t c memo united_states tax_court james j rosemann petitioner v commissioner of internal revenue respondent docket no filed date james j rosemann pro_se lynette mayfield and beth a nunnink for respondent memorandum findings_of_fact and opinion dawson judge respondent determined deficiencies in petitioner’s federal income taxes of dollar_figure for and dollar_figure for and accuracy-related_penalties under sec_6662 a of dollar_figure for and dollar_figure for after concessions the issues we must decide are whether petitioner was a statutory_employee for and entitled to report his income and expenses on schedule c profit or loss from business or a common_law_employee whose deductions for those years were reportable on form_2106 employee business_expenses and schedule a itemized_deductions subject_to the 2-percent limitation imposed on miscellaneous_itemized_deductions under sec_67 and b whether petitioner has substantiated claimed employee_business_expense deductions in and for mileage depreciation sec_179 expenses and a repair with respect to his personal vehicle and whether petitioner is liable for accuracy-related_penalties for and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure 2petitioner conceded that he is not entitled to charitable_contribution deductions for cash contributions of dollar_figure for and dollar_figure for and deductions for travel and entertainment_expenses of dollar_figure for and dollar_figure for respondent had disallowed the charitable_contribution deductions for lack of substantiation and the travel and entertainment expense deductions because they were reimbursed by petitioner’s employer findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioner resided in tennessee when he filed his petition during and petitioner worked as an outside_salesman for cooper container corp cooper and for a brief period in he worked for greathouse packaging he had worked for cooper since as an account manager in and cooper paid petitioner a salary and quarterly commissions for taking orders for cardboard containers and packaging he worked mainly out of his vehicle and his home petitioner was required by cooper to work hours per week during business hours and to report to its place of business for meetings once or twice a week he could not wear casual clothes in cooper’s offices or when calling on customers cooper had the right to discharge petitioner at will cooper provided petitioner with the following benefits a dollar_figure life_insurance_policy weeks of annual paid vacation_leave sick leave health insurance and a sec_401 retirement_plan in and cooper leased a mazda for petitioner’s business use at the corporation’s expense and allowed him to use it for some personal purposes petitioner regularly submitted weekly expense reports to cooper that contained detailed information regarding his auto mileage meals and entertainment and the persons contacted at the companies served he also submitted a mileage log each month with odometer figures cooper reimbursed petitioner for the automobile mileage expenses and other business_expenses related to his work as an outside_salesman of its products at times during the years at issue petitioner used his personal sport_utility_vehicle a jeep cherokee in and a ford expedition in to make some deliveries to customers to deliver samples for design work to cooper’s offices or to return bad products petitioner was not reimbursed by cooper for business travel in his personal vehicle petitioner kept no records regarding the business use of the jeep cherokee and the ford expedition he kept no record of the deliveries to customers and no mileage records in he had the transmission reconditioned in his ford expedition for dollar_figure and claimed a repair expense of dollar_figure on his federal_income_tax return based on percent business use james clark an unenrolled_return_preparer prepared petitioner’s and federal_income_tax returns on form_4562 depreciation and amortization for petitioner claimed a sec_179 expense deduction of dollar_figure on his personal vehicle the jeep cherokee based on business use of dollar_figure percent with an estimated big_number business miles driven for he erroneously claimed on form_4562 a depreciation deduction of dollar_figure on the jeep cherokee rather than the ford expedition which he then owned based on business use of dollar_figure percent with an estimated big_number miles driven respondent disallowed car expenses of dollar_figure for and dollar_figure for that petitioner claimed on his tax returns these expenses included amounts claimed for mileage for using his personal vehicle for some alleged business purposes on his federal_income_tax returns petitioner claimed deductions on schedule c of dollar_figure for and dollar_figure for respondent determined in the notice_of_deficiency that the deductions were improperly claimed on schedule c and should have been claimed on schedule a as employee business_expenses which are subject_to the 2-percent adjusted_gross_income limitation respondent determined that petitioner was a common_law_employee and not a statutory_employee the forms w-2 wage and tax statement which petitioner received from cooper did not indicate in box that petitioner was a statutory_employee cooper withheld federal taxes as well as social_security and medicare taxes from petitioner’s wages and commissions opinion i burden_of_proof as a general_rule the commissioner’s determination of a taxpayer’s liability is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 however pursuant to sec_7491 the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue the burden will shift only if the taxpayer has inter alia complied with substantiation requirements pursuant to the internal_revenue_code maintained required records and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 petitioner has not asserted that the burden_of_proof has shifted to respondent moreover petitioner has neither complied with the substantiation requirements nor maintained the required records accordingly the burden_of_proof remains on petitioner ii employment classification a statutory_employee a statutory_employee may properly reflect business income and expenses in full on schedule c of form_1040 u s individual_income_tax_return and thereby avoid the schedule a limitations on the deduction of employee business_expenses and the phaseout_of_itemized_deductions see prouty v commissioner tcmemo_2002_175 citing revrul_90_93 c b an individual qualifies as a statutory_employee pursuant to sec_3121 only if such individual is not a common_law_employee pursuant to sec_3121 117_tc_263 sec_3121 defines employee in pertinent part as follows any officer of a corporation or any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee or any individual other than an individual who is an employee under paragraph or who performs services for remuneration for any person-- d as a traveling or city salesman other than as an agent-driver or commission-driver engaged upon a full-time basis in the solicitation on behalf of and the transmission to his principal except for side-line sales activities on behalf of some other person of orders from wholesalers retailers contractors or operators of hotels restaurants or other similar establishments for merchandise for resale or supplies for use in their business operations 3generally an employee may deduct unreimbursed employment expenses on schedule a subject_to an overall 2-percent of adjusted_gross_income limitation see sec_62 sec_67 a statutory_employee is not an employee for purposes of sec_62 see sec_3121 prouty v commissioner tcmemo_2002_175 as the court concludes infra that petitioner is not a statutory_employee petitioner’s expenses are subject_to this overall percent of adjusted_gross_income limitation if the contract_of_service contemplates that substantially_all of such services are to be performed personally by such individual except that an individual shall not be included in the term employee under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services other than in facilities for transportation or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed because an individual qualifies as a statutory_employee only if the individual is not a common_law_employee the court will initially decide whether petitioner was a common_law_employee of cooper b common_law_employee whether an individual is an independent_contractor or a common_law_employee is a question of fact see 67_f3d_574 6th cir weber v commissioner 103_tc_378 affd 60_f3d_1104 4th cir doubtful questions should be resolved in favor of employment 900_f2d_49 5th cir generally