t c memo united_states tax_court merrill c roberts petitioner v commissioner of internal revenue respondent docket no filed date francis j emmons for petitioner michael dancz gorica djuraskovic and grubert roger markley for respondent memorandum findings_of_fact and opinion paris judge on date respondent issued a notice_of_deficiency to petitioner determining deficiencies of dollar_figure dollar_figure dollar_figure and dollar_figure for tax years and respectively respondent also determined that petitioner owed penalties under sec_6662 of dollar_figure dollar_figure dollar_figure and dollar_figure for tax years and respectively last respondent determined petitioner owed an addition_to_tax under sec_6651 of dollar_figure for the tax_year the issues for decision are whether petitioner engaged in various horse-related activities during tax years and with the expectation of making a profit whether petitioner is liable for accuracy-related_penalties under sec_6662 for tax years and and whether petitioner is liable for an addition_to_tax under sec_6651 for failure to timely file his federal_income_tax return for the tax_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by this reference petitioner lived in indiana when he filed the petition i background in petitioner purchased an abandoned restaurant on washington street highway in indianapolis indiana around five miles from his current home he worked two jobs and saved money for several years to be able to afford the unless otherwise indicated 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 purchase the restaurant had originally been built as part of the horne’s highway restaurant chain and came with a reputation of staying open hours a day seven days a week an additional investor helped petitioner reopen the restaurant as a steakhouse called the sherwood inn petitioner a high school graduate did not perform any business studies or projections before opening the restaurant and instead anchored his business plan on hard work the sherwood inn was initially very successful but closed because of significant kitchen fire damage several months after opening petitioner sought to collect on the restaurant’s insurance_policy and eventually settled his claim nearly a year after the sherwood inn had burned petitioner was left without a source_of_income and used his personal savings to support his family of three children during this time because the insurance settlement was insufficient to rebuild a fully equipped restaurant petitioner reopened the business as a bar around the bar was near an airport and attracted airport employees at the end of their shifts specifically airport controllers would often patronize petitioner’s bar to celebrate passing certification tests the airport controllers asked petitioner to arrange for exotic dancers to perform at the celebrations and he petitioner’s wife was estranged from the family for medical reasons complied soon thereafter the nights featuring exotic dancers became popular and well-attended events although petitioner recognized the financial potential of operating a gentlemen’s club he chose to sell the business for moral reasons around the sale agreement required the buyers to make payments directly to petitioner petitioner then opened a pizza parlor about five miles from his former bar around petitioner reclaimed the bar because the buyers failed to make payments after explaining the specific circumstances to his family petitioner continued to operate the bar on washington street highway as a gentlemen’s club called dancers dancers turned into a very profitable venture and petitioner expanded his business by opening other nightclubs and restaurants at one point petitioner owned six operating establishments and a staffing company to coordinate personnel every restaurant or bar that petitioner opened was eventually successful and was still operating at the time of trial petitioner actively participated in trade organizations that supported the nightclub industry petitioner originally joined the associations to learn about the industry and to stay current on industry techniques eventually petitioner ascended to multiple leadership roles within the organizations petitioner ultimately was president of the indiana licensed beverage association for four years and president of the indiana nightclub association for eight years the organizations helped nightclub owners--like petitioner--protect their investments by advocating for the businesses’ specific interests for example the organizations helped defend bars against disgruntled neighbors who were unhappy with a bar’s location or late hours petitioner undoubtedly learned valuable lessons from the trade organizations and implemented the valuable knowledge in his own operations petitioner also expanded his business activities by investing in real_estate one of the properties that petitioner acquired was a 50-acre parcel of land that fronted washington street this parcel bought in was directly across the street from dancers and about five miles from petitioner’s current home petitioner paid about dollar_figure for the acres and rented it to a farmer for around years in or petitioner bought a 45-acre parcel of land directly north of the 50-acre parcel for around dollar_figure the former owner had used this land to board horses and there was an operational stable on the property petitioner recognized there was a small income potential from the stable but actually the 45-acre parcel fronted morris street these two parcels are collectively referred to as the morris street property to avoid confusion with dancers which is also on washington street intended to capitalize on the land by creating a 95-acre contiguous plot and through appreciation not through stable rental receipts in the mid-1990s petitioner began to ease out of the nightclub industry around this time he sold all of his shares of the nightclub business to his three grown children petitioner also eventually relinquished control of his nightclub businesses but continued to consult with the new management team because petitioner had over years of experience in the nightclub industry and his experience was a valuable asset to the businesses he created a new corporate entity to structure a management consulting agreement as his adult children became more experienced petitioner transitioned from his previous onsite management to providing most of his day-to-day services through cell phone consultations petitioner’s newly adopted cell phone management style and reduced interest in his nightclub businesses allowed him to think about long-term life goals around the time petitioner bought the morris street property he was contemplating a career change he read that owning restaurants and nightclubs was a particularly dangerous occupation and decided to change his life petitioner started participating less in the nightclub businesses and started an insulation company as well as a used car dealership while petitioner did not lose money in these new endeavors he was not happy working his new jobs he was eventually bought out of the insulation business and he chose to close the car dealership ii horse-related activities in or the indiana thoroughbred owners and breeders association invited petitioner--as an owner of a horse boarding stable--to attend a free dinner and a tour of hoosier park the first horse racing track to be opened in indiana the breeders association presented basic information about horse racing and the potential financial gains associated with the activity petitioner was interested in the financial prospect of horse racing even though he had been to a horse track only once before the event petitioner asked a trainer who already worked at his boarding stables to show him the ropes of horse racing the trainer taught petitioner some initial basic horse skills and petitioner decided to acquire his owner’s license in petitioner purchased his first two young horses for dollar_figure each and proceeded to work with his trainer to prepare the young horses for the racetrack petitioner also bought two horse racing videos to help explain more about horse racing and built his first training track on the morris street property in his first year of racing petitioner’s net_income was around dollar_figure from his two horses petitioner recognized the ease of accounting for only two horses but he was also enticed by the profit potential of racing more horses he decided he liked the activity and bought more horses petitioner used several trainers in his first few years of horse racing and learned more about the industry he increased his personal racing stable from horses in to horses in and also bought a breeding stallion if he had a question about the business that his trainer could not answer petitioner would turn to other experienced trainers because he did not have twenty years to learn petitioner began working every day at the morris street property to develop the skills needed to become a licensed trainer and he passed the trainer’s license test in unlike an owner’s license the trainer’s license is much harder to obtain and the state of indiana required an applicant to pass a rigorous test on a range of subjects from horse bridle construction to equine medication in petitioner started consulting a specialized professional called a blood stock agent for horse purchasing and breeding advice so he could substantially expand the bloodlines of the horses in his breeding program by petitioner felt comfortable with his knowledge of horse racing and wanted to build his own horse training facility on the morris street property the original some of petitioner’s trainers passed away and he fired others for cause boarding stable was in disrepair and not suitable for petitioner’s intended activity petitioner started building a new facility on the morris street property but the city of indianapolis attempted to stop him from training horses despite the agricultural zoning of the property the city raised his property taxes from around dollar_figure to dollar_figure per year and was fining him dollar_figure for every day that he was out of compliance further before he could construct any new structures the city required all new buildings including barns to meet strict city building codes for example the city required petitioner to hire an architect to design and draw the proposed barns before construction could commence the city’s actions discouraged petitioner from building on the morris street property and he started looking for a new location to build a horse training facility around an unrelated party offered to buy the entire 95-acre morris street property from petitioner for around dollar_figure million and in date petitioner closed the sale petitioner chose to recognize gain on the 45-acre parcel and reinvest the proceeds from the 50-acre parcel through a sec_1031 exchange into property that would be better suited for training horses on date as noted the morris street property also includes the abutting washington street property see supra note instead of recognizing a dollar_figure gain from the 50-acre parcel petitioner continued petitioner purchased a 180-acre parcel of land near mooresville indiana-- around miles from his current home--for dollar_figure million and within the next six months he invested between dollar_figure and dollar_figure in building improvements for a horse training facility petitioner recognized the land would probably appreciate because of its proximity to a planned highway project but he sought the land specifically to suit his horse-related activities petitioner decided to build a first-class training facility on the mooresville property and he sought out expert advice for its design he asked his trusted blood stock agent to help design the new training facility and the bloodstock agent advised petitioner on many aspects of the new facility the facility-- completed and placed_in_service in 2007--includes a large training track portable horse stalls unique rehabilitation equipment several specialized training areas and small apartments for employees in petitioner’s view he built an extraordinary training facility unmatched in the state of indiana offering the unique aspect that his facility is used to condition horses rather than race horses continued chose to defer the gain through a sec_1031 exchange the exact costs of improvements are unknown because these records were destroyed in a fire as a new participant in the race horse industry petitioner developed his own training philosophy he determined that to be successful he needed to motivate a horse to race rather than force the horse to race and he built his horse facilities specifically for conditioning and motivating the move to acres also allowed him to offset his previously considerable hay expense by using a part of the mooresville property to grow hay for his horses and he purchased a significant amount of equipment to harvest and process the horse hay in addition the mooresville property was large enough that petitioner rented out about acres of the land for around dollar_figure a year in the through tax years petitioner was involved in multiple aspects of the race horse industry including boarding breeding training and racing horses petitioner primarily raced horses in indiana but also raced at least races per year in kentucky and intermittently raced in other states including ohio louisiana north dakota minnesota and west virginia before buying the mooresville property petitioner split his time between the track and his training collectively these activities will be referred to as petitioner’s horse-related activities the boarding and breeding activities were reported together and the percentage of the activities the breeding program represented during tax years through is unclear petitioner believes that racing in at least kentucky races per year makes him eligible for a trainer-specific retirement_plan operation but in he hired a full-time assistant trainer when he started his operations at the mooresville property during racing season petitioner’s assistant trainer worked at the racetrack while petitioner worked at the training facility petitioner structured the arrangement so that he collected fees when his trainer performed services for third parties petitioner did most of the manual labor to keep the facility in excellent condition while his assistant coordinated each horse on race day petitioner’s evenings were now generally spent choosing the races in which each horse would compete he spent substantial time studying track condition books and picking specific races for specific horses this required matching the attributes of a horse to the requirements of each race if petitioner erred he could have been fined for not meeting race requirements but more importantly because many of the races were claiming races his horse might have been purchased cheaply if the horse was worth more than the claiming amount in petitioner’s view find ing the right race for the right horse i s the secret to the horse a claiming race is a race in which any entered horse may be purchased by any owner for a set price before the start of the race for example in a dollar_figure claiming race any horse may be purchased before the race for dollar_figure and the new owner takes delivery of the horse after the race in other words every time petitioner entered a horse into a claiming race he risked losing the horse to a claimant accordingly it was in petitioner’s interest to match a specific horse to certain races according to the value or potential of the horse racing business and it took him some time to learn the skill to ensure compliance with racing regulations and entry strategy petitioner would often confer with his assistant trainer about race entries this strategy has produced some successful horses and one of petitioner’s horses was nominated to run in the triple crown races petitioner suffered several mishaps during his first few years of horse racing several of his best horse prospects were injured or killed in unfortunate accidents or lost during foaling season for example petitioner has lost numerous horses to lightning strikes and in-race injuries also after moving to the mooresville property petitioner was also swindled when a fence builder substituted flimsy poplar lumber to build a paddock fence rather than the agreed- upon oak before petitioner could rebuild the poplar fence two stallions were spooked stampeded through the fence and died on the impaling timbers the loss of the stallions and the cost of a replacement fence were serious setbacks to petitioner additionally in many of his horses were captured in a quarantined stable when another owner’s horse tested positive for a contagious infection within the same building as a result petitioner could not race any of these horses for a significant part of the season iii professional horse racing industry activities paralleling his participation in nightclub trade associations petitioner joined several professional horse racing associations and from through he served as a board member for two of the organizations in petitioner’s peers asked him to run for a leadership position within the indiana horsemen’s benevolent and protective association hbpa the hbpa in addition to other missions was responsible for allocating broadcasting funds and negotiating race purse structure after serving as an hbpa board member for over a year petitioner resigned to spend more time training horses also similar to his nightclub professional activities petitioner was involved in lobbying the indiana state legislature for horse racing interests specifically petitioner acted as a sounding board for his bloodstock agent who was a key indiana horse racing lobbyist when he was preparing to testify or lobby at the state legislature the bloodstock agent would stay at petitioner’s house and petitioner would help the bloodstock agent prepare to testify in support of indiana professional horse racing in the spring of the lobbying_activities were successful and helped pass legislation to permit slot machines at racetracks petitioner served on only one board at a time because the professional associations forbid concurrent board membership he resigned in to spend more time training his horses house bill no the slot bill substantially increased the purses for horse racing in indiana for example the new law increased a dollar_figure purse to a dollar_figure purse for one race further the bill led to more races for unproven prospects allowing trainers more opportunities to race young horses iv petitioner’s finances petitioner’s certified_public_accountant cpa had handled his nightclub business accounting needs for about years and he used the same cpa for his horse-related activities petitioner first met this cpa through a mutual acquaintance after being dissatisfied with several other accountants petitioner continuously used this same cpa for his accounting needs including representation during two audits before the tax years in issue neither of the prior audits resulted in an increased tax_deficiency and he continued to seek the cpa’s tax_advice on tax matters petitioner used a rudimentary accounting system for all of his businesses including his horse-related finances petitioner gave his cpa receipts for cash expenditures and relied on canceled checks and bank statements to track expenses some of these receipts were turned over to respondent in bundled reclosable plastic bags for gross_receipts petitioner partly relied on a complex internet database devoted to horse racing records the internet database is extensive and tracks inter alia each horse trainer owner and jockey the database keeps detailed records of each horse’s history complete with total earnings earnings per start and earnings per year the database is maintained by a private organization and is publicly available petitioner also tracked the cost of boarding a horse and the amount of feed each of his horses required he knew the cost of keeping each of his horses at his property or boarding them elsewhere during the racing season for tax years through petitioner reported horse-racing income expenses and deductions from his horse-related activities on schedules c profit or loss from business of his personal income_tax returns in addition he reported what was described as the horse farm portion of the income expenses and deductions on forms 1120s u s income_tax return for an s_corporation for an s_corporation he owned merrill c roberts inc petitioner then reported the net ordinary_income or loss and any separately_stated items reported by the s_corporation on its corporate_income_tax returns on various schedules to his personal income_tax returns for the corresponding years petitioner switched his tax reporting in beginning in petitioner began reporting all of the horse-related income expenses and deductions on the s_corporation forms on his schedule c petitioner reported income of dollar_figure and deductions of dollar_figure for a loss of dollar_figure for his horse-related activities the form 1120s shows income of dollar_figure and deductions of dollar_figure for a loss of dollar_figure in horse-related activities on his schedule c petitioner reported income of dollar_figure and dollar_figure of deductions for a profit of dollar_figure the form_1120s shows income of dollar_figure and deductions of dollar_figure for a loss of dollar_figure the form_1120s shows income of dollar_figure and deductions of dollar_figure for a loss of dollar_figure for tax_year the year in which petitioner’s horses were quarantined for a significant portion of the race season the form_1120s shows income of dollar_figure and deductions of dollar_figure for a loss of dollar_figure in while preparing his tax_return some of petitioner’s financial records were permanently lost when a former girlfriend burned the records in a fireplace additionally petitioner’s personal returns reflect less than dollar_figure in gambling income for all of the tax years in issue opinion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer generally bears the burden of proving that the petitioner may have reported additional income deductions and credits related to his horse-related activities on various other schedules for various years for example petitioner may have listed real_estate rental income related to the horse activities on a schedule e supplemental income and loss and form_4835 farm rental income and expenses determinations are in error see rule a 290_us_111 taxpayers also bear the burden of proving that they are entitled to any deductions claimed see 503_us_79 292_us_435 taxpayers must maintain sufficient records to establish the amounts of allowable deductions and to enable the commissioner to determine the taxpayers’ correct_tax liabilities see sec_6001 112_tc_183 sec_1_6001-1 income_tax regs sec_7491 provides an exception that can shift the burden_of_proof to the commissioner if the taxpayer introduces credible_evidence regarding relevant factual issues and has complied with all relevant substantiation requirements complied with all relevant recordkeeping requirements and cooperated with reasonable requests by the commissioner for meetings interviews witnesses documents and information sec_7491 and a and b credible_evidence is evidence that after critical analysis the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted 116_tc_438 a taxpayer who provides only self-serving testimony and inconclusive documentation has been held not to have provided credible_evidence see id pincite blodgett v commissioner tcmemo_2003_212 aff’d 394_f3d_1030 8th cir it is unclear whether petitioner complied with all the substantiation requirements or complied with all relevant recordkeeping requirements the parties’ dispute concerns whether petitioner engaged in his horse-related activities with the requisite profit objective and the very little evidence provided in regard to petitioner’s rudimentary style of recordkeeping did not show the adequacy of petitioner’s substantiation or recordkeeping practices with respect to the requirements of sec_7491 accordingly the burden has not shifted to respondent i sec_183 under sec_183 if an activity is not engaged in for profit then no deduction attributable to that activity is allowed except to the extent provided by sec_183 in pertinent part sec_183 allows those deductions that would have been allowable had the activity been engaged in for profit only to the extent of gross_income derived from the activity reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 deductions are allowable under sec_162 or under sec_212 or if the taxpayer is engaged in the activity with the actual and honest objective of making a profit 78_tc_642 aff’d without published opinion 702_f2d_1205 d c cir the taxpayer need not however establish that his or her expectation of profit was reasonable 72_tc_411 aff’d without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs the existence of the requisite profit objective is a question of fact that must be decided on the basis of all of the facts and circumstances 84_tc_227 aff’d without published opinion 782_f2d_1027 3d cir sec_1_183-2 income_tax regs in resolving this factual question greater weight is given to objective facts than to a taxpayer’s statement of intent see elliott v commissioner t c pincite sec_1 a income_tax regs the regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and any elements indicating personal pleasure or recreation sec_1_183-2 income_tax regs these factors are not exclusive and no single factor is determinative id a manner of carrying on the activity the first factor the court considers is the manner in which the taxpayer carries on the activity the fact that the taxpayer carries on an activity in a businesslike manner and maintains complete and accurate books_and_records may indicate a profit objective sec_1_183-2 income_tax regs similarly where an activity is carried on in a manner substantially_similar to other profitable activities of the same nature a profit objective may be indicated id a change_of operation methods adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit objective id a taxpayer should use some cost accounting techniques that at a minimum provide the entrepreneur with the information required to make informed business decisions 809_f2d_355 7th cir aff’g tcmemo_1985_523 without such a basis for decisions affecting the enterprise the incidence of a profit in any period would be wholly fortuitous and losses would be expected id petitioner demonstrated significant changes in operation adoption of new techniques and abandonment of unprofitable methods when he moved his horse racing activity from the morris street property to the mooresville property he recognized that the morris street property was not suitable because the buildings were in disrepair and building a new facility at this location was cost prohibitive because of the city’s building codes the city was imposing a dollar_figure-a-day fine and increased his property_tax from around dollar_figure a year to dollar_figure petitioner chose to mitigate these expenses by liquidating his old facility and moving to a property that would help make him more money the larger mooresville property allowed petitioner to build substantially larger and better new facilities and the increased size also allowed petitioner to reduce his fixed feeding costs by growing his own hay and renting out part of the property petitioner rented out acres of the mooresville property for around dollar_figure a year--further reducing his horse racing activity costs the mooresville property was suitable for producing high-quality horse hay which he planted and harvested demonstrating petitioner’s willingness to adopt new cost- saving techniques further while petitioner did not undertake any business studies he did significantly change his business model when he hired an assistant trainer after moving to the mooresville property see phillips v commissioner tcmemo_1997_128 explaining a business plan was evidenced by actions instead of a written document instead of balancing a schedule between the racetrack and the training facility petitioner could delegate tasks and potentially increase profitability by hiring a full-time assistant trainer in his own words petitioner would meet himself coming and going and the employee allowed petitioner to spend more of his time training horses while his assistant coordinated racing activities petitioner also earned additional income from trainer’s fees when his assistant trained third-party horses these significant changes in operating methods suggest petitioner engaged in horse racing activities for profit once his new facility was placed_in_service starting in the tax_year petitioner also treated other aspects of his horse-related activities in a professional manner for example petitioner planned to take advantage of a retirement_system for horse trainers in kentucky according to petitioner the retirement program divided an amount of money between trainers and assistant trainers who are retiring and who ran horse races in kentucky per year petitioner was based in indiana but raced in other states petitioner credibly testified that he had run at least races in kentucky for several years and that he believed that if he continued his current racing schedule he would qualify to collect some of the kentucky trainers’ retirement benefits respondent points to petitioner’s accounting methods to show he was not carrying on the activities in a businesslike manner primarily respondent suggests petitioner’s disorganization and reliance on an accountant is not businesslike however the accounting_method needs only provide the entrepreneur with the information require d to make informed business decisions burger v commissioner f 2d pincite while rudimentary petitioner’s system of recordkeeping allowed him to make informed business decisions his daily costs for each horse were consistent and he had a method of keeping receipts or bank documents to track additional expenses a publicly available internet database conveniently tracks the starts placement earnings and other information of each horse petitioner raced the database also tracks entry fees and awarded purses allowing racehorse professionals to closely monitor the performance of each horse on line petitioner’s accounting methods at a minimum provided him with enough information to make informed business decisions this factor is neutral for tax years and for and however when petitioner made significant changes to his operating procedure and location this factor favors petitioner b expertise of taxpayer or advisors the next factor to consider is the expertise of the taxpayer and his advisers preparation for an activity by extensive study of its accepted business economic and scientific practices or consultation with those who are expert therein may indicate that the taxpayer has a profit objective where the taxpayer carries on the activity in accordance with such practices sec_1_183-2 income_tax regs petitioner acknowledged that merely buying a horse does not make the owner an expert petitioner did however have enough business acumen to seek sound advice from horse breeding and racing experts he noted that he entered the horse racing profession later than many other professionals and wanted to rapidly learn about the business petitioner consulted with bloodstock agents and respected trainers on various aspects of the horse racing business when he had a question about the business he would call an expert to find an answer for example when building a new training facility petitioner incorporated advice from industry experts into the design of the buildings and improvements further petitioner immersed himself in all aspects of the horse racing business becoming an expert in his own right instead of taking a cursory interest in horses he chose to be intimately involved with and gain valuable knowledge from the horse racing business petitioner learned to administer medication choose specific events for each horse rehabilitate injured horses and assemble racing equipment and he acquired many other skills usually possessed by an expert in the horse racing business respondent contends that petitioner developed only an expertise with respect to the actual boarding breeding and training of horses but developed no expertise in the financial aspects of the horse-related activities respondent however omitted an important aspect of petitioner’s horse-related activities racing to enter a horse into a race the decisionmaker--whether trainer or owner--must have an in-depth understanding of the financial aspects of the proposition if a superb horse enters into a low-claim claiming race the horse may be bought cheaply from the owner and the owner will lose money if an outmatched horse enters a stakes race the owner will not earn back the entry fee petitioner learned about how to enter races and how to pick a horse for a specific race to maximize his potential prize thus to navigate the complex regulations and financial