internal_revenue_service number release date index number -------------------------- ------------------------------------ ------------------------------------------------------------- --------------------------------------------- ----------------------------------- ------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------- --------------------------------------------------- telephone number -------------------- refer reply to cc psi b03 plr-135574-18 plr-135575-18 date date legend x1 -------------------------------------------------- ------------------------- x2 -------------------------------------------------- -------------------------------------- y ----------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------- country state date1 ---------------------- ------------ ------------------ dear --------------- this letter responds to a letter dated date submitted by y on behalf of x1 and x2 and requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x1 and x2 to file entity classification plr-135574-18 elections to be disregarded as entities separate from their owners for federal_income_tax purposes facts the information submitted states that x1 and x2 were formed as limited_liability companies by y under the laws of country on date1 y is a domestic limited_partnership formed under the laws of state y wholly owns x1 and x1 wholly owns x2 x1 and x2 represent that they are foreign eligible entities eligible to elect to be disregarded as entities separate from their owners for federal tax purposes as of date1 however x1 and x2 failed to timely file forms entity classification election to be classified as disregarded entities for federal tax purposes effective date1 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides default classification for an eligible_entity that does not make an election sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_7701-3 provides that if an eligible_entity classified as an association elects under sec_301_7701-1 to be classified as a partnership the following is deemed to occur the association distributes all of its assets and liabilities to its shareholders in liquidation of the association and immediately thereafter the shareholders contribute all of the distributed assets and liabilities to a newly formed partnership plr-135574-18 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic_extension of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the granting of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x1 and x2 are granted an extension of time of days from the date of this letter to file forms with the appropriate service_center to elect to be disregarded as entities separate from their owners for federal tax purposes effective date1 a copy of this letter should be attached to each form_8832 this ruling is contingent on x1 x2 and y filing within days from the date of this letter all required federal_income_tax returns and information returns including amended returns for all open years consistent with the requested relief these returns must include but are not limited to form_8858 information_return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code and the regulations thereunder in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-135574-18 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the powers of attorney on file with this office we are sending copies of this letter to x1’s and x2’s authorized representatives sincerely associate chief_counsel passthroughs special industries by __________________________ richard t probst senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court new jersey council of teaching hospitals petitioner v commissioner of internal revenue respondent docket no filed date p is a tax-exempt charitable_organization described in sec_501 whose exempt purposes include promoting health care and medical education during its calendar tax years p contracted with third-party vendors v1 and v2 to provide its mem- bers hospitals and a medical school access to debt-collection serv- ices and group purchasing programs p received fees from v1 and v2 in exchange for administering these programs and promoting the pro- grams to its members on its forms return of organization exempt from in- come tax p treated all of these receipts as substantially related to the conduct of its tax-exempt purposes see sec_513 and thus as exempt from federal_income_tax the irs selected p’s re- turns for examination and determined that the fees it received from v1 and v2 constituted unrelated_business_taxable_income ubti subject_to unrelated_business_income_tax ubit under sec_511 and sec_512 held the fees p received from v1 represented payments for services not for_the_use_of intangible_property and thus did not constitute royalties within the meaning of sec_512 held further the business activities that gave rise to the fees p received from v1 and v2 were not carried on primarily for the convenience of its members within the meaning of sec_513 held further given the inapplicability of the exclusions in sec_512 and sec_513 the fees p received from v1 and v2 were subject_to ubit because they were derived from an unre- lated trade_or_business that p regularly carried on t j sullivan and joseph a rillotta for petitioner joan casali and mark l hulse for respondent opinion lauber judge with respect to petitioner’s calendar tax years and the internal_revenue_service irs or respondent deter- mined deficiencies in unrelated_business_income_tax ubit under sec_511 as follows 1all statutory references are to the internal_revenue_code code in effect for the tax years at issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar year deficiency dollar_figure big_number big_number big_number although petitioner is exempt from federal_income_tax under sec_501 and c it is subject_to tax on its unrelated_business_taxable_income ubti see sec_511 sec_512 the question presented is whether fees petitioner received under certain contracts with third parties are excluded from ubti as royalties under sec_512 or as amounts received in a trade_or_business carried on primarily for the convenience of its members under sec_513 we conclude that neither of these exclusions applies and hence that the fees petitioner received are subject_to ubit background the parties submitted this case for decision without trial under rule the stipulation of facts and the attached exhibits are incorporated by this refer- ence petitioner had its principal_place_of_business in new jersey when it filed its petition petitioner was incorporated in as university health systems of new jersey inc in date it changed its name to new jersey council of teaching hospitals since its incorporation petitioner has been a membership or- ganization whose members consist primarily of teaching hospitals operating in new jersey at all relevant times petitioner’s board_of trustees has consisted of petitioner’s president and the chief_executive_officer ceo of each of its members in date the irs issued petitioner a determination_letter recogniz- ing it as exempt from federal_income_tax under sec_501 and c the irs classified petitioner as a public charity rather than a private_foundation by virtue of its status as a supporting_organization ie an entity organized and operated ex- clusively for the benefit of to perform the functions of or to carry out the pur- poses of one or more public_charities sec_509 the entities petitioner supports are its members all of which are tax-exempt organizations as specified in sec_509 or in its application_for tax exemption petitioner stated that its charitable ob- jectives like those of its supported organizations are to further undergraduate and graduate medical education to coordinate such education with the clinical pro- grams available in its affiliated hospitals and to help provide innovative and cost efficient health care delivery systems in new jersey on its forms return of organization exempt from income_tax for petitioner defined its ex- empt purposes to include promoting health care medical education and techno- logy by studying and improving graduate medical education and articulat ing a vision of a superior healthcare system for all new jerseyans petitioner incurred the following expenses in advancing these goals year expenses dollar_figure big_number big_number big_number during petitioner’s members consisted of to teaching hospi- tals one nonteaching hospital and one medical school each member paid annual dues the dues for major teaching hospitals were generally set at dollar_figure per year other members paid annual dues between dollar_figure and dollar_figure during the tax years at issue petitioner received dues from its members as follows year dues dollar_figure big_number big_number big_number besides dues income petitioner received fees under contracts with third par- ties petitioner’s business model was to offer various programs and services to its members if its members patronized or contracted with the third parties who supplied these programs and services the third parties