department of the treasury internal_revenue_service washington d c contact person identification_number contact number employer_identification_number form required to be filed tax years tax_exempt_and_government_entities_division release number release date date date uil code no dear file the returns in accordance with their this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely robert choi director exempt_organizations rulings agreements enclosures notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c person to contact identification_number contact telephone number fax number employer_identification_number e v i n a i l i i tax_exempt_and_government_entities_division date date uil code no egend i y l i w n o y l w u a n o i v m i m i o i z c a a i r e z i o i v i a b s s l e e i f l u o t t s e i v u w e t i dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were incorporated under the laws of aa in bb your application and subsequent correspondence indicates that you are organized for the following purposes a to make grants for educational and charitable endeavors b to make grants for scientific and medical_research related to spinal cord injuries c to make grants to assist with costs of medical treatment rehabilitative services hospitalization hospice temporary housing and educational expenses of individuals with spinal cord injuries and their families you were organized in response to a’s spinal cord injury that left him paralyzed from the neck down requiring the support of a ventilator at the time of the accident a had no form of medical insurance and his mother r was billed by sdollar_figure for outstanding medical costs you were formed to educate the public regarding the costs of medical treatment for spinal cord injury victims and to assist those with similar injuries pay for the costs associated with spinal cord injuries you have a self-perpetuating board_of directors members include the following individuals a b a’s father b c a’s stepmother c d a’s aunt d e a’s sister e f your accountant f g business consultant g h actor h business owner and i je your officers include b president d secretary and e treasurer you state that your operations consist of raising money and accepting donations the proceeds of which are granted to spinal cord injury victims you received a donation from the k and the proceeds were specifically used to purchase a van for a from inception to cc your income consisted of donations and revenue generated by fundraisers totaling dollar_figuredd you also received a donation of medical equipment and supplies totaling dollar_figureee your grant making procedures include an application with several open-ended questions you advertise the availability of such grants through your website at l the decisions regarding the selection of grant recipients rests within the sole discretion of your board_of directors over the course of your existence you have used your income to make several grants f b c e a a in the amount of dollar_figurejj to pay his rent at an apartment a in the amount of dollar_figurehh to pay for van taxes and fees a in the amount of dollar_figureii to pay for gas to operate the van a in the amount of dollar_figuregq to pay for the purchase of van insurance a in the amount of dollar_figureff to pay for the purchase of a handicapped van you have made grants to the following individuals and organizations in the following amounts for the following purposes a in the amount of dollar_figurekk to pay for his utilities medical_supplies and his other living_expenses n a sec_501 rehab center medical equipment that was donated to you worth dollar_figuremm in the amount of dollar_figurerr for a handicapped ramp m in the amount of dollar_figurell g h i you have considered using your income to purchase a house for a but because of the lack of funds for that project you pay for an apartment for him to live in you also pay for all of his living_expenses medical_supplies and utilities you will continue to pay for his rent and living_expenses until he becomes self-sufficient according to your board minutes you have applied for a credit card exclusively used to pay all of a’s bills he require sec_24 hour care and thus his caregivers must live at the apartment you rent for him girlfriend his mother his sister and his father his caregivers have included his your website includes information about a’s life prior to the injury his accident and his life after the injury there is information about your fundraisers and general information about spinal cord injuries and the costs associated therewith you have a newsletter as well as links to other organizations involved with spinal cord injuries you also advertise where and how to make a donation to you you have included in your application a news article advertising your golf fundraiser and indicating that the foundation’s number one priority was a law sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its general accepted legal sense and includes the relief of the poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section organization fails to meet either the organizational_test or the operational_test it is not exempt if an sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes onlly if its articles of organization a b limit the purposes of such organization to one or more exempt purposes and do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes 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 of the code an organization will not be so regarded if more than an insubstantial part of its activities are not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization may be exempt as an organization described in sec_501 of the code if it is operated exclusively for one or more of the following purposes religious charitable scientific testing for public safety literary educational or prevention of cruelty to children or animals sec_1_501_c_3_-1 of the regulations provides t he term educational as used in sec_501 of the code relates to the instruction or training of the individual for the purposes of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 of the regulations provides examples of educational organizations example refers to a n organization whose activities consist of presenting public discussion groups forums panels lectures or other similar program sec_1_501_c_3_-1 of the regulations provides a n 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 sec_1 a - c of the regulations provides that a private individual is a person having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that and organization is not organized and operated exclusively for one or more exempt purposes unless it serves public rather than private interests thus it is necessary for the organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests in john marshall law school v u s u s t c ct_cl the court held that the commissioner acted properly in revoking exemption under code sec_501 on the ground of inurement to the controlling officers and their families the inurement included but was not limited to payments to members of the officer’s families in wendy l parker v commissioner t c memo an organization was formed to aid victims of coma resulting from motor_vehicle accidents stroke drowning and other related causes to provide such coma victims who are in various stages of rehabilitation and recovery with funds and therapeutic equipment and devices used in conjunction with accepted coma recovery programs to run fundraising affairs and social functions in aid of coma victims to exchange and disseminate information concerning the care and treatment of coma victims in all stages of recovery the organization received voluntary contributions and distributed to organizations helping coma victims and to individual coma victims of which was expended for the benefit of wendy parker the organization’s board members and officer consisted of wendy parker’s father mother and brother in upholding the commissioner’s decision denying exemption the court stated the distribution of funds for the benefit of wendy parker assists the parker family in providing for her care these funds will be used to pay for the medical and rehabilitative care of wendy parker this relieves the parker family of the economic burden of providing such care consequently there is a prohibitive benefit from the organization’s funds that inures to the benefit of private individuals the parker family’s control_over the organization is not in itself fatal to the organization’s cause however the organization’s selection of wendy parker as a substantial beneficiary of its disbursements is the determinative factor in this case inurement of a benefit to private individuals whether monetary or not as a result of contributions made to a purportedly exempt_organization is proscribed you are virtually indistinguishable from the organization discussed in wendy parker v analysis commissioner supra similar to wendy parker v commissioner supra a is one of an unspecified number of recovering spinal cord injury victims a is the son of board member and president b the brother of board member and treasurer e the stepson of board member and secretary c and the nephew of board member d b e c and d as officers and directors of your organization formed to benefit spinal cord injury victims including a have a personal and private interest in your affairs to provide assistance including financial aid to a and other spinal cord injury victims see sec_1_501_a_-1 of the regulations similar to wendy parker v commissioner supra all of the p family members serving as officers and directors are private individuals within the meaning of sec_1_501_a_-1 your operations are indistinguishable from the organization in wendy parker v commissioner supra the organization in that case distributed of their income to individual victims and of that amount was given for the benefit of wendy parker your income totals dollar_figurenn in funds and equipment and of that amount you have distributed dollar_figure or ss for the benefit of a you have distributed dollar_figurepp or tt of your total income for the benefit of individuals and organizations other than a see wendy parker v commissioner supra you did not use formal guidelines in selecting a as a grant recipient those decisions were within the sole discretion of related board members who have a personal and private interest in that decision see sec_1_501_a_-1 of the regulations similar to the payments made to family members in john marshall law school v u s supra are the grant payments made to a here consequently there is a prohibitive benefit from your income that inures to the benefit of private individuals see wendy parker v commissioner supra obtain a credit card for the sole purpose of paying a’s expenses your directors have discussed using your income to purchase a small home for a the dollar_figureqq of your income donated to you by the k was used specifically for the purchase of a van for a a newspaper article affirmatively states that a is your number one priority by distributing funds primarily for the benefit of a and your board members have discussed allowing the corporation’s name to be used to here incidentally to organizations and members of the public you are operated for private interests see sec_1_501_c_3_-1 of the regulations the decision to distribute funds for the benefit of a assists the p family and a in providing for his care these funds are used to pay for a’s rent living medical and transportation_expenses you will continue to use your income to pay for his expenses this alleviates the p family and a of the economic burden of providing for his care see wendy parker v commissioner supra the selection of a as a substantial beneficiary of your disbursements by related family members is the determinative factor in this case inurement to the benefit of a private individual as a result of contributions made to a purportedly exempt_organization is proscribed see sec_1_501_c_3_-1 of the regulations see also wendy parker v commissioner supra although you may have an educational purpose by maintaining a website that informs the public of spinal cord injuries and the various costs associated therewith you are not operated exclusively for an exempt_purpose within the meaning of sec_1_501_c_3_-1 of the regulations because your earnings inure to the benefit of private individuals see sec_1_501_c_3_-1 additionally you have failed to demonstrate that your operations serve public interests rather than private interests see sec_1_501_c_3_-1 as a result you fail the operational_test of sec_1_501_c_3_-1 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code you have a right to protest this ruling if you believe it is incorrect to protest you should submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practice requirements if you do not protest this ruling in a timely manner it will be considered by the internal_revenue_service as a failure_to_exhaust_administrative_remedies sec_7428 of the code provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted administrative remedies available to it within the internal_revenue_service if we do not hear from you within days this ruling will become final and a copy of it will be forwarded to the ohio tax exempt and governmental entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 in the event this ruling becomes final it will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intent to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions and do not intend to protest our denial of exempt status you should follow the instructions in notice if you decide to protest this ruling your protest statement should be sent to the address shown below if you also disagree with our proposed deletions you should send your comments on the deletions with your protest statement and not to the address shown in notice internal_revenue_service constitution ave washington d c if you do not intend to protest this ruling and if you agree with our proposed deletions as shown in the letter attached to notice you do not need to take further action if you have any questions please contact the person whose name and telephone number are shown in the header of this letter sincerely lois g lerner director exempt_organizations rulings and agreement


t c memo united_states tax_court suzanne gormeley petitioner v commissioner of internal revenue respondent docket no filed date carlton m smith for petitioner robert w mopsick for respondent memorandum opinion cohen judge the petition in this case was filed in response to a notice of final_determination denying relief under sec_6015 for unpaid federal_income_tax for this case is now before the court on cross-motions to dismiss for lack of jurisdiction respondent’s motion is based on petitioner’s failure_to_file the petition within days from the mailing of the notice petitioner’s motion seeks dismissal for lack of jurisdiction on the ground that she was not a party to a joint federal_income_tax return all section references are to the internal_revenue_code background some of the facts have been stipulated and the stipulated facts are incorporated as our findings by this reference petitioner resided in new jersey at the time that she filed her petition petitioner and erdal kaya kaya were married on date during both petitioner and kaya were employed in a dunkin’ donuts franchise owned by poshka inc petitioner was paid dollar_figure by poshka inc during and dollar_figure was withheld for federal_income_tax kaya was paid dollar_figure by poshka inc during and dollar_figure was withheld for federal_income_tax in kaya told petitioner that he would have an accountant prepare tax returns for them for but petitioner does not recall seeing or signing a return for sometime in kaya left the united_states and returned to turkey petitioner has not lived with kaya since that time although they are not yet divorced she now denies that she intended to be a party to a joint_return for according to internal_revenue_service irs records a joint federal_income_tax return was filed for petitioner and kaya for reporting dollar_figure as adjusted_gross_income dollar_figure as income_tax due and dollar_figure as income_tax withheld on examination of the return the irs disallowed certain itemized and business deductions that had been claimed and allowed only the standard_deduction for a joint_return on date the irs assessed additional tax an accuracy-related_penalty and interest bringing the amount due to dollar_figure on date petitioner submitted a form_8857 request for innocent spouse relief to the irs she did not answer the questions on the form_8857 relating to whether she and kaya had filed a joint_return on date the irs sent to petitioner at her correct address a final_determination denying her request for relief the original final_determination was returned to the irs by the u s postal service marked unclaimed and a copy was mailed to petitioner on date after she inquired about it the petition was postmarked date days after the first mailing of the final_determination respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was untimely under sec_6015 or sec_7502 petitioner responded with a cross-motion to dismiss for lack of jurisdiction alleging that the court’s jurisdiction under sec_6015 c and f is dependent on the filing of a joint_return and that she did not file a joint_return with kaya for in an affidavit in support of her cross-motion petitioner stated i never told erdal to file a joint_return for and i did not authorize him to sign a joint_return for me i had assumed that he would get a married_filing_separately return prepared for me if he desired though i thought one was not required however i may have been shown and asked to sign a form_1040 for prepared as married_filing_jointly and may have signed it i would have to see a copy of that return i have no copy of that return in my records so i have not been able to see whether erdal signed it for me or i signed it without paying attention to what was on the return discussion during the hearing on the pending motions petitioner’s counsel candidly stated so what i’m trying to ask the court here to do is try to help my client out here by finding a way to rule because this is an equitable thing that congress really wanted to help taxpayers get some ruling from the court under e try to throw this case out on the basis it gives my client some help that there wasn’t a joint_return so that’s why the court has to say well what’s the whole purpose of this statute what was congress intending here it wanted equity it wanted to help the spouse even after they couldn’t make an argument of a deficiency case that this should be part of what the court can do in the process counsel asks us to make a categorical finding on an ambiguous factual record and to disregard or overrule prior opinions of the court while we commend his desire to serve his client we decline the invitation shortly before the hearing on the pending motions petitioner suggested an alternative to the theory asserted in the cross-motion to dismiss for lack of jurisdiction petitioner withdrew a prior concession that she did not timely file the petition and argued that the 90-day period of sec_6015 in which to file a petition is not jurisdictional but rather is a statute_of_limitations subject_to equitable_tolling and that her filing of the petition herein was timely because due to her belated receipt of the notice_of_determination on or after date equitable_tolling applies and the 90-day period should not begin to run before that date of receipt since petitioner mailed her petition to this court on date or fewer days after her receipt of the notice and the court filed it on date the petition was timely under equitable_tolling petitioner acknowledges that her argument is contrary to the court’s holding in pollock v commissioner t c __ but she argues that pollock was incorrectly decided in that regard she relies on other recent decisions favoring relief to taxpayers under entirely different circumstances petitioner’s generalized reliance on equity and policy considerations cannot overcome a jurisdictional defect see eg 351_f2d_602 9th cir 119_tc_267 affd 360_f3d_361 2d cir 58_tc_256 there is no dispute that the notice was sent to petitioner’s last_known_address there is no special or compelling inequity here petitioner urges us to deny respondent’s motion to dismiss and to grant petitioner’s motion to dismiss by analogy to other cases in which the court has had before it cross-motions to dismiss for lack of jurisdiction with respect to a petition filed more than days after a notice_of_deficiency was sent in some such cases the court will grant a taxpayer’s motion on the ground that the notice_of_deficiency was not sent to the taxpayer’s last_known_address and was therefore invalid in those cases however we have followed the truism that our jurisdiction depends on a valid notice and a timely petition see 92_tc_729 affd without published opinion 935_f2d_1282 3d cir 74_tc_377 in this case there is no suggestion that the final_determination sent in response to the form_8857 request by petitioner is invalid in situations where a timely petition was filed in response to a valid notice but the taxpayer denies that he or she was party to a joint_return the court has decided the case on the merits and entered a decision rather than dismissing the case for lack of jurisdiction see 119_tc_306 affd 101_fedappx_34 6th cir 119_tc_191 petitioner suggests that the court arguably rendered a different jurisdictional holding in 120_tc_102 where the court dismissed for lack of jurisdiction a spouse’s claim for relief under sec_66 the rationale of that case is that congress had not by statute provided this court with jurisdiction under sec_66 in contrast to sec_6015 where the grant of jurisdiction is explicit see bernal v commissioner supra pincite petitioner argues that a footnote in bernal v commissioner supra pincite n citing raymond v commissioner supra pincite for the proposition that provisions of sec_6015 for relief from joint_and_several_liability are inapplicable and dismissal in bernal for lack of jurisdiction means that the court was sub silencio denying jurisdiction under sec_6015 for lack of joint returns this argument is meritless the court does not overrule or modify precedents by inference in footnotes the predicates for our jurisdiction in a stand-alone proceeding under sec_6015 are a claim by a taxpayer a final_determination and a timely petition see sec_6015 among the conditions for relief under sec_6015 is that a joint_return was filed but that condition is not set forth as a prerequisite to our review of denial of a claim for relief if the taxpayer’s claim is rejected for failure to satisfy the conditions set forth under sec_6015 c or f our review is on the merits of the claim petitioner’s position would require a review of the merits in every sec_6015 case where the filing of a joint_return is disputed even where as here the parties agree that ultimately there is no jurisdiction if jurisdiction is lacking as it is here because the petition was not timely we do not and should not proceed to address the merits we have considered petitioner’s other arguments they are irrelevant or unpersuasive for the reasons set forth above petitioner’s motion to dismiss will be denied respondent’s motion will be granted and the case will be dismissed for lack of jurisdiction on the ground that the petition was not filed timely an appropriate order of dismissal for lack of jurisdiction will be entered


t c memo united_states tax_court travis c tinney and amanda a tinney petitioners v commissioner of internal revenue respondent docket no filed date travis c tinney pro_se randall b childs for respondent memorandum findings_of_fact and opinion morrison judge the respondent issued a notice_of_deficiency determining a dollar_figure deficiency in the petitioners’ federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 for the tax_year unless otherwise indicated all section references are to the internal_revenue_code as in effect for the tax_year the respondent is referred to as the irs the petitioners are referred to as travis tinney and amanda tinney collectively tinneys after concessions by the parties the issues for decision are whether the tinneys failed to report dollar_figure of gross_receipts on schedule c profit or loss from business whether the tinneys are entitled to deduct dollar_figure in schedule c car and truck expenses disallowed in the notice_of_deficiency whether the tinneys are entitled to dollar_figure in miscellaneous_itemized_deductions claimed on schedule a itemized_deductions of their return and whether the tinneys are liable for the accuracy-related_penalty pursuant to sec_6662 1the tinneys reported dollar_figure in gambling income on their return the notice_of_deficiency determined that their gambling income was dollar_figure resulting in an adjustment of dollar_figure the tinneys have conceded they had dollar_figure in gambling income the irs has conceded that they are entitled to an itemized_deduction for dollar_figure in gambling expenses this concession is reflected on page of the transcript of the proceedings of date the tinneys also reported dollar_figure in short-term_capital_gains the notice_of_deficiency determined they had short-term_capital_gains of dollar_figure resulting in an adjustment of dollar_figure the irs conceded this adjustment and agrees with the amount reported on the return findings_of_fact some facts have been deemed admitted under tax ct r pract proc f and are so found the tinneys resided in florida at the time the petition was filed travis tinney was self-employed in the construction industry during amanda tinney his wife was a homemaker the tinneys filed a form_1040 u s individual_income_tax_return for an accountant prepared the return which included a schedule c and a schedule a the tinneys did not review the return before signing it the adjustments in the notice_of_deficiency are summarized in the table below adjustments in the notice_of_deficiency except computational adjustments item as reported on the return irs adjustments total after adjustments gross_receipts from travis tinney’s schedule c business dollar_figure dollar_figure dollar_figure gambling income short-term_capital_gain car and truck expense deductions total mileage insurance repairs and maintenance schedule a other expenses the case was tried in tampa florida 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 -0- opinion one procedural matter requires attention before we proceed to the merits of this case when the case was called for trial amanda tinney did not appear nor was there any appearance on her behalf travis tinney did appear as travis tinney had no authority to represent his wife and there was no other appearance by her or on her behalf the court will on its own motion dismiss her from this case for lack of prosecution a decision will be entered against amanda tinney for a deficiency and a penalty in the same amounts as those ultimately determined against travis tinney the taxpayer generally bears the burden of proving by a preponderance_of_the_evidence that the irs’s determinations in the notice_of_deficiency are incorrect tax ct r pract proc a 290_us_111 138_tc_382 under sec_7491 if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for tax and meets other requirements the burden_of_proof rests on the irs as to that factual issue the tinneys have not established their compliance with the requirements of sec_7491 they bear the burden_of_proof with respect to the deficiency determined in the deficiency_notice see tax ct r prac proc a whether the tinneys failed to report dollar_figure of schedule c gross_receipts the tinneys attached a schedule c to their return for travis tinney’s construction business travis tinney operated they reported gross_receipts of dollar_figure the facts deemed established show that the tinneys failed to report dollar_figure in gross_receipts we hold that the tinneys failed to report dollar_figure in gross_receipts for travis tinney’s construction business whether the tinneys are entitled to an dollar_figure deduction for schedule c car and truck expenses disallowed in the notice_of_deficiency on the schedule c the tinneys claimed deductions of dollar_figure for car and truck expenses dollar_figure for insurance and dollar_figure for repairs and maintenance these deductions--which total dollar_figure--related to an f-350 truck that travis tinney used for business purposes according to the return the dollar_figure in the car 2it has been deemed admitted that the bank_deposits analysis the irs performed showed that the tinneys had unexplained bank_deposits of dollar_figure and that this amount should have been but was not reported as gross_receipts at the trial the court told travis tinney that it would consider vacating its order deeming these facts established if it were shown that those facts should not be deemed admitted but he did not challenge the accuracy of the deemed facts if a taxpayer fails to keep adequate_records the irs may reconstruct the taxpayer’s income by any reasonable method that clearly reflects income see eg sec_446 348_us_121 one acceptable method is the bank_deposits method 102_tc_632 96_tc_858 aff’d 959_f2d_16 2d cir bevan v commissioner tcmemo_1971_312 aff’d 472_f2d_1381 6th cir this method assumes that if a taxpayer is engaged in an income-producing activity and makes deposits to bank accounts then those deposits less amounts identified as nonincome items constitute taxable_income see clayton v commissioner t c pincite the record is devoid of any books_or_records of the receipts and expenses of travis tinney’s construction business and truck category was equal to big_number miles multiplied by a business_use_percentage of multiplied by a standard mileage rate of dollars per mile the notice_of_deficiency allowed only a dollar_figure deduction for the expenses for the f-350 truck which was calculated using the mileage method thus the notice_of_deficiency disallowed dollar_figure of the dollar_figure deduction the tinneys claimed in the car and truck category it completely disallowed the dollar_figure deduction claimed for insurance and it completely disallowed the dollar_figure deduction claimed for repairs and maintenance the total disallowance was dollar_figure dollar_figure dollar_figure dollar_figure the tinneys presented no documentary_evidence or testimony regarding the disallowed f-350 truck expenses therefore they have not met their burden_of_proof we hold that they cannot deduct the dollar_figure in disallowed expenses whether the tinneys are entitled to dollar_figure in schedule a miscellaneous_itemized_deductions claimed on their return on their schedule a the tinneys entered dollar_figure as other expenses under miscellaneous_itemized_deductions a statement attached to the schedule a gave the following details 3truck expenses are subject_to the strict substantiation requirements of sec_274 see sec_1_274-5t temporary income_tax regs fed reg date the tinneys have failed to satisfy their burden_of_proof even without considering the effect of the strict substantiation requirements description seminars travel lodging mileage--land investments legal fees--land investments listing fees--land investmen sic telephone--land investments fax line--land investments internet--land investments postage--land investments hometown remodelers parking tolls marketing--land investments advertising total amount dollar_figure big_number big_number big_number big_number big_number big_number at trial travis tinney testified that the dollar_figure was the total expense of repairing and rehabilitating rental properties that the tinneys owned one of these properties travis tinney testified wa sec_1315 florida avenue in st cloud florida he introduced no documents to support the deductibility of the dollar_figure in expenses 4the income and expenses from rental properties are required to be reported on schedule e supplemental income and loss see form_1040 line but no schedule e was attached to the tinneys’ form_1040 to the extent the dollar_figure constitutes travel_expenses no deduction is available because there is no evidence corroborating travis tinney’s testimony see sec_274 as for the nontravel expenses there is insufficient information on which to base an estimate of any deductible amount therefore no deduction can be allowed for nontravel expenses see 245_f2d_559 5th cir vanicek v commissioner t c big_number whether the tinneys are liable for the accuracy-related_penalty pursuant to sec_6662 the irs determined that the tinneys are liable for an accuracy-related_penalty pursuant to sec_6662 and b and for negligence or substantial_understatement_of_income_tax the irs bears the burden of production with respect to this penalty see sec_7491 to meet this burden the irs must produce evidence establishing that it is appropriate to impose this penalty once the irs has done so the burden_of_proof is upon the tinneys see 116_tc_438 negligence includes a failure to make a reasonable attempt to comply with internal revenue laws or to exercise ordinary and reasonable care in preparing a tax_return see sec_6662 sec_1 b income_tax regs negligence also includes the failure to keep adequate books_and_records or substantiate items properly see sec_1_6662-3 income tax regs the tinneys did not maintain adequate_records of the disputed items and they did not review the return before filing it the irs has carried its burden of production with respect to the sec_6662 penalty for negligence for the same reasons we conclude there was no reasonable_cause for the underpayment and the tinneys did not act in good_faith see sec_6664 the accuracy-related_penalty does not apply with respect to any underpayment for which it is shown that the taxpayer has reasonable_cause and acted in good_faith we hold that the tinneys are liable for a sec_6662 penalty for negligence to reflect the foregoing decision will be entered under rule with respect to travis c tinney and an appropriate order and decision will be entered with respect to amanda a tinney


uniform issue list internal_revenue_service department of the treasury washington dc - person to contact telephone number refer reply to t ep ra t3 date apr legend company a company b company c company d state m state n dear this is in response to your request for a ruling dated date submitted by your authorized representative concerning federal_income_tax consequences of the proposed conversion of company a a state m mutual holding_company into a stock corporation and the related restructuring of the affiliated_group of which company a is the common parent correspondence dated date date supplemented the request company a was formed in as a mutual insurance holding_company for company b and its affiliates company a is the common parent of an affiliated_group_of_corporations that has elected to file a consolidated_return company b issues and reinsures annuity_contracts accident_and_health_insurance policies and life_insurance policies collectively policies company b's primary business segments are pension operation group_insurance operations and individual insurance operations for federal_income_tax purposes company b qualifies as an insurance_company taxable under subchapter_l of the internal_revenue_code code as a mutual insurance holding_company company a cannot issue common or preferred_stock instead policyholders of company b by reason of their ownership of company b policies become members of company a as members the policyholders have certain rights under state m law these rights membership interests include the bae page right to vote for directors of company a and the right to receive any residual assets of company a in the event of a liquidation company a is not authorized to engage in the business of insurance_company a is not authorized to pay dividends or make any other distributions or payments of income or profit except as directed or approved by the state m commissioner of insurance or as provided in company a's articles of incorporation in the event of the liquidation or dissolution of company a company a currently owns per cent of the stock of company c a state m stock corporation which in turn owns as its only significant asset per cent of the stock of company d company d owns per cent of the stock of company b as well as substantially_all of the stock of seven foreign and domestic subsidiaries that are principally engaged directly or through their subsidiaries in overseas operations company a and its subsidiaries will be referred to collectively herein as the group w state m law does not provide for the direct merger of a mutual insurance holding_company into a stock corporation as a result it is necessary for company a to convert from a mutual insurance holding_company to a stock corporation under state m law before it can merge with and into a newly formed stock company in state m new state m corporation state m law further provides that any such conversion and merger must be fair and equitable to the mutual company and its policyholders new state m corporation will be a wholly-owned subsidiary of a newly formed state n corporation state n holding which will be a wholly-owned subsidiary of company a prior to consummation of the pian prior to the effective date of the demutualization the effective date company a will organize state n holding as its wholly-owned subsidiary and state n holding will in turn form new state m corporation as its wholly-owned subsidiary it is presently anticipated that under the terms of the plan the following steps will occur on the effective date company a will by operation of section and chapter of the state m code become a stock corporation company a will merge with and into new state m corporation in a forward_triangular_merger pursuant to section of the state m code as consideration for the termination of their membership interests in company a eligible members will receive common_stock cash or policy credits ’ state n holding will sell shares of its common_stock to the public in an initial_public_offering the ipo state n holding may also raise capital through one or more of the following a a private_placement or public offering of debt b a private_placement or public offering of preferred_stock c a private_placement of common_stock d a private or public offering of convertible securities e bank borrowing or f other sources of capital or a combination thereof on the effective date ' for purposes of the plan the term policy credit means consideration to be paid in the form of an increase in cash_value or account value as appropriate depending on the policy if the policy is owned by a qualified_plan customer as defined below the policy credit may take the form of an interest in a separate_account hoiding common_stock or an increase in the contract value as appropriate page state n holding will contribute a portion of the cash raised in the ipo or other capital-raising transactions to company b the amount contributed will be at least equal to the amount company b will use to pay expenses resulting from the transactions contemplated by the plan that are properly allocated to state n holding and to fund the payment and crediting by company b of mandatory cash payments and policy credits required to be paid or credited under the terms of the plan under the plan consideration will be paid through the addition of policy credits with respect to policies that are tax-sheltered annuities tsas within the meaning of sec_403 individual retirement annuities iras within the meaning of sec_408 individual annuity_contracts and individual life_insurance policies issued directly to a plan participant pursuant to a plan qualified under sec_401 or sec_403 or group annuity_contracts issued to an employer designed to fund benefits under retirement plans sponsored by an employer including governmental plans described in sec_414 which are qualified under sec_401 or sec_403 all policyholders described in the first sentence of this paragraph must receive policy credits and will not have the option of receiving stock or cash with certain exceptions not pertinent to the rulings requested relating to qualified_plan customers who own contracts described in all policies issued by company b and in force prior to the consummation of the plan will remain outstanding in accordance with their terms policy premiums and guarantees will not be affected by the consummation of the plan nor will benefits payable under policies or policy values except in the case of policies whose holders will receive compensation in the form of policy credits policy dividends on participating policies will continue to be paid as declared at the time group w's mutual insurance holding_company structure was created in for policy dividend purposes only company b formed and began operating a closed block for the benefit of individual policies paying experience-based policy dividends the closed block for accounting purposes only assets of company b were allocated to the closed block in an amount that produces cash flows which together with anticipated revenue from the closed block policies and contracts were expected to be sufficient to support the closed block policies including but not limited to provisions for payment of claims and certain charges and taxes and to provide for continuation of policy and contract dividends in aggregate in accordance with the dividend scales if the experience underlying such scales continues and to allow for appropriate adjustments in such scales if such experience changes assets in the closed block remain generai account assets of company b and are fully subject_to the claims of creditors of company b like any general account assets the closed block continues in existence as established and will not be affected by the consummation of the plan no additional policies will be added to the closed block as a result of this transaction based on the foregoing you request the following rulings the addition of policy credits to the tsas and iras pursuant to the plan will not i be treated as a distribution from such tsas in violation of sec_403 of the code that would cause such tsas to fail to qualify as tax-sheltered annuities described in sec_403 of the code or ii be treated as a transaction described in sec_408 of the code that could cause the iras to become disqualified under sec_408 of the code page the addition of policy credits to the tsas iras and contracts owned by qualified_plan customers pursuant to the plan will not be treated as a distribution under such retirement arrangements or a contribution to such retirement arrangements and consequently will not result in the imposition of a income_tax on distributions from qualified_retirement_plans pursuant to sec_72 of the code b the per cent penalty tax on early distributions from qualified_retirement_plans pursuant to sec_72 of the code c the per cent tax on excess_contributions to iras pursuant to sec_4973 of the code or d the per cent tax on excess_contributions or excess_aggregate_contributions to certain tsas and qualified_plans pursuant to sec_4979 of the code policy credits will not resuit in current taxable_income to the tsa or ira policyholders or the qualified_plan customers but will be includible in the taxable_income of the distributee in the taxable_year of actual distribution pursuant to sec_72 sec_72 or sec_402 of the code as applicable policy credits will not be treated for purposes of sec_72 or sec_72 of the code as part of the investment in the tsa or ira contract but will be treated for purposes of sec_403 and sec_408 of the code as investment earnings under the tsas and iras respectively attributable to the year such policy credits are added to the tsas and iras policy credits will not be treated as distributions to or contributions by qualified_plan customers but will be treated as investment earnings under the applicable group_annuity_contract attributable to the year such policy credits are credited to such group annuity_contracts for purposes of sec_403 of the code and the effective date provisions applicable thereto a pro_rata portion of the policy credits added to tsas to which contributions have been made pursuant to a salary reduction agreement will be treated as earnings attributable to such contributions and will be treated as credited under the tsas in the year such policy credits are added to the tsas pursuant to the plan the addition of policy credits to policyholder contracts including tsas iras or qualified_plan customers pursuant to the plan will not constitute designated distributions within the meaning of sec_3405 of the code and will not be subject_to any withholding requirement pursuant to sec_3405 of the code sec_72 of the code generally provides that gross_income includes any amount_received_as_an_annuity under an annuity endowment or life_insurance_contract sec_72 provides that any amount which is received under an annuity endowment or life_insurance_contract and is not received as an annuity i if received on or after the annuity_starting_date shall be included in gross_income and ii if received before the annuity_starting_date shail be included in gross_income to the extent allocable to income_on_the_contract and shall not be included in gross_income to the extent allocable to the investment_in_the_contract sec_72 defines the investment in a contract as the aggregate amount of premiums or other consideration paid for the contract minus the aggregate amount received under the contract before such date to the extent that such amount was excludable from gross_income under this subtitle or prior income_tax laws sec_72 defines the annuity_starting_date in part as the first day of the first period for which an amount is received as an annuity under the annuity_contract sec_72 provides that an amount shall be treated as allocable to income_on_the_contract to the extent that such amount does not exceed the 33s page 128u6 excess of the cash_value of the contract immediately before the amount is received over the investment_in_the_contract at the time sec_72 provides in part that with certain exceptions an amount distributed from a_trust described in sec_401 which is exempt from tax under sec_501 or is received from a contract purchased by a_trust described in sec_401 purchased as part of a plan described in sec_403 or described in sec_403 that the proceeds shall be included in gross_income but only to the extent it exceeds the investment_in_the_contract sec_72 provides that the investment_in_the_contract as of any date is the aggregate amount of premiums or other consideration paid for the contract as of such date minus the aggregate amount received under the contract before such date to the extent such amount was excludable from income sec_72 of the code provides in part that if any taxpayer receives any amount from a qualified_retirement_plan as defined in sec_4974 prior to certain dates or the occurrence of certain events specified in sec_72 the taxpayer's tax for the taxable_year shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income sec_4979 of the code imposes excise_taxes on certain excess_contributions made to plans described in sec_401 and sec_403 excess_aggregate_contributions under sec_4979 are defined in part as the sum of the employer matching_contributions and employee contributions actually made on behalf of highly compensated employees within the meaning of sec_414 for a plan_year in excess of the maximum amount of such contributions permitted under the actual_contribution_percentage_test of sec_401 for such plan_year sec_4973 of the code imposes excise_taxes equal to percent on certain excess_contributions made to iras and to certain tax-sheltered annuity_plans described in sec_403 sec_408 and sec_408 require in part an ira trustee with respect to its ira and an employer with respect to its simplified_employee_pension plan to make reports as specified therein with respect to contributions distributions from plans qualified under sec_401 must be made pursuant to sec_401 sec_403 sec_408 and sec_408 require distributions under ‘the respective plans in compliance with rules similar to the minimum distribution_requirements included in sec_401 and applicable to qualified_plans under sec_401 of the code sec_401 and applicable regulations issued thereunder contain the criteria for determining the minimum distribution amount for any year for which such minimum distribution is required the minimum distribution amount is based in part on the total value of the retirement benefit as the policy credits to be issued by company a will be treated as increasing the value of the tax-qualified retirement funding contracts in the year such policy credits are added to the tax-qualified retirement contracts for purposes of determining the minimum required distributions for any calendar_year the value of the benefits attributable to such policy credits will first be required to be taken into account in the year such policy credits are added to the tax qualified contracts sec_401 of the code requires in part that the entire_interest of an employee under a qualified_retirement_plan be distributed beginning no later than april of the calendar_year following the later of the calendar_year in which the employee attains age or the calendar_year in which the employee retires over the life or life expectancy of the employee or over the joint lives or joint life expectancy of the employee and a designated_beneficiary as enumerated in sec_1_401_a_9_-1 of the proposed income_tax 3h page the proposed_regulations also provide that in the case of a benefit in the form regulations of an individual_account the benefit used in determining the minimum distribution for a distribution calendar_year is the account balance as of the last valuation_date in the calendar_year immediately preceding the distribution calendar_year sec_403 of the code provides generally that amounts contributed by certain tax-exempt employers to an annuity_contract purchased from an insurance_company by such an employer for an employee shall be excluded from the gross_income of the employee for the taxable_year of contribution and that the amount actually distributed to any distributee under such a contract shall be taxable to such distributee in the year distributed under sec_72 sec_403 imposes a limit on the maximum amount which may be contributed to a tax-sheltered annuity described in sec_403 on behalf of an employee in any taxable_year sec_403 provides that the provisions of sec_403 will not apply to an annuity unless requirements similar to the minimum distribution_requirements of sec_401 are met with respect to such annuity sec_403 provides that the provisions of sec_403 will not apply to an annuity unless under the annuity distributions attributable to contributions made pursuant to a salary reduction agreement may be paid only when the employee attains age separates from service dies or becomes disabled or in the event of hardship distributions in the event of hardship may not include income attributable to salary reduction contributions the distribution limitations of sec_403 do not apply to distributions attributable to assets held in the tax-sheltered annuity arrangement described in sec_403 as of the close of the last year beginning before date p l the tax_reform_act_of_1986 section e as amended by p l tamra sec_101 1a c sec_408 of the code defines an ira annuity as an annuity or endowment_contract which is issued by an insurance_company and which meets the requirements of sec_408 sec_408 impose requirements similar to the distribution_requirements of sec_401 on distributions of the entire_interest of the contract owner sec_219 permits an individual taxpayer to deduct from gross_income amounts contributed to an ira subject_to the maximum annual deduction limitations specified in sec_219 sec_408 establish the annual_limit on contributions and premiums to an ira sec_402 and sec_408 relating to rollover_contributions permit an individual taxpayer to purchase an ira using funds distributed from certain other plans subject_to certain requirements relating to the nature and amount of the distribution sec_408 provides that amounts paid or distributed from an ira shall be included in gross_income by the payee or distributee in the manner provided in sec_72 sec_3405 of the code requires the payor of a designated_distribution within the meaning of sec_3405 to withhold certain amounts from such distributions in general absent an election under sec_3405 made by a recipient sec_3405 requires the payor to withhold on distributions from employer deferred_compensation plans iras and commercial annuities sec_3405 provides that in the case of an eligible_rollover_distribution as defined in sec_3405 the payor of such distribution shall withhold from such distribution an amount equal to percent of such distribution sec_3405 provides that the term designated_distribution does not include the portion of any distribution which it is reasonable to believe is not includible in gross_income central to our analysis of your submitted ruling requests is the question of whether or not membership interests in a mutual_insurance_company are within the stated plans page in this regard any membership interests in a mutual_insurance_company which arise from the purchase of an insurance_contract are inextricably tied to the contract from the time of purchase these membership interests are created by operation of state law solely as a result of the policyholder's acquisition of the underlying contract from a mutual_insurance_company and cannot be transferred separately from that contract prior to conversion the membership interests have no determinable value apart from the insurance_contract itself further if the insurance_contract is surrendered by the policyholder or in the event an insurance_contract is terminated by payment of benefits to the contract beneficiary these membership interests cease to exist having no continuing value the membership rights associated with the tax qualified retirement contracts are acquired as a direct result of tax-favored payments to a mutual_insurance_company indeed these membership interests cannot be obtained by any purchase separate from an insurance_contract issued by company a contracts created pursuant to sec_401 a a b and b of the code respectively in view of the foregoing such interests are part of the tax qualified retirement while it has been recognized that consideration received in a demutualization transaction is in exchange for a membership interest in a mutual_insurance_company and not from or under an insurance_contract such a distinction does not require the detachment of such consideration from the tax qualified retirement contracts which consists of both the contracts and all other interests which arise with the purchase of such a contract see revrul_71_233 1971_1_cb_113 rather contracts and the related membership interests must be viewed as part of a program of interrelated contributions and benefits which are retained within the plans cf income_tax regulation sec_1_72-2 the planned issuance of policy credits does not constitute a distribution of such credits to the annuitants the conversion of membership interests in company a to policy credits is a mere change in form of one element within the arrangement to another since the conversion increases the accumulation value of the annuity_contracts the policy credits are treated for purposes of sec_401 sec_403 sec_403 sec_408 sec_408 of the code in the same manner as any other return of or return on an investment within the arrangements described above and are not regarded as having been received by the policyholder such amounts representing the policy credits will be considered as part of the respective balances to the credit of the employees in the plans similarly under sec_402 sec_403 sec_403 and sec_408 of the code only amounts paid or distributed under the applicable plans will be included in the gross_income of the distributee under the rules of sec_72 sec_72 dealing with the tax treatment of amounts_not_received_as_an_annuity provides for the inclusion of such amounts when received by the distributee as policy credits will be issued in exchange for membership interests such interests being held within the applicable plans no amount is treated as received by or includible in the gross_income of any policyholder under such plans of company a for purposes of sec_72 the value of policy credits which will be added to the tax-qualified retirement contracts will not be regarded as part of the investment in the contracts an amount which under sec_72 consists of the aggregate amount of premiums or other consideration paid for the contract in addition as no amount is to be treated as having been distributed as a result of the issuance of policy credits nor received by the tax-qualified retirement policyholders outside the plans the additional percent tax imposed by sec_72 does not apply 33k page similarly for purposes of determining the applicability of sec_403 of the code the limitation on distributions of amounts attributable to salary reduction contributions the policy credits added to the tax-sheltered annuity arrangements described in sec_403 issued by company b are treated as income received within the tax-sheltered annuity arrangement the planned issuance of policy credits likewise does not constitute a contribution of such credits by the annuitants thus no excess_contributions can be attributed to the addition of these policy credits to the pension annuities sec_3405 of the code requires a payor to withhold income taxes on certain designated distributions as described in sec_3405 including distributions from or under an employer_deferred_compensation_plan an individual_retirement_plan or a commercial_annuity similarly sec_6047 generally requires that the employer maintaining or the plan_administrator of a plan from which designated distributions may be made and any person issuing a contract pursuant to which designated distributions may be made to report payments under the plan or contract the addition of policy credits within the tax-sheltered annuity arrangement described in sec_403 ira arrangement or other qualifying plan pursuant to the conversion does not result in the distribution of any amounts to individual policyholders within the meaning of sec_3405 and thus will not be subject_to any requirement to withhold or the reporting requirements under sec_6047 according with respect to rulings one through seven we hold that the addition of policy credits to the tsas and iras pursuant to the plan will not i be treated as a distribution from such tsas in violation of sec_403 of the code that would cause such tsas to fail to qualify as tax-sheltered annuities described in sec_403 of the code concerning part two of this ruling_request sec_408 states in part that if during any taxable_year of the individual for whose benefit any ira is established that individual or his beneficiary engages in any transaction prohibited by sec_4975 with respect to such account such account ceases to be an ira as of the first day of such taxable_year it seems unlikely that the described transaction results in a prohibited_transaction however sec_102 of the white house reorganization plan number of federal_register date generally provides that authority to issue rulings under sec_4975 of the cade is transferred from the secretary_of_the_treasury to the secretary of labor accordingly we are unable to issue a ruling on this issue however it is our opinion that the proposed transaction will not otherwise cause an individual_retirement_account or an individual_retirement_annuity to lose its status under sec_408 of the code the addition of policy credits to the tsas iras and contracts owned by qualified_plan customers pursuant to the plan will not be treated as a distribution under such retirement arrangements or a contribution to such retirement arrangements and consequently will not result in the imposition of a income_tax on distributions from qualified_retirement_plans pursuant to sec_72 of the code b the per cent penalty tax on early distributions from qualified_retirement_plans pursuant to sec_72 of the code c the per cent tax on excess_contributions to ras pursuant to sec_4973 of the code or d the per cent tax on excess_contributions or excess_aggregate_contributions to certain tsas and qualified_plans pursuant to sec_4979 of the code policy credits will not result in current taxable_income to the tsa or ira policyholders or the qualified_plan customers but will be includible in the taxable_income of page i z u o the distribute in the taxable_year of actual distribution pursuant to sec_72 sec_72 or sec_402 of the code as applicable policy credits will not be treated for purposes of sec_72 or sec_72 of the code as part of the investment in the tsa or ira contract but will be treated for purposes of sec_403 and sec_408 of the code as investment earings under the tsas and iras respectively attributable to the year such policy credits are added to the tsas and iras policy credits will not be treated as distributions to or contributions by qualified pian customers but will be treated as investment earnings under the applicable group_annuity_contract attributable to the year such policy credits are credited to such group annuity_contracts for purposes of sec_403 of the code and the effective date provisions applicable thereto a pro_rata portion of the policy credits added to tsas to which contributions have been made pursuant to a salary reduction agreement will be treated as earnings attributable to such contributions and will be treated as credited under the tsas in the year such policy credits are added to the tsas pursuant to the plan the addition of policy credits to policyholder contracts including tsas iras or qualified_plan customers pursuant to the plan will not constitute designated distributions within the meaning of sec_3405 of the code and will not be subject_to any withholding requirement pursuant to sec_3405 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures notice of intention to disclose deleted copy of ruling copy of letter to authorized representative 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 ------------------------------------ -------------- telephone number ---------------------- refer reply to cc psi b02 plr-102459-13 date date legend x a b ---------------------------------------------------------------------------------------------------------------------- --------- ------------------------ ------------------------------------------------------------------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- ------------------------------------ trust ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- -------------------------- trust ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- -------------------------- trust ---------------------------------------------------------------------------------------------------------------------- ------------------------------------------------ state ----------- d1 d2 ---------------------- ---------------------- plr-102459-13 d3 d4 d5 d6 -------------------- ------------------- ------------------- ------------------------ dear------------------------ this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under the internal_revenue_code the information submitted states that x was incorporated under the laws of state on d1 and elected to be an s_corporation effective d2 at the time of the s election all of the shares of x stock were held equally by a and b husband and wife until a died on d3 on d4 following the administration of a’s estate a’s estate distributed its shares of x to trust trust and trust additionally on d4 b contributed b’s shares to trust a grantor_trust x represents that trust trust and trust were qualified subchapter_s trusts qssts eligible to make an election under sec_1361 effective d5 during the two years between d4 and d5 trust trust and trust were eligible shareholders by reason of sec_1361 however no qsst elections were filed on behalf of trust trust or trust therefore trust trust and trust were not permissible shareholders and x’s s_corporation_election terminated on d5 beginning d4 x made disproportionate distributions among its shareholders trust trust trust and trust x represents that the failure to make pro_rata distributions to its shareholders was inadvertent after x learned of this failure x made corrective distributions to trust trust and trust on or before d6 thus eliminating the cumulative amount of the disproportionate distributions x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x further represents that from d5 x and its shareholders have filed all returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 provides for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization plr-102459-13 described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides in relevant part that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholders consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1361-1 of the income_tax regulations provides in part that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides in part that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances based solely on the facts submitted and representations made we conclude that because x’s stock has identical distribution and liquidation rights under its governing provisions the difference in timing between x’s disproportionate distributions to some of the shareholders and x’s corrective distributions to certain shareholders do not cause x to have more than one class of stock for purposes of sec_1361 however such disproportionate and corrective distributions must be given appropriate tax effect plr-102459-13 under these circumstances we conclude that x’s s_corporation_election did not terminate because of the disproportionate and corrective distributions to the shareholders additionally based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d5 because trust trust and trust were not eligible shareholders of x we further conclude that the termination of x’s s_corporation_election on d5 was inadvertent within the meaning of sec_1362 therefore x will be treated as an s_corporation effective d5 and thereafter provided x’s s_corporation_election is not otherwise terminated under sec_1362 this ruling is conditioned upon b filing qsst elections for trust trust and trust respectively with an effective date of d5 within days of the date of this ruling a copy of this letter should be attached to each election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election no opinion is expressed as to whether trust trust or trust qualifies as a qsst or whether any other shareholder of x is a permissible s_corporation shareholder 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 this ruling is directed 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 forwarded to x’s authorized representative sincerely bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index numbers washington dc person to contact telephone number refer reply to cc dom p si plr-106058-98 date date number release date legend a b c trust bank state dear this responds to a letter dated date and subsequent correspondence submitted by your authorized representatives requesting the following rulings concerning the effect of a proposed transfer of an insurance_policy to a charitable_remainder_trust the existence or exercise of a trustee’s power to pay annual premiums on an insurance_policy on b’s life will not cause a or b to be treated as the owner of all or any portion of the trust under sec_677 of the internal_revenue_code the existence or exercise of the trustee's power to pay annual insurance premiums will not disqualify the trust as a charitable_remainder_unitrust under sec_664 a will be entitled to an income_tax charitable_contribution_deduction for the present fair_market_value of the remainder_interest in the insurance_policy contributed to the trust plr-106058-98 a will be entitled to a gift_tax_charitable_deduction upon the contribution of an insurance_policy to the trust based upon the present_value of the remainder_interest in the trust and after a gift to the trust is completed the gifted asset and the asset of the trust will at no time be includible in a’s gross_estate or in the gross_estate of b facts a the grantor proposes to create the trust which is intended to qualify as a charitable_remainder_unitrust under sec_664 and the trustee of the trust will be bank and will not be a or grantor's spouse b the trust will be governed by the laws of state the governing instrument of the trust provides that the trustee will pay the unitrust_amount in quarterly installments to c for her life c the step-daughter of a is the sole income_beneficiary of the trust the unitrust_amount will be the lesser_of the trust's income as defined in sec_643 or six percent of the net fair_market_value of the trust's assets valued annually the unitrust_amount for any year will include any amount of the trust's income in excess of the amount required to be distributed under the general_rule above to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as six percent of the net fair_market_value of the trust's assets on the valuation dates upon the death of c the trustee will distribute all of the then principal and income of the trust to charities that qualify as organizations described in sec_170 sec_170 sec_2055 and sec_2522 a will fund a policy of insurance on b's life with enough cash so that no additional premiums are expected to be due a will then transfer the insurance_policy to the trust and assign ownership of the policy to the trustee the trustee will designate the trust as the beneficiary of the policy article v paragraph r of the trust's governing instrument provides that the trustee will have the power to sell appreciated assets contributed to or owned by the trust and may use the proceeds therefrom or use other assets of the trust to acquire and hold insurance on the life of b and to pay the premiums on such insurance and to exercise all rights of an owner of such insurance including the right to surrender the insurance or allow it to lapse provided that the plr-106058-98 premiums_paid on the insurance whether payable from net_income or taxable_income of the trust shall be charged to the trust’s principal account and any proceeds paid on the insurance upon the death of the insured any dividends_paid on the insurance during the life of the insured any withdrawals made from the insurance during the life of the insured and any amount_paid on the surrender of the insurance during the life of the insured shall be credited to the trust’s principal account and no part of any such receipt shall be credited to the trust’s net_income account notwithstanding any statute rule or convention to the contrary one of the statutory provisions of state’s law provides that a_trust is administered with due regard to the respective interests of income beneficiaries and remaindermen if receipts are credited and expenditures are charged to income or principal in accordance with the terms of the trust instrument notwithstanding contrary statutory provisions state’s law has no statutory provision concerning whether the trust’s payment of premiums on life_insurance policies should be charged to principal or income or concerning whether any amounts received by a_trust on account of life_insurance policies should be allocated to principal or income in addition any state law that would allocate to income a portion of the proceeds received from the sale_or_other_disposition of underproductive assets is subject_to the provisions of the trust’s governing instrument ruling_request sec_1 and law and analysis under sec_664 a charitable_remainder_unitrust is a_trust that provides for the distribution of the unitrust_amount at least annually for life or a term of years to one or more persons at least one of which is not a charitable_organization with an irrevocable remainder_interest to be held for the benefit of or paid over to a qualified charitable_organization under sec_664 the unitrust_amount is generally a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of the trust's assets valued annually however under sec_664 the governing instrument may instead provide that the trustee is to pay the unitrust recipient a the amount of the trust income if such amount is less than the amount determined by the fixed percentage of the value of the trust's assets and b any amount of trust income which is in excess of the amount required to be distributed based on the fixed percentage to the extent that the plr-106058-98 aggregate of the amounts paid in prior years was less than the aggregate of the required amounts based on the fixed percentage of the value of the trust’s assets sec_1_664-3 of the income_tax regulations refers to the payout provisions of sec_664 as the income exception this section of the regulations states that trust income under the income exception means income as defined in sec_643 and the applicable regulations sec_643 provides that the term income when standing alone means the amount of income of the trust for the taxable_year determined under the terms of the governing instrument and applicable local law sec_1_664-1 provides that for a_trust to be a charitable_remainder_trust it must satisfy the definition of and function exclusively as a charitable_remainder_trust from the creation of the trust solely for purposes of sec_664 and the regulations thereunder the trust will be deemed to be created at the earliest time that neither the grantor nor any other person is treated as the owner of the entire trust under subpart e part subchapter_j chapter subtitle a of the code subpart e but in no event prior to the time property is first transferred to the trust for the preceding sentence neither the grantor nor the grantor's spouse is treated as the owner of the trust merely because the grantor or the grantor's spouse is named as a recipient of the annuity or unitrust_amount sec_677 provides that the grantor is treated as the owner of any portion of a_trust whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse except policies of insurance irrevocably payable for a purpose specified in sec_170 relating to the definition of charitable_contributions in this case a will transfer an insurance_policy on the life of b a's spouse to the trust if necessary the trustee may pay the premiums on the policy the terms of governing instrument provide that any amount received by the trust from the insurance_policy on b's life whether received during b's life or upon his death will be allocated to the trust's principal and not income because the trust is an income exception unitrust within the meaning of sec_664 and sec_1_664-3 b the unitrust_amount payable to the noncharitable beneficiary is limited to the trust's income as described in sec_1_664-3 if such income is less than the fixed percentage of the net value of the trust's assets because amounts received from the insurance_policy on b's life will not plr-106058-98 be allocated to income under the terms of the governing instrument these amounts will not be used in computing the amount of the trust’s income and thus will not be used in determining the income limitation on the unitrust_amount payable to the noncharitable beneficiary rather amounts received from an insurance_policy on the life of b will be allocated to the trust’s principal and will become part of the remainder that is payable to qualified charitable organizations therefore after applying the applicable law to the facts presented and the representations made we conclude that under these circumstances the insurance_policy on b’s life is irrevocably payable for a charitable purpose under sec_677 because the policy is so payable we conclude that the existence or exercise if necessary of the trustee's power to pay annual premiums on the insurance_policy on b's life does not cause a or b to be treated as the owner of all or any portion of the trust under sec_677 if there are no other provisions in the governing instrument that cause a b or any other person to be treated as the owner of the trust under subpart e and if the trust otherwise qualifies as a charitable_remainder_unitrust under sec_664 we conclude that the existence or exercise if necessary of the trustee's power to pay the annual premiums on the insurance_policy on b's life will not cause the trust to be deemed to be created any later than when property is first transferred to the trust under sec_1_664-1 thus the existence or exercise if necessary of the trustee's power to pay the annual premiums on the insurance_policy on b's life will not disqualify the trust as a charitable_remainder_trust assuming the trust otherwise qualifies as a charitable_remainder_trust under sec_664 ruling_request sec_170 permits a deduction for any charitable_contribution payment of which is made within the taxable_year sec_170 generally provides that in the case of property transferred in trust no charitable_contribution_deduction is allowed for the value of the charitable_remainder interest unless the trust is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 see sec_1 170a- b therefore assuming the trust qualifies as a charitable_remainder_unitrust we conclude that a will be entitled to a charitable_contribution_deduction for the present fair_market_value of the remainder_interest in the insurance_policy contributed to the trust plr-106058-98 ruling_request sec_2522 provides in part that in computing taxable_gifts there shall be allowed as a deduction the amount of all gifts made during the year to or for_the_use_of any corporation organized and operated exclusively for religious charitable scientific literary or educational_purposes sec_2522 provides in part that where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in sec_2522 or sec_2522 and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 or sec_2522 no deduction shall be allowed under this section for the interest which is or has been transferred to the person or for the use described in sec_2522 or sec_2522 unless in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 in the case of any other interest the interest must be in the form of a guaranteed annuity or a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly provided the trust otherwise qualifies as a charitable_remainder_trust under sec_664 we conclude that a will be allowed a gift_tax_charitable_deduction under sec_2522 for the present_value of the remainder_interest in the trust as determined under sec_25_2522_c_-3 ruling_request 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_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of the decedent's death sec_2035 provides that if the decedent made a transfer by trust or otherwise of an interest in any property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of such property or an interest therein would have been included in the decedent's gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if such transferred interest or relinquished power plr-106058-98 had been retained by the decedent on the date of his death the value of the gross_estate shall include the value of any property or interest therein which would have been so included sec_2036 provides that the value of the decedent’s gross_estate includes the value of all property to the extent of any interest transferred by the decedent in which the decedent has retained for life either an income_interest in the property or the right to designate the persons who will possess or enjoy the property or have an interest in the income of the property sec_2038 provides that in the case of transfers after date the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or when any such power is relinquished during the 3-year period ending on the date of the decedent’s death sec_2041 provides in part that the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 defines the term general_power_of_appointment to include a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate except that a power to consume invade or appropriate property for the benefit of the decedent which is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed to be a general_power_of_appointment sec_2042 provides that the value of the gross_estate shall include the value of all property to the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents_of_ownership exercisable either alone or in conjunction with any plr-106058-98 other person in the present case a and b will not retain any interest in or power over any of the property transferred to the trust and under the terms of the trust will not possess any interest or power with respect to the trust corpus accordingly we conclude that the trust will not be included in the gross_estate of either a or b furthermore assuming b never possessed any incidents_of_ownership in the policy we conclude that sec_2035 will not apply with respect to the insurance_policy no opinion is expressed as to any other provisions of the trust or any other amendments to the provisions of the trust no opinion is expressed on the federal tax consequences of the formation or operation of the trust under the provisions of any other section of the code specifically no opinion is expressed on whether the trust is a qualified charitable_remainder_unitrust under sec_664 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent under a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative sincerely yours jeff erickson assistant to the branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes