department of the treasury internal_revenue_service ‘tege eo examinations fulton street room brooklyn ny date ‘tax exempt and government entities dimsion number release date legend org organization name uil address address xk date taxpayer_identification_number person to contact dentification number contact telephone number last date for filing a pleading with the tax_court the claims_court or the united_states district_court for the district of columbia february 20xx org address certified mail dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated august 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s in our letters dated december 20xx january 20xx and may 20xx we requested information necessary to conduct an examination of your form_990 for the year ended december 20xx you refused to provide the requested information sec_1_6033-1 of the income_tax regulations provides in part that every organization which is exempt from tax shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status since you have not provided the requested information we hereby revoke your exemption from federal_income_tax under sec_501 contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments 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 under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses you also 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 we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this final_determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely vicki l hansen acting director eo examinations enclosure publication tar exemot and org address department of the treasury intemal revenue service ms dalkt commerce street dallas tx date 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 section c of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter your protest should include a statement of the facts the ifyou 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 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 letter calalog number s4809f 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 intemal revenue service we will then issue a final revocation fetter 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 oy 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 ifyou 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 marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f oj explanation of items form bb6-a ‘name of taxpayer org ‘yeariperiod ended december 20k ‘schedule no or exhibit legend org organization name state treasury emp-1 employee ‘president president secretary secretary address address city city xyz treasury issue whether org org qualifies to be exempt from federal_income_tax as an organization described in internal_revenue_code sec_501 c facts the case was referred by an sbse agent who examined form sec_1040 of the president and org’s clients the initial letter and a general information_document_request idr were sent to org on december 20xx to schedule the examination then the president sent a letter to provide notice that org did not have any information available for review since org had submitted the requested information to district_court in city to file a claim against its employee emp-1 org accused his employee of stealing dollar_figure however per the website of city district_court the case filed by org has been discharged on january 20xx another idr was sent to org to address the president’s concerns on the letter sent to org on december 20xx and to request some information that should not have been submitted to district_court as of may 20xx the agent working on the case had not received any responses or information requested on january 20xx therefore the agent sent another idr on may 20xx after receiving that idr instead of providing the requested information the president sent a letter and some forms to the agent threatening to sue all agents who examines org’s return and who had examined his personal tax returns org’s cancelled checks and bank statements have been summoned by the sbse agent from org’s bank per bank statements and cancelled checks org has paid its employee emp- but neither employment_tax returns have been filed nor have employment_tax liabilities been remitted the president used org’s fund to pay for his wife’s immigration fees although he paid back to org a few days later per form_990 org’s primary activity is to complete tax retums for individuals sent by the irs org filed tax returns for several businesses and individuals that are not considered part of a charitable_class per the bank information org received the tax preparation fees from several clients form 886-a of the treasury - internal_revenue_service department page -1- explanation of items form 886-a rev date ‘name of taxpayer org ‘yeariperiod ended december 20xx ‘schedule no or exhibit on july 20xx the agent and her manager went to org’s office to serve the summons to the president the office was closed the only sign at the front window said bookkeeping service no signage about org is present at the front of the office called the president via the phone number listed at the front window the president answered the phone but said he would not be available due to his trip to xyz the group manager had a discussion about requirements to discuss about org’s activities and to review books_and_records during the conversation the president alluded to the lawsuit he ‘was processing and threatened to file the document if we did not leave him along the manager told the president that we had no business with him but org the group manager also asked the president whether he and org were synonymous the president flustered then the conversation ended the group manager per the information listed on _ comptroller’s website org did not have an independent board_of directors all listed officers and board members are related for example his wife is listed as director secretary and is listed as director treasurer also org is listed as not in good standing on that website since it has not satisfied all franchise tax requirements the activities and operational information as described in the form_1023 were as following the mission of org is to make a positive difference in the lives of low to middle income families primarily through a professionally supported one-lo-one relationship with a tax professionals and to assist them in achieving and receiving help with the preparation of tax returns and negotiations with the internal_revenue_service the corporation will atso provide legal tying and simple letter writing the purpose to assist middle and low income individuals with tax preparation free charge also to help fight bias bigotry and racism in america the business advocacy conflict resolution and the taxpayer education the value understanding and respect among all races religious and cultures and to provide a forum to assist all people with professional issues org has activities in the following four areas a maintaining and developing a volunteer group the primary activity of org occupying about of out organization time is the operation of a public-access tax clinic on a volunteer basis this tax clinic is currently housed in a rental building at address city xyz it is operated by a volunteer staff under the direction of org board_of directors and currently has about registered clients the volunteer group provides a wide range of service to the community that further the mission of org law form 886-a deparment of the treasury - internal_revenue_service page form rev date ‘name of taxpayer org explanation of items yeariperiod ended ‘schedule no or exhibit december 20xx sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_tax sec_501 c of the code exempts from federal_income_tax corporations must be organized and operated exclusively for charitable educational and other purposes and provide that no part of the net_earnings inure to the benefit of any private sharcholder or individual poor and distressed see sec_1 c -1 income_tax regulations sec_1 c -i a of the regulations provides that in order to be exempt as an organization described in section dollar_figure c 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 the term charitable includes relief of the sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that 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 the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test better business bureau of washington d c v us us sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of section although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business sec_6001 provides that every person liable for any_tax imposed by the trc ot for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shail file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue jaws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 in conjunction with sec_1 -1 c provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books ot accounts or records including inventories as are sufficient to establish the amount of gross_income form 886-a department of the treasury - intemal revenue service page -3- ‘schedule no of exhibit explanation of items form 886-a rev date ‘name of taxpayer org 205k deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 yearperiod ended december treas reg sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as tong as the contents thereof may administration of any internal revenue law be material in the treas reg sec_1_6033-2 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual retum of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 rev_rul c b concems an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annuai information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax taxpayer's position this area is left blank agent has not been able to contact the taxpayer in spite of repeated efforts government's position org has failed to submit information that is required for the purpose of enabling internal_revenue_service to inquire further into its exempt status org’s primary activity is to form 886-a department of the treasury - internal_revenue_service page or exhibit form 886-a rev date explanation of items ‘schedule no ‘name of taxpayer org yeariperiod ended december 205k prepare tax retums for fees like any normal_tax preparation services therefore the tax exempt status of org should be revoked conclusion org is not organized and operated exclusively for charitable purposes org is not entitled to exemption from federal_income_tax as an organization described in sec_501 of the code from income_tax under sec_501 c of the code to such organization should be revoked effective january 20xx ruling and determination letters which have been issued granting exemption forms should be filed for the tax periods ending on or after december 20xx form 886-a department of the treasury - intemal revenue service page -5-


t c memo united_states tax_court golden gate litho petitioner v commissioner of internal revenue respondent docket no filed date jon r vaught for petitioner elaine l sierra for respondent memorandum findings_of_fact and opinion wright judge respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax and an accuracy- related penalty under sec_6662 of dollar_figure for the taxable_year ending date unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure after concession sec_1 by the parties the issues to be decided are whether petitioner is required to change from the cash_method_of_accounting to the accrual_method of accounting if petitioner is required to change to the accrual_method of accounting to what extent if any adjustments were properly made under sec_481 and whether petitioner is liable for the accuracy-related_penalty under sec_6662 findings_of_fact petitioner is a california corporation organized in at the time of filing the petition in this case petitioner's principal_place_of_business was in oakland california petitioner is owned percent by its president clifford asher mr asher and percent by mr asher's son donald asher petitioner is in the lithography or commercial printing business the business was established by a prior owner in in mr asher purchased the business from the prior owner in mr asher incorporated the business and changed its name to golden gate litho respondent concedes that petitioner is entitled to deduct commission expenses in the amount of dollar_figure petitioner concedes that it is not entitled to deduct a loss of dollar_figure on the sale of an automobile petitioner prints calendars napkins greeting cards and forms according to the specifications of its customers petitioner orders the types of paper and supplies needed for print jobs after receiving job orders petitioner does not maintain a stock of paper or other materials because each job requires paper of a different weight and finish usually when a job is completed any materials left over are scraps and are not used for other jobs on average it take sec_2 to weeks from the time an order is placed to complete the job and ship the order to the customer petitioner holds title to and bears the risk of loss of the supplies and printed goods until the final goods are shipped to its customers after the goods are shipped the client is billed for the order petitioner usually receives payment for an order within days of shipment a large portion of petitioner's work is done for one customer suzy's zoo greeting cards for the taxable_year ending date suzy's zoo greeting cards accounted for approximately percent of petitioner's accounts_receivable at the start of the taxable_year and approximately percent of the accounts_receivable at the end of the taxable_year petitioner usually donates the scraps to a school or makes scratch pads out of the them petitioner has used the cash_receipts_and_disbursements_method of accounting cash_method for tax purposes since its incorporation petitioner reports sales at the time it receives payment petitioner deducts the cost of materials_and_supplies for each printing job in the year of purchase and deducts all expenses in the year paid petitioner did not report any beginning or ending inventory on its tax returns and did not use inventory_accounting for either tax or financial_accounting purposes for the year at issue or the immediately preceding tax_year since its incorporation petitioner has reported no opening or closing inventories on its tax returns petitioner reported its income under the cash_method for the taxable years ending date through as follows taxable_year ending gross_receipts dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cost_of_goods_sold gross_profit total deductions net income1 other income2 special_deductions -0- taxable_income 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 schedule a cost_of_goods_sold inventory beginning year purchases labor_union benefits misc o s services sales_tax freight inventory end year total -0- big_number big_number big_number -0- big_number big_number big_number schedule e compensation of officers -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- -0- big_number big_number -0- big_number big_number big_number -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- big_number big_number big_number -0- -0- big_number -0- big_number -0- -0- -0- big_number big_number big_number big_number c f asher d asher wage in c o g s -0- 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 taxable_income excluding other income and before nol and special_deductions dividends interest gross rents and royalties capital_gain and other income mr asher and petitioner's bookkeeper used a commercial bookkeeping program to prepare balance sheets that included estimates of petitioner's end-of-year accounts_receivable accounts_payable salaries and wages payable and work in process the bookkeeper determined the amount of accounts_payable by totaling bills that were due the bookkeeper also determined the amount of accounts_receivable by compiling amounts reflected on customer account cards mr asher estimated the amount reflected on the balance_sheet as work in process mr asher's estimates of work in process were based on the market_value that included the expected profit from the work the balance sheets for the fiscal years ending date through reflect the following amounts item taxable_year ending accounts_receivable accounts_payable salaries and wages payable pension_plan accrual work in process dollar_figure big_number dollar_figure dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number -0- big_number big_number big_number big_number big_number -0- -0- big_number big_number big_number big_number big_number big_number no later than date an agent of the internal_revenue_service irs began an audit of petitioner's returns for the amounts are rounded to the nearest dollar taxable years ending date and the agent has a bachelor of science and a master's in business administration in accounting the audit was extensive and lasted longer than months petitioner provided the agent with all its books_and_records although petitioner had previously been audited and had not been required to change from the cash_method_of_accounting the agent determined that petitioner was required to account for inventories and use the accrual_method of accounting during the examination of petitioner's returns petitioner provided the following breakdown of the work in process as of date paper w_i p camera w_i p press w_i p bindery jobs completed and shipped jobs ready to bill jobs at outside service total dollar_figure big_number big_number big_number big_number big_number big_number big_number adjustments to taxable_year ending date in the notice_of_deficiency respondent determined that petitioner was required to maintain inventories and use the accrual_method of accounting with respect to purchases and sales of inventory_items respondent increased petitioner's income for the taxable_year ending date by dollar_figure dollar_figure dollar_figure - dollar_figure to account for the change to the accrual_method as follows respondent reduced petitioner's gross_receipts or sales by dollar_figure computed as follows accounts_receivable at close of year less accounts_receivable at beginning of year adjustment to gross_receipts or sale sec_1dollar_figure big_number big_number 1respondent used the amount of accounts_receivable provided during the examination of petitioner's return rather than the amount reflected on petitioner's balance_sheet for the fiscal_year ending date respondent increased petitioner's income by dollar_figure to reflect an dollar_figure reduction of petitioner's cost of goods sold4 to account for inventories as follows work in process at beginning of year less work in process at end of year reduction in cost_of_goods_sold dollar_figure big_number big_number respondent increased petitioner's income by dollar_figure to reflect a dollar_figure reduction of petitioner's cost_of_goods_sold to account for purchases on the accrual_method as follows accounts_payable at close of year less accounts_payable at beginning of year reduction in cost_of_goods_sold 1dollar_figure big_number big_number this amount is the portion of the accounts_payable at the close of the taxable_year that is related to cost_of_goods_sold it does not include dollar_figure in accounts_payable related to operating_expenses and dollar_figure in salaries and wages payable to mr asher this amount includes all accounts_payable dollar_figure plus all salaries and wages payable dollar_figure at the beginning of the the notice_of_deficiency identifies the dollar_figure increase as an adjustment to work in process taxable_year it includes payables related to operating_expenses as well as those related to cost_of_goods_sold respondent determined that adjustments were required by sec_481 and adjusted petitioner's taxable_year ending date as follows respondent increased petitioner's income by dollar_figure for the amount of accounts_receivable reflected on its balance_sheet for fiscal_year ending date respondent increased petitioner's income by dollar_figure for the value of work in process reflected on its balance_sheet for fiscal_year ending date and respondent decreased petitioner's income by dollar_figure for the amount of accounts_payable and wages and salaries payable reflected on its balance_sheet for fiscal_year ending date respondent made the entire sec_481 adjustment to the year_of_the_change taxable_year ending date and did not consider the application of sec_481 respondent also disallowed dollar_figure in commission expenses and dollar_figure that petitioner claimed as the loss on the sale of an automobile as a result of the adjustments respondent determined that petitioner's taxable_income for the taxable_year ending date was dollar_figure rather than dollar_figure as reported on the return adjustments to taxable_year ending date in the notice_of_deficiency respondent also adjusted petitioner's taxable_income for the taxable_year ending date respondent reduced petitioner's income by dollar_figure because of the change in accounting_method specifically respondent decreased petitioner's income by dollar_figure to reflect a reduction in gross_receipts decreased petitioner's income by dollar_figure to reflect the reduction in the amount of petitioner's work in process and decreased petitioner's income to reflect an dollar_figure increase in the cost_of_goods_sold respondent also disallowed a repair expense of dollar_figure and reduced petitioner's depreciation deduction by dollar_figure as a result of the adjustments respondent determined that petitioner had a dollar_figure net_operating_loss for the taxable_year ending date rather than dollar_figure of taxable_income as reported on the return opinion i whether petitioner is required to change from the cash_method_of_accounting to the accrual_method of accounting sec_446 requires a taxpayer to compute his taxable_income under the same method_of_accounting by which he regularly computes his income in keeping his books sec_446 however provides that if the method used by the taxpayer does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income in general a method_of_accounting clearly reflects income when it accurately reports taxable_income under a recognized method_of_accounting 420_f2d_352 1st cir affg tcmemo_1969_70 98_tc_457 affd 58_f3d_413 9th cir 88_tc_1500 both the cash_method and the accrual_method are permissible methods_of_accounting sec_446 and additionally sec_471 provides sec_471 general_rule -- whenever in the opinion of the secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer inventories shall be taken by such taxpayer on such basis as the secretary may prescribe as conforming as nearly as may be to the best_accounting_practice in the trade_or_business and as most clearly reflecting the income by regulation the secretary has determined that inventories are necessary if the production purchase or sale of merchandise is an income-producing factor sec_1_471-1 income_tax regs the regulations provide that unless otherwise authorized by the commissioner a taxpayer who is required to account for inventories must use the accrual_method of accounting with regard to purchases and sales sec_1 c i income_tax regs a whether petitioner is required to maintain inventories petitioner prints calendars napkins greeting cards and forms according to the specifications of its customers petitioner does not maintain a stock of paper or other materials because each job requires paper of a different weight and finish petitioner orders the types of paper and supplies needed for a job after the customer's order is placed usually when a job is completed any materials left over are scraps and are not used for other jobs respondent asserts that petitioner's production purchase and sale of merchandise is an income-producing factor and therefore petitioner must account for inventories petitioner argues that it provides a service and the printed items it sells to its customers and the materials it uses are not merchandise petitioner argues therefore it is not required to maintain inventories although not specifically defined in the internal_revenue_code or regulations courts have found that the term merchandise as used in sec_1_471-1 income_tax regs is defined as an item held_for_sale wilkinson-beane inc v commissioner supra pincite tebarco mechanical corp v commissioner tcmemo_1997_311 galedrige constr inc v commissioner tcmemo_1997_240 honeywell inc subs v commissioner tcmemo_1992_453 affd without published opinion 27_f3d_571 8th cir petitioner sells items that it prints according to the specifications of its customers the printed items are items held_for_sale and thus are merchandise all of petitioner's gross_receipts are generated by the sale of the items petitioner produces for its customers therefore the production and sale of merchandise is an income-producing factor furthermore even if we agreed that petitioner performs a service courts have held that if the cost of materials a taxpayer uses to provide a service is substantial compared to its receipts the material is a substantial income-producing factor wilkinson-beane inc v commissioner supra pincite petitioner reported the following gross_receipts and purchases for the taxable years ending date through taxable_year ending gross_receipts purchases percentage dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the cost of materials petitioner uses to provide its service is substantial compared to its receipts therefore the material petitioner uses is a substantial income-producing factor petitioner's arguments have previously been considered and rejected by this court see thompson elec inc v commissioner tcmemo_1995_292 j p sheahan associates inc v commissioner tcmemo_1992_239 akers v commissioner tcmemo_1984_208 affd on this issue sub nom 796_f2d_843 6th cir revd on another issue 482_us_117 we find that petitioner's sale of merchandise is an income-producing factor and therefore petitioner is required to maintain inventories b whether it was an abuse of respondent's discretion to change petitioner from the cash_method to respondent's method_of_accounting the regulations provide that unless otherwise authorized by the commissioner a taxpayer who is required to account for inventories must use the accrual_method of accounting with regard to purchases and sales sec_1_446-1 income_tax regs respondent argues that petitioner must account for inventories and must use the accrual_method of accounting in this case however the facts show that respondent completely disregarded the applicable provisions of the internal_revenue_code and regulations and made no attempt to properly value petitioner's inventory or compute petitioner's income using a proper accrual_method of accounting respondent's method of valuing petitioner's inventory was improper rules governing the valuation of inventories are set forth in regulations promulgated under sec_471 and the uniform_capitalization_rules of sec_263a see sec_1_471-1 sec_1_471-2 sec_1_471-3 sec_1_471-5 income_tax regs sec_1_263a-1t temporary income_tax regs fed reg date respondent failed to comply with the rules for identifying items properly included in inventory and for properly valuing inventory_items a items included in inventory respondent increased petitioner's income for the taxable_year ending date by dollar_figure to reflect a reduction of petitioner's cost_of_goods_sold to account for inventories based on the increase in the value of work in process at the end of the year dollar_figure over the value at the beginning of the year dollar_figure in making the computation respondent used the value of the work in process as reflected on petitioner's balance sheets during the examination of petitioner's return for the taxable_year at issue petitioner provided the following breakdown of the work in process as of date paper w_i p camera w_i p press w_i p bindery jobs completed and shipped jobs ready to bill jobs at outside service total dollar_figure big_number big_number big_number big_number big_number big_number big_number sec_1_471-1 income_tax regs provides in part merchandise should be included in the inventory only if title thereto is vested in the taxpayer accordingly the seller should include in his inventory goods under contract for sale but not yet segregated and applied to the contract but should exclude from inventory goods sold title to which has passed to the purchaser a purchaser should include in inventory merchandise purchased including containers title to which has passed to him although such merchandise is in transit or for other reasons has not been reduced to physical possession but should not include goods ordered for future delivery transfer of title to which has not yet been effected petitioner holds title to goods until they are shipped to the purchaser and bills the customer after the order is shipped therefore petitioner does not hold title to work in process for jobs completed and shipped and work in process for jobs ready to bill under the regulations such goods are not properly included in valuing petitioner's inventory and it was improper for respondent to do so b respondent's use of estimated market_value the bases_of_valuation most commonly used by business concerns and which meet the requirements of sec_471 are cost and cost or market whichever is lower sec_1 c income_tax regs sec_1_471-4 income_tax regs provides where the inventory is valued upon the basis of cost or market whichever is lower the market_value of each article on hand at the inventory date shall be compared with the cost of the article and the lower_of such values shall be taken as the inventory value of the article sec_1_471-3 income_tax regs defines cost as follows a in the case of merchandise on hand at the beginning of the taxable_year the inventory price of such goods c in the case of merchandise produced_by_the_taxpayer since the beginning of the taxable_year the cost of raw materials_and_supplies entering into or consumed in connection with the product expenditures_for direct labor and indirect production_costs incident to and necessary for the production of the particular article including in such indirect production_costs an appropriate portion of management expenses but not including any cost of selling or return on capital whether by way of interest or profit see sec_1_263a-1t for more specific rules regarding the treatment of production_costs the uniform_capitalization_rules of sec_263a apply to real or tangible_property produced_by_the_taxpayer sec_263a sec_263a provides that inventory costs include the direct costs of such property and such property's proper share of those indirect_costs part or all of which are allocable to such property sec_1_263a-1t temporary sec_263a also applies to real or personal_property described in sec_1221 which is acquired by the taxpayer for resale except for taxpayers who have annual gross_receipts of dollar_figure million or less sec_263a there is no exception provided for producers who have annual gross_receipts of dollar_figure million or less income_tax regs supra provides complex rules for allocating indirect_costs to inventory in valuing petitioner's inventory respondent used the value of petitioner's work in process as reflected on petitioner's balance sheets the value reflected on the balance sheets was based on mr asher's estimate of the market_value of work in process and included the expected profit from the work the regulations permit the use of market_value only when that value is less than cost therefore respondent's use of the value of work in process as reflected on petitioner's balance sheets is improper additionally the regulations require a comparison of the market_value of each article on hand at the inventory date with the cost of the article respondent made no attempt to properly identify inventory_items or the direct costs of such items or to properly allocate indirect_costs associated with such items under the uniform_capitalization_rules of sec_263a we find that respondent's method of valuing petitioner's work in process was arbitrary and without sound basis in fact or law respondent's method is not a proper accrual_method a accounts_receivable respondent reduced petitioner's gross_receipts by dollar_figure to account for accounts_receivable respondent excluded from gross_receipts dollar_figure attributable to accounts_receivable at the beginning of the year and included dollar_figure attributable to accounts_receivable at the close of the year the amount of receivables however was determined by compiling amounts reflected on customer account cards accrual_method taxpayers recognize income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy sec_1_446-1 income_tax regs generally under the all_events_test accrual_method taxpayers recognize income when it is paid due or earned whichever occurs first see eg 372_us_128 n as discussed above the breakdown of the work in process at the end of the year included amounts that had been earned even though not billed to the client those amounts were accounts_receivable at the close of the taxable_year consequently gross_receipts should have been increased by those amounts similarly any portion of the work in process at the beginning of the year representing completed work that had been shipped by the close of the previous tax_year properly was a receivable attributable to the prior taxable_year consequently gross_receipts should have been reduced by that amount b adjustment for accounts_payable under an accrual_method of accounting a liability is incurred and taken into account in the taxable_year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy sec_1_461-1 income_tax regs thus for purposes of accrual_method accounting and ascertaining true income for a given accounting_period an expense must be deducted in the taxable_year in which all the events have occurred which determine the fact of the liability and fix the amount of the liability even though the liability is not due and payable until a later year 282_us_92 269_us_422 respondent increased petitioner's income by dollar_figure to reflect a reduction of petitioner's cost_of_goods_sold to account for purchases on the accrual_method as follows accounts_payable at close of year less accounts_payable at beginning of year reduction in cost_of_goods_sold dollar_figure big_number big_number the adjustment for accounts_payable was based on the accounts_payable reflected on petitioner's balance sheets for the close of the taxable years ending date and although respondent's counsel would not stipulate the accuracy of the amounts reflected on the balance sheets it is those amounts upon which respondent's adjustments are based further petitioner's bookkeeper computed the payables by totaling bills that were due the payables did not include expenses that may have properly accrued under the regulations but for which petitioner had not yet been billed additionally no method_of_accounting will be regarded as clearly reflecting income unless all items of gross_profit and deductions are treated with consistency from year to year sec_1_446-1 income_tax regs in this case respondent did not treat petitioner's accounts_payable with consistency the accounts_payable of dollar_figure at the beginning of the taxable_year included all accounts_payable dollar_figure plus all salaries and wages payable dollar_figure reflected on the balance_sheet for the taxable_year ending date the accounts_payable of dollar_figure for the close of the taxable_year included only those payables identified as payables related to the cost_of_goods_sold and did not include dollar_figure in accounts_payable not related to the cost_of_goods_sold or dollar_figure in salaries and wages payable to mr asher respondent made no adjustments to account for accounts_payable at the end of the taxable_year related to the dollar_figure of operating_expenses or related to the dollar_figure of salaries and wages payable respondent's adjustment of these items was improper in order to clearly reflect petitioner's income accounts_payable at the beginning and the end of the year should have been treated in a consistent manner if the accounts_payable were to be allocated between those related to the cost_of_goods_sold and those related to operating costs an allocation should also have been made for accounts_payable at the beginning of the taxable_year then proper adjustments could be made to the cost_of_goods_sold and to the deduction for operating_expenses additionally since respondent treated all accounts_payable at the beginning of the year as related to the cost_of_goods_sold there would have been no accounts_payable at the beginning of the year related to operating_expenses therefore respondent should have increased petitioner's deduction for operating_expenses reducing petitioner's income by dollar_figure to reflect the increase in payables related to operating_expenses at the close of the year we find respondent's determinations with respect to petitioner's accounts_receivable and payable to be unreasonable arbitrary and without basis in law it was an abuse of respondent's discretion to change petitioner from the cash_method to respondent's improper method_of_accounting during the 12-month examination of petitioner's records the agent made no attempt to properly value petitioner's inventories or value payables and receivables under the accrual_method furthermore although respondent's adjustments were based on the amounts reflected on petitioner's balance sheets respondent's counsel would not stipulate the accuracy of those amounts in 184_f2d_263 d c cir the court addressed the commissioner's power to allocate items of income and stated we perceive no basis upon which the allocation made by the commissioner of the condemnation_award among the several pieces of property can be sustained the government's allocation is thus completely erroneous on its face the district_court held that since there was a lump-sum award the commissioner of internal revenue had power to make whatever allocation he pleased the commissioner has no such arbitrary power he has wide latitude in the ascertainment of the fact as to what were the amounts awarded on account of the several tracts and several pieces of property but his ascertainment must be within the realm of the ascertainment of a fact he has no unilateral power to allocate as he pleases and thus to create income as he pleases where no income or a different amount of income exists his own published rule is that such an apportionment must be upon the comparative values as of the date of the sale we think that the reasoning of the u s court_of_appeals for the d c circuit in the keneipp case is equally applicable in the case at hand we do not think there is any legitimate basis for the method imposed upon petitioner in this case the facts clearly show that the method_of_accounting employed by respondent was not authorized or warranted by any provision of the internal_revenue_code or the regulations merely invoking the accrual_method without a serious attempt to comply with the rules and regulations governing that method is simply not sufficient respondent has no unilateral power to value inventory and allocate amounts to accounts_receivable and payable as he pleases in complete disregard of the internal_revenue_code and the regulations to do so is an abuse of respondent's discretion respondent contends that petitioner must show a substantial identity of results between the cash_method and the method_of_accounting respondent imposed in order to show an abuse_of_discretion we disagree the substantial identity of results test is applicable when the taxpayer is required to maintain inventories and the commissioner has required the taxpayer to compute its income on a proper accrual_method of accounting as provided in the regulations we think it would be an abuse of the court's discretion to require petitioner to show that the cash_method it has consistently used produces substantially the same results as the arbitrary and erroneous method respondent imposed respondent's adjustments based on the improper method increased petitioner's income by dollar_figure for the taxable_year ending date but decreased petitioner's income by dollar_figure for the taxable_year ending date and created a net_operating_loss of dollar_figure for the taxable_year ending date under the circumstances of this case and given the inadequacies of respondent's method we think petitioner's use of the cash_method produces substantially the same results furthermore respondent's method not only distorts petitioner's income but will subject petitioner to further adjustments including adjustments under sec_481 in subsequent taxable years if petitioner attempts to properly comply with regulations for accrual_method accounting if in respondent's opinion petitioner's accounting_method did not clearly reflect its income the remedy was to require a computation on a basis that would correctly reflect income by proper application of the accrual_method of accounting the fact that the commissioner possesses broad authority under sec_446 does not mean that the commissioner can change a taxpayer's method_of_accounting with impunity see 91_tc_1101 affd 882_f2d_820 3d cir wal-mart stores inc v commissioner tcmemo_1997_1 the commissioner cannot require a taxpayer to change his accounting_method to one which is unacceptable or wrong 223_f2d_418 10th cir revg and remanding 21_tc_781 rotolo v commissioner t c pincite courts will not approve the commissioner's change_of a taxpayer's accounting_method from an incorrect method to another incorrect method harden v commissioner supra prabel v commissioner supra pincite see also dayton hudson corp subs v commissioner tcmemo_1997_260 the commissioner's authority is limited to substituting a method that will clearly reflect the taxpayer's income harden v commissioner supra pincite the commissioner is required to use reasonable accounting methods 293_us_507 rubin v commissioner tcmemo_1954_213 the taxpayer has the burden of showing that the method selected by the commissioner is incorrect and that burden is extremely difficult to carry 97_tc_120 42_tc_926 affd 357_f2d_656 9th cir in this case petitioner has carried its burden because the facts clearly show that the method selected by the commissioner is arbitrary capricious and without sound basis in fact or law in 577_f2d_1206 5th cir the court stated while abuse of this discretion by the commissioner must be proven by a clear showing 245_f2d_888 5th cir it would seem that such a showing could be predicated upon a decision to use an accounting_method that is inaccurate under the circumstances we hold it was an abuse of respondent's discretion to require petitioner to change from the cash_method to respondent's improper and inaccurate method c for the taxable_year at issue petitioner is not required to change from the cash_method_of_accounting courts have recognized that the regulations do not impose an absolute prohibition of the use of the cash_method upon a taxpayer who is required to maintain inventories cf asphalt prods co v commissioner f 2d pincite an insignificant increase in inventories may be grounds for finding an abuse_of_discretion by the commissioner estate of 341_f2d_201 2d cir affg tcmemo_1963_260 courts will not require the commissioner to place a taxpayer on the accrual_method 34_tc_1070 where inventories are so small as to be of no consequence or consist primarily of labor the presence of inventories is not necessarily sufficient to require a change in the taxpayer's method_of_accounting in estate of sperling v commissioner supra the taxpayer argued that it was required to account for inventories and therefore the commissioner should have used the accrual_method in determining the tax_deficiency the court stated it is difficult to find any basis in reason for thus placing the burden on the commissioner to place the taxpayer's tax returns on a different accounting basis as this case comes to us the taxpayer's and tax returns show two defects the first is that certain alleged credits for the purchase of metals are not adequately documented the second is the use of an improper accounting_method what the commissioner has done is to determine deficiencies attributable to the first defect but to leave the second alone we may guess that this decision was made because it was believed that the game was not worth the candle the additional deficiencies if any which use of the accrual_method might reveal would not warrant the considerable effort which a redetermination would require whatever the reason however we cannot see why the decision should be held improper of course it is possible that the taxpayer's accounting system may be so inadequate that the commissioner has no choice but to redetermine the liability on the basis of his own system but where the taxpayer does have a rational though improper system we think that the commissioner may choose to let it stand and to pursue only specific deficiencies within it and so long as the deficiencies which he determines are not themselves infected by the system's shortcomings the taxpayer may not avoid the deficiencies simply by pointing to the inadequacy of his own accounting system id pincite citation omitted in keneipp v united_states f 2d pincite the court reversed and remanded for further proceedings in that case the court stated such proceedings need not be elaborate or extensive the bureau of internal revenue has many auditors who can quickly compute the gain properly taxable to these appellants upon the facts of this case and the principles we have referred to by contrast in this case proper application of the accrual_method and inventory_valuation would require a full audit of petitioner's books_and_records the record does not provide any basis upon which the court can properly value petitioner's inventory or accounts_receivable and payable or otherwise discern petitioner's taxable_income under a proper accrual_method in this case the erroneous items cannot be discerned with relative clarity and therefore cannot be corrected in a computation under rule cf 54_tc_1749 affd in part revd in part and remanded 467_f2d_1184 7th cir the internal_revenue_code contemplates action by the commissioner not the courts harden v commissioner supra pincite since petitioner's cash_method is a rational system we think that the court may choose to let it stand we see no basis for placing a greater burden on the court than we place on the commissioner see estate of sperling v commissioner supra pincite we hold that petitioner is not required to change from the cash_method_of_accounting for the taxable_year at issue ii whether respondent's adjustments under sec_481 were proper sec_481 provides that where in computing a taxpayer's taxable_income the computation is under a method_of_accounting different from the method under which the taxpayer's income for the preceding_taxable_year was computed there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent an amount from being duplicated or omitted since we have held that petitioner is not required to change from the cash_method for the taxable_year at issue petitioner's taxable_income is computed under the same method_of_accounting as in the previous taxable_year therefore petitioner is not subject_to any adjustments under sec_481 iii whether petitioner is liable for the accuracy-related_penalty under sec_6662 in its brief petitioner addressed the accuracy-related_penalty only with respect to the change in accounting_method petitioner concedes that it is not entitled to deduct the loss on the sale of an automobile the deficiency to be computed under rule is attributable solely to the disallowance of that loss therefore we hold petitioner is liable for the accuracy-related_penalty under sec_6662 to reflect the foregoing and because of the concessions by the parties decision will be entered under rule


internal_revenue_service number release date index number --------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc fip b01 plr-135042-17 date january legend trust ------------------------------------------------------------- ---------------------------------- sub1 ----------------------------------------------------------------------------------- -------------------------------------- sub2 ----------------------------------------------------------------------------------- -------------------------------------- parent lp1 lp2 law firm accounting firm state a date date --------------------------------- ------------------------------------ ------------------------------------ ---------------------------------- ----------------- -------------- --------------------- ----------------------------- plr-135042-17 date date date date date date date date date date year year a b c ------------------------ ------------------------ -------------------------- ------------------------ -------------------- ---------------------- ------------------- ---------------------------- ----------------------- ------------------------ ------- ------- ------ ------ ----- dear ------------------- this responds to a letter dated date submitted on behalf of trust sub1 and sub2 collectively taxpayers taxpayers request an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make elections under sec_856 of the internal_revenue_code code to treat each of sub1 and sub2 collectively the subsidiaries as a taxable_reit_subsidiary trs of trust effective as of date facts trust is a state a corporation that was formed on date and has elected to be treated for u s federal_income_tax purposes as a real_estate_investment_trust reit each of the subsidiaries is a state a corporation that was formed on date plr-135042-17 parent originally was formed as a state a limited_liability_company on date and subsequently was converted into a state a limited_partnership on date lp1 and lp2 are state a limited_partnerships formed on date and date respectively trust and parent are owned primarily by institutional investors trust owns approximately a percent of the limited_partnership interests of each of lp1 and lp2 parent owns the remaining percentage approximately b percent of the limited_partnership interests of each of lp1 and lp2 lp1 owns c percent of all the issued and outstanding shares of sub1 lp2 owns c percent of all the issued and outstanding shares of sub2 in year taxpayers engaged law firm to provide legal and tax_advice regarding the formation of each of taxpayers and the qualifications of each of the subsidiaries to be treated as a trs of trust in the same year taxpayers engaged accounting firm to provide tax and accounting advice including the preparation of all of the tax returns and related forms for each of taxpayers around this time trust’s in- house advisor advisor began to perform routine accounting functions for taxpayers and began to coordinate accounting and tax_advice with law firm and accounting firm taxpayers represent that since inception they always have intended to make elections under sec_856 to treat each of the subsidiaries as a trs of trust effective as of date for the intended elections to be effective as of date a form_8875 taxable_reit_subsidiary election should have been filed by or on behalf of each of trust and sub1 and trust and sub2 no later than date taxpayers’ forms taxpayers’ forms however were never filed due to confusion as to who among law firm accounting firm and advisor would file taxpayers’ forms on date law firm prepared and submitted to the service a letter on behalf of taxpayers requesting extensions of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make elections under sec_856 to treat each of the subsidiaries as a trs of trust effective as of date on date the service issued a letter_ruling prior ruling which concluded that taxpayers had satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat each of sub1 and sub2 as a trs of trust effective as of date and which granted taxpayers a reasonable extension of time until date to do so law firm accounting firm and advisor each assumed that one of the others had timely filed taxpayers’ forms in accordance with prior ruling accounting firm prepared taxpayers’ tax returns and audited financial statements consistent with this assumption law firm attorney who obtained prior ruling left law firm in year plr-135042-17 trust recently began negotiations with potential buyers regarding the sale of trust’s shares on date during the course of due diligence in connection with the proposed sale the potential buyers requested copies of taxpayers’ forms on date having reviewed their files and consulted with law firm and accounting firm taxpayers realized that they had no evidence of the filing of taxpayers’ forms representatives for taxpayers contacted the service and the service advised taxpayers’ representatives that they found no evidence of such filings law firm accounting firm and advisor each represent that until date the date on which the potential buyers requested copies of taxpayers’ forms no events had occurred which would have caused them to question whether taxpayers’ forms had been properly and timely filed in accordance with prior ruling taxpayers represent that they believed that taxpayers’ forms had been properly and timely filed in accordance with prior ruling and that they have timely filed all of their respective u s tax and information returns consistent with and based on this belief taxpayers make the following additional representations the request for relief was filed before the failure to make the regulatory elections was discovered by the service granting the relief requested will not result in trust sub1 or sub2 having a lower tax_liability in the aggregate for all taxable years to which the elections apply than they would have had if the elections had been timely made taking into account the time_value_of_money taxpayers do not seek to alter return positions for which accuracy- related penalties have been or could have been imposed under sec_6662 at the time they requested relief and the new positions require or permit the regulatory elections for which relief is requested being fully informed of the required elections and related tax consequences taxpayers did not choose to not file the elections taxpayers are not using hindsight in making the decision to seek the relief requested no specific facts have changed since date the due_date of the elections making the elections advantageous to trust sub1 or sub2 in addition as required by sec_301_9100-3 and of the procedure and administration regulations taxpayers submitted with their request affidavits signed under penalties of perjury from appropriate individuals at law firm accounting firm and advisor plr-135042-17 law and analysis sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement 2001_1_cb_716 the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for taxable years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the taxable_year however the effective date of the election depends on when the form_8875 is filed the instructions further provide that the effective date cannot be more than months and days prior to the date of filing the election or more than months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has discretion to 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 code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by regulations or by a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 through c sets forth rules that the service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence taking plr-135042-17 into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election a taxpayer will be deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section under all the facts and circumstances of this case as represented by the taxpayers we have determined that the interests of the government are not prejudiced under the standards set forth in sec_301_9100-3 conclusion based on the information submitted and representations made we conclude that taxpayers have satisfied the requirements for granting a reasonable extension of time to elect under sec_856 to treat each of the subsidiaries as a trs of trust effective as of date accordingly taxpayers have days from the date of this letter to make the intended elections this ruling is limited to the timeliness of taxpayers’ forms this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether trust qualifies as a reit or whether sub1 or sub2 otherwise qualifies as a trs under subchapter_m of the code no opinion is expressed with regard to whether the tax_liability of taxpayers is not lower in the aggregate for all years to which the elections apply than such tax plr-135042-17 liability would have been if the elections had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director's office will determine such tax_liability for the years involved if the director's office determines that such tax_liability is lower that office will determine the federal_income_tax effect the ruling contained in this letter is based upon information and representations submitted by taxpayers 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 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to taxpayers sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ________________________________ alexa t dubert assistant to the branch chief branch office of associate chief_counsel financial institutions products enclosure copy of this letter for sec_6110 purposes cc


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-107916-08 date date legend legend x ------------------------------ ---------------------------- sub1 -------------------------------------------- --------------------------------- sub2 --------------------------------------- --------------------------------- state ----------- date1 -------------------------- date2 ----------------- date3 ---------------------- date4 ------------------ date5 ------------------ dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting relief pursuant to sec_301_9100-3 of the procedure and administration regulations that plr-107916-08 x be granted an extension of time to elect to treat sub1 and sub2 as qualified subchapter_s subsidiaries qsubs under sec_1361 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on date1 and elected to be treated as an s_corporation effective date1 on date2 sub1 was incorporated under the laws of state on date3 x acquired all of the stock of sub1 from an unrelated third party on date4 sub2 was incorporated under the laws of state on date5 x acquired all of the stock of sub2 from an unrelated third party x intended to elect to treat sub1 and sub2 as qsubs effective as of the respective dates of acquisition of each subsidiary however due to inadvertence x failed to file form_8869 qualified_subchapter_s_subsidiary election on behalf of each subsidiary x represents that it and the subsidiaries have filed tax returns for all of the relevant tax years consistent with the tax treatment of sub1 and sub2 as qsubs from their respective acquisition dates sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation sec_1361 defines a qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qualified_subchapter_s_subsidiary sec_1_1361-3 of the income_tax regulations prescribes the time and manner for making an election to be classified a qualified_subchapter_s_subsidiary sec_1_1361-3 provides that an election to treat an eligible subsidiary as a qualified_subchapter_s_subsidiary may be effective up to two months and days prior to the date the election is filed or not more than months after the election is filed the proper form for making the election is form_8869 qualified_subchapter_s_subsidiary 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_9100-2 provides the rules governing automatic extensions of time for making certain elections plr-107916-08 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 that granting relief will not prejudice the interests of the government based solely upon the information submitted and the representations made we conclude that the requirements of sec_301 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to file form_8869 qualified_subchapter_s_subsidiary election with the appropriate service_center to elect to treat the following corporations as qualified subchapter_s subsidiaries sub1 effective date3 and sub2 effective date5 a copy of this letter should be attached to the form_8869 a copy is enclosed for that purpose except for the specific rulings above we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code specifically we express no opinion regarding whether x otherwise qualifies as a small_business_corporation under sec_1361 or whether sub1 and sub2 otherwise meet the definition of qualified_subchapter_s_subsidiary under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc intl br1-plr-112599-01 date date number release date index number in re a ty country b year l year year dear this is in response to your letter dated date requesting a ruling that a’s surrender of his u s alien registration card green card did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in country b in year in year a obtained a green card a is now retired and has returned to country b a surrendered his green card in year a will be subject_to country b tax on his worldwide income on the date of a’s expatriation his net_worth exceeded the amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year plr-112599-01 unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 a provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 a if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 a c under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a resident of country b and his worldwide income is subject_to country b tax the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code plr-112599-01 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely w edward williams senior technical reviewer cc intl br1


internal_revenue_service number release date index number ------------------------------------ ------------------------------------ ------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number -------------------- refer reply to cc ita b04 plr-154117-04 date date --------------------------------------------- ---------------------- --------------------- ----------------- ------ ---------- ----------------------------------- taxpayers ----------------------------------------- date date date state state home dear -------------- this responds to your letter dated date requesting a ruling on whether you are eligible to exclude gain from the sale of a residence under sec_121 of the internal_revenue_code facts after living in state for years the taxpayers retired and sold their house on date taxpayers then moved to state and purchased home on date subsequent to taxpayers move to state taxpayers’ daughter who resides in state lost her job and is in the process of divorcing her husband taxpayers represent that because of the daughter’s changed financial and marital situation the daughter and grandchild would need to live with the taxpayers however because of the age restrictions in taxpayers’ community in state the daughter and grandchild would be unable to live with them accordingly taxpayers sold home on date relocated back to state and purchased a new home where the daughter and grandchild now live with taxpayers while the daughter searches for full-time employment law and analysis sec_121 provides that a taxpayer's gross_income will not include gain from the sale_or_exchange of property if during the five-year period ending on the date of the sale_or_exchange such property has been owned and used by the taxpayer as the plr-154117-04 taxpayer's principal_residence for periods aggregating two years or more the full exclusion is available only once every two years sec_121 provides that the maximum exclusion amount is dollar_figure if a husband and wife file a joint_return for the year of the sale both spouses meet the year use test at least one of the spouses meets the 2-year ownership test and neither spouse used the sec_121 exclusion during the last two years sec_121 provides for a reduced maximum exclusion for taxpayers who fail to satisfy the ownership and use tests or the limit of one sale every two years if the primary reason for sale_or_exchange is a change in place of employment health or unforeseen circumstances a sale is by reason of unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer does not anticipate before purchasing and occupying the residence a taxpayer's primary reason for the sale_or_exchange is deemed to be unforeseen circumstances if one of the safe_harbor events such as involuntary_conversion of the residence death or divorce occurs during the period of the taxpayer's ownership and use of the residence as the taxpayer's principal_residence in addition the commissioner may designate other events or situations as unforeseen circumstances in published guidance of general applicability or in a ruling directed to a specific taxpayer see sec_1_121-3t e of the income_tax regulations sec_1_121-3 provides that if a safe_harbor does not apply a sale is by reason of unforeseen circumstances only if the primary reason for the sale is unforeseen circumstances factors that may be relevant in determining the taxpayer’s primary reason for the sale include but are not limited to the extent to which the sale and the circumstances giving rise to the sale are proximate in time the suitability of the property as the taxpayer’s principal_residence materially changes the taxpayer’s financial ability to maintain the property is materially impaired the taxpayer uses the property as the taxpayer’s residence during the period of ownership of the property the circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer’s principal_residence and the circumstances giving rise to the sale occur during the period of the taxpayer’s ownership and use of the property as the taxpayer’s principal_residence the reduced maximum exclusion is computed by multiplying the maximum dollar limitation of dollar_figure dollar_figure for certain joint filers by a fraction the numerator of the fraction is the shortest of the following periods the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale_or_exchange the period of time that the taxpayer used the property as the taxpayer's principal_residence during the 5-year period ending on the date of the sale_or_exchange or the period of time between the date of a prior sale_or_exchange of property for which the taxpayer excluded gain under sec_121 and the date of the current sale_or_exchange the numerator of the fraction may be expressed in days or months the plr-154117-04 denominator of the fraction is days or months depending on the measure of time used in the numerator based on the facts representations and the relevant law as set forth above we conclude that your primary reason for the sale of home was an unforeseen circumstance consequently the sale of home which you owned and used as your principal_residence for less than two of the preceding five years will allow you to exclude gain up to the reduced maximum exclusion amount under sec_121 caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under ' except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter in addition no opinion is expressed or implied as to whether taxpayers have used home as their principal_residence this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the authorized representative sincerely george f wright assistant branch chief branch office of associate chief_counsel income_tax accounting