would make payments to petitioner based on the revenues thus derived the third-party programs and services petitioner offered to its members dur- ing included credit cards internet services research and polling equip- ment maintenance transportation services debt collection and group purchasing arrangements the revenues at issue in this case were derived from agreements with two third parties osi collection services inc osi which provided debt- collection services and greater new york hospital association gnyha which provided directly or through affiliates group purchasing programs a osi agreement osi was formerly known as payco-general american credits inc payco in date petitioner and payco executed a contract captioned service agree- ment that was renewed periodically through the tax years at issue this agree- ment recites that petitioner had been appointed purchasing agent by certain of it sec_2during osi was a subsidiary of outsourcing solutions inc for convenience we will refer to osi and its parent collectively as osi 3petitioner also appears to have derived fees during from third parties that supplied its members with transportation services and research and polling services the aggregate amounts of these fees were dollar_figure in dollar_figure in dollar_figure in and dollar_figure in the notice_of_deficiency did not include these amounts in petitioner’s ubti members and that petitioner desire d to recommend the services of payco to its members under the conditions stated in the agreement for its part payco agreed to provide petitioner’s current and future members in exchange for specified fees a full range of collection services for primary accounts secondary accounts and accounts subject_to litigation article of the agreement captioned purpose states that petitioner here- by endorses payco as a collection agency and shall advise its members that payco is one of petitioner’s selected vendors article which sets forth petitioner’s rights and responsibilities provides that petitioner shall endorse payco as a collection agency and shall advise its members that payco is one of petitioner’s selected vendors to provide collection agency services neither these nor any other provisions of the agreement license payco to use peti- tioner’s intangible_property or obligate petitioner to make intangible_property available to payco nowhere in the agreement is there any reference to tangible or intangible_property owned by petitioner to fulfill its obligations under the osi agreement petitioner listed osi in the member services section of its website this listing included osi’s logo a hot link to osi’s website and a paragraph-long description of osi’s offerings during several board meetings petitioner’s president encouraged the ceos of its member hospitals to hire osi to perform their debt collection services represent- ing that osi’s fees were important to petitioner’s financial stability petitioner provided osi with a list of its member hospitals but that list was already publicly available on petitioner’s website along with the names and phone numbers of the hospitals’ ceos and chief financial officers in article of the agreement captioned payco’s rights and responsibili- ties payco agreed to pay petitioner for its services as group purchasing organi- zation a fee equal to three percent of the amount collected on petition- er’s members’ accounts placed with payco additionally in consideration for the coordination and liaison services to be provided by petitioner in its ca- pacity as group purchasing agent payco agreed to pay petitioner a distinct fee pursuant to a separate agreement previously executed during the tax years at issue osi as successor to payco paid petitioner aggregate fees as follows year fees total dollar_figure big_number big_number big_number big_number during three of petitioner’s nine dues-paying members participated in the osi program during three of petitioner’s ten dues-paying members par- ticipated in the osi program during three of petitioner’ sec_11 dues-paying members participated in the osi program during four of petitioner’s ten dues-paying members participated in the osi program members who chose not to participate in the osi program were free to contract with other debt-collection service providers petitioner did not track or assess and cannot now quantify the extent to which its members saved money as a result of discounts or favorable pri- ces offered by osi b gnyha agreement in health alliance inc a for-profit affiliate of petitioner entered into a management agreement with gnyha under this agreement health alliance was paid a share of the fees that gnyha received as a result of enrollment by pe- titioner’s members in certain group purchasing programs this agreement applied only with respect to hospitals that did not have contracts with gnyha before be- coming members of petitioner the agreement had an initial term of two years but was extended periodically through the tax years at issue health alliance subsequently assigned to petitioner all of its rights and obli- gations under the gnyha agreement health alliance filed its final federal in- 4certain activities under this agreement were performed by affiliates of gnyha including gnyha services inc and gnyha ventures inc for con- venience we will refer to these entities collectively as gnyha come tax_return for its tax_year and apparently became dormant sometime the following year thus during the tax years at issue all fee payments under the gnyha agreement were received by petitioner during gnyha offered hospitals in new york new jersey and connecticut the opportunity to select purchasing agreements from two port- folios its own regional portfolio and a national portfolio offered in conjunc- tion with premier inc a national healthcare group purchasing organization the products and services that hospitals might purchase in this way included medical and surgical supplies pharmaceuticals imaging and cardiology products nutrition services operating room instruments and various types of capital equipment if a hospital enrolled in either program it was able to purchase products and services from vendors at discounted prices that gnyha and premier had negotiated with those vendors under the agreement petitioner received sales-related administrative fees for promoting gnyha’s group purchasing programs to its members and for helping to administer those programs eg by distributing application forms and instructions petitioner listed gnyha in the member services section of its website this listing included a description of gnyha’s offerings a hot link to its website and the name and telephone number of a gnyha contact person the fees petitioner received from gnyha were labeled commissions in petitioner’s financial statements these commissions were calculated as a percent- age of the fees that vendors paid gnyha and or premier with respect to pur- chases by petitioner’s members who chose to participate in the group purchasing programs during the tax years at issue gnyha paid petitioner fees as follows year total fees dollar_figure big_number big_number big_number big_number during three of petitioner’s nine hospital members participated in a gnyha group purchasing program during six of petitioner’s ten hospital members participated in a gnyha group purchasing program during six of petitioner’ sec_11 hospital members participated in a gnyha group purchasing program during seven of petitioner’s ten hospital members participated in a gnyha group purchasing program members who chose not to enroll with gnyha were free to enter into group purchasing agreements with premier direct- ly or to participate in arrangements offered by other providers such as the volun- tary hospitals of america during a hospital was not required to belong to an association such as petitioner in order to participate in gnyha’s group purchasing programs hospitals received essentially the same vendor discounts regardless of whether they joined individually or through an association however whereas gnyha paid fees to petitioner when its members enrolled through it gnyha did not pay fees to hospitals that enrolled individually and would not have paid fees to peti- tioner’s members had they done so petitioner did not track or assess and cannot now quantify the extent to which its members saved money in absolute terms or in comparison with other group purchasing programs available to them as a result of discounts made available through gnyha c irs examination petitioner timely filed form_990 for each year at issue on these returns it treated all of its receipts as substantially related to the conduct of its tax-exempt purposes see sec_513 and thus as exempt from federal_income_tax it did not include with any of these returns form 990-t exempt_organization business in- come tax_return following an examination of these returns the irs sent petitioner a timely notice_of_deficiency determining that the fees it had received from osi and gnyha constituted ubti subject_to tax under sec_511 and sec_512 the irs determined that petitioner had marketed and administered the gnyha program and that this activity was not substantially related to its educational pur- poses the irs likewise concluded that the fees received from osi were subject_to ubit concluding that a charity’s need for revenues to accomplish its charit- able mission does not make a questioned activity related to its exempt purposes in reaching these conclusions the irs rejected petitioner’s reliance on sec_513 which provides that an unrelated_trade_or_business does not in- clude an activity which is carried on by the organization primarily for the convenience of its members according to the irs petitioner’s efforts to secure economic benefit s due to bulk marketing did not constitute an activity under- taken primarily for its members’ convenience the irs likewise rejected petition- er’s reliance on sec_512 which excludes royalties from ubit in the irs’ view osi and gnyha were paying fees to petitioner not for use of its in- tangible_property but for its services in endorsing marketing and administering those programs petitioner timely petitioned this court for redetermination of the deficien- cies set forth in the notice see supra p by order dated date we granted the parties’ motion to submit the case under rule for decision without trial discussion a burden_of_proof the irs’ determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 petitioner does not con- tend that the burden_of_proof should shift to respondent under sec_7491 in any event because only legal issues remain the burden_of_proof is irrelevant see eg 115_tc_523 b governing statutory structure congress enacted the ubit regime in prompted in part by a universi- ty’s acquisition of a macaroni company see note the macaroni monopoly the developing concept of unrelated_business_income of exempt organiza- tions harv l rev the goal of these provisions was to level the playing field between for-profit companies and tax-exempt entities that engage in business activities otherwise charitable and educational organizations could leverage their tax-exempt status to gain an unfair competitive advantage over businesses required to pay the corporate_income_tax see 475_us_834 s rept no pincite 1950_2_cb_483 sec_511 imposes a tax at regular corporate tax_rates on the ubti of most charitable and educational organizations sec_512 defines ubti as the gross_income derived by any organization from any unrelated trade or bus- iness regularly carried on by it subject_to certain modifications and less al- lowable deductions consistently with its legislative purpose congress excluded from ubti most types of passive_investment_income such as dividends interest and capital_gains see sec_512 among the excluded forms of passive_income are royalties sec_512 sec_513 generally defines an unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 the statute provides three exceptions to this general_rule the exception relevant here set forth in sec_513 provides that an unrelated_trade_or_business does not include a trade_or_business that an organization carries on primarily for the convenience of its members students patients officers or employees 5petitioner does not contend that it incurred any allowable deductions for expenses_incurred in generating its fee income from osi and gnyha c analysis petitioner concedes that the activities by which it earned fees from osi and gnyha constituted a trade_or_business that this business was regularly car- ried on and that the conduct of this business was not substantially related to the performance of its educational_purposes but it urges that these fees were nev- ertheless exempt from ubit on the grounds that its fees from osi constituted royalties and that its fees from both vendors were derived from a business car- ried on primarily for the convenience of its members we address these contentions in turn royalty exclusion sec_512 excludes from ubti all royalties including overriding royalties whether measured by production or by gross or taxable_income_from_the_property the regulations do not define royalty except to indicate that the term includes mineral royalties sec_1_512_b_-1 income_tax regs whether an item_of_income constitutes a royalty is to be determined by all the facts and cir- cumstances of each case id sec_1_512_b_-1 first sentence as relevant here royalties are payments for the right to use intangible_property 86_f3d_1526 9th cir aff’g in part rev’g in part and remanding 103_tc_307 see 94_tc_60 concluding that royalties for purposes of sec_512 are payments for_the_use_of valuable intangible pro- perty rights rev’d on other grounds 942_f2d_309 6th cir we have held that royalties include payments to a tax-exempt_organization for use of such intangible assets as its name logo service marks and membership list see eg 112_tc_332 planned parenthood fed’n of am inc v commissioner tcmemo_1999_206 sierra club inc v commissioner tcmemo_1999_86 77_tcm_1569 on the other hand royalties for purposes of sec_512 cannot in- clude compensation_for services rendered by the owner of the property sierra club f 3d pincite for example in 53_f3d_120 5th cir an insurance_company paid a tax-exempt_organization to use its good offices influence and prestige to promote the companies’ life insur- ance plans and provide various administrative services the court_of_appeals held these fees subject_to ubit reasoning that the plain language of the agree- see also disabled am veterans t c pincite noting that royalties are generally defined to include payments for the rights to use copyrights literary works motion picture rights and dramatic rights the commissioner has ruled that royalties for purposes of sec_512 include proceeds derived by a tax-exempt_organization from licensing the use of its members’ names photo- graphs likenesses and facsimile signatures revrul_81_178 1981_2_cb_135 ments demonstrates that the agreements were strictly for services and did not con- template a royalty payment id pincite see nat’l water well ass’n inc v com- missioner 92_tc_75 ruling that a royalty is a payment for_the_use_of a valuable right and that compensation_for services rendered does not constitute royalty income cf sierra club t c m cch pincite holding that the organization’s receipts were not received in consideration for services pro- vided but rather in consideration for_the_use_of intangible_property petitioner’s contract with osi was captioned service agreement peti- tioner thereby agreed to advise its members that osi was a selected vendor to endorse osi as a collection agency and to provide various administrative services in exchange for petitioner’s services as group purchasing organization and its coordination and liaison services osi agreed to pay petitioner specified fees nowhere in the agreement does petitioner license osi to use its intangible_property or obligate itself to make intangible_property available to osi indeed the agreement makes no reference whatever to tangible or intangible_property owned by petitioner that being so it is hard to see how the fees petitioner re- ceived under the agreement could be regarded as royalties measured by pro- duction or by gross or taxable_income_from_the_property see sec_512 emphasis added petitioner urges that the services it actually provided osi were quite mod- est it listed osi on the member services page of its website which displayed osi’s name and logo supplied a hot link to osi’s website and provided a para- graph-long description of osi’s offerings during several board meetings peti- tioner’s president encouraged the ceos of its member hospitals to hire osi to per- form their debt collections representing that osi’s fees were important to petition- er’s financial stability hypothesizing that this volume of services could not have been worth the dollar_figure it received from osi during petitioner urges that osi must in fact have been paying for something else that something else petitioner says was osi’s acquisition of the right to associate its name and mark with petitioner’s name and mark and with petitioner’s reputation with its members in petitioner’s view this was the crux of the contract this argument is unpersuasive because petitioner has failed to identify any intangible_property of its own that it licensed osi to use the placement of osi’s trademark on petitioner’s website obviously did not constitute the use of petition- er’s intangible_property by osi rather it constituted the rendition of a service to osi by petitioner and while petitioner’s reputation might be described as an intangible asset petitioner did not license osi to use petitioner’s reputation rath- er petitioner exploited its own reputation with its members by endorsing osi and inducing its members to patronize that company it is not our role to second-guess the value that osi placed on petitioner’s endorsement and administrative services by agreeing to endorse osi as one of its selected vendors petitioner directed to osi’s door a potentially large stream of revenue and osi agreed to pay petitioner at least of the resulting receipts the fact that petitioner’s share of these receipts amounted to dollar_figure simply at- tests to the depth of that revenue stream it creates no inference that osi was pay- ing petitioner for the right to use some unspecified intangible_property we con- clude that osi was paying petitioner for its services not for_the_use_of its intangi- ble property and that the osi fees cannot be excluded from ubti as royalties under sec_512 convenience exception sec_513 excepts from the definition of unrelated trade or busi- ness any trade_or_business which is carried on in the case of an organization de- scribed in sec_501 or in the case of a college or university described in sec_511 by the organization primarily for the convenience of its members students patients officers or employees neither the code nor the regulations explain the scope of this exception or define the term convenience however the regulations supply three examples of activities that qualify for the convenience exception the sale of books by a college bookstore to students the sale of pharmaceutical supplies by a hospital pharmacy to patients of the hos- pital and a laundry operated by a college for the purpose of laundering dormi- tory linens and the clothing of students sec_1_513-1 e flush lan- guage income_tax regs these examples resemble those set forth in the legis- lative history see h_r rept no pincite 1950_2_cb_380 stating that i n the case of an educational_institution income from dining halls restaurants and dormitories operated for the convenience of the students would qualify for the sec_513 exception the commissioner has expanded on these examples in a series of revenue rulings elaborating on one regulatory example the irs has ruled that a laundry 7we are not bound by revenue rulings under 323_us_134 the weight we afford them depends upon their persuasive- ness and the consistency of the commissioner’s position over time 129_tc_131 w e evaluate the revenue_ruling under the less deferential standard enunciated in skidmore see 533_us_218 citing 467_us_837 chevron did nothing to eliminate skidmore’s holding that an agency’s interpretation may merit some de- ference whatever its form the commissioner’s rulings on the convenience exception date back to and reflect a consistent position we conclude that these rulings are entitled to some deference see 144_tc_324 and dry-cleaning plant operated by a university primarily to serve its students and faculty qualified for the convenience exception even though some members of the public were also served revrul_55_676 1955_1_cb_266 the commis- sioner has similarly ruled that the operation of vending machine facilities on a college campus including food and soft drink vending and laundromat facilities would qualify for the convenience exception revrul_81_19 1981_1_cb_353 the commissioner concluded that t he goods and services dispensed by the vending machines are necessary for the day-to-day living on the campus of students faculty and staff accordingly these activities further ed the educa- tional program of the university and qualified for the sec_513 exception by operating facilities for the convenience of the university community ibid see also revrul_58_194 1958_1_cb_239 holding that an organization operating a bookstore and cafeteria on a college campus for the convenience of students and faculty qualified for exemption under sec_501 on the other hand distinguishing another of the regulatory examples the commissioner has ruled that sales of pharmaceutical supplies by a tax-exempt hospital to members of the general_public or to private patients of physicians prac- ticing in a building owned by the hospital do not qualify for the convenience exception revrul_68_375 1968_2_cb_245 revrul_68_374 1968_2_cb_242 the commissioner reasoned that t he buyer-seller relationship between these off-street patrons and the pharmacy was insufficient to classify them as patients of the hospital revrul_68_374 c b pincite the commis- sioner concluded that these revenues were subject_to ubit because there was no substantial causal relationship between the achievement of the hospital’s exempt purposes and the sale of pharmaceutical supplies to such individuals ibid revrul_68_375 c b pincite read together these examples suggest that a business conducted by a uni- versity or a hospital will be regarded as carried on for the convenience of its stu- dents or patients if the business activity assists those individuals in their capacity as such viz by helping them be better students or healthier patients on-campus cafeterias assist students in fulfilling their role as students by facilitating student interaction before and after class on-campus dormitories allow students to live close to classrooms and libraries and share quarters with fellow students on- campus bookstores laundromats and vending machines enable students to obtain day-to-day living necessities without the inconvenience of traveling to distant off- campus locations and operation of a pharmacy helps hospital patients stay healthier by enabling them to secure needed drugs and supplies without endanger- ing their health by leaving the premises in each case the university or hospital furthers its own educational or health-advancement purpose by helping the recipi- ents of its services to perform better see also st luke’s hosp v united 494_fsupp_85 w d mo pathology tests performed by hospital pri- marily for convenience of member physicians the case law on this subject while sparse supports this interpretation of the convenience exception see am college of physicians v united_states cl_ct rev’d on other grounds 743_f2d_1570 fed cir rev’d on other grounds 475_us_834 the question addressed by the su- preme court in that case was whether a medical association’s publication of com- mercial advertising in its medical journal was substantially related to its tax- exempt purposes see am college of physicians u s pincite but the college advanced an alternative argument at the trial and appellate levels namely that its advertising activity was carried on primarily for the convenience its members within the meaning of sec_513 the claims_court rejected that argument and its holding to this effect was affirmed on appeal see am college of physicians f 2d pincite the claims court’s reasoning is instructive here the college contended that journal advertising served the convenience of its physician members by bring- ing to their attention new medical products and positions offered in classified ads the court assumed that this advertising might benefit the college’s members in their capacity as practicing physicians am college of physicians cl_ct pincite but it found the convenience exception unavailable because the advertis- ing was not published for the convenience of members in their capacity as such the members’ interests as members concern such matters as attending the college’s educational functions participating in research and test- ing disseminating health information to the public and promoting quality medical education the members’ interests as physicians are much broader and include all aspects of medical practice ibid although journal advertising might assist practicing physicians by inform- ing them of new products or publicizing the availability of positions the court found that the college’s advertising does not have any connection with their responsibilities as members of the college ibid it accordingly ruled that the college’s advertising business was not carried on for the convenience of its members within the meaning of sec_513 petitioner contends that its activities under the gnyha contract were un- dertaken for the purpose of providing members access to discounted supplies and services and generating non-dues revenue to support its operations on behalf of its members its activities under the osi contract were allegedly under- taken for the purpose of refer ring to its members a vetted and reliable collec- tions vendor because its business activity allegedly assisted its members in these ways petitioner insists that this activity was carried on primarily for their convenience we reject this contention for a variety of reasons first by helping its mem- bers save time or money by directing them to low-cost or high-quality vendors petitioner was not serving the convenience of its members in their capa- city as members am college of physicians cl_ct pincite the members’ interests as members may include attending petitioner’s educational functions and participating in its research programs petitioner might serve its members’ con- venience in their capacity as members for example by providing travel services in connection with its conferences or by contracting with research or consulting firms although helping its members save money might improve the hospitals’ balance sheets it would not provide a convenience to them in their capacity as members of petitioner nor would it enable petitioner to advance its own educa- tional purposes as a university does by serving the convenience of its students in their capacity as students second petitioner has not established that its activity benefitted its members in any meaningful way petitioner did not track or assess and cannot now quan- tify the extent to which its members saved money in absolute terms or in compar- ison with other programs available to them as a result of discounts or favorable prices offered by gnyha or osi hospitals were not required to belong to an association like petitioner in order to participate in gnyha’s group purchasing programs and they received essentially the same vendor discounts regardless of whether they joined individually or through an association petitioner insists that it served its members’ convenience if only in terms of saved time and effort by vetting osi through a request for proposals but this alleged vetting was conduct- ed in more than a decade earlier and only a third of petitioner’s members signed up for the osi program suggesting that its benefits were not obvious peti- tioner cannot show that these activities were conducted primarily for the conveni- ence of its members without showing that the activities plausibly benefitted its members in some way third even if petitioner’s business activity saved its members money there is no legal support for the notion that saving money without more is enough to qualify for the convenience exception in sec_513 there is nothing in the statute or its legislative_history in the regulations promulgated by the secre- tary or in the rulings issued by the commissioner to suggest that saving money is an important or even a relevant consideration a university’s operation of on- campus cafeterias and laundromats might save students or their parents money by offering lower prices than those available commercially but there is no evi- dence that considerations of this sort played any role in congress’ enactment of the convenience exception indeed petitioner’s money saving theory is hard to reconcile with congress’ overall purpose in enacting the ubit provisions which was to eliminate unfair competition between tax-exempt and taxpaying bus- inesses petitioner’s money saving theory also proves too much tax-exempt or- ganizations could engage in a wide array of businesses that might save time or money for their members students patients officers or employees by selling directly to those individuals or by directing them to low-cost or high-quality vend- ors were sec_513 construed as petitioner urges it would significantly undercut the purpose of the ubit because there would be no end to the types of goods and services an organization could provide its members while avoiding tax on the income so derived am college of physicians cl_ct pincite 8insurance programs are one example of a business that might qualify under petitioner’s interpretation of the convenience exception many tax-exempt or- ganizations sponsor or endorse insurance plans for their members receiving fees from the insurance_companies when their members sign up such organizations may plausibly contend that these plans have been well vetted and may save their members time or money but it is well established that this activity generally con- stitutes an unrelated_trade_or_business the revenues from which are subject_to ubit see eg 477_us_105 continued fourth even if petitioner’s business activity were thought to provide a con- venience to its members by saving them time or money petitioner has not shown that it conducted this activity primarily for the convenience of its members as the statute requires sec_513 emphasis added in another tax context the supreme court has interpreted the term primarily’ to mean of first importance or principally 383_us_569 construing sec_1221 as the claims_court concluded in am college of physicians t here seems to be no reason to depart from this common sense definition in interpreting sec_513 cl_ct pincite during petitioner derived aggregate fees of dollar_figure approxi- mately of its total revenue under its contracts with osi and gnyha as petitioner’s president emphasized to his fellow board members these revenues were important to petitioner petitioner’s annual expenditures substantially ex- ceeded the dues its members paid in the gap between expenditures and dues was more than dollar_figure see supra p without the fees it received from osi and gnyha petitioner would have been forced to curtail its activities or raise its dues significantly even if petitioners’ members were thought to have derived continued texas farm bureau f 3d pincite am postal workers union afl-cio v united_states 925_f2d_480 d c cir some incidental benefit from the conduct of these two businesses it seems clear that petitioner’s primary purpose for engaging in these activities was to raise reve- nue for itself see am college of physicians cl_ct pincite if raising revenue were deemed its primary purpose petitioner asserts that its fee-generating activity nevertheless served its members’ convenience by en- abling it to conduct a broader range of charitable activities or by reducing the dues its members would otherwise have had to pay but this is simply a variation on the money saving theory we have already rejected see supra pp peti- tioner offers no legal authority and we have found none to support the proposi- tion that a desire to raise revenue whether rebated to members or not is sufficient to meet the requirements of the convenience exception the ubit provisions adopt the general_rule that an organization’s business revenues are taxable unless the underlying activity is substantially related to its exempt purposes aside from the need of such organization for income or funds or the use it makes of the profits derived sec_513 adoption of petitioner’s premise--that raising revenue to support its operations is sufficient to meet the 9hospitals were not required to belong to an association like petitioner in order to participate in gnyha’s group purchasing programs but if petitioner’s members participated through it rather than individually gnyha would pay peti- tioner substantial fees this makes it clear that petitioner operated this business not for its members’ convenience but primarily to raise revenue for itself convenience exception--would cause that exception to swallow this general_rule in construing provisions in which a general statement of policy is qualified by an exception we usually read the exception narrowly in order to preserve the primary operation of the provision 489_us_726 for all these reasons we find that the business activities giving rise to peti- tioner’s fees from osi and gnyha were not carried on primarily for the convenience of its members within the meaning of sec_513 those rev- enues were thus derived from an unrelated_trade_or_business that petitioner reg- ularly carried on the royalty exclusion of sec_512 being inapplicable petitioner’s fees constitute ubti under sec_512 that is subject_to ubit under sec_511 to implement the foregoing decision will be entered for respondent


internal_revenue_service tax exempt and government entities exempt_organization commerce st dallas tx department of the treasury uil release number release date date date legend org name of organization address address of org org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers phone fax certified mail - return receipt requested dear in a determination_letter dated date you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on august 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are therefore required to file form_1120 u s corporate_income_tax return for the years ended december 20xx with the ogden service_center for future periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter thank you for your cooperation sincerely nanette m downing director eo examinations internal_revenue_service tax exempt and government entities exempt_organization department of the treasury date date taxpayer_identification_number org name of organization address address of org year xx form tax_year s ended person to contact id number contact numbers phone dear we are enclosing a draft copy of our report of examination explaining why we believe the revocation of your organization’s exempt status is necessary if you accept our findings please sign and return the enclosed form 6018-a consent to proposed action the form 6018-a must be signed by officers of the organization we will then send you a final letter revoking your exempt status we request that you respond within days from the date of this letter lf you do not agree with our position you may appeal your case you will need to notify the revenue_agent named above a final report and a 30-day_letter will be issued to you the publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process following the issuance of the final 30-day_letter you will have days to provide a written_statement of appeals telling us why you do not agree with our determination we will forward your written_statement of protest to the appeals_office and they will contact you if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in the united_states tax_court the united_states court of federal claims or the united_states district_court after satisfying procedural and jurisdictional requirements you may also request that we refer this matter for technical_advice as explained in publication how to appeal an irs decision on tax-exempt status if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice publications and are available on the internal revenue services website at www irs gov you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate in the event of revocation you will be required to file federal_income_tax returns for any years after the tax period s shown above file returns with the appropriate service_center indicated in the instructions for those returns lf you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely enclosure form 6018-a draft report of examination form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx legend org name of organization year xx issue whether the org continues to be qualified as a social_club under internal_revenue_code irc sec_501 due to substantial activities with nonmembers and failing to maintain adequate_records facts the org club was granted exemption from federal_income_tax under sec_501 social_club as indicated on their determination_letter dated march 19xx its application_for recognition of exemption form_1024 states the club’s purpose is to provide a sports oriented recreational facility for its membership by operating a golf and country club promoting golf swimming and other sports related activities the club’s facilities consist of a club house containing bars a restaurant and event space an hole golf course driving range and swimming pool during 20xx the restaurant and bars were rented out to a party the 20xx form_990 showed a loss of dollar_figure onrents of dollar_figure the club's 20xx and 20xx form_990 and 990-t had been previously examined an advisory had been issued instructing the club to e e e correct its signage to indicate the club was private follow revproc_71_17 1971_1_cb_683 to comply with record- keeping requirements in order to substantiate nonmember usage maintain documentation as to the reasonableness of exempt and nonexempt expense allocation monitor nonmember usage of the club's facilities and services in order to comply with public law requirement of less than15 of gross_receipts as defined in rev_proc the club was advised that a follow-up examination would be conducted to ensure future compliance form 886-a ev department of the treasury - internal_revenue_service page -1- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx during the 20xx examination of the club’s form_990 and 990-t it was determined the club had not maintained records which followed rev the previously issued advisory proc in accordance with the club had a continued its failure to maintain documentation as to whether members paid for their guest when the group consisted of eight or less individuals or when groups greater than eight consisted of in these cases payment for services is assumed to be made by the members for guests the club also did not follow revproc_71_17 sec dollar_figure through dollar_figure record keeping requirements rev_proc sec dollar_figure precludes the use of minimum gross_receipts standard or audit assumptions as described above in cases where documentation has not been maintained the club has not maintained required_documentation that it is operating for an exempt_purpose percent members the club manager indicated during the examination’s initial interview that guests traditionally paid their fees nonmember income during 20xx was calculated at as follows account account description membership dues corporate green fees green fees regular green fees outings green fees outings cart rental-member cart rental-total golf service fees pool guest fees o total dollar_figure nonmember dollar_figure dollar_figure nonmember percentage of gross_receipts income trom nonmembers included green fees cart rentals pool and driving range use signage at the entrance to the club’s facility read course now open public welcome the club’s website the club house facilities are currently being used for nonmember meetings and events the restaurant has closed following the bankruptcy filing of its operator advertises open to the public also form 886-a rev department of the treasury - internal_revenue_service page -2- form_8 a department of the treasury - internal_revenue_service name of taxpayer org explanation of items schedule no or exhibit year period ended 20xx no documentation regarding the basis for the expense allocation between exempt and nonexempt purposes was available from the club law internal_revenue_code irc sec_501 states clubs organized for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder shall be exempt from taxation sec_512 provides the unrelated_business_taxable_income ubti of organizations described in internal_revenue_code sec_501 includes all gross_income less deductions directly connected with producing that income but not including exempt_function_income exempt_function_income is gross_income from dues fees charges or similar items paid_by members for the purposes for which exempt status was granted to the organization exempt_function_income also includes income that is set_aside for qualified purposes sec_1_501_c_7_-1 provides that a club which engages in business such as makes its social and recreational facilities available to the public is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima fade evidence that an organization is engaging in business and is not being operated exclusively for pleasure recreation or social purposes sec_1_512_a_-1 provides that where an organization uses its facilities or personnel for both exempt and non-exempt purposes expenses must be allocated on a reasonable basis and are to be proximately and primarily related to the activity an organization is required to maintain appropriate documentation to substantiate the reasonableness of the allocations made revproc_71_17 1971_1_cb_683 sets forth guidelines for determining the effect of gross_receipts derived from nonmember use of a social club's facilities on exemption under internal_revenue_code sec_501 and recordkeeping requirements failure to maintain such records or make them available to the service for examination will preclude use of the minimum gross_receipts standard and audit assumptions set forth in this revenue_procedure all incorne derived from the use of your facilities may be considered unrelated_business_income and subject_to income_tax section dollar_figure requires additional recordkeeping on all occasions other than documented groups of eight or fewer or when of the groups are members the additional information required includes the date form 886-a crev department of the treasury - internal_revenue_service page -3- form 886a department of the treasury - internal_revenue_service name of taxpayer org explanation of items schedule no or exhibit year period ended 20xx the total number in the party the nonmembers in the party the total charges the charges attributable to nonmembers the charges paid_by nonmembers a signed statement by the member as to the amount of reimbursement from nonmembers asigned statement by the member when the member's employer makes payment for nonmembers indicating the name of the employer the amount_paid for the nonmember the nonmember’s name and relationship to the member and purpose served amember signed statement for nonmember gratuitous payment for a member including the amount donor’s name and relationship and the nature of the payment e public law provides not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non-members so long as the latter do not represent more than percent of total receipts gross_receipts are defined for this purpose as those receipts from normal and usual activities traditionally conducted by clubs of the same general type taxpayer’s position the club’s manager states the club could not be profitable without income from public use at the current membership level and has agreed with the government government’s position it was determined during the examination that the club e exceeded the limitation of percentage of gross nonmember income to total gross_receipts as set forth by rev_proc and p l e failed to comply with the prior examination’s advisory instructions relating to public use signage documentation of nonmember use and method of expense allocation in determining unrelated_business_income e e advertised the public use of its facilities failed to document nonmember income form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx the identification and recording of nonmember income is a fundamental tax requirement of a membership_organization whether it is taxable under sec_277 of the code or tax exempt under sec_501 of the code nonmember income is often done by coding entries in the accounting system properly and having members sign a form regarding payment of expenses for parties of more than eight clubs must recognize the importance of record keeping for nonmember activities and the recording of such activity at the time of a sale throughout the examination it was determined there was inadequate record keeping as well as substantial nonmember activity gathering the necessary information regarding it is the government's position that the club is no longer operated exclusively for the pleasure and recreation of its members and is not exempt under sec_501 conclusion the sec_501 tax exempt status of the the nonmember income received by the club exceeded of the club’s total gross_receipts for the year under examination and in prior years should be revoked since further the club advertises the use of their facilities to the general_public reflecting evidence that it is engaged in a business and is not being operated exclusively for pleasure recreation or social purposes as the club no longer meets the requirements to qualify as exempt from federal_income_tax under sec_501 as described in sec_501 your exempt status under c of the internal_revenue_code will be revoked effective january 20xx as a taxable entity the organization is required to file form_1120 u s_corporation income_tax return for all periods following december 20xx sec_277 stipulates in the case of a membership_organization which is not exempt from taxation deductions for the taxable_year attributable to furnishing services goods or other items of value to members shall be allowed only to the extent of income derived from members form 886-a rev department of the treasury - internal_revenue_service page -5-


internal_revenue_service department of the treasury number release date index number in re washington dc person to contact telephone number refer reply to cc intl plr-117869-00 date date legend taxpayer subsidiarie sec_1 date a b c d countries n o p q r s t individuals a b c dear this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file the agreement provided under sec_1_1503-2 as required by sec_1_1503-2 for the tax years ended on date a b and c to file the agreement provided under sec_1_1503-2 for the tax_year ended on date d and to file the annual certification required under sec_1 g vi for the tax_year ended on date d additional information was submitted in letters dated date and date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process following a nontaxable_transaction on date a taxpayer became a publicly held company and the common parent of a consolidated_group that included subsidiarie sec_1 through each of the subsidiaries generated losses for the tax years indicated in re plr-117869-00 below and these losses were included in the consolidated tax returns of the former parent of subsidiaries subsidiary through are each a dual_resident_corporation as defined in sec_1_1503-2 subsidiary does business in countries r s and t in branch form and each branch constitutes a separate_unit within the meaning of sec_1_1503-2 and are not hybrid_entity separate units within the meaning of sec_1_1503-2 subsidiary generated losses from its operations in country n for the tax years ended on dates b and c and for the short_period ended on date a subsidiary generated losses from its operations in country o for the tax_year ended on date c and for the short_period ended on date a subsidiary generated losses from its operations in country p for the tax_year ended on date c and for the short_period ended on date a subsidiary generated losses from its operations in country q for the short_period ended on date a subsidiary generated losses for the tax_year ended on date c with respect to its branch located in country r date d was after date a for the short_period ended on date d subsidiarie sec_2 and generated losses from their operations in countries o and p respectively and subsidiary generated losses from its branches in countries r s and t individual a is the vice president of tax and financial planning for taxpayer individual b is the director of international tax for taxpayer individual c is the outside counsel for taxpayer the affidavits from these individuals describe the circumstances surrounding the failure to timely file the agreements and establish that taxpayer relied upon these individuals to timely file the agreements the i r s has not discovered or raised any issue concerning the dual consolidated losses or the need to file any agreements under sec_1_1503-2 sec_301 -1 b defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i in re plr-117869-00 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation sec_1_1503-2 fixes the time to file the agreement and annual certification therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file the agreement provided under sec_1_1503-2 as required by sec_1_1503-2 for the tax years ended on date a b and c to file the agreement provided under sec_1_1503-2 for the tax_year ended on date d and to file the annual certification required under sec_1 g vi for the tax_year ended on date d the granting of an extension of time to file the agreements and annual certifications is not a determination that taxpayer is otherwise eligible to file the agreements and annual certifications sec_301_9100-1 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be associated with the agreements and annual certifications no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer sincerely s allen goldstein reviewer office of the associate chief_counsel international


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-122403-00 date date legend x a d1 d2 state dear this letter responds to a letter dated date and subsequent correspondence submitted by your authorized representative on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under state law on d1 and it was subsequently decided that x would be an s_corporation a the sole shareholder of x did not transfer assets to x and x did not issue stock to a until d2 a relied on an accountant to file x's form_2553 election by a small_business_corporation with an effective date of d2 however the form_2553 was not filed timely x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d2 under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation's taxable_year plr-122403-00 then the corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusion based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d2 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether x is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely mary beth collins assistant to the chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 1-plr-126218-00 date date legend parent purchaser disregarded_entity target target_affiliate target_affiliate newco sellers country x date a date b date c parent’s officer authorized representatives this letter responds to your letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election additional information was submitted in letters dated february march and date parent is plr-126218-00 requesting the extension to file an election under sec_338 of the internal_revenue_code and sec_1_338-1 of the income_tax regulations with respect to the acquisition of the stock of target and the deemed acquisition of the stock of target_affiliate and target_affiliate sometimes hereinafter referred to as the election the information submitted for consideration is summarized below all citations in this letter to regulations under sec_338 are to regulations in effect for date a parent is the common parent of a consolidated_group that includes purchaser parent operates on a calendar_year and uses the accrual_method of accounting purchaser is a wholly owned domestic subsidiary of parent disregarded_entity is a country x entity that the taxpayer represents is treated as a branch or division of purchaser for u s tax purposes prior to the acquisition described below target a country x corporation was wholly owned by foreign individuals and a foreign_trust sellers target_affiliate was a wholly owned subsidiary of target target_affiliate was a wholly owned subsidiary of target_affiliate target_affiliate and target_affiliate together target affiliates were also country x corporations prior to the transaction described below neither sellers target nor target affiliates filed united_states income_tax returns nor were they subject_to united_states income_taxation neither target nor either of target affiliates was a controlled_foreign_corporation within the meaning of sec_957 a passive_foreign_investment_company for which an election under sec_1295 was in effect a foreign_investment_company or a foreign_corporation the stock ownership for which is described in sec_552 or required under sec_1_6012-2 to file a united_states income_tax return on date a purchaser acquired all the stock of target from sellers it is represented that the acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 immediately after the closing target target affiliates and disregarded_entity amalgamated and continued as newco a country x company the election was due on date b for various reasons however the election was not filed on date c which is after the due_date for the election authorized representatives discovered that the election had not been filed the period of limitations on assessments under sec_6501 has not expired for parent's taxable_year s in which the acquisition occurred the taxable years in which the election should have been filed or any taxable_year s that would have been affected by the election had they been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase plr-126218-00 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 information affidavits and representations submitted by parent’s officer and authorized representatives explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the taxpayers reasonably relied on a qualified_tax professional and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations that have been made we conclude that parent has established that it acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the election with respect the acquisition of the stock of target and the deemed acquisition of the stock of target affiliates as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' parent’s consolidated group’s target’s target affiliates’ and sellers’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made upon audit of the federal_income_tax returns involved further we express no opinion as to the federal_income_tax effect if any if it is determined that the taxpayers' tax_liability is lower sec_301_9100-3 parent should file the election in accordance with sec_1_338-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the election form a copy of this letter should be attached to the election form parent target and target affiliates must file or amend if and as applicable its applicable returns to report the acquisition as a sec_338 transaction and to attach a copy of the form_8023 and a copy of this letter plr-126218-00 we express no opinion as to whether the acquisition of the target stock and the deemed acquisition of target affiliates stock qualify as qualified_stock purchases whether the acquisition of the target stock and the deemed acquisition of the target affiliates stock qualify for sec_338 treatment or any other tax consequences arising from the election in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and representatives all essential facts are subject_to verification however in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the powers of attorney on file in this office copies of this letter are being sent to parent and another representative sincerely associate chief_counsel corporate by ken cohen senior technician reviewer branch


internal_revenue_service number release date index number --------------------------------------------------------- ------------------------------------------------- ---------------------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc ita b03 plr-102521-12 date march ty ------- ty ------- legend taxpayer --------------------------------------------------- year ------- date -------------------------- date -------------------------- date -------------------------- date -------------------------- date --------------------------- dear ------------ this is in response to the letter dated date submitted on your behalf by your authorized representative in the letter you request an extension of time to file a duplicate form_3115 application_for change in accounting_method with the internal_revenue_service irs ogden office this request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulation facts in year taxpayer engaged accounting firm to prepare a form_3115 application_for change in method_of_accounting to change its method_of_accounting for repair and maintenance_costs to be filed under revproc_2011_14 for the taxable_year ending date plr-102521-12 on date taxpayer provided a copy of the form_3115 to the lb_i division director to obtain consent to file the method changes as required by section b of revproc_2011_14 on date taxpayer filed its form_1120 u s_corporation income_tax return in accordance with section of revproc_2011_14 the form_3115 was included with the filing under sec_3 of the appendix to revproc_2011_14 as modified by section dollar_figure of revproc_2011_43 2011_37_irb_326 a copy of the form_3115 was required to be filed with the internal_revenue_service irs ogden office no earlier than the first day of the year_of_change and no later than the date that taxpayer filed the original form_3115 with its federal_income_tax return accounting firm assumed responsibility for filing the copy of the form_3115 with the irs ogden office due to a miscommunication between taxpayer’s tax department and accounting firm and the lack of confirmation regarding the filing dates of the form_1120 and the form_3115 the copy of the form_3115 was mailed on date on date accounting firm learned that the form_1120 for taxpayer had been filed on date and determined that this filing caused the form_3115 to not be timely filed accounting firm advised taxpayer of this fact and began evaluating options to correct the late filing of the form_3115 after evaluating various options taxpayer engaged accounting firm to prepare this request_for_ruling applicable law revproc_2011_14 provides the procedures by which a taxpayer may obtain automatic consent to change certain methods_of_accounting a taxpayer complying with all the applicable provisions of this revenue_procedure obtains the consent of the commissioner to change the taxpayer’s method_of_accounting under sec_446 and the regulations thereunder section a of revproc_2011_14 provides that a taxpayer changing a method_of_accounting pursuant to the revenue_procedure must complete and file the application in duplicate section a i provides that the original application must be attached to the taxpayer’s timely filed including any extension original federal_income_tax return implementing the change in method_of_accounting for the year_of_change section a ii b provides that for certain applications a copy of the application must be filed with the irs in ogden utah in these cases the signed copy must be filed with the ogden office no earlier than the first day of the year_of_change and no later than the date the taxpayer files the original application with the federal_income_tax return for the year_of_change plr-102521-12 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 provides that an election includes a request to adopt change or retain an accounting_method and defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides automatic extensions of timing for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 sec_301_9100-3 provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v 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 sec_301_9100-3 provides that a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer - i seeks to alter a return position for which an accuracy-related_penalty had been or could be imposed under sec_6662 when the taxpayer requests relief and the new position requires a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax plr-102521-12 consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time only when the interests of the government will not be prejudiced by granting the relief under paragraph c i the interests of the government are prejudiced if granting relief would result in a taxpayer having a 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 under paragraph c ii the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made is closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section conclusion based solely on the facts and representations submitted including affidavits we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied the information provided and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith with this request taxpayer is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 when relief was requested taxpayer represented that granting an extension of time to file the signed duplicate copy of the form_3115 with the ogden office will not result in a lower tax_liability for all taxable years affected by the election than taxpayer would have had if the duplicate copy of the form_3115 had been timely filed the taxable years in which the regulatory election should have been made and any taxable years that would have been affected by the election had it been timely made are not closed by the period of assessment finally granting an extension will not prejudice the interests of the government accordingly an extension of time is hereby granted for taxpayer to file the necessary signed copy of the form_3115 with the ogden office this extension shall be for a period of days from the date of this ruling please attach a copy of this ruling to the form_3115 when filed this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-102521-12 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office had not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert m casey senior technical reviewer branch income_tax accounting cc