internal_revenue_service number release date index number --------------------------- ---------------------------- ----------------------------------------------------- ------------------------------------------------------------ ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no ------------- ----------------- telephone number ---------------------- refer reply to cc psi plr-126009-16 date date legend x ---------------------------- ---------------------------- country ----------------------------- date -------- ------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts the information submitted states that x was formed under the laws of country on date x represents that as of date it was a foreign_entity eligible to elect to be a partnership for u s federal tax purposes and at all times its partners intended x to be treated as a partnership x’s default status is an association_taxable_as_a_corporation x represents that it relied upon a qualified_tax professional to file the election effective date however the tax professional failed to file the election timely x represents that its partners consistently reported income treating x as a partnership x also represents that granting relief will not prejudice the interests of the government and that hindsight is not involved in seeking relief to file a late election x further represents that such relief would not result in a lower tax_liability in the aggregate for all years to which the request applies finally x represents that it acted reasonably and in good_faith plr-126009-16 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an 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 guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic_extension of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for the regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonable and in good_faith and granting relief will not prejudice the interests of the government plr-126009-16 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to file form_8832 with the appropriate service_center to elect to be treated as a partnership for federal tax purposes effective date a copy of this letter is attached for that purpose this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief to the extent appropriate these returns must include but are not limited to form_8865 information_return of u s persons with respect to certain foreign_partnerships such that the forms and returns reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by laura c fields laura c fields senior technician reviewer branch passthroughs special industries enclosures copy of letter copy for purposes


t c no united_states tax_court nield and linda montgomery petitioners v commissioner of internal revenue respondent docket no filed date p-h president and ceo of mgc communications inc mgc received incentive stock_options isos from mgc between date and date in date p-h resigned as president and ceo of mgc and entered into an employment contract with mgc which included provisions accelerating the vesting dates of his isos in early p-h exercised many of his isos p-h subsequently sold shares of mgc stock in and at prices above and below the exercise prices that he paid for the shares ps filed a joint federal_income_tax return for reporting total_tax of dollar_figure including alternative_minimum_tax amt ps subsequently submitted to r an amended_return for in which they claimed they were not subject_to amt and they overpaid their taxes r rejected ps’ claimed overpayment and issued to ps a notice_of_deficiency for r determined ps failed to report wages capital_gains and additional alternative_minimum_taxable_income amti arising from the exercise of p-h’s isos held p-h’s rights to the mgc shares he acquired upon the exercise of his isos were not subject_to a substantial_risk_of_forfeiture within the meaning of sec_83 i r c and sec b of the securities exchange act of held further r’s determinations ps failed to report wages capital_gains and amti arising from the exercise of p-h’s isos are sustained in that r properly applied the dollar_figure annual_limit imposed on isos under sec_422 i r c ps are not entitled to carry back capital losses to and ps are not entitled to carry back alternative_tax net operating losses to held further ps are not liable for an accuracy-related_penalty for under sec_6662 i r c duncan c turner and brian g isaacson for petitioners kirk m paxson julie l payne and william c schmidt for respondent haines judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty of dollar_figure under sec_6662 all references to petitioner in the singular are to petitioner nield montgomery unless otherwise indicated section references are to the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure after concessions the issues remaining for decision are whether petitioner’s rights in shares of stock acquired upon the exercise of incentive stock_options isos in were subject_to a substantial_risk_of_forfeiture within the meaning of sec_83 and section b of the securities exchange act of the exchange act we hold petitioner’s rights were not subject_to a substantial_risk_of_forfeiture whether respondent properly determined that petitioner’s options exceeded the dollar_figure annual_limit imposed on isos under sec_422 we hold respondent correctly applied sec_422 in this case whether petitioners may carry back capital losses to reduce the amount of their alternative_minimum_taxable_income for we hold they may not whether petitioners may carry back alternative_tax net operating losses to reduce the amount of their alternative_minimum_taxable_income for we hold they may not whether petitioners are liable for an accuracy-related_penalty under sec_6662 for we hold petitioner sec_2 the parties filed a stipulation of settled issues in which they agreed to the amounts of deductions petitioners are entitled to claim for charitable_contributions made during the securities exchange act of ch sec b 48_stat_896 codified pincite u s c sec_78p b for convenience all citations are to sections of the securities exchange act of are not liable for the accuracy-related_penalty under sec_6662 findings_of_fact some facts have been stipulated and are so found the parties’ stipulations of facts with attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners husband and wife resided in las vegas nevada a mgc communications inc in petitioner cofounded nevtel inc subsequently renamed mgc communications inc mgc to engage in the business of providing local_telephone_service in nevada petitioner served as mgc’s president and chief_executive_officer from to date during the period in question mgc’s common_stock was publicly traded on the nasdaq market system and mgc was subject_to the reporting requirements of the exchange act mgc shares were subject_to a 6-for-10 reverse_stock_split in date and a 3-for-2 stock split in date unless otherwise indicated all data including tables set forth below reflect these stock splits mgc communications inc stock_option plan in mgc adopted the mgc communications inc stock although mgc communications inc was subsequently renamed mpower communications inc we shall refer to the corporation as mgc option plan the mgc stock_option plan which provided in pertinent part the plan would be administered by a committee of no fewer than two disinterested persons the committee who would be appointed by mgc’s board_of directors mgc board from its membership or in the absence of such appointments by the entire mgc board the committee would have the sole discretion to a select the persons to be granted options b determine the number of shares subject_to each option c determine the duration of the exercise period for any option d determine that options may only be exercised in installments and e impose other terms and conditions on each option as the committee in its sole discretion deemed advisable the mgc stock_option plan expressly contemplated that the committee would grant to mgc employees isos within the meaning of sec_421 and sec_422 petitioner’s incentive stock_options on date date and date petitioner executed a series of share option agreements under which he was granted isos from mgc each of the share option agreements stated that if petitioner were considered an insider subject_to section b of the exchange act petitioner shall be restricted from selling any option shares acquired by him through exercise of the options or any portion thereof during the six 6_month period following the date of grant of the option