possibilities of horse racing petitioner was required to gain expertise in the financial aspects of his horse-related activities for example petitioner learned of ruses that unscrupulous racers would use to maximize profit potential in one case petitioner heard of racers affixing raw cuts of meat to a horse’s ankles so that the horse would appear to be in poor shape and not be claimed a racer that is aware of the ruse may claim the horse and profit from the transaction petitioner credibly testified that he spent significant effort and time to match the right horse to the right race he spent this time matching each horse to a race with the expectation of making a profit he admitted that it took time to learn this skill but that it was the secret to the business petitioner’s custom-tailored entry strategy shows he was an expert in the financial aspects of his horse-related activities petitioner also displayed his expertise through his participation in trade associations much like his progression from member to leader of nightclub associations petitioner rose through the ranks into leadership roles at two professional horse racing associations in one organization petitioner’s peers placed enough weight on his expertise to ask him to run for the leadership role petitioner did not independently volunteer for the position but was asked to run for it presumably because his peers trusted him with the responsibility further petitioner shows that he was an expert in the financial aspects of the horse racing industry through his contributions to the horse racing lobbying effort an experienced horse racing lobbyist credibly testified that he would discuss the finer points of horse racing with petitioner in connection to the lobbying effort the legislature eventually passed the slot bill which would significantly affect the financial aspects of horse racing in indiana petitioner knew the new bill would increase the purse size and wished to contribute to the effort in other words petitioner was on the ground floor of improving economic conditions for horse racing in indiana accordingly this factor weighs in favor of petitioner’s profit objective for all the tax years in issue c time and effort devoted to the activity the third factor to consider is the time and effort expended by the taxpayer in carrying on the activity the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit sec_1_183-2 income_tax regs a taxpayer’s withdrawal from another occupation to devote most of his energies to the activity may also be evidence that the activity is engaged in for profit id the fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit objective where the taxpayer employs competent and qualified persons to carry on the activity id in barbour v commissioner tcmemo_1976_85 the court found that full-time participation in an activity tended to show that a taxpayer was engaged in a for-profit activity petitioner was working on horse-related activities some portion of every day by at least and full time by at least he treated the activities as a full-time profession and worked long hours to train horses horse racing is a seasonal activity and it was sometimes necessary for petitioner to work longer hours when horses were training and racing further the barbour case suggests that participation in unpleasurable work associated with an activity tends to show a profit objective in barbour the court found that enduring cold temperatures and administering medication to ensure the profitability of an animal showed a profit objective similar to the taxpayer in that case petitioner often endured cold winter temperatures to work with his horses he also performed other unpleasant and burdensome activities such as administering shots and rebuilding fences in sum petitioner devoted a significant amount of his personal time and effort to carrying on the activities where the activities did not have substantial personal or recreational aspects and this tends to show a profit objectivedollar_figure respondent questions the amount of time actually dedicated to horse-related activities during the tax years in issue specifically respondent points to the fact that petitioner continued to earn income related to his former occupation of running nightclubs respondent seems to challenge whether petitioner could have spent the amount of reported time dedicated to horse-related activities and still performed functions deserving remuneration from other sources indeed petitioner did not deny that he was still tangentially involved in the nightclub industry he credibly testified that he was able to consult on high-level decisions by using his cell phone he explained that cell phones allowed him to consult with business contacts several times a day but that it did not detract from time dedicated to training horses petitioner credibly testified that he could not stop his training of the horses to go over there and sit and talk for hours instead his cell phone allowed him to balance his time between the two activities as discussed infra petitioner transitioned from participating in the more recreational aspect to the more businesslike aspect of his operation in tax_year when he moved to the mooresville property and began spending most of his time at the training facility rather than at the racetrack petitioner retained no financial interests in his nightclub businesses but for his consulting fees and rental payments accordingly by tax_year petitioner devoted time and effort appropriate to demonstrate a profit objective for all the tax years in issue d expectation that the assets used in the activity will appreciate in value the fourth factor to consider is the expectation that the assets used in the activity may appreciate in value the term profit encompasses appreciation in the value of assets such as land used in the activity sec_1_183-2 income_tax regs thus the taxpayer may intend to derive a profit from the operation of the activity and may also intend that even if no profit is derived from current operations an overall profit will result when appreciation in the value of the assets used in the activity is realized since income from the activity together with the appreciation of the assets will exceed expenses of operation id petitioner’s horse-related activities include two different types of appreciable assets first the horses that petitioner bred and trained second the real_property and capital improvements associated with his training facility respondent does not dispute that petitioner purchased or bred each horse with the expectation the horse would increase in value respondent does however contend that petitioner’s real_property is not an asset used in the activities and that any expectation of appreciation is not a factor to be considered in determining whether petitioner was engaged in his horse-related activities for profit respondent is correct for the and tax years and incorrect for the and tax years because petitioner moved his horse-related activities during the tax_year where land is purchased or held primarily with the intent to profit from an increase in its value and a taxpayer also engages in another activity on the land the activity and the holding of the land will ordinarily be considered a single activity only if the income derived from the activity exceeds the deductions attributable to that activity which are not directly attributable to the holding of the land sec_1_183-1 income_tax regs in other words when a taxpayer buys land mainly to profit from its appreciation the potential appreciation of the land is relevant to a sec_183 analysis only if the activity generates income in excess of the deductions for the activity when a taxpayer’s primary intent is not to profit from the land then the appreciation of the land is considered in a sec_183 profit analysis see perry v commissioner tcmemo_1997_417 citing hoyle v commissioner t c memo petitioner’s primary intent in purchasing and holding the morris street property was to gain from the real_estate appreciation when asked whether he intended to use the morris street property for horse-related activities petitioner responded no in my mind the property is going to be worth a lot of money i’ll just make a little money pay the taxes hang on to it until i can sell it this is a clear indication that his primary purpose was not to train or race horses on the morris street property further petitioner’s horse-related activities did not reduce the net cost of carrying the morris street property as a result holding the morris street property was an activity separate from petitioner’s horse-related activities and any expectation of appreciation of that real_estate does not contribute to a finding that he was engaged in those activities for profit in contrast petitioner specifically purchased and held the mooresville property to breed and train horses his primary intent was to build a premier horse training facility and he purchased property to suit his needs petitioner started searching for a new location because problems arose from building a barn on the morris street property he recognized that to be a competitive horse trainer he needed to build a better mousetrap in the horse business a major aspect of his improved mousetrap included a better location because the morris street property was not ideal for horse training petitioner sought a new location and intended to train horses on the land when he purchased the mooresville property further petitioner followed through and completed a well-furnished horse operation he improved the land with a significant amount of specialized equipment and in his opinion the training facility was unmatched in the state of indiana admittedly petitioner recognized that the land might appreciate but capitalizing on appreciation was not his primary intent in purchasing or holding the mooresville property accordingly the mooresville property’s expected appreciation is relevant to whether petitioner carried on his horse-related activities with the intent to profit under sec_183 however petitioner transferred the headquarters of his horse-related activities to mooresville in and thus tax_year is the first tax_year that real_estate appreciation expectation weighs in favor of finding for petitioner’s profit objective under sec_183 for tax years and the factor is neutral e success in carrying on other activities the fifth factor to consider is the success of the taxpayer in carrying on other similar or dissimilar activities the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs moreover diligence initiative foresight and other qualities that generally lead to success in other business activities may help demonstrate profit objective of a new venture see mcnaught v commissioner tcmemo_1999_25 daugherty v commissioner tcmemo_1983_188 petitioner built a successful nightclub business from very humble beginnings he turned a single unprofitable bar into a network of up to six different establishments employing enough individuals to necessitate creating a staffing company to coordinate shifts later petitioner started a successful car dealership and an insulation company moreover petitioner appears to be a successful real_estate speculator further petitioner’s peers trusted him to serve as a representative and advocate for two different industries within indiana demonstrating his ability to transfer skills across vastly different trades he worked hard and showed initiative foresight and other qualities that led to success in his other business activities and he had reason to expect eventual success in his horse-related activities accordingly this factor weighs in petitioner’s favor f history of income or losses the sixth factor to consider is the taxpayer’s history of income or losses with respect to the activity in question a series of losses during the initial or startup stage of an activity may not necessarily be an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs however where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses if not explainable as due to customary business risks or reverses may be indicative that the activity is not being engaged in for profit id a record of substantial losses combined with a remote chance of achieving a profitable operation are important factors bearing on a taxpayer’s intent to make a profit schlafer v commissioner tcmemo_1990_66 the startup phase for some horse-related activities can be between and years see 72_tc_659 petitioner started his horse-related activities in and the years in issue fall within this startup phase further sustaining losses after the expected startup_period is not necessarily indicative that a taxpayer is not engaged in horse-related activities for profit where the losses can be explained see farris v commissioner tcmemo_1972_165 if losses are sustained because of unforeseen or fortuitous circumstances which are beyond the control of the taxpayer such as drought disease fire theft weather damages other involuntary_conversions or depressed market conditions these losses would not be an indication that the activity is not engaged in for profit sec_1_183-2 income_tax regs some of petitioner’s losses can be explained by a series of unfortunate events beyond his control these events include the untimely death of several racing and breeding prospects an unfortunate quarantine during racing season a contractor’s building a shoddy fence that factored into the accidental death of two stallions and the need to hire and fire several different trainers accordingly the startup phase and unforeseen expenses balance the history of large losses and this factor is neutral for all tax years in issue g the amount of occasional profits the seventh factor to consider is the amount of occasional profits if any which are earned in the course of conducting the activity profit is generally defined as receipts in excess of costs see 497_us_154 the amount of profits in relation to the amount of losses_incurred and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s intent sec_1_183-2 income_tax regs an occasional small profit from an activity generating large losses or from an activity in which the taxpayer has made large investment would not generally be determinative that the horse breeding and racing is speculative and the loss of some horses may be foreseen see chandler v commissioner tcmemo_2010_92 aff’d 481_fedappx_400 9th cir but petitioner’s loss of two stallions was more similar to an involuntary_conversion because the deaths were from injuries relating to a dishonest contractor activity is engaged in for profit id however an opportunity to earn a substantial ultimate profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated id for example an investor in a wildcat oil well who incurs substantial expenditures is engaging in the activity for profit even though the expectation of a profit is very small sec_1_183-2 income_tax regs horse racing can be very speculative and the expectation of profit may be very small racing a horse has been compared to investing in a wildcat oil well where there may be substantial expenditures with little chance of profit see dawson v commissioner tcmemo_1996_417 sec_1_183-2 income_tax regs petitioner had success with his first two horses and expected that success to continue he knew continuing to race horses was a highly speculative activity but there was a small possibility of large profits however because of his participation in various organizations and his assisting with some lobbying efforts petitioner knew that prize purses were increasing in indiana in other words the ultimate profit potential would significantly increase further one of petitioner’s horses was nominated to run in the triple crown races showing that his horses have the potential to race at a very high level and possibly earn significant profits accordingly petitioner’s expectation of future profits was consistent with the existence of a profit objective for all the tax years in issue see betts v commissioner tcmemo_2010_164 h financial status the eighth factor to consider is the financial status of the taxpayer the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit sec_1 b income_tax regs substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if personal or recreational elements are involved id petitioner earned_income from sources other than horse-related activities the losses claimed in relation to the horse-related activities had the effect of reducing petitioner’s taxable_income petitioner however was not an excessively wealthy individual his house was mortgaged and he continued to work long hours at a physically demanding endeavor after resigning from several successful ventures further petitioner participated less in the personal and recreational according to petitioner once his horse was nominated it had a in chance of running the races aspects of the horse-related activities starting in tax_year as discussed infra under the strict wording of the regulations this factor favors respondent for all the tax years in issue i elements of personal pleasure or recreation the final factor that should be considered is whether the activity in question involves personal pleasure or recreation the presence of personal motives in the carrying on of an activity may indicate that the activity is not engaged in for profit especially where recreational or personal elements are involved sec_1 b income_tax regs further there is likely no profit objective where a taxpayer combines horse racing with social and recreational activities sec_1 c example income_tax regs petitioner was first enticed into the horse racing business through a social gathering at a racetrack where he was invited to a free dinner and a tour of the facilities petitioner met trainers and learned about the business as a result of the social meeting petitioner registered for an owner’s license and bought two young horses he asked a trainer using his facilities to show him some training basics and only later applied to become a trainer from until petitioner divided his time between racetracks and the training facility while there is certainly work involved while at racetracks there is also a higher level of recreation and social activity available at a racetrack a horse trainer can socialize with other trainers and owners the concessions and public wagering options available also show that a racetrack is a very social and recreational venue although there is no evidence that petitioner actually participated in the wagering options further a physical embodiment of a trainer’s exertions and skills are on public display while a horse is racing the owner and trainer of a winning horse may get applauded and get his or her picture taken in a winner’s circle in contrast the training facility is a largely private operation void of social or recreational activities activities such as grading the track mucking stalls baling hay administering medication and building fences are all necessary for a successful horse race operation but these activities are rarely publicly displayed much less applauded similar a trainer cannot socialize or confer with other racing professionals face to face while at the training facility if a trainer has a question he or she must call a specialist in order to solicit advice during tax years and petitioner attended both the track and training activities of his operation he was able to train horses at his facility but he was also able to accept the accolades of a successful race in other words petitioner participated equally in the social and business aspects of horse racing in the tax_year however petitioner hired an assistant trainer to take over the more socially oriented track activities in doing so petitioner actively chose to undertake the less glamorous and less recreational activities of his operation this is indicative that before tax_year petitioner enjoyed some recreational aspects of horse racing but starting in he became more interested in the business aspects of the activity the mooresville property was not a recreational facility or a retirement property for petitioner petitioner did not build a new house on the mooresville property and in fact the new facility was significantly farther from petitioner’s home than the morris street property petitioner’s commute to the mooresville property was about miles a day longer than his commute to the morris street property petitioner did not purchase the property to have a place to enjoy the golden years of his retirement but instead purchased the property to run a business accordingly the elements of personal pleasure or recreation weigh in respondent’s favor for the and tax years and in petitioner’s favor for tax years and an activity that was previously carried on without a profit objective does not preclude a finding that it has become a trade_or_business see demler v commissioner tcmemo_1966_117 a taxpayer may start an activity without a profit objective and later develop the desire and objective to earn a profit from the undertaking a taxpayer should not be denied the opportunity to deduct expenses from his or her business merely because the profit objective was not evident from the outset of the activity petitioner started his horse-related activities without a profit objective but later turned his social and recreational activity into a serious business venture petitioner’s objective may have been gradually changing from the outset of his horse-related activities but beginning operations at the mooresville property is a clear indication that his motivation had fully turned to seeking a profit in petitioner--a successful businessman--was given an opportunity to exit the horse training and racing business and pursue other ventures while petitioner acquired the land for his horse-related activities in he could have left it unimproved and stopped his horse activities instead he chose to reinvest in the activities and open a premier training facility in thus petitioner’s profit objective was first shown in when he began operating his horse-related activities at the mooresville property further the indiana slot bill was introduced and passed in the spring of petitioner was on the ground floor of the lobbying efforts to pass the legislation and was in a position to recognize the increased profit potential he chose to build a custom training facility to take advantage of the new racing opportunities that the bill created on the basis of the record and considering the nine factors discussed above the court finds that petitioner did not engage in horse-related activities for profit during the and tax years however petitioner demonstrated a profit objective beginning in tax_year when he significantly changed his operation opened a new facility on real_estate specifically purchased for horse-related activities and transitioned out of the recreational aspect of horse racing accordingly petitioner demonstrated the requisite profit objective under sec_183 to deduct business_expenses for tax years and but not for tax_year or ii sec_6662 penalty sec_6662 and b and imposes an accuracy-related_penalty equal to of the portion of the underpayment attributable to any substantial_understatement_of_income_tax or to negligence or disregard of rules or regulations under sec_7491 the commissioner has the burden of production to show that the imposition of a penalty under sec_6662 is appropriate respondent has met this burden by presenting evidence that petitioner’s underpayments were attributable to substantial understatements of income_tax for tax years and with exceptions not here relevant a taxpayer may avoid a sec_6662 accuracy-related_penalty with respect to any portion of an underpayment by showing that he acted with reasonable_cause and in good_faith with respect to that portion sec_6664 reasonable_cause requires that the taxpayer exercise ordinary business care and prudence as to the disputed item 469_us_241 the term good_faith has no precise definition but means among other things an honest belief and the intent to perform all lawful obligations e g 964_f2d_318 4th cir those determinations are made on a case-by-case basis taking into account all pertinent facts and circumstances including the taxpayer’s knowledge and experience sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id the most important factor is the taxpayer’s efforts to assess the proper tax_liability id the duty_of filing accurate returns generally cannot be avoided by placing the responsibility on an employee or tax_return_preparer see 88_tc_654 slawek v commissioner tcmemo_1991_338 finding no reasonable_cause defense where taxpayers blamed their employees and accountants for erroneous returns aff’d without published opinion 972_f2d_1332 3d cir a taxpayer however may demonstrate reasonable_cause through good-faith reliance on the advice of an independent professional such as a tax adviser a lawyer or an accountant as to an item’s tax treatment boyle u s pincite 135_tc_199 to prevail the taxpayer must show that he selected a competent adviser with sufficient expertise to justify reliance supplied the adviser with necessary and accurate information and actually relied in good_faith on the adviser’s judgment 136_tc_67 citing 115_tc_43 aff’d 299_f3d_221 3d cir aff’d 684_f3d_84 d c cir petitioner hired a cpa for his auditing and tax requirements petitioner had not been satisfied with the work performed by several accountants before he hired his current cpa who he met through a mutual acquaintance to handle the tax aspects of his nightclub businesses the cpa had experience in the nightclub industry and petitioner recognized that a cpa might have more skills than a non- cpa accountant petitioner continued to employ this cpa for over years petitioner’s returns were audited twice before the tax years in issue and both times he fared well as a result of his cpa’s work further as discussed above petitioner maintained a rudimentary recordkeeping system but did turn over the necessary documents to his cpa in the form of receipts canceled checks and bank statements for tax years and last petitioner credibly testified that he relied on his cpa and his attorney for business and tax_advice accordingly petitioner demonstrated reasonable_cause through good_faith for tax years and there is no sec_6662 penalty with respect to the sec_183 adjustments for tax_year or because there is no deficiency iii sec_6651 addition_to_tax failure_to_file a tax_return on the date prescribed leads to a mandatory addition_to_tax unless the taxpayer shows that such failure was due to a reasonable_cause and not due to willful neglect sec_6651 for each month the return is late an addition_to_tax equal to of the amount of tax required to be shown on the return shall be assessed not exceeding in the aggregate id the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the payment due_date sec_6651 under sec_7491 the commissioner has the burden of production to show that the imposition of an addition_to_tax under sec_6651 is appropriate petitioner conceded that respondent met his burden by presenting evidence that petitioner failed to timely file his federal_income_tax return petitioner’s position based on sec_301 c proced admin regs is that a reasonable_cause outside his control caused his delayed filing petitioner contends that he had reasonable_cause to file his return late because some of his records were burned in a fireplace by a former girlfriend petitioner cites a case where a taxpayer was not held liable for a sec_6651 addition_to_tax because a hurricane destroyed critical tax documents the wrath of a former girlfriend may be a formidable force but it is not analogous to a hurricane-like natural disaster and it does not constitute a reasonable_cause outside petitioner’s control further petitioner did not present any evidence showing the records were actually destroyed or document any attempts to find the lost information petitioner also suggests that the commissioner’s audits of prior-year returns was a reasonable_cause for his delay he contends that he knew the tax_return would likely be audited and he spent extra time to make sure the return was correct preoccupation with an audit however does not constitute a reasonable_cause for failing to timely file a federal tax_return 149_f3d_1249 10th cir citing 807_f2d_81 6th cir aff’g t c memo accordingly petitioner is liable for an addition_to_tax for the tax_year under sec_6651 we have considered the remaining arguments made by the parties and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


vie department of the treasury internal_revenue_service washington d c 4fiis oy - oy date may of e g0 to contact person id number telephone number employer_identification_number legend x y dear sir or madam this is in reply to your letter of date as supplemented by your fetter of date requesting advance approval of a grant-making program designed to strengthen leadership in the fields of urban and rural community development and affordable housing you have been recognized as exempt under sec_50i c of the code and are a private_foundation within the meaning of sec_509 you were established by x and have received substantial funding from x x operates in the secondary mortgage market it does not originate loans but purchases loans from mortgage lenders you were originally established by x to make grants to various organizations that are described in sec_50l c of the code with an emphasis on those organizations involved in the field of housing this new program is designed to recognize and reward professionals for their work in the areas of community development and affordable housing it will seek to improve and cultivate their professional skills and to foster the development of creative solutions to housing issues candidates for grants will be nominated through a process you have designed to identify a wide variety of qualified candidates nominations will come from a broad spectrum of organizations both nonprofit and for-profit and individuals with experience and exposure to qualified candidates in the fields of affordable housing and community development however approximately y percent of the nominations will be made by representatives of x‘s local partnership offices your field and regional offices your employees board members and former board members candidates will not be eligible to participate in this program if they are employees of or family members of employees of x or you or if they are family members of individual nominators or members of the program review committees or selection committee you have established criteria to select grantees from amongst the nominees in an objective and nondiscriminatory manner final selection will be made by a member committee this committee will be comprised of the chair of your board_of directors or a designee your president and ceo or a designee and three individuals associated with national foundations academia or other nonprofit organization who do not have any affiliation with either x or yourself re you have established procedures to continuously review the grant and the expenditures of each grantee you have also indicated that where a grantee fails to follow through on their proposal you will refuse to make additional payments request that funds be returned and resort to such other measures as may be economic and prudent you will also maintain complete records regarding the selection process expenditures and reports regarding the program undertaken by the grantee you expect that the grant recipients will work with your staff to improve housing opportunities in the country this may include designing a plan that may include affordable housing and community development issues research establishing academic and in-service studies mentorship opportunities internships and other activities designed to enhance the individual's skill and learning in the field affordable housing and community development issues the program will also recognize individuals who are making significant contributions to community development and the field of affordable housing increase leadership and profession skill in the area create new solutions to housing problems and perhaps influence your long-term strategies in the area it is hoped that this program will permit exploration of new solutions to current as previously stated you have requested advance approval of your procedures for administering this grant program pursuant to the requirements of sec_53_4945-4 of the foundation and similar excise_tax regulations sec_50l c of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable or educational_purposes sec_509 a of the code provides that unless specifically excepted a domestic or foreign organization described in sec_50l c is chapter a private_foundation and subject_to the excise_taxes of sec_4945 of the code imposes an excise_tax on each taxable_expenditure made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the purpose of the grant is to achieve a specific objective produce a report or other similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 a of the regulations defines the term ‘grants’ as including but not limited to such expenditures as scholarships fellowships internships prizes_and_awards term ‘grants’ do not ordinarily include salaries or other compensation to employees the sec_53_4945-4 a ii of the regulations provides that under sec_4945 a grant to an individual for travel study or other similar purposes is not a ‘taxable expenditure’ only if ee re a the grant is awarded on an objective and nondiscriminatory basis within the meaning of paragraph b of this section b the grant is made pursuant to a procedure approved in advance by the commissioner and c it is demonstrated to the satisfaction of the commissioner that the purpose of the grant is to achieve a specific objective produce a report or other similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee if a grant is made to an individual for a purpose described in sec_4945 and such grant otherwise meets the requirements of sec_4945 such grant shall not be treated as a taxable_expenditure even if under sec_117 or if it is a scholarship or a fellowship_grant which is not excludable from income it is a prize or award which is includible in income under sec_74 sec_53_4945-4 provides that a grant by a private_foundation to an individual which meets the requirements of sec_4945 d and g is a taxable_expenditure by such foundation under sec_4945 only if i the grant is earmarked to be used for any activity described in sec_4945 or or is earmarked to be used in a manner which would violate sec_4945 or ii there is an agreement oral or written whereby such grantor foundation may cause the grantee to engage in any such prohibited activity and such grant is in fact used in a manner which violates sec_4945 or iii the grant is made for a purpose other than a purpose described in sec_170 b for purposes of this subparagraph a grant by a private_foundation is earmarked if such grant is given pursuant to an agreement oral or written that the grant will be used for specific purposes sec_53_4945-4 b of the regulations sets forth standards for determining whether grants to individuals awarded under sec_4945 of the code are made on an objective and nondiscriminatory basis sec_53_4945-4 and of the regulations require that the group from which the candidates are selected is sufficiently broad the selection is made by criteria reasonably related to the purposes of the grant and that the persons making the selection not be in a position to derive a private benefit directly or indirectly if certain potential grantees are selected over others sec_53_4945-4 of the regulations provides that to secure the necessary prior approval of a grant-making program a private_foundation must demonstrate to the satisfaction of the commissioner that-- i its grant procedure includes an objective and nondiscriminatory selection process as described in paragraph b of this section ii such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and re iii the foundation plans to obtain reports to determine whether the grantees have performed the activities that the grants are intended to finance sec_53_4945-4 and require that progress records regarding a g grant be maintained jeopardized grants be investigated and reasonable efforts be made to recover the grant monies sec_53_4945-4 c of the regulations requires that a private_foundation shall retain records pertaining to all grants to individuals for purposes described in sec_4945 such records shall include i afl information the foundation secures to evaluate the qualification of potential grantees ii identification of grantees including any relationship of any grantee to the foundation sufficient to make such grantee a disqualified_person of the private_foundation within the meaning of sec_4946 iii specification of the amount and purpose of each grant and iv the follow-up information which the foundation obtains in complying with subparagraphs and of this paragraph as applicable sec_53_4945-4 of the regulations describes the contents of a request for approval of grant procedures the approval procedure does not contemplate specific approval of particular grant programs but instead one-time approval of a system of standards procedures and follow-up designed to result in grants which meet the requirements of sec_4945 thus such approval shall apply to a subsequent grant program as long as the procedures under which it is conducted do not differ materially from those described in the request to the commissioner the information you have submitted establishes that the individuals selected to receive these grants will work with your staff to design a plan or plans in the fields of affordable housing and community development the program is designed to enhance the individual's skill and learning in the field as well as to permit exploration of new solutions to current affordable housing and community development issues the results of this program will be to recognize individual who are making significant contributions to community development and the field of affordable housing increase leadership and profession skill in the area create new solutions to housing problems and perhaps influence your long-term strategies in the area grants are earmarked to be used for any activity described in sec_4945 or or is earmarked to be used in a manner which would violate sec_4945 or there is no apparent agreement oral or written whereby you may cause the grantee to engage in any such prohibited activity and such grant is are the grants made for a purpose other than a purpose described in sec_170 c b in fact used in a manner which violates sec_4945 nor it does not appear that the program or we recognize that you and x will nominate a large number of the candidates for these grants will influence the selection of the grantees and that you may potentially benefit from their projects however we have concluded that any benefit you or x may receive is insubstantial when compared with the overall benefit to the public accordingly we have concluded that this grant-making program will further your charitable purposes re we have considered your procedures under sec_4945 g of the code based on the information submitted and assuming your grant program will be conducted as proposed with a view to providing objectivity and nondiscrimination in awarding grants we have determined that your procedures in awarding these grants comply with the requirements of sec_4945 and that monies granted according to these procedures will not be taxable_expenditures to you within the meaning of sec_4945 d this ruling is conditioned on the understanding that there will be no material_change in the facts upon which it is based and is timited to the facts as stated in your letters of date and date to your organization’s creators officers directors trustees or members of the selection committee or for a purpose that is inconsistent with the purposes described in sec_170 c b of the code is further conditioned on the premise that no grants will be awarded it the approval of these procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 g of the code thus approval will apply to succeeding programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we express no opinion as to the tax consequences of your grants to the recipient under any further we not that you have stated that you will comply with applicable_section of the code reporting requirements with respect to amounts paid to your grant recipients this ruling is directed only to the organization that requested it sec_6110 j of the code provides that it may not be used or cited as precedent 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 a copy of this letter is being sent to your key district_director sincerely yours q signed garland garter garland a carter chief exempt_organizations technical branch ae


internal_revenue_service number info release date index number --------------------------------- ----------------------------- -------------------------------- - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 genin-160622-04 date february legend taxpayer dear -------------- --------------------------------- we are responding to a letter dated date submitted on behalf of the taxpayer requesting a late s_corporation_election effective date although we are unable to respond to the request as submitted this letter provides useful information relating to the request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2005_1 copy enclosed in particular revproc_2005_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure if postmarked before date and dollar_figure if postmarked on or after date however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if postmarked before date and dollar_figure if postmarked on or after date if you are eligible to use the reduced fee provision you must include the statement described in ' b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address plr-nnnnnn-yy attn cc pa t p o box ben franklin station washington dc direct to cc psi room by way of introduction the irs has a small_business website which provides information and various useful links visit this special site at www irs gov smallbiz additionally you can order a single free copy of the small_business resource guide cd-rom by calling the cd-rom provides critical tax information including forms instructions and publications as well as valuable information from a variety of government agencies non-profit organizations and educational institutions we hope that the above information proves helpful sincerely s dianna k miosi dianna k miosi chief branch office of associate chief_counsel passthroughs and special industries enclosures announcement revproc_2005_1


department of the treasury internal_revenue_service washington d c jul z tax_exempt_and_government_entities_division uil no attn legend company a company firm c firm d individual e individual f individual g individual h dear this is in response to a letter dated date as supplemented by information received on date in which you request through your authorized representative an extension of time pursuant to sec_301_9100-1 of the procedure and administration regulations the p a regulations to file the notice of election described in sec_3 of revproc_93_40 c b rev_proc to be treated as operating qualified separate lines of business qslobs under sec_414 of the internal_revenue_code the code the following facts and representations have been submitted under penalties of perjury in support of company a's ruling_request affidavits supporting these facts and representations were also submitted company a is a holding_company with nine wholly-owned subsidiaries each of its subsidiaries sponsors a plan described under sec_401 a and k of the code 401_k_plan ' company b a subsidiary of company a established it sec_401 k plan in company a acquired company bin prior to the acquisition company b was not part of a controlled_group following the acquisition in company b continued to operate as a separate_entity with its own financial and accounting systems human resources system and procedures employees and 401_k_plan company a had minimal involvement in the business operations of company b which continues to operate independently of company a and the other entities in company a's controlled_group company a recognized that certain plan qualification requirements apply to the controlled_group and retained firm c a third-party administrator to consolidate testing data for company a firm c tested the k plans maintained by company a's subsidiaries on an employer-wide basis including the average deferral percentage adp_test if excess_contributions were found company a's policy was to inform the affected subsidiary of the test results and identify the hces to whom corrective distributions should be made company a did not confirm with each subsidiary that the corrective distributions were actually made following the expiration of the transition_period for acquisitions contained in sec_410 of the code firm c began including company bin consolidated testing beginning in the plan_year company b provided the information requested each year and acknowledged company a's instructions to make corrective distributions to hces however company b failed to make the distributions instead company b followed the results of testing prepared by its own third-party administrator firm because it considered itself to be an independent entity with a stand-alone plan individual e the vice-president for human resources at company b has held her position since october of she had trained for several months with her predecessor who informed her that company b was not required to follow company a's testing results and instructions to make corrective distributions because it performed its own testing individual e did not understand the significance of company b's relationship to company a and she received confirmation that company b could act independently from company b's chief financial officer cfo individual g whose understanding was also based on advice given by individual e's predecessor individual g had also been informed by the prior cfo of company b that company a had assured company bit would operate independently after the acquisition in and company b's benefits manager individual f completed an annual questionnaire from firm which asked whether company b was part of a controlled_group whether it was a qslob and whether any changes in ownership had occurred individual f followed her predecessor's answers of responding negatively to these questions while individual f assisted in gathering the information annually provided to company a the request for information and instructions to make corrective distributions were sent to individual e and not to her the prior director of human resources for company a individual h recalls annual discussions with company b regarding the testing because company b did not believe it should be included in group testing individual h also recalls particular concerns from other subsidiaries about including company b in the testing because company b has a high percentage of hces in firm c had some communications with firm regarding company b's controlled_group status but no further action was taken prior to the spring of neither firm c nor firm raised the possibility of making a qslob election by filing the form 5310-a notice of qualified_separate_lines_of_business form 5310-a in the spring of individual e contacted benefits counsel to streamline the communications between company a and company b regarding plan testing at this time she learned that company a would be required to file the form_531 0-a in order for company b to rely on separate testing however she did not notify company a of this issue and became absorbed in company b's other business priorities she revisited the issue during the next round of testing in the spring of and at that time notified company a of the issue you represent that except for the filing of the form_531 0-a company b satisfied the requirements for treatment as a qslob beginning date based on the above facts and representations you request an extension of time pursuant to sec_301_9100-3 of the p a regulations to file the form 5310-a effective for plan years beginning on or after date in general sec_414 of the code provides that for purposes of sec_129 d and o b an employer shall be treated as operating separate lines of business during any year if the employer operates separate lines of business for bona_fide business reasons and satisfies certain other conditions under the code if the employer is treated as operating qualified_separate_lines_of_business for the year the employer may apply the minimi lm coverage requirements of sec_410 including the nondiscrimination requirements of sec_401 and the minimum participation requirements of sec_401 a separately with respect to the employees in each qualified separate business line sec_414 of the code requires that an employer notify the secretary_of_the_treasury that a line_of_business is being treated as separate for purposes of sec_129 and sec_41 o b sec_3 of revproc_93_40 sets forth the exclusive rules for satisfying the notice requirement of sec_414 of the code section dollar_figure of revproc_93_40 provides that notice must be given by filing form_531 0-a section dollar_figure of revproc_93_40 provides that notice for a testing year must be given on or before the notification date for the testing year the notification date for a testing year is the later of october of the year following the testing year or the 15th day of the 1oth month after the close of the plan_year of the plan of the employer that begins earliest in the testing year section dollar_figure of revproc_93_40 provides that after the notification date notice cannot be modified withdrawn or revoked and will be treated as applying to subsequent testing years unless the employer takes timely action to provide a new notice sec_301_9100-1 a of the p a regulations states that the regulations under sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner of internal revenue commissioner will use to determine whether to grant an extension of time to make a regulatory election it further provides that the granting of an extension of time is not a determination that the taxpayer is otherwise eligible to make the election sec_301_9100-1 b of the p a regulations defines a regulatory election to mean an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin notice that an employer elects to be treated as operating qualified_separate_lines_of_business pursuant to sec_414 of the code and sec_3 of revproc_93_40 constitutes a regulatory election sec_301_9100-1 of the p a regulations provides that the commissioner in the commissioner's discretion may grant a reasonable extension of time under the rules of sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-2 of the p a regulations lists certain elections for which automatic extensions oftime to file are granted sec_301_9100-3 generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 section dollar_figure a of the p a regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government section dollar_figure b of the p a regulations provides that except as provided in paragraphs b i through iii of this section a taxpayer will be deemed to have acted reasonably and in good_faith if i the taxpayer's request for relief under this section is filed before the failure to make a timely election is discovered by the service ii the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii the taxpayer failed to mak the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election section dollar_figure b of the p a regulations provides that a taxpayer is deemed to have not acted reasonably or in good_faith if i the taxpayer seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed at the time relief is requested ii the taxpayer was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii the taxpayer requests relief based on hindsight section dollar_figure c of the p a regulations provides the standards for determining whether the interests of the government are prejudiced paragraph c i provides that the interests of the government are prejudiced if granting relief would result in lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made paragraph c ii provides that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section company a's ruling_request contains an explanation describing the circumstances that caused its failure to give the service timely notice of its qsl08 election for the testing year company had operated as an independent company prior to its acquisition by company a in and testing it sec_401 k plan established in on a controlled_group basis was not required until the plan_year beginning date company continued to operate independently from company a as it been assured it could do after the acquisition the persons involved in the administration of company 8' sec_401 k plan individuals e f and g and firm were unaware of the election until individual e learned of the requirement to file form 5310-a in the spring of and informed company a in the spring of firm c hired by company a in to test the k plans annually for compliance did not raise the possibility of electing qsl08 status until the spring of although firm c and firm had communicated regarding company b's controlled_group status in no further action was taken this request for relief under sec_301_9100-1 of the p a regulations was made on date before the service discovered the failure_to_file the election based on these facts company a is deemed to have acted reasonably and in good_faith because it satisfies clause i of section dollar_figure b although the interests of the government are ordinarily prejudiced if the taxable_year in which the election would have been made is closed by the statute_of_limitations company a has filed an application under the voluntary correction program to correct the k plans for failures to satisfy the adp_test additionally company a does not have a lower tax_liability than it would have if it had timely filed the election accordingly company a is granted an extension of days from the date of the issuance of this ruling letter to file notification of the qslob election on form_531 0-a with the appropriate office of the service no opinion is expressed as to whether the separate lines of business_of_the_taxpayer satisfy the requirements other than notifying the secretary under sec_414 of the code this ruling does not constitute a determination that a separate_line_of_business satisfies the requirement of administrative scrutiny within the meaning of sec_1_414_r_-6 of the federal_income_tax regulations no opinion is expressed as to the tax treatment of the transaction described herein under any other provisions of the code cr regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_611 o k of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file with this office should you have any concerns regarding this ruling please contact c carlton a watkins manager employee_plans technical group enclosures deleted copy of letter_ruling notice cc