petitioner has the burden of proving error in respondent’s notice_of_deficiency determination that he was a common_law_employee see rule a 89_tc_225 affd 862_f2d_751 9th cir in determining whether a worker is a common_law_employee or an independent_contractor the court generally considers the degree of control exercised by the principal which party invests in work facilities used by the individual the opportunity of the individual for profit or loss whether the principal can discharge the individual whether the work is part of the principal’s regular business the permanency of the relationship the relationship the parties believed they were creating and the provision of employee_benefits see ewens miller inc v commissioner supra pincite weber v commissioner supra pincite all the facts and circumstances of each case are considered and no single factor is dispositive degree of control the degree of control necessary to find employee status varies with the nature of the services the worker provides although petitioner had some independence and flexibility in planning his sales work and contacting customers in promoting his employer’s products cooper retained and exercised considerable control_over petitioner’s activities he was an at-will employee as were all who worked for cooper he was subject_to dismissal he was required to attend regular weekly meetings at the cooper facility he had to keep normal business hours he was required to work a minimum of hours per week he had to observe cooper’s no-jeans dress code his productivity was periodically checked and cooper’s officers treated him as an employee thus we find that cooper had a right of control_over petitioner sufficient for an employment relationship investment in facilities the parties have stipulated that petitioner’s work for cooper did not involve a risk of financial loss cooper invested in the facilities but petitioner did not the fact that petitioner maintained a home_office standing alone does not constitute a sufficient basis for a finding of independent_contractor status see colvin v commissioner tcmemo_2007_157 affd 285_fedappx_157 5th cir furthermore cooper provided petitioner with a vehicle for his sales work in and and reimbursed him for his travel_expenses this factor supports common_law_employee status opportunity for profit or loss petitioner was paid a salary and commissions with periodic reconciliations there is no evidence that petitioner otherwise had any opportunity for profit or loss while he worked for cooper this factor weighs in favor of petitioner’s being a common_law_employee right to discharge where the principal retains the right to discharge a worker it is indicative of an employer-employee relationship id cooper retained the right to discharge petitioner at will this factor weighs in favor of common_law_employee status integral part of regular business petitioner’s services were an integral part of cooper’s regular business of manufacturing and selling cardboard shipping containers and packaging petitioner made sales presentations and solicited orders for cardboard shipping containers and packaging for cooper petitioner’s sales were therefore a key factor in cooper’s business where work is part of the principal’s regular business it is indicative of employee status 64_tc_974 accordingly this factor weighs in favor of petitioner’s being a common_law_employee permanency of relationship there has been a significant permanency of the relationship between petitioner and cooper petitioner has worked for cooper since permanency of a working relationship is indicative of common_law_employee status thus the lengthy working relationship between cooper and petitioner weighs in favor of petitioner’s being a common_law_employee relationship the parties thought they created while petitioner and cooper had no written employment contract the relationship the parties thought they were creating was shown by the testimony of cooper’s vice president she testified that cooper retained the right to discharge petitioner retained other controls over his employment elected not to check the box on forms w-2 indicating that petitioner was a statutory_employee withheld income taxes employment_taxes and medicare taxes and provided several employee_benefits her testimony shows that the nature of the relationship cooper thought it was creating with petitioner was that of employer-employee this factor weighs in favor of finding that petitioner was a common_law_employee during the years at issue provision for employee_benefits benefits such as health insurance life_insurance paid vacations and retirement plans are typically provided to employees weber v commissioner t c pincite petitioner received weeks of annual paid vacation health insurance a life_insurance_policy and sick leave and participated in cooper’s sec_401 retirement_plan cooper also provided petitioner with a company car and reimbursed him for his business_expenses with the exception of cell phone home phone home computer internet services and home fax expenses which respondent allowed as nonreimbursable expense deductions all of these benefits clearly support a finding that petitioner was a common_law_employee during and we realize as petitioner testified that the irs audited his and income_tax returns to determine whether he qualified as a statutory_employee because the auditor agreed with petitioner that he was then qualified as a statutory_employee petitioner continued using that same status in his income_tax returns for later years it was not until the audit for and that respondent again challenged petitioner’s claimed statutory_employee status as the court informed petitioner each taxable_year stands alone and the commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year auto club of mich v commissioner 353_us_180 55_tc_28 thus the irs’s failure to challenge petitioner’s claimed statutory_employee status during the prior years does not entitle petitioner to that status for the years in suit conclusion even though there are some aspects of petitioner’s work indicating independent_contractor status and therefore the possibility that he may have been a statutory_employee during the years at issue our analysis of the applicable factors strongly supports the conclusion that petitioner was a common_law_employee of cooper hence petitioner is precluded from being a statutory_employee pursuant to sec_3121 see ewens miller inc v commissioner t c pincite accordingly he is not entitled to deduct expenses on schedule c iii petitioner’s deductions relating to personal vehicle expenses depreciation sec_179 expenses and a repair in view of our conclusion that petitioner is not entitled to deduct expenses on schedule c we must now decide whether petitioner is entitled to deduct expenses_incurred in connection with his employment on schedule a see sec_67 a schedule a deductions an individual performing services as an employee may deduct miscellaneous itemized expenses_incurred in the performance of services as an employee only to the extent such expenses exceed percent of the individual’s adjusted_gross_income sec_67 b general deduction rules deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any claimed deductions 503_us_79 292_us_435 taxpayers must maintain records relating to their expenses and must prove their entitlement to all claimed deductions credits and expenses in controversy see sec_6001 rule a pursuant to sec_162 a taxpayer is entitled to deduct all of the ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business the deduction for an employed individual’s unreimbursed business_expenses under sec_162 is claimed on form_2106 and included in the miscellaneous_itemized_deductions claimed on form_1040 schedule a expenses_incurred in the performance of services as an employee are to be reported and memorialized as required by the regulations promulgated under sec_162 see sec_1 a income_tax regs the taxpayer bears the burden of proving that the claimed expenses were ordinary and necessary according to sec_162 the employee must show the relationship between the expenditures and the employment see evans v commissioner tcmemo_1974_267 affd in part and revd in part on another ground 557_f2d_1095 5th cir in certain instances the taxpayer must meet specific substantiation requirements in addition to the requirements of sec_162 see sec_274 if a claimed expense other than one subject_to heightened scrutiny under sec_274 is not fully substantiated we are permitted to estimate the expense when we are convinced from the record that the taxpayer has incurred it 39_f2d_540 2d cir 85_tc_731 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date however the taxpayer must present credible_evidence that provides a rational basis for our estimate vanicek v commissioner supra pincite petitioner has presented no evidence that would provide a reasonable basis upon which we can estimate any expense under the cohan_rule c vehicle mileage vehicle mileage deductions are subject_to the strict substantiation requirements of sec_274 where a taxpayer fails to establish that his records satisfy the heightened substantiation requirements of sec_274 the expenses will not be allowable sec_274 applies in part to the use of listed_property which includes passenger automobiles to deduct such expenses the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own testimony the amount of the expenditure or use which includes mileage in the case of automobiles the time and place of the travel or use and the business_purpose of the expense id to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs fed reg date in lieu of substantiating the actual amount of any expenditure relating to the business use of a passenger_automobile a taxpayer may use a standard mileage rate as established by the irs see sec_1_274-5 income_tax regs the standard mileage rate is to be multiplied by the number of business miles traveled the use of the standard mileage rate establishes only the amount deemed expended with respect to the use of a passenger_automobile the taxpayer must still establish the amount ie business mileage the time and the business_purpose of each use petitioner claimed in his income_tax return a sec_179 expense deduction of dollar_figure for his personal jeep cherokee placed_in_service on date based on dollar_figure percent business use and in his return a depreciation deduction of dollar_figure based on dollar_figure percent business use for he claimed big_number business miles and for he claimed big_number business miles at trial he admitted that he had no records to substantiate these claimed deductions or the business miles driven in those years and no records of any of the deliveries made to cooper’s customers the amounts claimed for business use of the jeep cherokee were only estimates he testified that he did not even use the jeep cherokee in but bought a used ford expedition in that year and used it for personal as well as some business purposes he also testified that the jeep cherokee and the ford expedition were probably not used more than percent for business even though he reported dollar_figure percent business use in and dollar_figure percent business use in we think his estimates were greatly exaggerated and not supported by any contemporaneous or permanent records petitioner further claimed a repair expense of dollar_figure for replacing the transmission in his personal ford expedition in the notice_of_deficiency respondent disallowed all of the deductions for vehicle expenses depreciation sec_179 expenses and the repair because of inadequate substantiation we agree with respondent it is clear on this record that petitioner did not maintain the necessary books_and_records required to substantiate his claimed business_expense deductions for_the_use_of his personal vehicle during the years in issue in accordance with the provisions of sec_6001 and sec_274 and the regulations thereunder therefore we hold that petitioner failed to prove that he is entitled to any employee_business_expense deductions in excess of those respondent allowed iv sec_6662 accuracy-related_penalties sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate on the basis of our findings herein respondent has met his burden of production with respect to the disallowed deductions petitioner did not make a reasonable attempt to comply with the law in some respects or maintain adequate_records with respect to his claimed deductions respondent determined that petitioner is liable for the accuracy-related_penalties under sec_6662 for and sec_6662 imposes a 20-percent penalty on the portion of an underpayment attributable to any one of various factors including negligence or disregard of rules or regulations see sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs sec_6664 provides that the penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id we impose no accuracy-related_penalties against petitioner with respect to the issue of whether he was a statutory or common_law_employee during and we conclude on these particular facts and circumstances that petitioner acted reasonably and in good_faith because he relied on respondent’s determination in a prior audit for the and taxable years that he qualified as a statutory_employee entitled to use schedule c for tax purposes see sec_1_6664-4 income_tax regs see also tesar v commissioner tcmemo_1997_207 de boer v commissioner tcmemo_1996_174 balis v commissioner tcmemo_1992_34 affd without published opinion 987_f2d_770 5th cir as to petitioner’s concessions that he is not entitled to the unsubstantiated charitable_contribution deductions he claimed for and and the claimed travel and entertainment_expenses which were reimbursed by his employer we sustain the accuracy- related penalties pursuant to sec_6662 because of petitioner’s disregard of rules or regulations finally we sustain respondent’s determination of accuracy- related penalties with respect to petitioner’s claimed business_expense deductions pertaining to his personal vehicle here again petitioner disregarded the substantiation rules or regulations in view of petitioner’s detailed expense reports required to be submitted to his employer cooper for reimbursement of the leased vehicle mileage and for his meal and entertainment_expenses we think petitioner was well aware of his responsibility to maintain separate records to support his claimed expense deductions for any business use of his personal sport_utility_vehicle he was negligent in failing to do so accordingly we hold that he is liable for the accuracy-related_penalties with respect to such unsubstantiated deductions to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index numbers ------------------------------------------------- ---------------------------------- ----------------------------- ------------------------------- 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-138167-14 date april x --------------------------------------------------------------------------------------------------- --------------------------- legend country -------- date ------------------ dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a partnership for federal tax purposes facts the information submitted states that x was organized on date under the laws of country x represents that it is a foreign_entity eligible to elect to be classified as a partnership for federal tax purposes however x failed to timely file form_8832 entity classification election electing to be a partnership effective date law and analysis sec_301_7701-3 provides in part 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 as provided in plr-138167-14 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more 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 by filing form_8832 with the service_center designated on form_8832 under sec_301_7701-3 the 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 effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides 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 conclusion based solely on the information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result we grant x an extension of time of days from the date of this letter to file plr-138167-14 form_8832 with the appropriate service_center to elect to be classified as a partnership effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on x and the owners of x filing within days from the date of this letter all required federal_income_tax and information returns including amended returns consistent with the requested relief being effective date these returns may include but are not limited to form_8865 return of u s persons with respect to certain foreign_partnerships a copy of this letter should be attached to any such returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of the facts discussed above under any other provision of the code 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 under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives 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 sincerely associate chief_counsel passthroughs special industries by ________________________________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


significant index number department of the treasury internal_revenue_service washington d c ‘ tax_exempt_and_government_entities_division mat i tole ty az re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning may identified in your application submission established as of date this extension applies to the eligible amortization charge bases as the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the to the ‘and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours david m ziegler manager ep actuarial group


vi department of the treasury internal_revenue_service p o box irs cincinnati oh release number release date uil code date date employer id number contact person id number contact telephone number form you must file tax years all dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code previously we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and you had filed a protest within days you subsequently withdrew the protest therefore the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 we sent a copy of this letter to your representative as indicated in your power_of_attorney sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service cincinnati oh legend b date c state d organization e organization f number g number range x dollars amount dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated on b in the state of c exclusively for charitable and educational_purposes within the meaning of sec_501 of the internal_revenue_code your primary activity consists of operating a coffeehouse which will act as both a fundraising organization for nonprofits that serve your community and act as a community launch point and gathering venue featuring local art and music the coffeehouse will sell barista coffee and coffee prepared in the style of local cultural groups as well as a limited breakfast and lunch menu in addition a much cheaper alternative retro style coffee will be offered that will be a no-frills basic drip coffee you are still in the process of finalizing your regular menu and prices you however provided a list of proposed prices showing how your coffees prices and other items compare to the prices of other coffeehouses in your locale your prices were the same as those of the other coffeehouses the only exception is a basic drip coffee that will be offered at a discounted price for those who want to be part of your community but do not want to pay for the higher priced coffee you plan the coffeehouse to be open during typical business hours for a coffeehouse in your metro area which you anticipate will be from am to pm seven days per week furthermore concerning staffing your goal is to employ about f community members and pay them a living wage you also plan to use in the range of g volunteer hours per week to augment the paid staff your proposed budget shows for your first year of operations that you will rely on gifts grants and contributions for your financial support in subsequent years you project approximately income is from the operations of your coffeehouse your profits will be funneled back to other nonprofit_organizations which your customers and other community members will help in deciding where your profits will be donated this you project will be between individual donations by word-of-mouth solicitation and have a secure direct donation link on your website of your gross_sales you will also solicit of your gross and your expenses will consist of construction costs and coffeehouse equipment in your first years of operations your primary expenses once your coffeehouse is operational consist of occupancy expenses and salaries your other projected expenses once you are open for business include banking and credit card fees insurance slippage labor and parts repair office costs and costs of goods coffee food misc besides operating the coffeehouse you will conduct community-building programming that may include e e e e forums with leaders from multiple religious groups to include educational informational content as well as dialogue and bridge-building conversations celebrations of holidays recognized by the many cultures living in c conversations about shared community values and working together to set common goals and achieving them a neighborhood talent show where all proceeds go to the winner’s charity of choice you have also entered in a partnership with d an entity exempt under sec_501 of the code who serves as your fiscal agent until your c exempt status is granted furthermore you have received pro bono assistance with establishing your legal status as well as with building design work associated with the renovations necessary at the site where you are considering locating to date you have also raised x dollars from e in c your governing body currently consists of president and treasurer and will transition into a management role in your operations you currently do not have any printed materials for distribution and plan to rely on your website and word of mouth for advertising as well as radio advertising and building signage finally although you have identified a suitable facility available from an unrelated party you are waiting for your exemption before entering into a lease for the site unrelated volunteers your founder serves as your law sec_501 of the code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious charitable or other purposes as specified in the statute no part of the net_earnings may inure to the benefit of any private_shareholder_or_individual letter rev catalog number 47630w sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization’s assets will be considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization’s articles or operation of law be distributed for one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 defines the term charitable as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes lessening of the burdens of government sec_1_501_c_3_-1 states an organization may qualify for tax exemption under sec_501 of the code although it operates a trade_or_business as a substantial part of its activities ifthe operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purposes and also if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as defined in sec_513 of the code revrul_68_72 1968_1_cb_250 states that a nonprofit organization that operates a supervised facility to bring together young people of college age with church leaders educators and leading businessmen of the community may be exempt from federal_income_tax under sec_501 of the code the organization was formed by local churches for the purpose of furthering the religious intellectual and moral development of persons of college age through the operation of the coffeehouse a supervised facility where church leaders educators and leading businessmen of the community meet and mingle with young people in an informal atmosphere they hold discussions on such subjects as religion current events and social problems personal counseling and vocational guidance are provided a nominal charge is paid upon admission but there are no additional charges for the refreshments and entertainment the organization meets it expenses from contributions and the admission charges in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes letter rev catalog number 47630w in 70_tc_352 the court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational or scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in 76_tc_380 t c the court held that a not-for-profit corporation that owned and operated a mountain lodge as a religious retreat facility and made available to lodgers recreational and social activities comparable to activities offered by vacation resorts does not qualify for tax-exempt status as an organization described under sec_501 of the code in easter house v u s ci ct aff'd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under sec_501 because its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court rejected the organization's argument that the adoption services merely complemented the health-related services to unwed mothers and their children rather the court found that the health-related services were merely incident to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 easter house ci ct pincite in 950_f2d_365 the court_of_appeals upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church did not qualify for exemption under sec_501 of the code because the organization was operated for a substantial nonexempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses airlie foundation v commissioner in on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose as the court stated d d c the court relied supp 2d f among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of letter rev catalog