table sets forth the dates on which petitioner’s isos were granted and the number of mgc shares petitioner was entitled to purchase under each iso table grant grant_date share sec_1 big_number big_number big_number big_number big_number petitioner’s isos provided for exercise prices ie the price petitioner would pay for each mgc share ranging from dollar_figure to dollar_figure petitioner’s isos originally were scheduled to vest on various dates between and petitioner was not granted any additional mgc stock_options after date during the period in question petitioners owned less than percent of the total combined voting power of all classes of mgc’s stock petitioner unilaterally determined the specific terms and conditions of the isos that he received under the share option agreements the mgc board did not appoint a committee to administer the mgc stock_option plan and the mgc board did not play any role in consummating the share option agreements described above b petitioner’s employment agreement with mgc on date petitioner entered into a comprehensive agreement with mgc governing his employment status with mgc and his isos the employment agreement pursuant to the employment agreement petitioner resigned as president chief_executive_officer and director of mgc and he resigned as an officer and director of mgc’s subsidiaries petitioner agreed to assist mgc’s new chief_executive_officer in order to provide for a smooth transition for the company mgc agreed to make a lump-sum payment of dollar_figure to petitioner mgc and petitioner agreed to accelerate the vesting dates of petitioner’s isos and petitioner and mgc agreed that petitioner would continue to be employed by mgc through date for the purpose of providing advice regarding regulatory developments testimony at legal regulatory and administrative proceedings as necessary and other mutually agreed duties after date mgc never requested petitioner to prepare any formal reports for the company and petitioner did not prepare any formal reports for mgc table sets forth the fair_market_value of mgc shares as of the dates petitioner’s isos were granted and the total fair_market_value of all shares as to which petitioner’s isos were exercisable for the first time during each of the years to taking into account the accelerated vesting schedule that mgc and petitioner agreed to on date table year iso first exercisable fmv of mgc shares as of iso grant_date total grant grant grant grant grant fmv dollar_figure -- -- -- -- dollar_figure big_number -- -- -- -- big_number big_number dollar_figure dollar_figure dollar_figure -- big_number big_number big_number -- big_number dollar_figure big_number big_number -- -- big_number -- big_number c petitioner’s sec filings in date petitioner filed with the securities_and_exchange_commission sec a form_5 annual_statement of changes in beneficial_ownership of securities in which he reported owning big_number shares of mgc common_stock and options to purchase big_number additional shares of mgc common_stock a cover letter accompanying petitioner’s form_5 stated that the report would be petitioner’s last because he was no longer subject_to the reporting requirements of section a of the exchange act petitioner did not file any further form sec_5 with the sec during and petitioner remained in contact with certain mgc executive officers and was privy to material non- public information regarding mgc’s operations and financial matters d petitioner’s acquisitions and dispositions of mgc shares table sets forth the isos that petitioner exercised adjusted for mgc’s date stock split petitioner held options to purchase big_number shares of mgc common_stock see supra table identified by grant exercise date numbers of mgc shares acquired total exercise price and total fair_market_value fmv of the mgc shares acquired as of each exercise date table grant exercise date shares acquired exercise price fmv big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner subsequently disposed of a number of the mgc shares he had acquired upon the exercise of his isos as described in table above in particular on date petitioner transferred big_number shares of mgc stock by way of a gift in addition petitioner sold a number of mgc shares during and as set forth in the following table table gain_or_loss difference between exercise price and grant sale date shares sold sale proceeds sales proceeds big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioners have never been in the trade_or_business of trading stocks petitioners held their mgc shares for investment purposes and not as traders or dealers mgc never requested that petitioner disgorge any profits from his sales of mgc shares petitioner was never sued by mgc or one of its shareholders pursuant to section b of the exchange act and petitioner never paid over to mgc any part of the proceeds from his sales of mgc common_stock e petitioners’ tax_return and amended_return on or about date petitioners filed a joint federal_income_tax return for the taxable_year reporting total_tax of dollar_figure including amt described below petitioners reported total payments of dollar_figure leaving a balance due of dollar_figure including an estimated_tax penalty of dollar_figure petitioners submitted form_6251 alternative minimum tax--individuals with their tax_return for on form_6251 line petitioners reported dollar_figure of alternative_minimum_tax income arising from the exercise of petitioner’s isos in excess of regular taxable_income a total of dollar_figure of alternative_minimum_taxable_income amti and amt of dollar_figure petitioners’ tax_return was prepared and signed by a tax_return_preparer employed at deloitte touche llp petitioners failed to remit the full amount of tax due with their tax_return respondent accepted petitioners’ tax_return as filed and assessed the tax reported therein as well as statutory interest and a late-payment penalty respondent issued to petitioners a final notice_of_intent_to_levy and notice of your right to a hearing with regard to their unpaid taxes for petitioners submitted to respondent an amended_return for and a request for an administrative hearing under sec_6330 in their amended_return petitioners claimed that they overstated the amount of tax due on their original return and they claimed they were due a refund of dollar_figure contrary to their original return petitioners submitted a form_6251 with their amended_return in which they reported dollar_figure of alternative_minimum_taxable_income in excess of regular taxable_income a total of dollar_figure of amti and zero amt respondent declined to consider petitioners’ refund claim and issued to petitioners a notice_of_determination concerning collections actions for petitioners filed a petition for lien or levy action with the court at docket no 16864-02l upon review of the matter the court remanded the collection case to respondent’s office of appeals for consideration of petitioners’ amended_return during the remand respondent audited petitioners’ original and amended returns and issued to petitioners a supplemental notice_of_determination under sec_6330 and a notice_of_deficiency under sec_6213 in the notice_of_deficiency respondent determined petitioners failed to report the correct amount of wages and capital_gains arising from the exercise of petitioner’s isos petitioners were not entitled to certain itemized_deductions petitioners were liable for amt in excess of that reported on their original return and petitioners were liable for an accuracy-related_penalty specifically respondent determined that petitioners’ correct_tax liability for totaled dollar_figure--a sum comprising regular_tax of dollar_figure and amt of dollar_figure petitioners filed a petition for redetermination in this case challenging the notice_of_deficiency at the conclusion of the trial in this case the court directed the parties to file seriatim briefs after petitioners filed their opening brief respondent filed an answering brief and a motion for leave to file amended answer seeking an increased deficiency and an increased accuracy-related_penalty to conform the pleadings to testimony offered by petitioner pincite petitioners’ collection review case at docket no 02l was stayed pending the disposition of the instant case trial respondent asserted that petitioner’s trial testimony demonstrated that petitioner’s options were not isos as defined in sec_422 respondent’s motion was denied by order dated date under the following analysis petitioner’s options are treated as isos consistent with respondent’s position in the notice_of_deficiency opinion i taxation of stock_options a incentive stock_options generally under sec_421 a taxpayer is not required to recognize income upon the grant or exercise of an iso sec_422 provides that sec_421 shall apply with respect to the transfer of a share of stock to a taxpayer pursuant to the exercise of an iso if no disposition of such sec_422 defines an incentive_stock_option iso in pertinent part as an option granted to a taxpayer by an employer_corporation or a parent or subsidiary_corporation to purchase stock of any such corporation but only if the option is granted pursuant to a plan which is approved by the stockholders of the granting corporation such option is granted within the earlier of years from the date such plan is adopted or approved by the stockholders such option is not exercisable after years from the date such option is granted the option_price is not less than the fair_market_value of the stock at the time such option is granted such option is not transferrable by the taxpayer other than by will or the laws of descent and distribution and is exercisable during the taxpayer’s lifetime only by the taxpayer and such taxpayer at the time the option is granted does not own stock possessing more than percent of the total combined voting power of all classes of stock of the employer_corporation or of its parent or subsidiary_corporation share is made by the individual within years from the date of the granting of the option nor within year after the transfer of the share to the individual and the taxpayer remains an employee of the corporation granting the option or of a parent or subsidiary_corporation of such corporation during the period beginning on the date the option was granted and ending on the day months before the date the option was exercised any gain_or_loss on a sale of shares acquired pursuant to the exercise of an iso that are held for the periods prescribed in sec_422 generally will qualify as a capital_gain or loss sec_1001 sec_1221 sec_1222 sec_421 provides that if a taxpayer disposes of any shares of stock acquired pursuant to the exercise of an iso before the expiration of the holding periods prescribed in sec_422 the taxpayer shall recognize an increase in income in the taxable_year in which such disqualifying_disposition occurs sec_422 provides in pertinent part that if a taxpayer disposes of any shares of stock acquired pursuant to the exercise of an iso before the expiration of the holding periods required in sec_422 and such disposition is a sale_or_exchange with respect to which a loss sec_424 provides that the term disposition as related to shares of stock acquired pursuant to the exercise of an iso generally means a sale exchange gift or a transfer of legal_title if sustained would be recognized to such individual the amount includable in the taxpayer’s gross_income shall not exceed the excess if any of the amount_realized on such sale_or_exchange over the adjusted_basis of such shares sec_422 imposes an annual_limit on options that qualify as isos sec_422 provides sec_422 dollar_figure per year limitation -- in general --to the extent that the aggregate fair_market_value of stock with respect to which incentive stock_options determined without regard to this subsection are exercisable for the 1st time by any individual during any calendar_year under all plans of the individual’s employer_corporation and its parent and subsidiary corporations exceeds dollar_figure such options shall be treated as options which are not incentive stock_options ordering rule --paragraph shall be applied by taking options into account in the order in which they were granted determination of fair_market_value --for purposes of paragraph the fair_market_value of any stock shall be determined as of the time the option with respect to such stock is granted in sum when the aggregate fair_market_value of stock that a taxpayer may acquire pursuant to isos that are exercisable for the first time during any taxable_year exceeds dollar_figure such options shall be treated as nonqualified_stock_options nsos under sec_83 as discussed in detail below b alternative_minimum_tax in general the internal_revenue_code imposes upon taxpayers an amt in addition to all other taxes imposed by subtitle a sec_55 although a taxpayer exercising an iso may defer recognition of income for regular_tax purposes the taxpayer nevertheless may incur amt liability see sec_56 the amt is imposed upon the taxpayer’s amti which is an income base broader than that applicable for regular_tax purposes 118_tc_1 see also h conf rept vol ii at ii-249 ii-264 1986_3_cb_1 amti is defined as the taxable_income of a taxpayer for the taxable_year determined with adjustments provided in sec_56 and sec_58 and increased by the amount of items of tax preference described in sec_57 sec_55 for purposes of computing a taxpayer’s amti sec_56 provides that sec_421 shall not apply to the transfer of stock acquired pursuant to the exercise of an iso as defined by sec_422 therefore under the amt the spread between the exercise price and the fair_market_value of the shares of stock on the date an iso is exercised is treated as an item of adjustment and is included in the computation of amti see sec_56 sec_1_83-7 income_tax regs see also 124_tc_165 affd 454_f3d_782 8th cir insofar as sec_56 provides that sec_421 shall not apply to the exercise of an iso sec_83 is applicable to the exercise of an iso inasmuch as the exclusion for isos set forth in sec_83 is negated sec_83 sec_83 provides in pertinent part that if property is transferred to a taxpayer in_connection_with_the_performance_of_services ie stock transferred to a taxpayer upon the exercise of a stock_option the excess of the fair_market_value of the stock measured as of the first time the taxpayer’s rights in the stock are not subject_to a substantial_risk_of_forfeiture over the amount if any paid for the stock the exercise price shall be included in the taxpayer’s gross_income in the first taxable_year in which the taxpayer’s rights in the stock are not subject_to a substantial_risk_of_forfeiture see 117_tc_237 affd 65_fedappx_508 5th cir sec_1_83-7 income_tax regs as mentioned above the combined application of various provisions of sec_55 sec_56 and sec_83 requires that upon the exercise of an iso such income be included in the computation of amti sec_56 further provides however that sec_422 shall apply in any case where the disposition and the inclusion for this part are within the same taxable_year and such section shall not apply in any other case sec_83 contains special rules related to recognition of income under sec_83 sec_83 provides that a taxpayer’s rights in property stock are subject_to a substantial_risk_of_forfeiture and are not transferable so long as the sale of the stock at a profit could subject the taxpayer to suit under section b of the exchange act amt impact on basis as a result of the unique treatment of the exercise of isos under the amt regime a taxpayer normally will have two different bases in the same shares of stock the taxpayer’s regular_tax basis is the exercise price or cost_basis see sec_1012 however for amt purposes sec_56 provides that the adjusted_basis of any stock acquired by the exercise of an iso shall be determined on the basis of the treatment prescribed by this paragraph in other words a taxpayer’s adjusted amt basis equals the exercise or cost_basis in the shares increased by the amount of income included in amti see sec_55 sec_56 sec_83 the following example illustrates the general operation of the iso basis rules assume a taxpayer is granted an iso giving him the right to purchase shares of abc inc common_stock at dollar_figure per share the taxpayer exercises the iso at a time when abc inc common_stock is trading at dollar_figure per share and the taxpayer’s rights in such shares are freely transferrable under this example the taxpayer’s basis for regular_tax purposes is dollar_figure--the total exercise price or cost incurred by the taxpayer to purchase the shares of stock on the other hand the taxpayer’s adjusted_basis solely for amt purposes is dollar_figure--an amount that comprises the taxpayer’s dollar_figure cost_basis plus the dollar_figure bargain_purchase element of the transaction that is included in the computation of the taxpayer’s amt liability the anomaly in the iso basis rules may create inequitable results when a taxpayer has incurred amt liability upon the exercise of an iso in one taxable_year only to have the shares of stock decrease in value the following year in this situation the amt imposed on the bargain_purchase element of the iso results in a payment of tax on income the taxpayer may never actually receive ii the parties’ positions a respondent’s determinations respondent determined that the aggregate fair_market_value of the stock with respect to which petitioner held isos that were first exercisable in and exceeded the dollar_figure limitation imposed under sec_422 in connection with this determination respondent asserts that the aggregate value of stock that a taxpayer may acquire pursuant to isos during a taxable_year is computed for purposes of the dollar_figure limitation of sec_422 without taking into account any disqualifying dispositions ie transfers or sales of stock prior to the expiration of the holding periods required under sec_422 taking into account the effects of sec_422 and petitioner’s disqualifying dispositions of mgc shares respondent determined that petitioners failed to report gross_income wages and capital_gains subject_to regular_tax and they failed to compute properly their amt for b petitioners’ contentions petitioners first contend they were not obliged to recognize any income related to the shares of stock petitioner acquired upon the exercise of his isos during the taxable_year because petitioner’s rights in the mgc shares in question were subject_to a substantial_risk_of_forfeiture during specifically petitioner maintains he was a statutory insider of mgc throughout and he could have been sued by mgc or another mgc shareholder under section b of the exchange act and forced to disgorge the profits he realized when he sold his mgc shares see sec_83 in the alternative petitioners assert they incurred capital losses or alternative_tax net operating losses atnols in years subsequent to the taxable_year and such losses may be carried back to reduce their amti for petitioners contend that for amt purposes capital losses are not subject_to the dollar_figure limitation imposed under sec_1211 and imposing a dollar_figure limitation on the amount of capital losses petitioners may report would defeat congress’s intent to tax only the economic gain received by a taxpayer iii whether petitioner’s rights in his mgc shares were subject_to a substantial_risk_of_forfeiture within the meaning of sec_83 section a of the exchange act requires the principal stock holders of any class of equity security registered under sec_12 of the exchange act and the directors and officers of the issuer of such securities hereinafter insiders to file periodic statements with the sec disclosing the amount of equity securities such insider owns and purchases and sales made by such insider during the reporting_period section b of the exchange act provides in pertinent part b for the purpose of preventing the unfair use of information which may have been obtained by such beneficial_owner director or officer by reason of his relationship to the issuer any profit realized by him from any purchase and sale or any sale and purchase of any equity security of such issuer other than an exempted security or a security-based swap agreement as defined in section 206b of the gramm-leach-bliley act involving any such equity security within any period of less than six months unless such security or security-based swap agreement was acquired in good_faith in connection with a debt previously contracted shall inure to and be recoverable by the issuer irrespective of any intention on the part of such beneficial_owner director or officer in entering into such transaction of holding the security or security- based swap agreement purchased or of not repurchasing the security or security-based swap agreement sold for a period exceeding six months the remainder of section b provides that an issuer or any shareholder of the issuer may bring suit against an insider to recover any profit realized by the insider on any purchase and sale or any sale and purchase of any equity security of such issuer within any period of less than months section b the so-called short-swing profit recovery provision is a prophylactic and strict_liability measure under which an insider’s short-swing profits can be recovered regardless of whether the insider actually was in possession of material non-public information ownership reports and trading by officers directors and principal security holders ownership reports exchange act release no fed reg date see 314_f3d_106 3d cir 136_f3d_316 2d cir section b applies to transactions involving derivative securities such as stock_options 446_f3d_403 2d cir magma power co v dow chem co supra pincite sec rule 16a-1 c and d c f_r sec 16a-1 c and d the elements of a claim under section b of the exchange act are a purchase and a sale of securities by an officer or director of the issuer or by a shareholder who owns more than ten percent of any one class of the issuer’s securities within a six-month period 156_f3d_305 2d cir the parties disagree whether petitioner was an insider subject_to liability under section b of the exchange act during respondent points out that after petitioner’s resignation as an officer and director of mgc in petitioner no longer filed form_4 statement of changes in beneficial_ownership or form_5 statement of changes in beneficial_ownership of securities with the sec he was not a 10-percent_shareholder and he apparently no longer considered himself an insider subject_to the reporting requirements of section a of the exchange act respondent also points out that no lawsuit was ever filed against petitioner seeking disgorgement of the profits he realized when he sold mgc shares during and petitioner counters that he remained an insider at mgc during and as an adviser to mgc’s executives although we are doubtful petitioner was an insider subject_to liability under section b of the exchange act during we need not decide the point assuming arguendo that petitioner was an insider within the meaning of section b of the exchange act we conclude that petitioner was not subject_to a substantial_risk_of_forfeiture during the taxable_year because he exercised his isos and acquired shares of mgc stock at a point in time outside of the 6-month period which would give rise to a lawsuit under section b of the exchange act it is well settled that it is the acquisition grant of a stock_option as opposed to the exercise of a stock_option that is deemed to be a purchase of a security for purposes of the month short-swing profit recovery provision under section b of the exchange actdollar_figure see magma power co v dow chem co supra pincite the sec made this point indelibly clear when it adopted the regulatory framework governing insider transactions involving derivative securities in the sec stated in pertinent part the functional equivalence of derivative securities and their underlying equity securities for section purposes requires that the acquisition of the derivative security be deemed the significant event not the exercise the rules correspondingly recognize that for purposes of the abuses addressed by section the exercise of a derivative security much like the conversion of a convertible security essentially changes the form of beneficial_ownership from indirect to direct since the exercise represents neither the acquisition nor the disposition of a right for the sake of completeness we observe the exercise of a stock_option is treated as a purchase of the underlying_security for purposes of the insider reporting provisions under section a of the exchange act sec rule 16a-1 b c f_r sec 16a-1 b defines a call equivalent position as a derivative security position that increases in value as the value of the underlying equity increases including but not limited to a long convertible security a long call option and a short put option position sec rule 16a-4 b c f_r sec 16a-4 b provides that the exercise of a call equivalent position shall be reported on form_4 and treated for reporting purposes as a purchase of the underlying_security and a closing of the derivative security position affording the opportunity to profit it should not be an event that is matched against another transaction in the equity securities for purposes of section b short-swing profit recovery emphases added fn ref omitted ownership reports supra fed reg pincite9 the sec went on to state that to avoid short-swing profit recovery a grant of an employee stock_option by an issuer absent an exemption must occur at least six months before or after a sale of the equity security or any derivative security relating to the equity security id fed reg pincite n see sec b of the exchange act last sentence authorizes the sec to adopt rules and regulations exempting transactions as not comprehended within the purpose of the provision in 117_tc_237 affd 65_fedappx_508 5th cir this court held that the month period under which an insider is subject_to liability under section b of the exchange act begins on the date that a stock_option is granted in tanner v commissioner supra the taxpayer an officer director and owner of approximately percent of an issuer’s stock was granted an nso in date to purchase up to big_number of the issuer’s shares at an exercise price of cents per share the taxpayer exercised the nso in date and the commissioner determined the taxpayer was obliged to report compensation income on his return for pursuant to sec_83 the taxpayer challenged the commissioner’s determination and asserted he was not obliged to report compensation income in because he had signed a lockup agreement which purportedly extended for years the period under which he would he would remain liable under section b of the exchange act we rejected the taxpayer’s arguments and held the 6-month period under section b of the exchange act began to run in date when the taxpayer was granted the nso in question the 6-month period was not extended by the 2-year lockup agreement and the 6-month period expired long before the taxpayer exercised the nso in date id pincite- petitioner contends the court’s holding in tanner v commissioner supra is not controlling in this case petitioner testified at trial that the mgc stock_option plan was not administered by the mgc board nor by a committee as contemplated under the plan and he unilaterally granted the isos in question to himself consistent with these points petitioner maintains he obtained his isos pursuant to a discretionary transaction within the meaning of sec rule 16b-3 b c f_r sec 16b-3 b his isos were not exempt from the application of section b of the exchange act and because he failed to report to the sec that he exercised the isos and subsequently sold some of the shares so acquired he remained liable under section b of the exchange act until approximately date petitioner’s reliance on the discretionary transaction provisions contained in sec rule 16b-3 is misplaced a discretionary transaction is defined in sec rule 16b-3 b as a transaction pursuant to an employee_benefit_plan that is at the volition of a plan participant is not made in connection with the participant’s death disability retirement or termination of employment is not required to be made available to a plan participant pursuant to the internal_revenue_code and results in either an intraplan transfer involving an issuer equity securities fund or a cash distribution funded by a volitional disposition of an issuer equity security sec rule 16b-3 f provides that a discretionary transaction shall be exempt from section b of the exchange act only if an election effecting an acquisition or disposition is made at least months following the date of the most recent disposition or acquisition as the case may be a review of the sec’s release adopting sec rule 16b-3 reveals the exemption for discretionary transactions was targeted at opportunities for abuse arising from so-called fund-switching transactions effected within contributory employee benefit plans in particular the sec stated in pertinent part many contributory employee benefit plans permit a participant to choose one of several funds in which to invest eg an issuer stock fund a bond fund or a money market fund plan participants typically are given the opportunity to engage in ‘fund-switching’ transactions permitting the transfer of assets from one fund to another at periodic intervals plan participants also commonly have the right to withdraw their investments in cash from a fund containing equity securities of the issuer fund-switching transactions involving an issuer equity securities fund and cash distributions from these funds may present opportunities for abuse because the investment decision is similar to that involved in a market transaction moreover the plan may buy and sell issuer equity securities in the market in order to effect these transactions so that the real party on the other side of the transaction is not the issuer but instead a market participant fn ref omitted ownership reports and trading by officers directors and principal security holders exchange act release no fed reg date although petitioner exercised discretion in granting isos to himself in exercising the isos and in disposing of the underlying shares petitioner’s activities were not undertaken under the auspices of an employee_benefit_plan as contemplated under sec rule 16b-3 nor did his activities result in an intrafund transfer or a cash distribution from a plan accordingly we conclude the discretionary transaction provisions are not relevant to the question whether petitioner was subject_to a suit under section b of the exchange act during the period during which petitioner was subject_to liability under section b of the exchange act is directly addressed in sec rule 16b-3 d and sec rule b -6 a and b c f_r sec 16b-6 a and b which apply specifically to derivative securities read together these regulations provide that the establishment of a call equivalent position grant of a stock_option shall be deemed a purchase of the underlying_security for purposes of section b of the exchange act the acquisition of underlying securities at a fixed price upon the exercise of a call equivalent position shall be exempt from the operation of section b of the exchange act and if months elapse between the acquisition of a derivative security and the disposition of the derivative security or its underlying equity security the transaction is exempt from the operation of section b of the exchange act inasmuch as petitioner did not sell any mgc shares within months of date--the last date mgc granted petitioner an iso--we conclude petitioner qualified for the exemption set forth in sec rule 16b-3 d consequently we hold petitioner was not subject_to a suit under section b of the exchange act during we would reach the same conclusion even if some technical impediment precluded petitioner’s isos from qualifying for exemption under sec rule 16b that rule merely provides exemptions or a safe-harbor from the applicability of section b of the exchange act--it does not impose affirmative liability as previously discussed because petitioner’s isos were granted between date and date the 6-month period during which petitioner would have been subject_to suit under section b of the exchange act expired in date several months before petitioner exercised his isos in petitioner simply has not persuaded us that his liability under section b of the exchange act extended beyond date because petitioner was not subject_to a suit under section b of the exchange act during we conclude petitioner’s rights in his mgc shares were not subject_to a substantial_risk_of_forfeiture within the meaning of sec_83dollar_figure iv whether respondent correctly applied the dollar_figure annual_limit on isos imposed under sec_422 sec_422 provides stock_options will be subject_to taxation as nsos under sec_83 if the aggregate fair_market_value of stock a taxpayer may acquire pursuant to isos that are exercisable for the first time during any taxable_year exceeds dollar_figure sec_421 provides that if the transfer of a share of stock to a taxpayer pursuant to the exercise of an option would otherwise meet the requirements of sec_422 except there is a failure to meet a holding_period requirement petitioner contends sec_1_83-3 income_tax regs is invalid insofar as the regulation fails to acknowledge that the period during which an insider may remain subject_to suit under sec b of the exchange act may extend beyond the normal 6-month period specified in that provision because we have rejected petitioner’s argument that the period he was subject_to a suit under sec b of the exchange act extended beyond the 6-month period beginning with the dates his isos were granted we need not address petitioner’s challenge to the validity of sec_1_83-3 income_tax regs any increase in the income of the taxpayer or deduction from income of his employer_corporation shall be recognized in the taxable_year in which such disposition occurs the fair_market_value of the mgc shares petitioner was entitled to purchase under his isos measured as of the dates petitioner’s isos were granted and which were first exercisable in and exceeded dollar_figure the parties also agree that during and petitioner engaged in disqualifying dispositions of mgc shares that he acquired upon exercising his isos respondent determined that the value of the mgc shares petitioner could acquire pursuant to his isos exceeded the dollar_figure limit imposed under sec_422 by dollar_figure and dollar_figure for and respectivelydollar_figure petitioners contend without citation to any authority or any meaningful discussion that respondent erroneously applied sec_422 as we understand petitioners’ position they assert the dollar_figure limitation is only applied to shares that are not subject_to a respondent determined the following shares were not eligible to be treated as having been transferred to petitioner pursuant to isos big_number of the big_number shares that were the subject of option grant no dated date all of the big_number shares that were the subject of option grant no dated date big_number of the big_number shares that were the subject of option grant no dated date and all of the big_number shares that were the subject of option grant no dated date subsequent disqualifying_disposition during the same taxable_year in which the shares were acquired we disagree sec_422 summarized supra note sets forth the definition of the term incentive_stock_option sec_422 does not impose a holding_period requirement on shares of stock acquired pursuant to the exercise of an iso nor does it cross- reference sec_422 or otherwise exclude shares which are later subject_to disqualifying dispositions equally important although sec_422 provides the general_rule that sec_421 shall apply with respect to the transfer of a share of stock to an individual pursuant to an exercise of an iso if among other requirements certain holding periods are satisfied under sec_422 sec_422 does not state that a violation of the holding_period requirement will cause the option to fail to qualify as an iso along the same lines although sec_421 describes the tax effects if a taxpayer receives shares of stock pursuant to the exercise of an option which would meet the requirements of sec_422 except for a failure to meet any of the holding_period requirements of sec_422 sec_421 does not state that the option is not to be considered an iso in contrast sec_422 unambiguously states that options exceeding the dollar_figure limitation shall be treated as options which are not incentive stock_options in the absence of any language in the controlling statutory provisions suggesting a disqualifying_disposition of stock will cause the related option to be treated as something other than an iso we reject petitioners’ argument on this point we sustain respondent’s interpretation and application of the dollar_figure limit imposed under sec_422 in this case v whether petitioners may reduce their amti in by amt capital losses realized in capital losses under regular_tax and alternative_minimum_tax sales of securities generally are subject_to the capital_gain and loss provisions sec_165 provides that capital losses are permitted only to the extent allowed in sec_1211 and sec_1212 under sec_1212 a noncorporate taxpayer is required to offset capital losses against capital_gains for a particular taxable_year if aggregate capital losses exceed aggregate capital_gains for a taxable_year up to dollar_figure of the excess may be deducted against ordinary incomedollar_figure sec_1212 a noncorporate taxpayer may carry forward unrecognized capital losses to subsequent taxable years but it does not allow such for married individuals filing separately dollar_figure is reduced to dollar_figure sec_1211 if the excess of capital losses over capital_gains is less than dollar_figure or dollar_figure then only that excess may be deducted sec_1211 unrecognized capital losses to be carried back to prior taxable years sec_1212 the internal_revenue_code does not explicitly address the treatment of capital losses for amt purposes see secs and accompanying regulations petitioners are not securities dealers and they held their mgc shares strictly as investors there is no dispute the mgc shares in question are capital assets under sec_1221 the record also shows petitioner sold mgc shares in and that he realized capital losses as a resultdollar_figure however the capital_loss limitations of sec_1211 and sec_1212 restricted petitioners’ ability to deduct these regular capital lossesdollar_figure petitioners also realized amt capital losses in taking into account petitioner’s adjusted amt basis in his mgc shares petitioners contend that they may carry back these amt capital losses to reduce their amti in petitioners argue the capital_loss limitations of sec_1211 and sec_1212 do not apply to bar the carryback of amt capital losses for purposes of calculating amti we disagree to avoid confusion between petitioner’s capital losses we shall refer to his capital losses for regular_tax purposes as his regular capital losses and we shall refer to his capital_loss for amt purposes as his amt capital_loss the effect of the capital_loss limitations of sec_1211 and sec_1212 for regular_tax purposes is not in issue and thus is not discussed in detail in 126_tc_205 on appeal to the u s court_of_appeals for the fifth circuit the court recently rejected the argument that the capital_loss limitations of sec_1211 and sec_1212 do not apply for purposes of calculating a taxpayer’s amti in so holding we cited sec_1_55-1 income_tax regs which states in pertinent part that except as otherwise provided a ll internal_revenue_code provisions that apply in determining the regular taxable_income of a taxpayer also apply in determining the alternative_minimum_taxable_income of the taxpayer in the absence of any statute regulation or other published guidance which purports to change the treatment of capital losses for amt purposes we held the capital_loss limitations of sec_1211 and sec_1212 apply in calculating a taxpayer’s amti id pincite like the taxpayer in merlo v commissioner supra petitioners argue the instructions to lines and of form_6251 for do not mention sec_1211 and therefore sec_1211 does not apply for purposes of calculating petitioners’ amti petitioners’ reliance on these instructions is misplaced it is settled law that taxpayers cannot rely on internal_revenue_service instructions to justify a reporting position otherwise inconsistent with controlling statutory provisions 620_f2d_153 7th cir affg tcmemo_978_426 graham v commissioner tcmemo_1995_114 jones v commissioner tcmemo_1993_358 consistent with merlo v commissioner supra we conclude petitioners may not carry back their amt capital losses to reduce their amti in see spitz v commissioner tcmemo_2006_ vi whether petitioners may carry back net operating losses and alternative_tax net operating losses to reduce their amti for in a further attempt to carry back their amt capital losses petitioners assert their amt capital losses entitle them to an atnol deduction under sec_56 this too is an argument the court rejected in merlo v commissioner supra a taxpayer normally may carry back a net_operating_loss nol to the taxable years preceding the loss then forward to each of the taxable years following the lossdollar_figure sec_172 sec_172 defines an nol as the excess of the deductions allowed by this chapter over the gross_income as modified under sec_172 in the case of a noncorporate taxpayer the amount deductible on account of capital losses shall not exceed the amount includable on account of capital_gains sec_172 sec_1_172-3 income_tax regs in the case of nols incurred in or sec_172 creates a 5-year carryback petitioners argue they are entitled to relief from the 5-year carryback however because we conclude infra that petitioners are not entitled to an atnol petitioners’ argument is moot consequently the effect of sec_172 is that net capital losses are excluded from the nol computation see eg parekh v commissioner tcmemo_1998_151 in merlo v commissioner supra we stated in pertinent part for amt purposes sec_56 provides that an atnol deduction shall be allowed in lieu of an nol deduction under sec_172 an atnol deduction is defined as the nol deduction allowable under sec_172 and is computed by taking into consideration all the adjustments to taxable_income under sec_56 and sec_58 and all the preference items under sec_57 but only to the extent that the preference items increased the nol for the year for regular_tax purposes sec_56 petitioner’s net regular capital_loss is excluded from computing his nol deduction see sec_172 d a sec_1_172-3 income_tax regs for amt purposes petitioner’s atnol is the same as his nol taking into consideration all the adjustments to his taxable_income under sec_56 sec_57 and sec_58 see sec_56 d no adjustments under those sections modify the exclusion of net capital losses from the nol computation under sec_172 therefore petitioner’s amt capital_loss is excluded for purposes of calculating his atnol deduction as a result petitioner’s amt capital_loss realized in does not create an atnol that can be carried back to under sec_56 and sec_172 merlo v commissioner supra pincite fn ref omitted consistent with merlo v commissioner supra we hold petitioners may not claim an atnol carryback to reduce their amti for see spitz v commissioner supra vii whether petitioners are liable for a substantial_understatement_penalty under sec_6662 respondent determined petitioners are liable for a substantial_understatement_penalty under sec_6662dollar_figure petitioners assert respondent’s determination is invalid because respondent did not consider standardized exception criteria before imposing the penalty and the penalty is inapplicable because petitioners acted in good_faith and reasonably relied upon tax professionals to prepare their tax_return for while the commissioner bears the initial burden of production as to the accuracy-related_penalty and must come forward with sufficient evidence showing it is appropriate to impose the penalty the taxpayer bears the burden_of_proof as to any exception to the accuracy-related_penalty see sec_7491 rule a 116_tc_438 one such exception to the accuracy-related_penalty applies to any portion of an underpayment if the taxpayer can prove there was reasonable_cause for the taxpayer’s position and the taxpayer acted in good_faith with respect to that portion sec_6664 sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause there is a substantial_understatement of tax if the amount of the understatement exceeds the greater of either percent of the tax required to be shown on the return or dollar_figure sec_6662 b and d a sec_1_6662-4 and b income_tax regs this threshold is satisfied in the instant case and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional sec_1_6664-4 income_tax regs when a taxpayer selects a competent tax adviser and supplies him or her with all relevant information it is consistent with ordinary business care and prudence to rely upon the adviser’s professional judgment as to the taxpayer’s tax obligations 469_us_241 moreover a taxpayer who seeks the advice of an adviser does not have to challenge the adviser’s conclusions seek a second opinion or try to check the advice by reviewing the tax code himself or herself id petitioners received professional assistance in preparing their tax_return the return was prepared and signed by a representative of deloitte touche and we are satisfied from a review of the return petitioners supplied the return preparer with all relevant information we likewise conclude petitioners relied on their return preparer to accurately and properly prepare their return for we find nothing in the record to indicate it was unreasonable for petitioners to accept the advice of their return preparer our holding sustaining respondent’s determinations on the substantive issues in dispute does not in and of itself require holding for respondent on the penalty see 103_tc_711 indeed we have specifically refused to impose a penalty where it appeared that the issue was one not previously considered by the court and the statutory language was not entirely clear considering that the complex issues underlying the deficiency in this case had yet to be litigated at the time petitioners filed their return for we are persuaded petitioners had reasonable_cause and acted in good_faith in reporting their stock_option transactions see eg 123_tc_144 declining to impose a penalty involving an issue of first impression and the interrelationship between complex tax and bankruptcy laws consequently we hold petitioners are not liable for an accuracy- related penalty under sec_6662 for to reflect the foregoing decision will be entered pursuant to rule


internal_revenue_service number release date index number -------------------------- -------------- ------------------ ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-110849-09 date date legend x -------------------------------------------------- --------------- y ---------------------- -------------------------------------------------- country date ---------- --------------------------- dear ----------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity the information submitted states that x was formed as a company under the laws of country and is wholly-owned by y x was eligible to elect to be treated as a disregarded_entity effective date however x inadvertently failed to timely file form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an 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 plr-110849-09 sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_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 for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days following the date of this letter to file form_8832 and to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-110849-09 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service commerce street dallas tx date date tax_exempt_and_government_entities_division number release date taxpayer_identification_number uil m name of organization num m1 address of organization form num ein number date1 effective date tax_year s ended country location of org date2 election of sec_953 person to contact id number m contact numbers telephone m1 fax certified mail - return receipt requested dear ---- this is our final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made because for the year s of the examination you were not operated as an insurance_company within the meaning of sec_501 of the internal_revenue_code your exempt status is revoked effective date1 we have enclosed a copy of our report of examination further explaining why we believe an adjustment of your organization’s exempt status is necessary we have also enclosed publication exempt_organization appeal procedures for unagreed issues and publication the examination process these publications include information on your rights as a taxpayer they explain appeal rights and the procedure for obtaining technical_advice both technical_advice and appeals procedures require a minimum of days remaining on the statute_of_limitations in order to take advantage of appeal rights or technical_advice procedures a taxpayer might be asked to execute consent to extend the statute_of_limitations to permit appeals consideration or submission of a request for technical_advice that was the situation in this case an internal revenue_agent discussed with you the possible referral of this matter for technical_advice or appeals an internal revenue_agent also requested statute extensions to allow adequate time to refer this matter you elected not to extend the applicable statutes as you are aware the time remaining on the statutes does not allow for usual appeal procedures or submission of the case for technical_advice because this case involves exemption under sec_501 you cannot contest the adverse determination in a declaratory_judgment action under sec_7428 you can however contest the revocation of exempt status in the context of any related deficiency case involving adjustments that flow from the loss of exemption thus you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court from any deficiency_notice issued in this case or a related case after satisfying procedural and jurisdictional requirements as described in publications and you are required to file federal_income_tax returns for the tax period s shown above for all years still open under the statute_of_limitations and for all later years file the federal tax_return for the tax period s shown above with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office of taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation director eo examinations enclosures publication r c johnson sincerely publication report of examination addendum m is incorporated in country and filed an election under i r c sec_953 to be treated as a united_states_corporation for purposes of imposing united_states tax the revocation of exempt status under sec_501 of the code results in the loss of the sec_953 election that was previously accepted by the internal_revenue_service in date2 the organization is now a controlled_foreign_corporation and is subject_to i r c sec_951 through for the tax related to controlled_foreign_corporations the company will be treated as a foreign_person and may be subject_to sec_4371 excise_tax united_states_shareholders of the foreign_corporation are liable for subpart_f inclusions for taxable years in which the sec_953 election is not in effect as a result m is only required to file income_tax returns on form 1120-f as indicated in the body of this letter to the extent that m received taxable_income effectively connected with the conduct_of_a_trade_or_business in the united_states or received other taxable_income_from_sources_within_the_united_states


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service commerce street dallas tx date number release date org address vil taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at lf you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely vicki l hansen acting director eo examinations enclosures publication publication report of examination letter catalog number 34809f form_8 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service ltr-rul federal-exempt 47279gr irs letter_ruling undated jan 20xx irs letter_ruling undated code sec_501 exempt_organizations exempt status revocation an organization that was exempt from taxation under code sec_501 had its exempt status revoked this is a final adverse determination as to your exempt status under sec_501 as an organization described in ilr c sec_501 of the internal_revenue_code our adverse determination was made for the following reasons has not been operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 you are not a charitable_organization within the meaning of sec_1_501_c_3_-1 as a result of a recent examination of your organization's activities and form_990 for the period ended december it was determined that you had ceased all activity based upon the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code retroactively to datel contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending datel and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment form 886-a cev department of the treasury - internal_revenue_service page -1- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal_revenue_service taxpayer advocates office local office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations form 886a rev department of the treasury - internal_revenue_service schedule number or exhibit explanation of items name of taxpayer org year period ended legend org name of organization state name of state datel effective date form 886-a rev department of the treasury - internal_revenue_service page -2- form_8 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service issue should org 's tax exemption under sec_501 of the internal_revenue_code be revoked because their activities have not met the requirements of sec_501 revenue code of the internal facts org was recognized as a tax exempt_organization under c of the internal_revenue_code the primary activity of the organization was to provide housing to low to medium income families the organization was involved with these activities through the housing and urban development hud program the organization also donated money as well as volunteer time to a youth organization located in state per vice president he stated that the organization donated as much as dollar_figure to this youth organization vice president also volunteered as a drama instructor for this youth organization the organization also got involved with the distribution of food to families who were hungry and in need of it a field_audit was conducted at vice president's residence the organization does not maintain an office for its operations during the field_audit it was noticed that the organization ceased operations at the end of the calendar_year per vice president he stated that due to the rising prices of homes and the decreased amount of foreclosures for purchase the organization started to decrease its activities with the hud program during the audit year the organization did not own any property nor did it make any sales of any homes to low to medium income families the organization also ceased volunteering and donating money to a youth organization as well as providing food to hungry families vice president indicated that he would like to terminate the operations of the organization as the organization ceased operations at the end of and has no plans in the future to participate in the hud program currently the organization does not participate in any exempt_activities nor does it own any assets agent recommended that the eo provide a statement of dissolution to terminate the organization however the eo still has not provided the statement of dissolution to proceed with the termination process agent informed vice president that we will proceed with revocation of the eo instead of termination as the eo has not been able to provide the statement of dissolution vice president was in agreement with this process form 886-a ev department of the treasury - internal_revenue_service page -3- form_8 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service law internal_revenue_code sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if nor part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements and political campaign on behalf of or in opposition to any candidate for public_office regulation sec_1_501_c_3_-1 organizational and operational tests provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt_income tax regulation c -1 c states primary activities 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose regulation sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization the term private_shareholder_or_individual is defined in regulation sec_1_501_a_-1 regulation sec_1_501_c_3_-1 provides an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests government position form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service org is not operated exclusively for c purposes as defined by the internal_revenue_code and the regulations the organization has ceased its operations at the end of the calendar_year based on the initial interview during the field_audit it appears that the organization has been idle and has no plans to operate in the future vice president indicated that he would like to terminate the operations of the organization due to the organization's idleness with their exempt_activities the organization is not operating exclusively for one or more exempt purposes specified in c of the internal_revenue_code the organization is not furthering its exempt_purpose by being inactive and not planning to perform any exempt_activities in the future the organization does not qualify for exemption under c of the internal_revenue_code effective date due to the organization's inactivity and the absence of performing any exempt_activities we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its form 886-a cev department of the treasury - internal_revenue_service page -5- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year period ended administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service local office og ee if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations form 886-a cev department of the treasury - internal_revenue_service page -6-


internal_revenue_service number release date index number ---------------------------------------- -------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-141021-15 date date legend decedent spouse date date --------------------------- -------------------- ------------------------ -------------------- dear -------------- this letter responds to your personal representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election plr-141021-15 decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during her lifetime decedent made no taxable_gifts decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-141021-15 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a plr-141021-15 see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void 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 plr-141021-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by melissa c liquerman melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc