department of the treasury internal_revenue_service te_ge eo examinations commerce street mc4920dal dallas tx tax_exempt_and_government_entities_division release number release date ge ee date may taxpayer_identification_number person to contact employee identification contact telephone number in reply refer to te_ge review staff ‘ last date for filing a petition with the tax_court aug-8 certified mail - return receipt requested dear this is a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective september 20xx our adverse determination was made for the following reasons contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code 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 june 20xx and for all years thereafter organizations described in sec_501 and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to demonstrate that you are operated exclusively for exempt purposes within the meaning of sec_501 because you have ceased all operations 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 before the day after the date this determination was mailed to you if you wish to seek review of our determination please contact the clerk of the respective 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 court for rules and the appropriate forms regarding filing petitions for declaratory_judgment by referring to the enclosed publication please note that the united_states tax_court is the only one of these courts where a declaratory_judgment action can be pursued without the services of a lawyer you may write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc u s district_court for the district of columbia constitution ave n w washington dc the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights we can offer help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your tax problem with the irs if you qualify for assistance which is always free we will do everything possible to help you visit taxpayer_advocate its gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours fv farah maria hooke director eo examinations enclosures publication department of the treasury internal_revenue_service y irs tax exempt and government entities exempt_organizations examinations certified mail return receipt requested date july taxpayer_identification_number form tax_year s ended june person to contact id number employee id contact numbers telephone fax a manager's name id number employee id manager's contact number response due_date date 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 lf we don't hear from you lf 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 jegal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status lf 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 dear 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 fetter 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 mapaapole ma hooke director eo camnnatons enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit form 886-a fev date explanations of items name of taxpayer year period ended june 20xx tax identification_number issues whether continues to qualify for exemption as an organization described in the internal_revenue_code sec_501 because of no operation or activity facts was incorporated under the state of on october 19xx article ill purpose states the corporation is organized to purchase construct and thereafter to own maintain and operate facilities to minister to the physical emotional and spiritual requirements of ill senile aged and infirm persons’ amended articles of incorporation was filed september 19xx with secretary of state office the form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code was signed on june 19xx the purpose stated in the application is to provide a bed nursing home serving the elderly with services to include physical therapy pharmacy and social services activities also include operating a o-bed retirement apartments near the nursing home under hud project for the elderly revenue retirement apartment rents and rent supplements section hud housing act granted exemption under c and a on december 19xx per the application revenue was expected to be from supporter donations nursing home was the form_990 for tax_year ended june 20xx was selected for examination the form_990 states in part the organization leases a nursing home building and a related chapel to an unrelated company part viii statement of revenue reports gross_income in the following amounts contributions gifts and grants dollar_figure investment_income dollar_figure and gross rents dollar_figure expenses in the amount of -dollar_figure the organization was included in the consolidated independent audited financial statements for part of the form_990 reports total revenue less and subsidiaries provided a copy of a resolution of the board_of trustees of during the examination september 20xx per the resolution anonprofit charitable limited_liability_company of which provide documentation of the actual distribution of its assets during the examination the president ceo and executive vice president acknowledge in the initial interview that the organization ceased operations on september 20xx resolved to contribute their assets to is the sole member adopted did not answered yes to the question did the organization sell exchange in part iv of the form_990 dispose_of or transfer more than of its net assets the form_990 balance_sheet reports an end of the year balance of zero for land building and equipment the schedule n reports the land and buildings date of distribution as september 20xx the reported fair_market_value of assets distributed was dollar_figure to single member llc secretary of state certificate of organization and their former name was per amended certificate of restated articles their name changed to on september 20xx the same board_of directors including board officer ceo will govern was established december 20xx per schedule a part vi of entity has ceased operations and will be dissolved in the next months unaudited form 990-ez for the tax_year ended june 20xx states the catalog number 20810w form 886-a page_1 publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer year period ended june 20xx tax identification_number secretary of state website shows the organization was administratively dissolved with the state of on december 20xx for failure_to_file its annual registration since year 20xx law sec_501 exempts from federal_income_tax organizations which are organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office tax reg sec_1_501_c_3_-1 states that an organization may be exempt as an organization described in c 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 tax reg sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section tax reg sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 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 organization omitted or misstated a material fact operated in a manner materially different from that originally represented or in the case of organizations to which sec_503 applies engaged in a prohibited_transaction with the purpose of diverting corpus or income of the organization from tis 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 in cases where a ruling or determination_letter was issued in error or is no longer in accord with the holding of the service when sec_7805 relief is granted see sec_15 and of revenue_procedure retroactivity of the revocation or modification ordinarily will be limited to a date not earlier than that on which the original ruling or determination_letter is modified or revoked revrul_58_617 1958_2_cb_260 date rulings and determinations letters granting exemption from federal_income_tax to an organization described in sec_501 of the internal revenue department of the treasury-internal revenue service catalog number 20810w form 886-a publish no irs gov page schedule number or exhibit form 886-a ‘eaiv sapiisly explanations of items name of taxpayer tax identification_number year period ended june 20xx code of to which contributions are deductible by donors in computing their taxable_income in the manner and to the extent provided by sec_170 of the code are effective only so long as there are no material changes in the character of the organization the purposes for which it was organized or its methods of operation the district_director of the internal revenue for the district in which the organization is located must be advised immediately of any such changes in order that a determination may be made as to the effect the changes may have upon the exempt status of the organization see generally sec_1_501_a_-1 and sec_1_6033-1 of the income_tax regulations failure to comply with this requirement may result in serious consequences to the organization for the reason that the ruling or determination_letter holding the organization exempt may be revoked retroactively to the date of the changes affecting its exempt status depending upon the circumstances involved and subject_to the limitations on retroactivity of revocation found in sec_503 of the code taxpayer’s position unknown at this time government’s position and conclusion the service position is that the organization has been inactive since september 20xx operations have ceased for this entity as such exemption status under sec_501 the effective date of revocation will be july 20xx fails to meet the operational requirements to continue its if you agree to this conclusion please sign the attached forms if you disagree please submit a written_statement of your position with supporting law a form 886-a of the treasury-internal revenue service publish no irs gov department catalog number 20810w - page_


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date genin-116862-09 ------------------ ------------------------------------------ ------------------------------ uil dear ----- --------- thank you for your letter of february to commissioner shulman regarding the tax consequences to victims of the investment fraud mr bernard l madoff perpetrated on date we issued guidance revrul_2009_9 and revproc_2009_20 on the tax treatment of losses from so-called ponzi schemes similar to that mr madoff operated i am enclosing copies for your information revrul_2009_9 explains the income_tax law that applies to an investor who loses money in a fraudulent investment arrangement it provides that an investor who was the victim of a fraudulent investment arrangement is entitled to a theft_loss deduction that is not limited by the rules that apply to capital losses investment theft losses are not subject_to limitations that apply to personal casualty and theft losses the theft_loss is deductible in the year the fraud is discovered except to the extent the investor has a reasonable_prospect_of_recovery the amount of the theft_loss includes not only the investor's unrecovered investment but also amounts reported as income from the investment in prior years and reinvested in the fraudulent investment arrangement a theft_loss deduction that creates a net_operating_loss for the investor can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years genin-116862-09 to claim a theft_loss deduction in any taxable_year an investor must prove that the loss was due to theft and that no reasonable prospect exists of recovering the investment investors often cannot make highly factual determinations with certainty in the year the loss is discovered for this reason we published revproc_2009_20 to provide a simplified_method for investors to compute and report their losses from fraudulent investment schemes this revenue_procedure generally allows an investor who was a victim of mr madoff’s fraud to claim a theft_loss in the amount the investor may deduct is up to percent of the loss less the amount of reimbursement he or she expects to receive as an advance for customer claims from the securities investor protection corporation sipc or from private insurance or other contractual arrangements that guarantee the investor against loss i hope this information is helpful please call me at ---------------------if i can further assist you sincerely john p moriarty chief branch office of associate chief_counsel income_tax and accounting enclosures


cca_2016090114084732 id uilc number release date from sent thursday september pm to cc bcc subject issue snapshot good afternoon ------- this is in response to the issue snapshot on sec_4962 we recommend that in this part of the issue snapshot a discussion covering the following topics should be included include a short summary of the code’s provisions governing private_foundations ie recite the code’s rules to which the organization must adhere to maintain the status as a private_foundation describe the meaning of a taxable_event per sec_4962 and give a few examples of events that will cause the entity to be subject_to a first_tier_tax unless the entity shows reasonable_cause and that it acted in good_faith explain how the standards for showing reasonable_cause as a defense to the additions to tax for late filing payment or the accuracy-related_penalty under sec_6651 and sec_6662 aid in analyzing if a foundation shows reasonable_cause under sec_4962 more specifically the narrative should say that the foundation would have to prove that its directors used ordinary business care and prudence in conducting the foundation’s affairs transacting business for the relevant time period but nonetheless incurred a taxable_event explain that the inquiry regarding reasonable_cause is based on all facts and circumstances leading up to the taxable_event did the directors make an honest good_faith effort to determine if the proposed course of action could lead to a taxable_event did the foundation proceed on the advice of a competent tax advisor who opined that the transaction in question would not be considered a taxable_event did the foundation supply the tax professional with all of the relevant information was the professional advisor qualified to render an opinion on the transaction in question consider adding a discussion and perhaps a hypothetical example illustrating that a foundation cannot qualify for the defense when its managers directors act willfully that is when the evidence shows that they were aware of the code’s requirements but nonetheless caused the foundation to incur a taxable_event the author may wish to incorporate this below into the discussion that is already included under the heading issue indicators below if you have any questions give me a call thanks --------------- ------------------------------------ ----------------------------------------- ---------------------------------- --------------------


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 b1 plr-150905-08 date date legend x ------------------------ -------------------------------------------------- country date ------------ ------------------ dear -------------- this letter responds to a request dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to treat x as a partnership for federal tax purposes under sec_301_7701-3 facts according to the information submitted x is an entity organized under the laws of country x represents that as of date x was eligible to make an election under sec_301_7701-3 to be taxed as a partnership for federal tax purposes however the form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two plr-150905-08 members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely upon the information submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat x as a partnership for federal tax purposes effective date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-150905-08 except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of the facts described under any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curtis g wilson curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court toni l sarchett petitioner v commissioner of internal revenue respondent docket no filed date toni l sarchett pro_se carolyn a schenck for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure in petitioner’s federal income taxes for after a concession by respondent the issue for decision is whether petitioner is entitled to deduct as alimony under sec_215 dollar_figure in payments made to her former spouse unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in california at the time that she filed her petition petitioner was previously married to jon sarchett her former spouse the marriage of petitioner and her former spouse was dissolved through proceedings commenced in the los angeles county superior court in and concluded in attached to and made part of the judgment of dissolution of the marriage was the agreement between petitioner and her former spouse each represented by attorneys as to spousal support and property division section i of the agreement provided for the division of community_property after listing specifically property awarded to petitioner or to her former spouse the agreement provided ii equalization payment a in order to equalize the division of the parties community_property and debts toni sarchett shall pay to jon sarchett the sum of two hundred twenty-five thousand dollars said sum shall be paid to jon sarchett as set forth in the following schedule toni sarchett shall pay to jon sarchett the sum of one hundred twenty-five thousand dollars on or before date toni sarchett shall pay to jon sarchett the sum of twenty-five thousand dollars on or before date toni sarchett shall pay to jon sarchett the sum of twenty-five thousand dollars on or before date toni sarchett shall pay to jon sarchett the sum of twenty-five thousand dollars on or before date and toni sarchett shall pay to jon sarchett the sum of twenty-five thousand dollars on or before date in a separate section dealing with spousal support petitioner was ordered to pay to her former husband the sum of dollar_figure per month continuing until death of either party remarriage of the supported party or further order of court payment of the spousal support was to be suspended for so long as toni sarchett is in full compliance with the equalization payment schedule set forth above in paragraph ii the agreement further provided that in the event of default in any of the equalization payments the spousal support arrears would become due and payable from date through the date of default and the monthly spousal support payments would be reinstated and continue until the death of either party remarriage of jon sarchett or further order of court during petitioner made spousal support payments to her former spouse totaling dollar_figure petitioner also made four equalization payments totaling dollar_figure consisting of four payments consistent with section ii of the agreement quoted above on form_1040 u s individual_income_tax_return for petitioner claimed a deduction for alimony paid in the total amount of dollar_figure of that amount dollar_figure remains in dispute opinion sec_215 provides a deduction to an individual equal to the alimony or separate_maintenance payments paid during that individual’s taxable_year sec_215 defines alimony as any payment that is includable in the gross_income of the payee under sec_71 sec_71 provides for the inclusion in income of any alimony or separate_maintenance payments received during the taxable_year sec_71 defines alimony_or_separate_maintenance_payment as any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse under sec_71 if the payor is liable for any payment after the recipient’s death none of the payments required will be deductible as alimony by the payor see 407_f3d_186 3d cir affg tcmemo_2003_163 whether a postdeath obligation exists may be determined by the terms of the divorce_or_separation_instrument or if the instrument is silent on the matter by state law 309_us_78 see also kean v commissioner supra respondent argues that the payments comprising the dollar_figure in dispute are clearly part of a division of property under the settlement agreement petitioner relies on cases holding that the characterization of payments in a decree as alimony or property settlement is not controlling see eg baker v commissioner tcmemo_2000_164 she correctly states a general_rule but the general_rule does not aid her case whether the payments satisfy sec_71 and in this case particularly sec_71 is controlling see eg johanson v commissioner tcmemo_2006_105 berry v commissioner tcmemo_2005_91 in this case the settlement agreement requires petitioner to make the equalization payments until a fixed amount dollar_figure is paid in contrast to the spousal support awarded in the agreement the obligation to make the equalization payments would continue without regard to the death of petitioner’s former spouse thus the payments are not deductible as alimony petitioner argues that the payments would terminate on death under state law because they are alimony there is no persuasive evidence that the payments were alimony however the evidence is to the contrary and there is no need to resort to state law to determine the character of the payments we have considered the other arguments of the parties and they are irrelevant to our decision to reflect respondent’s concession decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------ ------------------------ --------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-143293-08 date november legend ------------------------- x ---------------------------------- state ------------- d1 d2 --------------------- ------------------------- dear ----------------- this letter is in response to the letter dated date submitted on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes facts according to the information submitted x a limited_partnership was formed pursuant to the laws of state on d1 x intended to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d2 however x inadvertently failed to timely file a form_8832 entity classification election law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity plr-143293-08 recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 an eligible_entity with at least two members can elect to be classified as an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that a domestic eligible_entity with at least two owners will be classified as a partnership unless it elects otherwise sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts 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 to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form plr-143293-08 except as specifically provided herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code pursuant to the power_of_attorney on file with this office a copy of the letter is being sent to your authorized representative sincerely curt g wilson curt g wilson deputy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number --------------------------------------- --------------------------- -------------------------------- -------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number --------------------- refer reply to cc psi b02 plr-101361-12 date date x state date --------------------------- ------------------------------- --------- ------------------- dear -------------------- this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code the information submitted states that x was formed on date as a limited_liability_company under the laws of state x intended to elect to be treated as an association_taxable_as_a_corporation and to elect to be treated as an s_corporation for federal tax purposes with both elections effective date however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed for x sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a domestic eligible_entity elects otherwise the entity is a plr-101361-12 a partnership if it has two or more members or b disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register 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 the 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 a 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 sec_1362 provides that a small_business_corporation may make an election to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 an s election made after the first two and one-half months of a corporation's taxable_year results in the corporation not be treated as an s_corporation until the taxable_year following the year in which the s election is filed sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the plr-101361-12 election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that x has established reasonable_cause for failing to timely make an election to be an s_corporation and thus is eligible for relief under sec_1362 provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date if x files a completed form_2553 effective date with the appropriate service_center within one hundred and twenty days from the date of this letter a copy of this letter should be attached to the election except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code including whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely associate chief_counsel passthroughs special industries bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court camille d sands et al petitioners v commissioner of internal revenue respondent docket nos filed date thomas j mitchell for petitioners patrick j murphy pro_se in docket no pamela s wilson and elizabeth a maresca for respondent memorandum opinion clapp judge respondent determined the following deficiencies additions to tax and accuracy-related_penalties in petitioners' federal income taxes cases of the following petitioners are consolidated herewith kenneth and maria heller docket no and patrick j murphy docket no camille d sands - docket no additions to tax sec sec sec sec sec year deficiency a a a a a b dollar_figure dollar_figure -- -- dollar_figure big_number -- -- big_number big_number -- -- dollar_figure big_number __________________ fifty percent of the interest due on the portion of the underpayment attributable to negligence kenneth and maria heller - docket no accuracy-related_penalty year deficiency sec_6662 dollar_figure dollar_figure patrick j murphy - docket no accuracy-related_penalty year deficiency sec_6662 dollar_figure dollar_figure respondent also determined that petitioners are liable for increased interest pursuant to sec_6621 formerly d for each of the taxable years in issue sec_6621 was redesignated as sec_6621 by sec c a of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 and repealed by sec b of the omnibus budget reconciliation act of obra publaw_101_239 103_stat_2106 effective for tax returns due after date obra sec d 103_stat_2400 for convenience we continued the issues for decision are whether petitioner sands is entitled to deductions related to lone star associates lone star a partnership we hold that she is to the extent stated herein whether pursuant to the doctrines of res_judicata or collateral_estoppel respondent must offer petitioner sands a settlement for the taxable years and analogous to the settlement between petitioner murphy and respondent for the taxable years and we hold that respondent is not required to offer sands the settlement whether lone star received dollar_figure from electro in cancellation of a lease we hold that it did not whether lone star recognized income when it was released from a debt obligation we hold that it did whether in petitioner murphy owned a percent interest or a 50-percent interest in lone star we hold that murphy owned a 53-percent interest in lone star in whether petitioners are liable for increased interest under sec_6621 we hold that they are not whether petitioner sands is liable for additions to tax for negligence under sec_6653 and for the taxable continued refer to this section as sec_6621 the annual rate of interest under sec_6621 for interest accruing after date equal sec_120 percent of the interest payable under sec_6601 with respect to any substantial_underpayment attributable to tax- motivated transactions years and and under sec_6653 and b for the taxable_year we hold that she is not whether petitioner sands is liable for an addition_to_tax under sec_6661 for a substantial_understatement of tax for each of the taxable years and we hold that she is whether petitioners heller and murphy are liable for an accuracy-related_penalty for a substantial_understatement_of_income_tax under sec_6662 for the taxable_year we hold that they are all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated we have combined our findings_of_fact and opinion some of the facts are stipulated and are so found we incorporate by reference the stipulation of facts and attached exhibits at the time the petitions were filed kenneth and maria heller and camille d sands sands resided in new york new york and patrick j murphy murphy resided in brooklyn new york murphy an attorney was the only witness at trial these cases relate to lone star in which sands kenneth heller heller and murphy were each general partners respondent determined deficiencies as to sands for the taxable years and on the theory that the deductions taken by lone star should be disallowed respondent determined deficiencies as to heller and murphy for the taxable_year on the theory that lone star recognized income when it was released from a debt obligation a background in murphy represented micro-bio ireland ltd micro- bio a corporation formed under the laws of ireland in the acquisition of a chlor-alkali system a system which produces chlorine murphy traveled to arizona with micro-bio executives to see a chlor-alkali system in use micro-bio executives liked what they saw and decided to purchase a chlor-alkali system from eltech ltd eltech the manufacturer of the chlor-alkali system on date micro-bio entered into a letter agreement with eltech in which micro-bio agreed to purchase the chlor- alkali system the relevant terms of the letter agreement include the following a lease period of years with interest calculated on the complete contract amount from the shipment date of the equipment payments were to commence days after plant startup and were to continue for consecutive months the equipment passed to micro-bio after the 5-year lease period the equipment remained the property of eltech at all times throughout the 5-year lease period micro-bio had the option to obtain a third-party lease or financing subject_to eltech's approval micro-bio would insure the equipment and micro-bio would pay a fee for any technical assistance provided by eltech during the lease period no purchase_price was set forth in the letter agreement but the parties agree that the purchase_price due eltech from micro- bio for the chlor-alkali system was dollar_figure the letter agreement purports to be a lease between eltech and micro-bio however we find that the terms of the transaction constitute a sale in which eltech retained a security_interest see generally 12_tc_446 the letter agreement provided that the conditions set forth therein together with eltech's other required lease conditions shall be formalized in a lease document entered into between eltech and micro-bio no such lease document has been made part of the record based on murphy's description of the transactions and from other documents that incorporate by reference the date agreement we find that eltech and micro-bio did enter into an agreement in date date agreement in which micro-bio agreed to purchase the chlor-alkali system from eltech for a purchase_price of dollar_figure eltech financed the purchase with a nonrecourse debt of dollar_figure the record does not state whether the debt was recourse or nonrecourse we find for purposes of this opinion that the debt was nonrecourse since there apparently was no attempt by eltech to recover from lone star or the general partners personally after lone star assumed micro-bio's obligations to eltech as noted infra a principal payment of dollar_figure was due in the first year and principal payments of dollar_figure were due in each of year sec_2 through no evidence shows the interest due on the unpaid principal balance micro-bio never completed the purchase micro-bio preferred to lease the chlor-alkali system rather than purchase it murphy saw this as an opportunity and he formed lone star a general_partnership to purchase the chlor-alkali system from eltech and then lease the system to electro systems electro a subsidiary of micro-bio sands heller murphy and two other individuals not involved in these cases miller and wiener were partners in lone star murphy managed lone star and lone star intended to profit from the venture each partner's_distributive_share of income gain loss deduction or credit was made in accordance with the partner's_interest_in_the_partnership on date micro-bio and lone star entered into an agreement micro-bio lone star agreement whereby micro-bio sold to lone star the contract rights to acquire the chlor-alkali system from eltech pursuant to the date agreement lone star paid micro-bio dollar_figure for micro-bio's contract rights and lone star assumed micro-bio's obligations to eltech the micro-bio lone star agreement also provided that micro- bio would lease the chlor-alkali system from lone star for years micro-bio lone star lease agreement payments under the micro-bio lone star lease agreement consisted of dollar_figure for year and dollar_figure in each of year sec_2 through plus a further payment by micro-bio to lone star of dollar_figure per annum over the 5-year period at the end of the 5-year lease period micro-bio could purchase the chlor-alkali system from lone star for dollar_figure or micro-bio could lease the system for the next succeeding years for dollar_figure per annum lone star entered into a lease agreement with miro-bio's subsidiary electro lone star-electro lease in which lone star agreed to lease the chlor-alkali system to electro the loan star-electro lease is not dated the lone star-electro lease provided for monthly payments of dollar_figure for the first months and dollar_figure for the following months for total payments of dollar_figure around date electro installed and put into service the chlor-alkali system problems plagued electro's operation of the chlor-alkali system and it never operated properly in electro stopped making rental payments to lone star under the lone star-electro lease and in turn lone star stopped making payments to eltech lone star depreciated the chlor-alkali system in the taxable years and and passed the depreciation_deductions through to its partners the poor operation of the chlor-alkali system led to disputes between lone star eltech micro-bio and electro these disputes were settled in under the terms of the settlement eltech forgave and canceled payment of the dollar_figure balance due from lone star at the time of the settlement lone star's adjusted_basis in the chlor-alkali system was dollar_figure dollar_figure cost_basis less dollar_figure of depreciation_deductions at the direction of eltech lone star as beneficial_owner transferred full ownership of the chlor-alkali system to electro and agreed to relieve electro of all obligations under the lone star-electro lease electro agreed to pay lone star some amount which was determined by respondent to be dollar_figure but electro never fulfilled that obligation b petitioner sands respondent argues that sands deducted amounts in excess of her distributive shares of the partnership items sands owned a 5-percent 7-percent and 5-percent partnership_interest in lone star during the taxable years and respectively and her distributive_share of the partnership items for each taxable_year is limited accordingly depreciation_deductions respondent argues that sands is not entitled to depreciation_deductions because the chlor-alkali system was never placed_in_service electro installed and operated the chlor-alkali system in and we find that the system was placed_in_service at that time we recognize that problems plagued the system's operation but those problems were not so severe as to prevent the system from being placed_in_service respondent argues that we should disregard lone star's dollar_figure cost_basis in the system because there were no arm's- length negotiations over the purchase_price to support this argument respondent notes that murphy served as legal counsel for micro-bio when micro-bio acquired the chlor-alkali system technology from eltech there is no evidence that murphy influenced the terms of the transaction between micro-bio and eltech before lone star agreed to purchase the chlor-alkali system from eltech murphy reviewed financial projections prepared by micro-bio after reviewing the information at his disposal murphy concluded that the purchase of the chlor-alkali system was a sound investment while the matter is not free from doubt we find that lone star acquired the chlor-alkali system in an arm's-length_transaction sands is entitled to her share of the lone star depreciation deduction in each of the taxable years and based on the foregoing facts interest deductions and other deductions lone star reported interest_expenses of dollar_figure and dollar_figure for taxable years and respectively lone star reported other deductions of dollar_figure and dollar_figure for taxable years and respectively sands deducted her proportionate shares of these items and respondent disallowed these deductions sands offered no evidence to substantiate that lone star paid the amounts in dispute sands submitted a payment notice addressed to her showing interest due on a loan in which she was the borrower petitioners submitted two other statements showing interest_paid on a loan to kips bay associates an entity that murphy described as an investment of his there is no evidence that the interest amounts shown on the loan statements were lone star's obligations or that lone star paid those amounts there is no evidence that lone star paid the other deductions during the years in issue we sustain respondent's determination as to these items application of res_judicata or collateral_estoppel sands argues that the terms of two settlements entered into between murphy and respondent should apply to her as well sands argues that the doctrines of collateral_estoppel and res_judicata bind respondent to this result we do not agree sands rests her argument on two cases filed by murphy which involved murphy's taxable years and murphy v commissioner docket no and murphy v commissioner docket no docket nos and those cases involved murphy's deductions associated with lone star those cases were never tried and sands was not a party in either case murphy and respondent settled those cases and agreed that no deficiencies in income taxes were due and that no addition_to_tax under sec_6651 was due for each of murphy's taxable years and this court entered a stipulated decision in each case collateral_estoppel and res_judicata protect litigants from the burden of relitigating an identical issue and promote judicial economy by preventing redundant litigation under the doctrine_of collateral_estoppel or issue preclusion the judgment in a prior lawsuit precludes in the second cause of action litigation of issues actually litigated and necessary to the outcome of the first action 439_us_322 the doctrine_of res_judicata or claim preclusion precludes a party to a suit and its privies from again litigating a cause of action in which a court of competent jurisdiction has entered a final judgment on the merits 91_tc_273 for res_judicata to apply the party invoking the doctrine must show the cause of action in the prior case is the same cause of action as in the instant case petitioner qualifies as a party or a privy of a party in the prior case and there was a final judgment on the merits in the prior case 333_us_591 98_tc_383 we have not decided the correctness of respondent's determinations for murphy's taxable years and this court held no trial received no evidence and made no finding of fact murphy and respondent disposed of docket nos and through settlement the stipulated decisions in docket nos and were only a pro forma acceptance of an agreement between murphy and respondent see 345_us_502 the stipulated decisions do not indicate the reason for the settlement moreover litigants generally arrive at settlement by mutual give and take petitioner sands and respondent are litigating the issues of this case for the first time furthermore a partner solely by reason of the partnership relationship generally is not privy with the other partners since one partner's interest is not derived from another partner but is an independent interest 22_tc_995 it is sands' tax_liabilities not murphy's that are being asserted against her the doctrines of collateral_estoppel and res_judicata are inapplicable here c petitioners murphy and heller lone star's income in taxable_year from the settlement with electro respondent determined that lone star received dollar_figure of taxable_income from electro in to support this determination respondent relies on the following lone star's settlement agreement with electro a handwritten worksheet attached to lone star's u s partnership return of income form_1065 for the taxable_year and a letter dated date from murphy to internal_revenue_service agent ronald sherman sherman in the settlement agreement between lone star and electro electro agreed to pay lone star the sum of dollar_figure murphy signed an affidavit dated date affidavit when he settled docket nos and with respondent in the affidavit murphy stated the settlement provided that electro would make a payment of dollar_figure to lone star and lone star would relieve electro of all obligations under the lease murphy testified that lone star did not receive payment from eltech pursuant to the settlement lone star's form_1065 for the taxable_year dated date includes one income item under other income in the amount of dollar_figure a handwritten worksheet is attached to the form_1065 with the following notations lone star sale of rights receipts - cash forgiven - debt dollar_figure big_number less rights released dollar_figure big_number big_number dollar_figure big_number loss interest murphy testified that he inadvertently attached the worksheet to lone star's form_1065 he testified that he prepared several worksheets and this one related to the possibility of discounting for dollar_figure electro's obligation to pay lone star dollar_figure lone star pursued none of these alternatives in a letter to sherman dated date murphy stated please be advised that lone star's form_1065 will reflect receipt of dollar_figure received as income in partial settlement of its claims we find that lone star did not receive dollar_figure from electro in the items highlighted by respondent indicate that murphy may have intended to collect a payment from electro pursuant to the settlement agreement but we find that no such payment occurred in lone star's disposition of the chlor-alkali system petitioners concede that eltech forgave the debt in the amount of dollar_figure due from lone star petitioners argue that this amount does not constitute income in because the debt was forgiven in and the debt reduction qualifies as a price reduction pursuant to sec_108 petitioners' contention that the discharge_of_indebtedness occurred in directly contradicts murphy's affidavit which provides that in electro micro-bio and eltech settled all their disputes arising from lone star's purchase of the chlor- alkali system the affidavit provides that eltech relieved lone star of its obligation to pay dollar_figure we sustain respondent's determination that the discharge_of_indebtedness in the amount of dollar_figure occurred in we further conclude that the discharge of debt by eltech and lone star's release of its ownership in the chlor-alkali system constitutes a sale_or_exchange see 737_f2d_479 5th cir affg tcmemo_1982_675 88_tc_984 73_tc_15 we reach this conclusion for several reasons first eltech's discharge of the debt and lone star's release of ownership in the chlor-alkali system were part of one settlement second we find that as part of the settlement eltech directed lone star to transfer ownership of the chlor-alkali system to electro rather than have those rights transferred back to eltech third we find incredible the contention that eltech forgave over dollar_figure million in debt owed by lone star while at the same time letting lone star retain some ownership rights in the chlor-alkali system and then in a separate and distinct transaction lone star transferred its ownership rights in the chlor-alkali system to electro we find that eltech's discharge of the debt and lone star's transfer of its ownership rights were part of a single transaction lone star must recognize as gain the excess of the amount of debt forgiven over the adjusted_basis of the chlor-alkali system sec_61 sec_1001 sec_1_1001-2 income_tax regs lone star's partners must take into account their distributive shares of such gain sec_702 as for petitioners' argument under sec_108 that section is not applicable to gains derived from dealings in property gershkowitz v commissioner supra murphy's percentage ownership of lone star in lone star's schedules k-1 partner's share of income credits deductions etc k-1 attached to the forms show the following partners and ownership percentages in lone star sands -- heller murphy dollar_figure miller -- wiener dollar_figure dollar_figure -- total dollar_figure lone star's form_1065 indicates that lone star consisted of five partners and that the partnership had no activity in there are no k-1's attached to lone star's form_1065 if there was a form_1065 it is not part of the record murphy argues that he did not own percent of lone star in and that amounts received by lone star in should be allocated to all five partners according to the ownership percentages we agree by lone star was settling its disputes with eltech electro and or micro-bio we find that the ownership interests for the taxable_year are the same as the ownership interests shown on lone star's form_1065 murphy intended the k-1's to reflect that he and heller were the only partners with any active involvement in lone star during and their involvement stemmed from the ongoing dispute with respondent murphy's filing of an erroneous k-1 in does not alter the ownership interests in lone star d increased interest additions to tax and penalty increased interest pursuant to sec_6621 respondent determined that petitioners are liable for increased interest under sec_6621 with respect to the underpayments for sands' taxable years and and for heller's and murphy's taxable_year sec_6621 provides for an increase in the interest rate to percent of the statutory rate on the underpayments of tax if a substantial_understatement is due to a tax-motivated transaction respondent argues that the underpayments are due to a tax-motivated transaction because lone star's purchase of the chlor-alkali system was not a transaction entered into for profit see 90_tc_656 as for heller and murphy the increased rate of interest under sec_6621 is inapplicable sec_6621 was repealed by sec b of the omnibus budget reconciliation act of obra publaw_101_239 103_stat_2106 effective for tax returns due after date obra sec d 103_stat_2400 murphy's tax_return and heller's tax_return for the taxable_year were due after that date sec_6072 as for sands murphy served as legal counsel for micro-bio when micro-bio executives traveled to arizona to see one of eltech's chlor-alkali systems in operation before lone star agreed to purchase the chlor-alkali system from eltech murphy reviewed financial projections prepared by micro-bio based on this information murphy concluded that the purchase of the chlor-alkali system was a sound investment for lone star technical problems after installation sapped the chlor-alkali system of its profit potential we find sec_6621 inapplicable under these circumstances additions to tax for negligence respondent determined that sands is liable for additions to tax for negligence under sec_6653 and for the taxable years and and sec_6653 and b for the taxable_year sec_6653 imposes an addition_to_tax equal to percent of the underpayment_of_tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations sec_6653 imposes an addition_to_tax equal to percent of the interest payable on the portion of the underpayment that is attributable to negligence for sec_6653 imposes an addition_to_tax equal to percent of the underpayment if any part of the underpayment is attributable to negligence and sec_6653 imposes an addition_to_tax equal to percent of the interest payable on the portion of the underpayment that is attributable to negligence negligence is defined as the lack of due care or the failure to do what a prudent person would do under the circumstances marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 85_tc_934 sands must establish that the negligence additions to tax do not apply 58_tc_757 sands' underpayments stem from her inability to substantiate lone star's expenses failing to keep or produce adequate books_and_records as required by sec_6001 may be justification for imposing the negligence additions to tax 56_tc_248 zafiratos v commissioner tcmemo_1992_135 affd without published opinion 993_f2d_880 3d cir we find that sands is not liable for additions to tax for negligence for the taxable years or sands played a minimal role in lone star's activities she relied on murphy to manage lone star and to keep adequate_records to substantiate lone star's expenses sands had no control_over these matters see 91_tc_686 affd 893_f2d_656 4th cir substantial_understatement addition_to_tax and accuracy- related penalty respondent determined an addition_to_tax under sec_6661 against sands for each of the taxable years and sec_6661 imposes an addition_to_tax equal to percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax 90_tc_498 an understatement exists where the amount of tax shown on the taxpayer's return is less than the amount required to be shown on the return sec_6661 in the case of individuals an understatement is substantial if it exceeds the greater of dollar_figure or percent of the tax required to be shown sec_6661 the amount of the understatement may be reduced under sec_6661 for amounts adequately disclosed or supported by substantial_authority respondent's determination of the addition_to_tax is presumed correct and petitioner must prove otherwise rule a hall v commissioner 729_f2d_632 9th cir affg tcmemo_1982_337 bixby v commissioner supra pincite- respondent determined that petitioners heller and murphy are liable for an accuracy-related_penalty for a substantial_understatement_of_income_tax under sec_6662 for the entire underpayments for their taxable_year sec_6662 imposes a penalty equal to percent of the portion of the underpayment that is attributable to a substantial_understatement_of_income_tax petitioners argue that substantial_authority supports their respective positions substantial_authority exists for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of the authorities supporting contrary positions 942_f2d_444 7th cir affg 94_tc_96 101_tc_225 affd 64_f3d_1406 9th cir sec_1 b income_tax regs in light of our discussion above we conclude that the authorities relied on by petitioners did not constitute substantial_authority accordingly if recomputation of petitioners' tax_liabilities reflects a substantial_understatement petitioner sands is liable for the addition_to_tax and petitioners heller and murphy are liable for the penalty to reflect the foregoing decisions will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-120646-01 date date legend x d1 d2 n1 this responds to a letter dated date submitted on behalf of x requesting a ruling that from d1 to d2 x had only one class of stock within the meaning of sec_1361 of the internal_revenue_code facts x was incorporated on d1 x elected to be treated as an s_corporation for federal tax purposes effective on d1 x’s organizing documents provided for class a and class b stock the class a stock was voting common_stock with a right to distributions the class b stock was non-voting common_stock with no right to distributions on d1 x issued n1 shares of class a stock to each of x’s shareholders no class b stock was issued on d1 or at any time between d1 and d2 on d2 x eliminated all distribution preferences between the class a stock and class b stock law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate other than a_trust described in sec_1361 and other than an organization described in c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that except as provided in sec_1_1361-1 relating to instruments obligations or arrangements plr-120646-01 treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock there was no class b stock outstanding from d1 to d2 so for purposes of the one class of stock requirement it is disregarded conclusion based solely on the facts submitted and representations made we conclude that from d1 to d2 x had only one class of stock within the meaning of sec_1361 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 specifically no opinion is expressed concerning whether the original election made by x to be treated as an s_corporation was a valid election under sec_1362 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david r haglund senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division release number release date date january uniform issue list legend w o o m m m m o t i z z o v h x d a e n n e t n a t y u dear we have considered m’s ruling_request concerning a transfer of assets under sec_501 sec_507 sec_4940 sec_4941 sec_4942 sec_4944 and sec_4945 of the internal_revenue_code facts m is a private_foundation created pursuant to n a_trust agreement dated date with b as trustor n provides that the principal or corpus of which and all income thereof and increment thereto shall be exclusively devoted to and for religious and charitable scientific or literary educational_purposes n appointed b c and d qualification in accordance with n as the initial trustees and appointed e and f as trustees upon their with the passing of years e and f so qualified n trust_indenture provides that the trustees may terminate m at any time by transferring all of its assets to one or more trusts corporations associations or institutions organized and operated exclusively for religious charitable scientific literary or educational_purposes any such transfer to terminate the trust shall be made conditional on the assumption by the transferee or transferees of such obligations then outstanding b and his wife are deceased the present trustees are c d e f and g except for g the other m’s trustees have met periodically and made four trustees are descendants of b and his wife for its taxable_year ending distributions upon the approval of all trustees in accordance with n the assets of m were approximately x the charitable interests and management strategies of m’s trustees have diverged in recent years and they currently are interested in supporting different charities and adopting different in order to resolve these differences the trustees have proposed to management strategies reorganize by transferring of m's assets to o to p and to q while retaining in m is tax exempt the transfer was conditioned upon each entity obtaining a determination that it at the time of the under sec_501 and as a private_foundation under sec_509 transfer of the assets the trustee who has created the new entity would resign as a trustee of m and become a director or a trustee of the new entity together with such trustee’s family upon completion of the asset transfers c and his family would be in sole control of and be trustees of m g the existing non-family trustee will continue as a trustee of m on a year to year basis upon the the designated new trustee of m to be appointed in appointment of the new trustees of m accordance with n is h who is the child of c m will exercise expenditure_responsibility under sec_4945 and sec_4945 over the transfer distributions for a period of three years from the date of the transfer distributions c will continue to serve as a trustee of m p and q are exempt under sec_501 of the code and are classified as private o foundations all of the trustees of m and all of the directors of o p and q are disqualified persons under sec_4941 of the code is anticipated that plans deferred it compensation or expense or other accounts will be provided to the directors of p and o is anticipated that no compensation contributions to employee benefit plans deferred_compensation or expense or other accounts with the no compensation contributions to employee_benefits be provided except that directors the q of to it director secretary treasurer will be paid a salary for the value of her services estimated to be approximate x per year - rulings requested the three distributions will be treated as transfers of assets described in sec_507 of the internal_revenue_code and will neither result in the termination of m’s private_foundation_status under code sec_507 nor subject m to the tax imposed by code sec_507 p and q will o distributions not be treated as newly created organizations as a result of m's the distributions will not constitute either a willful flagrant act or failure to act or one of a series of willful repeated acts or failures to act giving rise to liability for tax under chapter of the code the transfer distributions by the m to o p and q will not be taxable_expenditures by m under sec_4945 of the code as m will exercise expenditure_responsibility under sec_4945 and sec_4945 of the code m and its disqualified persons will neither be deemed to have engaged in an act of self dealing under code sec_4941 nor be subject_to any_tax under code sec_4941 through as a result of the formation of o p and q and the distributions the distributions may be counted toward satisfaction m’s minimum distribution_requirements under code sec_4942 to the extent the transfers meet the requirement of ’ code sec_4942 of the legal accounting and other expenses_incurred by m o p and q in connection with this ruling_request and effectuating the distributions will not constitute taxable_expenditures pursuant to code sec_4945 and will not be considered qualifying distributions under -- code sec_4942 the distributions will not affect the tax exempt status under code sec_501 of m o pandq law sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for the charitable and or other exempt purposes stated in that section ‘ sec_509 of the code describes organizations exempt from federal_income_tax under sec_501 of the code that are private_foundations subject_to the provisions of chapter of the code sec_507 of the code and sec_1_507-1 of the income_tax regulations provide that a private_foundation may voluntarily terminate its private_foundation_status by submitting to the internal_revenue_service a statement of its intention to voluntarily terminate its private_foundation_status pursuant to sec_507 and by paying any termination_tax under sec_507 of the code sec_507 of the code impose excise_tax on a private_foundation which voluntarily terminates its private_foundation_status under sec_507 of the code and provides that this sec_507 tax is equal to the lower_of the aggregate tax benefits that have resulted from the private foundation's exempt status under sec_501 of the code or the value of the net assets of the private_foundation sec_507 of the code concerns the transfer of assets by one private_foundation to one or more other private_foundations and provides that each transferee private_foundation shall not be treated as a newly created organization sec_1_507-1 of the income_tax regulations provides that if a private_foundation transfers all or part of its assets to one or more other private_foundations or one or more private_foundations _and one or more sec_509 or organizations pursuant to a transfer described in sec_507 and sec_1_507-3 such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_1_507-1 and sec_1_507-3 of the regulations provide that a transferor foundation's transfer of assets under sec_507 of the code will not constitute any termination of the transferor foundation's private_foundation_status under sec_509 of the code sec_1_507-3 of the regulations provides that for purposes of part il subchapter_f chapter of the code in the case of a transfer of assets of any private_foundation to another private foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee organization shall not be treated as a newly created a significant disposition of assets to one or more private organization thus in the case of foundations within the meaning of paragraph c of this section the transferee organization shall not be treated as a newly created organization sec_1_507-3 of the regulations provides that a transferee private_foundation succeeds to that percentage of the transferor's aggregate tax_benefit equal to the fair_market_value of the assets transferred divided by the fair_market_value of the assets held by the transferor immediately before the transfer the fair_market_value of the assets held and transferred are determined at the time of transfer sec_1_507-3 of the regulations provides that if a private_foundation incurs liability for one or more of the taxes imposed under chapter of the code or any penalty resulting therefrom prior to or as a result of making a transfer of assets described in sec_507 to one or more private_foundations then in any case where transferee_liability applies each transferee foundation shall be treated as receiving the transferred assets subject_to such liability to the extent that the transferor foundation does not satisfy such liability sec_1_507-3 of the regulations provides that except as provided in sec_1_507-3 a private_foundation is required to meet the distribution_requirements of sec_4942 for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation such transfer shall itself be counted toward satisfaction of the requirements to the extent the amount transferred meets the requirements of sec_4942 sec_1_507-3 of the regulations provides that except as provided in sec_1_507-3 where the transferor has disposed of all of its assets during any period in which the transferor has no assets sec_4945 and h shall not apply to the transferee or the transferor with respect to any expenditure_responsibility grants made by the transferor the exception does not apply to information reporting requirements imposed by sec_4945 and the regulations thereunder for the year in which the transfer is made sec_1_507-3 of the regulations provides that if a private_foundation transfers assets to one or more private_foundations which are effectively controlled directly or indirectly within the meaning of sec_1_482-1 of the regulations by the same persons who effectively control the it were the transferor transferor foundation each transferee foundation will foundation for purposes ‘of sec_4940 through and sec_507 through of the code each transferee is treated as its transferor in the proportion which the fair_market_value of the of the transferor's assets transferred to the transferee bears to the fair_market_value of all transferor's assets immediately before the transfer be treated as if sec_1_507-3 of the regulations provides that a b transfer of assets from a private_foundation to an organization recognized as exempt under sec_501 including a private_foundation qualifies as a transfer for charitable purposes sec_1_507-3 of the regulations provides in part that for purposes of sec_507 the terms other adjustment organization or reorganization shall include any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for sec_1_507-3 full and adequate_consideration or distributions out of current income indicates that a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization including a significant disposition of or more of the transferor foundation's assets sec_1_507-3 of the regulations provides that if a private_foundation transfers all or part of its in section assets to one or more other private_foundations pursuant to a transfer described b such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_1_507-4 of the regulations provides that the tax on termination of private_foundation a transfer of asets under section status under sec_507 of the code does not apply to b of the code sec_4940 of the code provides for the imposition on each private_foundation which is exempt from taxation under sec_501 for the taxable_year with respect to the carrying on of its activities a tax equal to percent of the net_investment_income of such foundation for the taxable_year sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation the rate_of_tax shall be equal to percent of the amount_involved with respect to the act of selfdealing for each year or part thereof in the taxable_period sec_4941 of the code defines the term self--dealing to include any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets or a private foun ation sec_4942 of the code provides for the imposition of a tax on the undistributed_income_of_a_private_foundation sec_4942 of the code defines undistributed_income as distributable_amount exceeds the qualifying distributions of the foundation the amount by which the sec_4942 of the code defines qualifying_distribution as any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more an organization purposes described in sec_170 other than a contribution to controlled directly or indirectly by the foundation or by one or more disqualified persons with respect to the foundation unless certain requirements are satisfied or ii any private_foundation which is not an operating_foundation under code sec_4942 unless certain requirements are satisfied i sec_4942 of the code provides that an excess qualifying_distribution is a distribution of either undistributed_income or corpus with respect to a taxable_year beginning after date ome that exceeds the distributable_amount for that taxable_year mer - sec_4944 imposes a tax on any amount invested by a private_foundation in a manner that jeopardizes the carrying out of the foundation’s exempt purposes sec_4945 of the code imposes a tax on each taxable_expenditure of a private_foundation as defined in sec_4945 sec_4945 of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 of the code on its grants to another private_foundation sec_4945 of the code provides that a taxable_expenditure includes any amount expended by a private_foundation for purposes other than exempt purposes under sec_170 sec_4945 of the code defines expenditure_responsibility in terms of the grantor private_foundation requiring pre-grant inquiry and postgrant reports as to the grantee private_foundation on its uses of the grant sec_53_4945-5 of the regulations provides that expenditure_responsibility includes a requirement that the grantor private_foundation must make a pre-grant inquiry of the prospective thus before making a grant the grantor must conduct a limited grantee private_foundation such pre-grant inquiry must be complete enough to givea inquiry of the potential grantee reasonable person assurance that the grantee will use the grant for the proper exempt purposes this inquiry should concern matters such as the identity prior history and experience of the grantee organization and its managers and any knowledge which the grantor has based on prior experience or other information which is readily available concerning the management activities and practices of the grantee foundation the scope of this inquiry may vary from case to case depending upon the size and purpose of the grant the period of time over which it is to be paid and the prior experience which the grantor has had with respect to the capacity of the grantee to use the grant for the proper purposes in order to exercise expenditure sec_53_4945-5 of the regulations provides that responsibility the grantor private_foundation must require that the grantee organization be made subject_to a written commitment signed by an appropriate officer director or trustee of the grantee to’ répay any portion of the amount granted which is not used for the purposes of the - grant to submit full and complete annual reports on the manner in which the grant funds are spent and the progress made in accomplishing the purposes of the grant to maintain records of receipts and expenditures and to make its books_and_records available to the grantor at reasonable times and not to use any of the funds to carry on propaganda or otherwise attempt to influence legislation within sec_4945 of the code or to influence the outcome of any specific public election or to carry on any voter registration drive within the meaning of sec_4945 or to make any grant which does not comply with the requirements of sec_4945 or sec_4945 or to undertake any activity for any purpose other than one specified in sec_170 of the code the agreement must clearly specify the purposes of the grant such purposes may include contributing for capital endowment provided that neither the grants nor the income therefrom may be used for purposes other than those in sec_170 of the code a capital endowment grants made to private sec_53_4945-5 of the regulations on foundations provides that if a private_foundation makes a grant to another private_foundation for endowment or for other capital purposes the grantor foundation must require reports from the grantee foundation on the uses of the principal and the income if any from the grant funds the grantee must make such reports annually for its tax_year in which the grant was made and for its immediately succeeding two tax years - only if it is reasonably apparent to the grantor before the end of such grantee's second succeeding tax_year that neither the principal nor the income from the grant funds has been used for any purpose which would result in liability for tax under sec_4945 of the code may the grantor then allow the grantee's reports to be discontinued in general unreasonable administrative sec_53_4945-6 of the regulations provides that expenditures will ordinarily be regarded as taxable_expenditures unless the foundation can demonstrate that they were paid_or_incurred in the good_faith belief that they were reasonable and that their payment was consis tent with ordinary business care and prudence sec_53_4945-6 allows a private_foundation to transfer its assets to exempt_organizations under sec_501 of the code including private_foundations pursuant to sec_507 of the code without the transfers being taxable_expenditures under sec_4945 of the code sec_53_4946-1 of the regulations provides that for purposes of self-dealing under sec_4941 of the code an exempt_organization under sec_501 of the code is not a disqualified_person revenue_ruling 1978_2_cb_270 describes the carryover of a transferor private foundation's excess qualifying distributions under sec_4942 of the code where the transferor and the transferee foundations are controlled by the same persons under sec_1_507-3 of the régulations the transferee is treated as the transferor so that the transferee can reduce its own distributable_amount under sec_4942 of the code by its share of the transferor foundation's excess qualifying distributions under sec_4942 of the code i - analysis a transfer of assets described in code sec_507 does not constitute a termination of the transferor’s private_foundation_status under code sec_507 unless the transferor voluntarily gives notice pursuant to code sec_507 see sec_1_507-1 and sec_1_507-3 of the regulations the transferor foundation is not required to provide such notice inasmuch as m has not given notice to the service of its intent to terminate it retains its private_foundation_status and the tax under code sec_507 does not apply see code sec_507 and sec_1 b of the regulations because the transferor m has not terminated its private_foundation_status it continues to be treated as a private_foundation the transferee foundations o p and q herein are treated as possessing the aggregate tax benefits of the transferor m moreover regardless whether the transferor foundation provides notice of its intent to terminate where transferee_liability applies each transferee foundation is treated as receiving the transferred assets subject_to the transferor foundation’s prior excise_tax liabilities under chapter and any penalties resulting therefrom if any to the extent the transferor did not previously satisfy those liabilities see sec_1_507-3 and of the regulations see sec_1_507-3 and sec_2 of the regulations concerning the implications of the proposed asset transfers under code sec_4941 the definition of self-dealing under code sec_4941 and the definition of a disqualified_person under code sec_4946 and d as set forth above do not apply to the proposed asset transfers to the three newly created foundations the proposed transfers from m to o p and q are transfers to entities which have been recognized by the service as tax exempt under code sec_501 as such the three new foundations are not considered disqualified persons for purposes of code sec_4941 pursuant to sec_53_4946-1 of the regulations in addition the divisive transfers here do not appear to be part of a plan to provide excess compensation to the trustees of the four foundations all of the family trustees will serve without compensation the one non-family trustee is paid in accordance with a state funded salary survey it is represented that the director secretary treasurer of q will be paid reasonable_compensation as m will transfer of its assets to three private_foundations which are effectively controlled by the same persons who effectively control m the transferee foundations are treated as though they were the transferor for purposes of code sec_4942 see sec_1_507-3 of the accordingly the proposed transfers to o p and q will not be treated as qualifying regulations distributions of m in addition each transferee foundation assumes all obligations with respect to m's undistributed_income within the meaning of code sec_4942 if any and reduces its own distributable_amount under code sec_4942 by m’s excess qualifying distributions under code sec_4942 here proportionality is appropriate and p and q will each become responsible for one fourth of m’s undistributed_income and succeed to one fourth of m’s excess qualifying distributions if any see sec_1_507-3 of the regulations and revrul_78_387 above wee o p and q will not constitute under the facts set forth above investments jeopardizing the transferor m’s exempt purposes and therefore are not subject_to tax under code sec_4944 the proposed transfers to o of its assets to o p and q all for purposes of code sec_4945 because m will transfer controlled by the same individuals who control m the transferee foundations will be treated as though they were the transferor for purposes of code sec_4945 see sec_1_507-3 of the regulations m will exercise expenditure_responsibility under sec_4945 and sec_4945 respecting the transfer distributions to the three newly created foundations for a period of three years from the date of each transfer the legal accounting and other expenses_incurred by the transferor foundation m and the three transferee foundations o p and q in connection with this ruling_request should not be considered taxable_expenditures under code sec_4945 to the extent that such expenses are reasonable and necessary in light of the legal implications of the proposed asset transfers for purposes of code sec_4942 these expenses will be considered qualifying distributions rulings based on the representations made in your ruling_request and the applicable law we rule as follows the three distributions will qualify insofar as m is concerned as transfers of assets described in sec_507 of the internal_revenue_code and will neither result in the termination of m's private_foundation_status under code sec_507 nor subject m to the tax imposed by code sec_507 p and q will o distributions not be treated as newly created organizations as a result of m's the distributions will not constitute either a willful flagrant act or failure to ac or one of a series of willful repeated acts or failures to act giving rise to liability for tax under chapter of the code the transfer distributions by the m to o p and q will not be taxable_expenditures by m under sec_4945 of the code because m will exercise expenditure_responsibility under sec_4945 and sec_4945 of the code for a period of three years on m and its disqualified persons will neither be deemed to have engaged in an act of self dealing under code sec_4941 nor be subject_to any_tax under code sec_4941 through as a result of the formation of o p and q and the distributions m’s minimum distribution the distributions may be counted toward satisfaction requirements under code sec_4942 to the extent the transfers meet the requirement of code sec_4942 of the legal accounting and other expenses_incurred by m o p and q in connection with this ruling_request and effectuating the distributions will not constitute taxable_expenditures pursuant to code sec_4945 and will not be considered qualifying distributions under code sec_4942 the distributions will not affect the tax exempt status under code sec_501 of m o p and q this ruling is conditioned on the understanding that there will by no material changes in the this ruling is directed to the organization that requested it facts upon which it sec_6110 of the code provides that it may not be used or cited by others as precedent please keep a copy of this ruling in your organization's permanent records is based this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice a copy of this ruling with deletions that we intend to make notice of intention to disclose if you disagree with our proposed available for public inspection is attached to notice deletions you should follow the instructions in notice if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely debra j kawecki manager exempt_organizations _ technical group enclosure notice