number 47630w financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations application of law you are not as described in sec_501 of the code because you have not established that you meet the operational_test as per sec_1_501_c_3_-1 your primary activity consists of operating a commercial coffeehouse you operate in a manner consistent and in competition with other coffeehouses you are not operating exclusively for charitable purposes as required under sec_1 c - c your primary activity is the operation of a coffeehouse open to the public your prices and your hours of operation are the same as those of other coffeehouses in your area as required by sec_1_501_c_3_-1 you have not established that your operations accomplish exclusively charitable purposes operating a coffeehouse on a regular and continuous basis is an unrelated_trade_or_business for profit within the meaning of sec_513 of the code pursuant to sec_1_501_c_3_-1 you do not meet the requirements for recognition of tax exemption under sec_501 of the code as your primary purpose is the operation of an unrelated_trade_or_business for profit within the meaning of sec_513 of the code you are not like the organization described in revrul_68_072 you were not formed by local churches to further the religious intellectual and moral development of persons of college age through the operation of a supervised facility under the guise of a coffeehouse additionally unlike the organization in revrul_68_72 that charged a nominal admission fee but did not charge for refreshments or entertainment you charge for the food and beverages and have a paid staff most your expenses which are devoted to the operation of the coffeehouse are met by the funds from these sales unlike the organization in the revenue_ruling the social and commercial aspects of your operations are not incidental therefore you fail to qualify under sec_501 of the code while you plan to make charitable_contributions and some of your activities may be charitable within the meaning of sec_501 of the code your primary activity is the operation of a coffeehouse open to the public as the court found in better business bureau of washington d c v u s the presence of a single substantial non-exempt purpose of operating a coffeehouse will preclude exemption regardless of the number of other exempt_activities your operations are like those of the organization described in arlie foundation inc as the owner and operator of a coffeehouse you are in direct competition with other coffeehouses in your area your prices are mostly the same as those of other coffeehouses in addition you will use advertising tools common to for-profit businesses such as radio advertisement and the internet you will primarily be funded by coffeehouse profits you will have a paid staff consequently you meet most of the factors provided in airlie foundation inc indicating that you are operated for a substantial nonexempt commercial purpose you are like the organizations described in b s w group inc easter house schoger foundation and living faith because you are operating for a substantial nonexempt commercial purpose rather than for a tax-exempt purpose you are open to the general_public during regular business hours you use your receipts from the coffeehouse to pay for the cost of sales occupancy expenses insurance and salaries this is an activity normally carried on by for-profit businesses therefore you conduct the activity in a manner like for profit businesses and are in direct competition with such businesses letter rev catalog number 47630w conclusion based on the above facts and legal analysis we conclude that you fail to meet the operational_test of sec_501 of the code because you are operated in a commercial manner you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives letter rev catalog number 47630w under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely letter rev catalog number 47630w stephen a martin director exempt_organizations rulings and agreements enclosure publication cc poa letter rev catalog number 47630w


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 b09 plr-160817-05 date date internal_revenue_service number release date index number --------------------------------- ------------------------------------------- ------------------------------- ------------------------------- in re ------------------------------ - legend sister sister father mother trust settlement agreement -------------------------------------------------------------------- -------------------------------------------------------------------- ---------------- -------------------- --------------------------------- ---------------------------------------------------------------------------- --------------------------------- ----------------------------------------------------------------- -------- --------------------------------------------------- ------------------------------------ ------- ------- ------- ------- ------- ------- court state state statute state statute year year year year year year dear ---------- this is in response to your letter dated date and subsequent correspondence requesting rulings on the gift and generation-skipping_transfer gst tax consequences of certain proposed modifications to a_trust in year before trust was formed by sister and sister their then husbands and their parents father and mother sisters have since divorced and remarried sister sister and father and mother collectively settlors funded trust in year with cash intangibles and their respective interests in certain minerals and ranch lands plr-160817-05 sister and sister funded one-third of trust and father and mother funded two-thirds of trust father and mother died in year and year respectively both prior to and trust became irrevocable in year the last contribution to trust was made in year and consisted of the residue of mother’s estate section i a of trust provides in relevant part that upon the death of mother and father the net_income of trust is to be distributed one-half each to sister and sister upon the death of either sister the deceased sister’s share of the income may be used to benefit the children and lineal_descendants of the deceased sister or accumulated and distributed to these persons upon the termination of trust section i b provides that in the event the trustee determines the net_income of trust to be insufficient to maintain and support sister and sister or their children and lineal_descendants in their accustomed manner of living the trustee may invade trust corpus to make up the deficiency further in the event the executor of a settlor’s estate so requests the trustee is to invade the trust corpus contributed by the settlor to pay the estate and other taxes of the settlor in the event trust corpus is invaded such reduction shall be reflected in the beneficial_ownership and such share shall sometimes hereinafter be referred to for example as adjusted one-half or other appropriate reference such distributions to be reflected in ownership regardless of whether such reference has been made furthermore to the extent such invasion materially affects the income attributable to the initial contribution of a settlor the trustee shall make appropriate adjustments to the relative income distributable under section i a section i c provides that during his lifetime father with the concurrence of either sister or sister may revoke alter and amend trust and distribute the assets of trust to the settlors in the same proportion as the original contributions by each of the settlors taking into account any adjustments under section i b in the event sister or sister is deceased that portion of trust that would have been distributed to the deceased sister is to be distributed in equal shares to her children and lineal_descendants section i d provides mother and father with a limited power to appoint up to one-third of trust’s assets one-half of this amount among the group consisting of sister and her lineal_descendants and one-half among the group consisting of sister and her lineal_descendants section i e provides that trust may be terminated under certain circumstances if the termination would best serve the intended purpose of trust in the event of such termination sister and sister if living and if not their children and lineal plr-160817-05 descendants of any deceased child are to receive one-half of trust’s assets adjusted by sections i b d and f section i f provides that each sister has a limited power to appoint an adjusted one- half of trust’s assets among her children and lineal_descendants the fractional share of the assets over which each sister has a power_of_appointment is to be adjustment pursuant to sections i b and d if either sister dies without exercising her power_of_appointment her adjusted one-half share is to be distributed in equal shares to her children and lineal_descendants in the event either sister dies without surviving lineal_descendants or lineal_descendants who do not survive until the termination of trust her share of trust assets is to be held in trust for the benefit of the surviving sister and her children and lineal_descendants section i h provides that trust will terminate no later than years after the death of the survivor of the settlors and the children lineal_descendants and spouses of the sisters alive on the date trust was created section i j provides in part that the trustee has the power to determine the manner in which expenses are to be borne and in which receipts are to be credited as between principal and income sister filed bankruptcy in year as a result of judicial proceedings assets contributed by sister to trust were removed from trust and became part of sister 2’s bankruptcy_estate a dispute arose between sister and sister as to whether certain costs and expenses_incurred by trust in connection with the bankruptcy should be treated as distributions under section i b the terms of trust do not specifically address the allocation of assets and or expenses and the division of trust into shares after one settlor’s contribution to trust is involuntarily distributed in a bankruptcy proceeding thus creating an ambiguity each party to settlement agreement has interpreted the terms of trust to support opposing results as a result of this dispute trustee filed a suit for declaratory action in year and through the process of mediation ordered by court the parties have entered into settlement agreement which was approved by court in year it has been represented that all beneficiaries of trust including unborn and contingent beneficiaries were represented by legal counsel in the negotiation of settlement agreement in general settlement agreement provides that trust is to be divided into two separate trusts one trust to benefit sister and her descendants and one trust to benefit sister and her descendants the terms of the resulting trusts will be the same as trust the assets contributed to trust in year by sister are to be allocated to sister 1’s trust plr-160817-05 the remaining assets of trust and the costs of all litigation are to be allocated equally between the two resulting trusts trustee has requested a ruling that the division of trust into two separate trusts and the allocation of trust’s assets between the resulting trusts based upon settlement agreement will not cause any beneficiary of trust or the resulting trusts to be deemed to have made a gift or to be subject_to gift_taxes under chapter of subtitle b of the internal_revenue_code and will not cause trust and the resulting trusts to lose their status as exempt from the gst tax by reason of b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations law and analysis ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by any individual sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations states that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see ahmanson foundation v united_states f 2d big_number 9th cir citing 387_us_456 87_sct_1776 18_led_886 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the internal_revenue_service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated state statute provides in part that a person interested as or through an executor or administrator trustee guardian other fiduciary creditor devisee legatee heir or next of kin in the administration of a_trust may have a declaration of rights or legal relations in plr-160817-05 respect to the trust to direct the executors administrators or trustees to do or abstain from doing any particular act in their fiduciary capacity or to determine any question arising in the administration of the trust including questions of construction of wills and other writings state statute provides in part that on petition of a trustee or a beneficiary a court may order that the terms of the trust be modified that the trustee be directed or permitted to do acts that are not authorized or that are forbidden by the terms of the trust or that the trustee be prohibited from performing acts required by the terms of the trust if the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill or because of circumstances not known to or anticipated by the settlor compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust the court will exercise its discretion to order a modification of a_trust in the manner that conforms as nearly as possible to the intention of the settlor in this case a bona_fide controversy existed concerning the administration of trust specifically sister and sister disagreed as to whether certain costs and expenses paid_by trust relating to sister 2’s bankruptcy should be treated as distributions under section i b to resolve the dispute the parties have entered into settlement agreement which was approved by court in year during the negotiations that lead to the agreement all of the beneficiaries of trust including unborn and contingent beneficiaries were represented by legal counsel under the terms of settlement agreement trust is to be divided into two separate trusts one trust to benefit sister and her descendants and one trust to benefit sister and her descendants the terms of the resulting trusts will be the same as trust the assets contributed to trust in year by sister are to be allocated to sister 1’s trust the remaining assets of trust and the costs of all litigation are to be allocated equally between the two resulting trusts the terms of settlement agreement are reflective of the rights of the parties under applicable state law that would be applied by the highest court of that state accordingly based on the facts submitted and the representations made we conclude that implementation of settlement agreement will not cause the parties to the agreement to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling sec_2601 imposes a tax on every generation-skipping_transfer made after date a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip plr-160817-05 sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person under a of the act and sec_26_2601-1 the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the regulations the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if - the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in the present case trust was irrevocable on date and no additions actual or constructive have been made to trust after that date as discussed above a bona_fide controversy existed concerning the administration of trust state court has the authority to modify the terms of a_trust to comport with a settlor’s intent under the agreement approved by the court trust will be divided into two trusts one for the benefit of sister and her descendants and one for the benefit of sister and her descendants in addition the costs of all of the litigation will be allocated equally between the two resulting trusts during the negotiations that led to settlement agreement all of the beneficiaries of trust including unborn and contingent beneficiaries were represented by legal counsel we believe that the terms of settlement agreement are within the range of reasonable outcomes under the governing instrument and applicable state law settlement agreement is a compromise between the litigating positions of each sister and their respective families and reflects their assessments of the relative strengths of their positions plr-160817-05 accordingly based upon the facts submitted and the representations made we conclude that the division of trust into two separate trusts and the allocation of trust’s assets between the resulting trusts based upon settlement agreement will not cause trust and the resulting trusts to lose their status as exempt from the gst tax by reason of b a of the act and sec_26_2601-1 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 or implied concerning the inclusion of part or all of trust or the resulting trusts in the estates of either sister or sister under ' the office_of_chief_counsel for income_tax accounting has declined to rule on the income_tax consequences of the modification discussed herein 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 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 has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan james f hogan office of the associate chief_counsel senior technician reviewer branch passthroughs special industries enclosures cc copy for ' purposes


internal_revenue_service national_office technical_advice_memorandum date number release date third party communication none date of communication not applicable index uil no case-mis no tam-107730-10 maria s hwang lmsb ctm dfow taxpayer’s name taxpayer’s address taxpayer’s identification no year s involved date of conference ------------------------------------------------ -------------------- ----------------------------------------- ---------------- -------------------------------------------- ------------------ legend parent target fiscal_year date a date b date c date d month year year year year issues ------------------------- --------------------------- -------------------------------------- ----------------- ----------------------- ----------------------- ------------------ ------------------ ------- ------- ------- ------- whether parent can include target’s and target subsidiaries’ qualified_research_expenses qres for the period date a through date b in parent’s computation of the credit_for_increasing_research_activities research_credit under sec_41 of the tam-107730-10 internal_revenue_code on parent’s federal consolidated_income_tax_return for the taxable_year ending on date d whether parent includes the average annual gross_receipts aagrs for target’s and target subsidiaries’ four taxable years preceding parent’s taxable_year ending on date d in parent’s base_amount when computing the research_credit for parent’s federal consolidated taxable_year ending on date d conclusions parent cannot include target’s and target subsidiaries’ qres for the period date a through date b in parent’s computation of the research_credit on parent’s federal consolidated_income_tax_return for the taxable_year ending on date d parent includes the aagrs for target’s and target subsidiaries’ four taxable years preceding parent’s taxable_year ending on date d in parent’s base_amount when computing the research_credit for parent’s federal consolidated taxable_year ending on date d however because target and target subsidiaries are members of the parent consolidated_group for only a portion of parent’s taxable_year beginning on date a and ending on date d the portion of the base_amount determined under sec_41 of the internal_revenue_code attributable to target and target subsidiaries must be reduced by multiplying such amount by the number of months in the period from date c through date d and dividing the result by twelve facts parent is the common parent of a consolidated_group filing federal_income_tax returns on a fiscal_year basis target was the common parent of its own unrelated consolidated_group that filed federal_income_tax returns on a calendar_year basis on date b parent acquired the stock of target in exchange for stock and cash in a transaction that did not constitute a reverse_acquisition within the meaning of sec_1_1502-75 of the income_tax regulations thus terminating the target consolidated_group parent included target’s and target subsidiaries’ qres for the period date a through date b in its computation of the parent group’s research_credit for its taxable_year ending on date d parent did not include month in its original computations but did file an informal amended claim to include month parent did not deduct any qres for the period date a through date b and is not claiming any deduction for these qres in calculating the research_credit for parent’s group for the taxable_year ending date d parent included target’s and target subsidiaries’ gross_receipts for the period date a through date b in the computation of parent’s base_amount additionally target included the same qres for the period date a through the end of year and for month in its computation of the target group’s research_credit for the year taxable_year and the short taxable_year ending on date b respectively however because these years tam-107730-10 were both loss years for the target group none of the credits were utilized to offset income_tax of the target group instead parent carried or intends to carry the credits forward to parent’s consolidated_return years subject_to limitation under sec_383 thus parent and target both included target’s and target subsidiaries’ qres for the period date a through date b in the computation of the research_credit law sec_41 provides in part that the research_credit for the taxable_year is an amount equal to the sum of percent of the excess if any of the qres for the taxable_year over the base_amount sec_41 provides that the term qualified_research_expenses means the sum of the in-house_research_expenses and contract_research_expenses that are paid_or_incurred by the taxpayer during the taxable_year in carrying on any trade_or_business of the taxpayer sec_41 provides that the term base_amount means the product of a the fixed-base percentage and b the aagrs of the taxpayer for the four taxable years preceding the taxable_year for which the credit is being determined that is the credit_year sec_41 provides that the fixed-base percentage is the percentage that the aggregate qres of the taxpayer for taxable years beginning after date and before date is of the aggregate gross_receipts of the taxpayer for such taxable years sec_41 provides that in determining the amount of the credit i all members of the same controlled_group_of_corporations shall be treated as a single_taxpayer and ii the credit allowable to each member shall be its proportionate share of the qres sec_1_41-6 provides that all members of a controlled_group are treated as a single_taxpayer for purposes of computing the research_credit the group credit is computed by applying all of the sec_41 computational rules on an aggregate basis sec_41 provides that the term controlled_group_of_corporations has the same meaning given to such term by sec_1563 except that more than percent shall be substituted for at least percent each place it appears in sec_1563 and the determination shall be made without regard to sec_1563 and e c sec_1563 provides that the term controlled_group_of_corporations means any group of one or more chains of corporations connected through stock ownership with a common parent_corporation if a stock possessing at least percent tam-107730-10 of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of each of the corporations except the common parent_corporation is owned by one or more of the other corporations and b the common parent_corporation owns stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations sec_41 provides that in the case of any short taxable_year qres and gross_receipts shall be annualized in such circumstances and under such methods as the secretary of treasury may prescribe by regulation sec_1_41-3 provides that if a credit_year is a short taxable_year then the base_amount determined under sec_41 shall be modified by multiplying that amount by the number of months in the short taxable_year and dividing the result by sec_1_41-3 provides that if one or more of the four taxable years preceding the credit_year is a short taxable_year then the gross_receipts for such year are deemed to be equal to the gross_receipts actually derived in that year multiplied by and divided by the number of months in that year sec_1_41-3 provides that no adjustment shall be made on account of a short taxable_year to the computation of a taxpayer’s fixed-base percentage sec_1502 provides that the secretary of treasury shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group both during and after the period of affiliation may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income_tax_liability and the various factors necessary for the determination of such liability and in order to prevent avoidance of such tax_liability in carrying out the preceding sentence the secretary of treasury may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns sec_1_1502-76 provides that a consolidated_return must include the common parent’s items of income gain deduction loss and credit for the entire consolidated_return_year and each subsidiary’s items for the portion of the year for which it is a member if the consolidated_return includes the items of a corporation for only a portion of its taxable_year determined without taking this section into account items for the portion of the year not included in the consolidated_return must be included in a separate_return including the consolidated_return of another group the rules of tam-107730-10 this paragraph b must be applied to prevent the duplication or elimination of the corporation's items sec_1_1502-76 provides that if a corporation other than one described in paragraph b ii a of this section concerning subchapter_s_corporations becomes or ceases to be a member during a consolidated_return_year it becomes or ceases to be a member at the end of the day on which its status as a member changes and its taxable_year ends for all federal_income_tax purposes at the end of that day sec_1_1502-80 as it applied for the years at issue provided that the internal_revenue_code or other law shall be applicable to the group to the extent the regulations do not exclude its application analysis the qres at issue were paid_or_incurred between date a and date b these are dates in which target was the common parent of its own consolidated_group when parent acquired the stock of target target’s tax_year ended for all federal_income_tax purposes sec_1_1502-76 target included the qres it incurred between date a and date b in its own consolidated_return however parent has also included target and its subsidiaries’ qres from date a through date b in parent’s consolidated_return as more fully discussed below target’s and target subsidiaries’ qres from the period date a through date b should not be included in parent’s consolidated_return for the tax_year ending date d because those qres were not paid_or_incurred during the portion of parent’s tax_year in which target and target subsidiaries were members of the parent consolidated_group but instead were paid_or_incurred during the portion of the year in which target was the common parent of its own group under the consolidated_return_regulations those qres must be included only in the target’s group’s consolidated_return for the year tax_year or the tax_year ended date b whichever is appropriate and not in the parent group’s consolidated_return for the tax_year ended date d the parent consolidated_group is a controlled_group_of_corporations under sec_41 under sec_41 all members of the parent consolidated_group shall be treated as a single_taxpayer for purposes of computing the research_credit the parent consolidated_group must aggregate each member’s credit_year qres under sec_41 the parent consolidated_group must aggregate each member’s base_year qres and base_year gross_receipts under sec_41 we note that we considered the potential application of sec_41 however irrespective of sec_41 the results do not change under the consolidated_return rules as discussed in this technical_advice_memorandum tam-107730-10 under sec_1_1502-76 target’s consolidated_group terminated at the end of the day on date b and target and its subsidiaries became members of the parent consolidated_group on date c under sec_1_1502-76 target’s and target subsidiaries’ qres for the period date a through the end of year and for month must be included in the target consolidated group’s qres for year and target’s short taxable_year ending on date b respectively the target consolidated_group must use the short taxable_year provision of sec_1_41-3 to compute its research_credit for its short taxable_year ending on date b under sec_1_1502-76 target’s and target subsidiaries’ qres for the period date c though date d must be included in the parent consolidated group’s qres for the taxable_year ending on date d the parent consolidated_group must aggregate each member’s aagrs for the four taxable years preceding the credit_year under sec_41 for parent the four taxable years preceding the credit_year are the fiscal years ending in year year year and year for target and its subsidiaries the four taxable years preceding the credit_year are the calendar years year year and year and the short taxable_year ending on date b parent must use the short taxable_year provision of sec_1_41-3 to compute target’s and target subsidiaries’ gross_receipts for the short taxable_year ending on date b therefore target and its subsidiaries’ gross_receipts derived in target’s short taxable_year are deemed to be equal to the gross_receipts actually derived in that year multiplied by twelve and divided by the number of months in the short taxable_year ending on date b pursuant to sec_1_41-3 because target and target subsidiaries were members of the parent consolidated_group for less than months in determining the parent consolidated group’s base_amount parent must multiply the portion of the base_amount determined under sec_41 attributable to target and target’s subsidiaries by the number of months in the period from date c to date d and divide the result by twelve caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09-plr-134511-01 date date re legend decedent trust testamentary_trust corporation family local court date date date date x y dollar_figurea dollar_figureb dear plr-134511-01 this is in response to your letter dated date in which you requested rulings under sec_2601 of the internal_revenue_code the facts submitted and representations made are as follows decedent created an irrevocable inter_vivos_trust trust on date the assets of trust consist of cash and marketable_securities having a value of approximately dollar_figurea plus x shares of corporation on date decedent died decedent’s will created a_trust testamentary_trust that currently holds among other assets a small amount of shares of stock in corporation y shares paragraph of testamentary_trust provides that during the continuation of testamentary_trust the net_income from the trust or the part the trustees determine to be available for distribution shall be paid not less than quarter-annually in equal shares to decedent’s four children if any child shall die prior to the termination of this trust leaving issue living then the share of income that child would have taken shall go to such issue per stirpes paragraph provides that testamentary_trust shall terminate on the death of the survivor of decedent’s four children and the entire trust estate shall be distributed in equal shares to decedent’s then living grandchildren per capita provided that if any grandchild of decedent shall predecease the termination of the trust with issue living the issue shall take per stirpes the share which the grandchild would have taken had he or she survived the termination of the trust paragraph provides that trustees may sell exchange and grant options to purchase or exchange any part of the trust estate in order to consolidate all of the corporation shares owned by the family trusts into one trust trustees filed a petition for approval of sale of corporation shares with local court requesting that local court approve the sale of the shares of corporation shares held by testamentary_trust to trust trustees represent that the y shares of stock of corporation held by testamentary_trust are worth a total of dollar_figureb on date local court approved all of the relief requested in the petition for approval of sale of corporation shares this order is conditioned on a favorable ruling from the internal_revenue_service that the sale will not cause testamentary_trust to lose its exempt status for generation-skipping_transfer gst tax purposes sec_2601 imposes a tax on each generation-skipping_transfer made by a transferor to a skip_person under section a of the tax_reform_act_of_1986 the gst tax is generally applicable to generation-skipping transfers made after date plr-134511-01 section b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the generation-skipping_transfer gst tax shall not apply to any generation-skipping_transfer from a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action will not cause a_trust that was irrevocable on date to lose its exempt status sec_26_2601-1 provides that a modification will not cause a_trust that was irrevocable on date to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst to determine whether a particular amendment to a_trust shifts a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification in this case trustees of testamentary_trust intend to sell the shares of stock that testamentary_trust holds in corporation to trust and local court has approved the sale the sale of the corporation stock will not shift a beneficial_interest in trust or testamentary_trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the sale will not extend the time for vesting of any beneficial_interest in the trusts therefore we conclude that the proposed sale of corporation stock by testamentary_trust to trust will not cause either trust to lose their exempt status with respect to the gst tax except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of plr-134511-01 the code provides that it may not be used or cited as precedent sincerely james f hogan senior technician reviewer office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes