which property is held at the time of the sale that is determinative although earlier events may be considered to decide the taxpayer’s purpose at the time of the sale see 89_tc_467 taxpayer has made the following representations that address its purposes with respect to the properties at issue taxpayer represents that it acquired the properties with the intent to own the properties for a long-term_holding_period and to derive its profits from capital appreciation and rental income from the properties the disposition of the properties is pursuant to a plan_of_liquidation no individual property to be disposed of has been owned for fewer than seven years all the individual properties have been operated as rental properties for at least two years taxpayer will use one or more independent third party brokers from which taxpayer derives no income to dispose_of the properties conclusion based on the facts presented and representations made we conclude that the gain recognized from the proposed sale of the properties pursuant to the plan_of_liquidation will not be treated as income derived from a prohibited_transaction under sec_857 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed with regard to whether taxpayer qualifies as a reit under subchapter_m of the code sec_4 of revproc_2013_3 sets forth those areas in which rulings or determination letters will not ordinarily be issued by the service not ordinarily means that unique and compelling reasons must be demonstrated to justify the issuance of a ruling or determination_letter see revproc_2013_3 sec_2 section dollar_figure of revproc_2013_3 provides that one of the areas in which rulings or determination letters will not ordinarily be issued is any matter dealing with the question of whether property is held primarily_for_sale_to_customers in the ordinary course of a trade_or_business in this case taxpayer has demonstrated unique and compelling reasons to justify issuance of the ruling plr-108241-13 this ruling is directed only at the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the terms of a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions products


internal_revenue_service number release date index number - -------------------------------------------------- --------------------------------- ------------------------ --------------------------------- department of the treasury washington dc person to contact ---------------------- --------- ------------- telephone number --------------------- refer reply to cc psi - plr-149275-05 date december ------------ ---------------------- --------------------------------- legend x --------------------------------------------------- state a ----------------------------------------------------- trust ------------------------------------------------------ date year dear ------------------ correspondence submitted on behalf of x requesting that the service grant x an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code this letter responds to a letter dated date and subsequent ------------------------------ ---------------- ------- the information submitted states that x is a state limited_liability_company a owned an interest in x through trust a grantor_trust on date of year a died x inadvertently failed to timely file a sec_754 election sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such plr-149275-05 an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years a transfer of an interest in a partnership on the death of a partner is eligible for the sec_754 election the value of the partnership_interest reported on the estate_tax_return including discounts is the value used to determine the basis of the partnership_interest and the adjustment to basis of partnership property under sec_743 and sec_754 see generally sec_1_1014-3 sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective year with the appropriate service_center a copy of this letter should be attached to the sec_754 election a copy is enclosed for that purpose as a condition for this late election relief x must amend its federal_income_tax except as specifically set forth above no opinion is expressed concerning the returns consistent with x having made a timely sec_754 election effective year federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is plr-149275-05 of the code provides that it may not be used or cited as precedent being forwarded to x's authorized representative enclosures sincerely yours copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries