t c summary opinion united_states tax_court alicia m elias petitioner v commissioner of internal revenue respondent docket no 3144-03s filed date alicia m elias pro_se thomas d greenaway for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for the year the sole issue for decision is whether petitioner is entitled to relief from joint liability under sec_6015 for federal_income_tax some of the facts were stipulated those facts with the exhibits annexed thereto are so found and are made part hereof petitioner’s legal residence at the time the petition was filed was pismo beach california petitioner married lee e elias mr elias in date they were divorced in the latter part of they had two children of their marriage petitioner and mr elias filed a joint federal_income_tax return for the year at issue in the notice_of_deficiency which was issued jointly to petitioner and mr elias respondent determined a deficiency of dollar_figure in federal_income_tax for the deficiency is essentially based on the disallowance of deductions for various schedule c profit or loss from business_expenses claimed on the return in connection with the self-employed activity of mr elias as an agent for state farm insurance state farm petitioner was not involved in this activity although both petitioner and mr elias had been engaged with state farm in different capacities from the time of their marriage during petitioner was employed as a claims adjuster for state farm in the latter part of mr elias discontinued his insurance agency business to become an insurance consultant for state farm in this latter position mr elias was an employee throughout the years petitioner continued in her employment as a claims adjuster for state farm in the latter part of the year mr elias became ill with viral encephalitis a serious illness that resulted in his becoming totally and permanently disabled his employment with state farm ended and likewise petitioner in date terminated her employment with state farm the notice_of_deficiency for referred to earlier was issued after petitioner and mr elias were divorced mr elias filed a petition with this court challenging the deficiency in docket no petitioner in this case also filed a petition and challenged the deficiency and further alleged that if the determinations in the notice_of_deficiency were sustained she should be relieved from joint liability under sec_6015 in lieu of proceeding to trial on the various determinations in the notice_of_deficiency petitioner and respondent agreed in a stipulation that petitioner would be bound by the outcome the decision to be rendered in the case of mr elias docket no to the extent the deficiency did not exceed dollar_figure the deficiency determined in the notice_of_deficiency prior to trial of this case mr elias settled his case and a decision was entered in that case for a deficiency of dollar_figure as a result of the closing of the case of mr elias and the stipulation of petitioner in this case to be bound by the outcome in the case of mr elias the deficiency in this case is not at issue the sole issue is whether petitioner is entitled to relief from joint liability under sec_6015 for the deficiency of dollar_figure for tax_year a notice of filing of petition and right to intervene mandated by rule a was served by respondent on mr elias 115_tc_118 mr elias has not intervened in this case nor was he a witness at trial the sole issue heard at trial was petitioner’s sec_6015 claim for relief generally married taxpayers may elect to file jointly a federal_income_tax return sec_6013 each spouse is jointly and severally liable for the entire tax due sec_6013 a spouse requesting spouse may however seek relief from joint_and_several_liability under sec_6015 or if eligible may seek an allocation of liability under sec_6015 sec_6015 if relief is not available under sec_6015 or c a requesting spouse may seek equitable relief under sec_6015 sec_6015 a prerequisite to granting relief under sec_6015 or c is the existence of a tax_deficiency sec_6015 and c 120_tc_62 consequently if there is no deficiency for the year for which relief is sought relief from joint_and_several_liability is not available under either subsection 120_tc_137 121_tc_73 block v commissioner supra in this case there is a deficiency in tax consequently petitioner can be considered for relief under sec_6015 as well as sec_6015 or f under sec_6015 a taxpayer is entitled to full or apportioned relief from joint_and_several_liability for an understatement_of_tax on a joint_return if among other requirements the taxpayer establishes that he or she did not know and had no reason to know that the other spouse understated the tax on the return sec_6015 in this case the adjustments in the notice_of_deficiency all related to the self-employed business activity of mr elias as an agent for state farm and more specifically the disallowance of certain deductions claimed on the return relating to that activity essentially the disallowed items included expenses for travel meals and entertainment respondent determined upon examination of receipts provided by petitioner that the disallowed expenses included meals petitioner had consumed trips that she took and gasoline all of which respondent determined were personal expenses that were unrelated to mr elias’s insurance agency activity some of the expenses were for family trips to disneyland a popular resort located in california and other personal expenses by petitioner’s stipulation to be bound in mr elias’s case petitioner in effect conceded respondent’s determinations for and the reasons for the disallowance of such items as trade_or_business_expenses although petitioner in this case did not challenge these determinations her contention is that she did not know and had no reason to know that these items had been claimed as trade_or_business_expenses on their joint_return petitioner knew the personal nature of these underlying transactions giving rise to the deficiency in levy v commissioner tcmemo_2005_92 the court held that the standard to be applied in such a situation is whether a reasonably prudent taxpayer under the circumstances of the spouse requesting relief at the time of signing the return could be expected to know that the tax_liability on the return was erroneous or that further investigation was warranted at trial petitioner admitted that she had a college degree in business consequently the court is satisfied that petitioner based on her educational background as well as her own business experience knew or should have known the nature of expenses that could or could not be deducted in determining the net_income of an activity subject_to an income_tax on its net profits moreover the court notes that some of these expenses personally benefited petitioner consequently it would not be inequitable in the court’s view to hold petitioner liable for the tax_deficiency arising from deduction of these personal expenses the court concludes that petitioner is not entitled to relief under sec_6015 the court next addresses whether petitioner is entitled to relief under sec_6015 sec_6015 provides relief from joint liability for spouses either no longer married legally_separated or living separate and apart generally this avenue of relief allows a spouse to elect to be treated as if a separate_return had been filed rowe v commissioner tcmemo_2001_325 sec_6015 places the burden_of_proof with respect to establishing the portion of the deficiency allocable to the electing spouse upon such spouse an election is not valid if the commissioner demonstrates that the electing spouse had actual knowledge of an item giving rise to the deficiency sec_6015 as noted earlier the disallowed expenses in this case related to nonbusiness travel and entertainment_expenses some of which benefited petitioner personally thus if petitioner had filed a separate_return she could not have claimed a deduction for such expenses because they were not incurred_in_a_trade_or_business and were personal the court is satisfied from the record that respondent demonstrated that petitioner had actual knowledge that the expenses claimed as deductions on the joint_return were personal in nature and were not deductible sec_6015 petitioner therefore is not entitled to relief under sec_6015 the final area in which petitioner can be considered for relief is sec_6015 this court has jurisdiction to review the commissioner’s denial of a requesting spouse’s request for equitable relief under sec_6015 to prevail the taxpayer must establish that respondent’s denial of equitable relief under sec_6015 was an abuse_of_discretion washington v commissioner supra pincite 115_tc_183 affd 282_f3d_326 5th cir pursuant to sec_6015 the commissioner has issued guidelines setting out threshold conditions that must be met before a request for relief under sec_6015 can be considered the guidelines that are applicable to this case are set out in revproc_2003_61 sec_4 2003_2_cb_296 this rev_proc is applicable to requests for relief that were pending on date as to which no preliminary determination_letter had been issued as of that date respondent agrees that in this case no preliminary determination_letter had been issued on date and therefore petitioner’s request should have been considered under revproc_2003_61 however in a trial memorandum respondent acknowledged that petitioner’s claim for relief under sec_6015 was considered under revproc_2000_15 sec_4 2000_1_cb_447 and relief was denied on the basis that none of the relevant factors to be considered under revproc_2000_15 weighed in favor of petitioner respondent agrees that revproc_2003_61 includes another factor that is not a factor to be considered under revproc_2000_15 that additional factor in revproc_2003_61 is an additional threshold condition that must be met by the taxpayer before an application_for equitable relief can be considered the income_tax_liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the joint_return the ‘nonrequesting spouse’ unless one of certain other exceptions applies--none of which exists in this case respondent points out that the expense items on the return that were disallowed were personal expenses of both petitioner and her spouse and came within the contemplation of this provision of revproc_2003_61 therefore respondent argues that this requirement of revproc_2003_61 works against petitioner’s entitlement to relief because the expense items in question were for her personal expenses meals she ate trips she took and gasoline purchased for personal_use and therefore constituted a forfeiture of petitioner’s right to be considered for equitable relief under sec_6015 the court agrees with that argument petitioner is not entitled to relief under sec_6015 reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


department of the treasury internal_revenue_service attn mandatory review mc dal commerce street dallas tx tax_exempt_and_government_entities_division number release date uil legend org organization name org address date xx date address address taxpayer_identification_number person to contact id number contact numbers telephone fax certified mail -- return receipt requested dear in a determination_letter dated may 20xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on october 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you have filed taxable returns on forms u s_corporation income_tax return for the years ended december 20xx 20xx 20xx and 20xx with us for future periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely marsha a ramirez director eo examinations department of the treasury internal_revenue_service te_ge eo examinations ormsby station court suite a - stop louisville ky septemter tax_exempt_and_government_entities_division legend org organization name xx date address address org address dear taxpayer_identification_number form s tax_year s ended person to contact id number contact numbers the purpose of this letter is to inform your organization on our findings as of now we have enclosed a copy of our draft report of examination explaining why we believe an adjustment of you organization’s exempt status is necessary if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status you will also be required to file forms for december 20xx 20xx and 20xx these returns can be filed at a later date if you do not agree with our position or have additional information to present please mail all information to the address in the heading of this letter so that we receive it by october 20xx if do not hear from you by october 20xx will issue my final report after issue my final report you will have days from the date the letter is mailed to file an appeal information on this process will be with the final report if required if you have any questions or would like to arrange a telephone conference with my manager please call me at the telephone number listed under the contact information thank you for your cooperation sincerely jason jarvis internal revenue_agent form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 20xx12 and 20xx12 elgend org organization name co-1 accountant accountant co-1 company c04 c02 co3 xx date president poa president poa city city xyz state treasurer treasurer co5 coé6 1st 2nd 3rd 4th 5th 6th companies issue should the tax-exempt status of org org be revoked facts org was granted tax-exempt status as a c business league on may 20xx according to the form_1024 the past present and planned activities state the corporation serves as a trade_association in the independent restaurant industry the corporation provides educational programs and seminars on issues relevant to the independent restaurant industry sample topics for the programs and seminars include improving efficiency maximizing resources marketing effectively and addressing relevant labor issues these activities are conducted by the corporation's officers directors staff and volunteers these activities are held periodically and at various locations throughout the united_states the corporation got off to a very slow start it had almost no activity during 19xx 19xx and early 20xx its program and seminar activities commenced in the spring of 20xx with a regional program held in city xyz the corporation had regional symposiums in 20xx including programs in city xyz city xyz city xyz and city xyz the corporation also publishes a periodic newsletter addressing issues facing the independent restaurant industry the publication is prepared by the corporation's officers directors staff and volunteers the letter that granted org tax-exempt status stated if your sources of support or your purposes character or method of operation change please let us know so we can consider the effect of the change on your exempt status org files a consolidated for all the chapters org is a membership_organization the current membership is made up of approximately restaurants from across america individual restaurants are part of local chapters called originals there are approximately different originals in a message from the president of co-7 titled working together for a common cause march 20xx it stated the overview of org is having an identifiable brand is the fabric that will tie hundreds of independents together co-1 has units by the end of 20xx that is where foresee co-7 with the clout of our pooled marketing resources we will be influencing hundred of thousands of dining decisions and be able to fortify and distinguish our brand as the one savvy consumers seek every time they dine out whether it’s through the website an article someone read in the newspaper or magazine advice from a friend or an attractive brochure the ultimate goal is to fill your seats tonight and every night you open your doors it’s going to work a lot better when we're all working together president the activities of the org include form 886-acrev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 20xx12 and 20xx12 elgend org organization name co-1 accountant accountant co-1 company co4 co3 c02 xx date president president poa poa city city xyz state treasurer treasurer co5 co6 3rp 5st 6th companies e the branding of co-7 to increase the profits of the members the use of the internet and printed material to influence the public to eat at the member restaurants the hiring of outside public relation firms to help promote co-7 selling gift certificates of the member's restaurants one june 20xx a phone conference was conducted treasurer org’s treasurer the revenue agent's questions are numbered and the answers provide by org are listed below treasurer book keeper was also involved on the phone call every exempt_organization is operated differently based off of the material that was provided believe that the primary activity of the organization is the promotion of the co-7 brand the brand is used by the member restaurants as a way to get the name of the member restaurants out to the public the brand name is a way to get people in the doors of the member restaurants the name is marketed on websites advertising rack cards brochures loyalty cards radio telephone etc am correct e yes the basic activities are to market co-7 and use the buying power to lower costs why do restaurants join org e e get people in the doors increase money decrease costs who can use the co-7 trademark e members only what are the advantages of the member restaurants that use the co-7 trademark brand that the public will recognize across the country people will look for your restaurant because of co-7 recognition best practices shared stories from other independent restaurants relationships with other independent restaurants can an independent restaurant use the co-7 trademark without joining the organization e no how do the non-member independent restaurants benefit e there should be no benefit the might benefit very slightly because they are independent a restaurant would be encouraged to join org org markets all of the member restaurants thru the co-7 trademark org operates a website that lists information of all the originals and restaurants the information includes website links and gift certificates according to the information that is provided to prospective members a few of the marketing goals are form 886-a ev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 20xx12 and 20xx12 elgend org organization name co-1 accountant accountant co-1 company c02 co3 c04 xx date president president poa poa city city xyz state treasurer treasurer co5 co6 3rp 7' companies e e create an easily recognizable national brand place advertising that enhances and educates consumers about our brand and our website the two goals of co-7 are more butts in your restaurant's seats more money for you to deposit in the bank at the end of the day the big picture is to have an identifiable brand is the fabric that will tie hundreds of independents together the chapters are strongly encouraged to use the i’m an original theme we have to work on building our brand to the point that the dining-out public makes a conscience effort to seek a restaurant whenever they are dining out some of the activities of the chapters to reach goal more butts in the member restaurant seats include co-1 e e e co-2 e e e e e e co-4 e ads --co-1 in lifestyle magazine promoting independent restaurants and listing members think globally-eat locally theme rack cards - take me listing member restaurants with the name phone number and web address of all co-1 restaurants media cooperation - magazines and newspapers that print lists of local restaurants asked to place a small logo next to member restaurant's name brochure - promotes co-1 restaurants with local map and logo charitable events - co-1 strive to own important non-profit fund raising events that need food service chain restaurants excluded from the event rack cards - be original listing member restaurants with the name phone number and web address of all co-2 restaurants loyalty card - power card customer loyalty program with points redeemable at any original magazine - phone line - dining-in line directing potential customers to co-2 magazine produced by the co-2 and co-2 dining card restaurants brochure - welcome to our fair city tri-fold brochure promoting independent restaurants with address phone number and web address listings magazine - co-3 magazine a twenty-one page publication promoting local flavor area’s unique rack cards - take one listing member restaurants with the name phone number and web address of all restaurants form 886-a ev department of the treasury - internal_revenue_service page -3- form 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 20xx12 and 20xx12 elgend org organization name co-1 accountant accountant co-1 company c02 co4 co3 xx date president poa president poa city city xyz state treasurer treasurer co5 co6 qhp 3rd gth 5th 6th 67th companies co-5 e co-5 e e co-6 e e e e co-7 e ads -all ads include promotion - tuesday promotion diners visit a participating member restaurant for dinner and server presents a form to capture name address phone number and email after more tuesday dinners at different member restaurants diner receives a dollar_figure dining certificate co-5 now has a mailing list with names and has presented dining certificates participating members rack cards - take me listing member restaurants with the name phone number and web address of all co-5 other collateral - concierge book listing all co-5 loyalty card - power card customer loyalty program with points redeemable at any co-6 ads --co-6 ads in radio - saturday morning culinard talk show to promote independent restaurants logo -member restaurants place co-6 logo in their restaurants magazine to promote independent restaurants marketing - retained cap creative a design public relations and branding firm that conducted extensive consumer research to define the originals brand then designed a marketing initiative and media plan based on the results and developed collateral materials dining guide - eighteen page member dining guide featuring half-page ads for each restaurant and map of restaurant locations to achieve goal more money at the end of the day the restaurants band together to create the same buying clout that chains have and negotiate better prices with broad line distributors and other vendors org sells gifts certificates for their member restaurants the sale of gift certificates funds dues by allowing restaurants to sell their gift certificates on line and use the proceeds of the sales to fulfill their dues obligations this is an effective model for the association because it passes the cost of dues out of cash_flow each restaurant makes an agreed upon number of gift certificates available to to sell on line at an agreed discounted price the gift certificates are discounted to insure quick and complete sales each chapter is empowered to set the discount rate at their gift certificates will be sold information documents requests idrs were sent to org on 20xx 20xx 20xx and 20xx as of the writing of this report org has failed to produce some of the requested documents for tye 20xx12 gross_receipts reported on the form_990 were dollar_figure for tye 20xx12 the gross_receipts reported on the form_990 were dollar_figure the form_990 was filed only represents the financial data of the national chapter the correct gross_receipts are unknown form 886-aev department of the treasury - internal_revenue_service page -4- form 886a name of taxpayer schedule no ot exhibit year period ended explanation of items department of the treasury - internal_revenue_service org elgend org organization name cco-1 accountant accountant co-1 company co4 co2 co3 xx date president president poa poa city city xyz state treasurer treasurer co5 co6 25p 3r 4th sth eth 7th companies 20xx12 20xx12 and 20xx12 no form_990 was filed for tye 20xx12 law sec_501 -1 of the code states a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit it is an organization of the same general class as a chamber of commerce or board_of trade thus its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons an organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit even though the business is conducted on a cooperative basis or produces only sufficient income to be self sustaining is not a business league an association engaged in furnishing information to prospective investors to enable them to make sound investments is not a business league since its activities do not further any common business_interest even though all of its income is devoted to the purpose stated a stock or commodity exchange is not a business league a chamber of commerce or a board_of trade within the meaning of sec_501 and is not exempt from tax organizations otherwise exempt from tax under this section are taxable upon their unrelated_business_taxable_income see part il sec_511 and following subchapter_f chapter of the code and the regulations thereunder revrul_68_182 1968_1_cb_263 states it is the position of the service that organizations promoting a single brand or product within a line_of_business do not qualify for exemption from federal_income_tax under sec_501 of the code see 71_f2d_142 ct_d c b xill-2 revrul_70_80 1970_1_cb_130 held that a nonprofit trade_association whose principal activity is the promotion of its members’ products under the association’s registered trademark does not qualify for exemption under sec_501 of the code revrul_66_338 1966_2_cb_226 denied exemption to an organization that as part of its activities sells supplies and equipment to its members provision of supplies equipment and additional services provides members with a convenience and economy in the conduct of their businesses as such it is a business of a kind ordinarily carried on for profit in 734_f2d_71 cir the court noted that a business league must not only improve the conditions of a line_of_business but must do so in a way different from simply supplying products or services to its individual members sec_1_6033-2 of the internal tax regulation provides in part that every organization exempt from tax shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status failure to comply with our request for information could result in the loss of your tax exempt status sec_6652 of the internal_revenue_code provides for a penalty of dollar_figure for each day the return is late the maximum penalty for any one return is the lesser_of dollar_figure or of the gross_receipts of the organization for the year if gross_receipts exceed dollar_figure for the year the penalty is increased to dollar_figure form 886-acev department of the treasury - internal_revenue_service page -5- form_886 a name of taxpayer schedule no ot exhibit year period ended explanation of items department of the treasury - internal_revenue_service org 20xx12 20xx12 and 20xx12 elgend org organization name co-1 accountant accountant co-1 company co4 c02 co3 president poa co6 co5 xx date city city xyz state treasurer treasurer president poa 2np 3rp 4th 5th gth 7th companies per day with a maximum penalty of dollar_figure this penalty may be abated if reasonable_cause for the late filing has been established the penalty may also be charged if the organization files an incomplete or incorrect return the use of a paid prepare does not relieve the organization of its responsibility to file a complete and accurate return taxpayer's position on 20xx org’s poa poa stated that the organization may agree with the revocation on 20xx treasurer requested that the irs takes no further action until the board_of directors meeting on september 20xx org agreed to the revocation and signed a form 6018-a on 20xx on 20xx the form was faxed to the irs org also mailed the original copy government’s position the brand name co-7 is promoted by the org in a way that is intended to give members of the association a competitive advantage over others in the same industry org failed to meet the line_of_business test the activities of org only served a segment of the restaurant industry the primary activity of org is the promotion of the brand name co-7 and encouraging members of the public to dine at the member restaurants the activities of org are not consistent with the activities listed on their application_for exemption org provided numerous publications that prove the primary activity is the promotion of the member restaurants and co-7 conclusion the primary activity of org is the promotion of the member restaurants this is accomplished through the co-7 trademark and other promotional activities an overwhelming majority of the activities of org is providing services to its members org does not qualify for exemption from federal_income_tax as a business league under sec_501 the tax-exempt status of org will be revoked effective january 20xx org is required to file forms for 20xx 20xx and 20xx by december 20xx form 886-a rev department of the treasury - internal_revenue_service page -6-


t c memo united_states tax_court paul arthur zipp petitioner v commissioner of internal revenue respondent docket no filed date paul arthur zipp pro_se shirley m francis for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in petitioner's federal_income_tax and fraud penalties for taxable years and as follows year deficiency dollar_figure penalty sec_6663 dollar_figure big_number big_number big_number big_number as an alternate position respondent determined that if the fraud_penalty does not apply petitioner is liable for the accuracy-related_penalty under sec_6662 for negligence or substantial_understatement of tax for each of the years in issue all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated after concessions by the parties the issues to be decided are as follows whether petitioner failed to report gross_receipts of dollar_figure for dollar_figure for and dollar_figure for whether petitioner is entitled to offsets and business deductions in excess of those allowed by respondent for the taxable_year whether petitioner is entitled to an embezzlement loss deduction for the taxable_year whether petitioner is liable for the fraud_penalty under sec_6663 for the and taxable years 1petitioner concedes that he is not entitled to the alimony deduction he claimed on his income_tax returns for the taxable years and and to business deductions for payments of dollar_figure and dollar_figure made to julie anne stanbery during and whether the assessment of a deficiency for the taxable_year is barred by the statutory period of limitations whether petitioner is liable for the accuracy-related_penalty under sec_6662 for the and taxable years findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner is a licensed radiologist who resided in roseburg oregon when the petition in this case was filed petitioner received his bachelor's degree from the university of california at santa barbara and his medical degree from the university of california at san francisco he completed an internship and residency at the university of colorado medical center in denver after completing his residency petitioner served in the u s navy for years from until petitioner was chief of the radiology department at the columbia district hospital in st helens oregon and also worked in the hospital's emergency room petitioner incorporated his practice in st helens petitioner's accountant recommended that he incorporate the practice so that petitioner could keep his business separate from his personal affairs and maximize his pension contributions from until petitioner practiced radiology in seattle washington in date petitioner began practicing at the highline community hospital in burien washington as chief of radiology on average petitioner worked to hours a day at the highline community hospital and provided services to patients a day over big_number per year petitioner provided patients a broad range of services including plain film analysis mammography intravenous pyelography computerized tomography ultrasound nuclear medicine magnetic resonance imaging and interventional radiology an employee of the hospital would screen a patient who came to the hospital and would take the patient's name address and insurance information the patient would then go to the department with a request slip indicating the procedure requested by the patient's doctor the request slip had three parts the last of which was a pink slip that petitioner used for billing purposes the highline community hospital billed the radiology patients for_the_use_of its equipment and petitioner billed the patients separately for his professional services after petitioner performed the radiology procedure the fee for petitioner's services was marked on the pink slip the pink slips were then batched daily and sent by courier to petitioner's billing service petitioner did not maintain a log of the information on the pink slips but relied on the billing services to accurately account for the billing petitioner used three unrelated billing services to collect his fees from patients petitioner used professional financial services from date until the end of that year he used hagy hagy until date and he used lynx medical from date until date petitioner resigned from the highline community hospital effective date and used professional financial services to collect the residual receivables remaining after date after petitioner retired he moved to roseburg oregon the billing services billed petitioner's patients and their insurance carriers collected the payments and deposited the payments into petitioner's main bank account at first interstate bank the main account for these services the billing services billed petitioner a percentage of the receivables collected usually percent to percent the billing services collected approximately percent of the gross charges primarily because of disallowances by insurance carriers the billing services sent petitioner lengthy monthly statements of his accounts occasionally a billing service would receive an overpayment resulting from payments from both the patient and the patient's insurance carrier petitioner established a separate refund account at first interstate bank the refund account to handle the payments refunded to patients petitioner would transfer funds from the main account to the refund account and his friend julie anne stanbery ms stanbery would then write a check from the refund account to reimburse the patient for the overpayment by late petitioner agreed to pay the hospital up to dollar_figure per month for clerical and other services petitioner also paid other radiologists for professional services they rendered in the radiology department of the highline community hospital he treated the radiologists as independent contractors and filed forms with the internal_revenue_service irs to report the payments he made to them for the taxable years and he deducted the payments made to other radiologists as an outside services expense on the schedules c attached to his income_tax returns during the taxable years and petitioner wrote checks to ms stanbery totaling dollar_figure and dollar_figure respectively on the schedules c attached to his income_tax returns for those years petitioner deducted the amounts paid to ms stanbery as business_expenses for outside services petitioner however did not file a form_w-2 or a form_1099 for the amount_paid to ms stanbery for either year petitioner did not employ a bookkeeper or use a bookkeeping system petitioner's accountant has prepared petitioner's tax returns since the mid-1970's and prepared petitioner's federal_income_tax returns and washington state excise_tax returns for and for years prior to the accountant prepared the returns using the bank statements and canceled checks from petitioner's main bank account petitioner also provided the accountant with forms petitioner received for interest and dividends petitioner wrote checks on the main account for personal as well as business purposes using the bank statements and checks the accountant made assumptions as to which payments were deductible business_expenses petitioner did not provide the accountant with bank statements and canceled checks from the refund account or the monthly statements from the billing services from until petitioner paid his former wife child_support of dollar_figure per month and alimony of dollar_figure per month in petitioner and his former wife agreed that the entire payment of dollar_figure per month would be child_support during and petitioner did not pay alimony to his former wife the accountant however deducted alimony payments on the and returns because petitioner had taken the deductions in prior years in preparing petitioner's return the accountant erroneously deducted dollar_figure from gross_receipts the accountant reduced petitioner's gross_receipts by the amounts transferred from the main account to the refund account the accountant thought that checks with the notation of rent were for petitioner's payment of rent to the hospital those rent payments however were for petitioner's personal_residence on the schedule c attached to his return petitioner reported gross_income of dollar_figure from his business computed by reducing gross_receipts of dollar_figure by dollar_figure for returns and allowances on the schedule c petitioner reported total business_expenses of dollar_figure and a net profit of dollar_figure on petitioner's return in addition to dollar_figure of net profit from his practice petitioner reported dollar_figure of interest_income of which dollar_figure was from first interstate bank and dollar_figure of dividend income in computing petitioner's washington state excise_tax the accountant did not use petitioner's bank statements although he had those records instead the accountant estimated petitioner's state excise_tax on the basis of petitioner's income taking into account the fact that petitioner 2the accountant erroneously assumed that interest_paid to petitioner by james associates had been deposited into the business account the accountant also made an adjustment of dollar_figure but could not recall to what transaction the adjustment related effectively stopped practicing as of the end of date in preparing petitioner's federal_income_tax return the accountant used the washington state excise_tax amounts to determine gross_receipts and petitioner's checks to compute expenses on the schedule c attached to his return petitioner reported gross_receipts of dollar_figure no returns or allowances and dollar_figure of total business_expenses resulting in a net profit of dollar_figure from his business during petitioner used currency in the following amounts to purchase krugerrands from clackamas gold silver inc of clackamas oregon that were reported to the irs as cash transactions date total purchase currency dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure in early as a result of the reported cash transactions with clackamas gold silver the irs began an audit of petitioner's return petitioner requested that the audit be conducted in his accountant's office in port angeles washington where the records were located in preparation for the audit and to verify the accuracy of the return the accountant constructed a spreadsheet for in preparing the spreadsheet however the accountant made errors that resulted in an understatement of gross_receipts in excess of almost dollar_figure because petitioner's return was under audit the accountant advised petitioner not to file his return until the last possible date petitioner filed an application_for an automatic_extension and filed his return in date in preparing petitioner's return the accountant used forms and handwritten notes from petitioner to compute petitioner's income the accountant did not look at petitioner's bank statements and canceled checks on the schedule c attached to petitioner's return petitioner reported dollar_figure of gross_receipts no refunds dollar_figure total expenses and net profit of dollar_figure petitioner did not deduct any amount on the return for fees paid to the billing services in date the irs agent referred petitioner's case to the criminal_investigation_division cid in date the cid withdrew from the case because petitioner's accountant accepted responsibility for the omissions and errors in petitioner's returns respondent reconstructed petitioner's income for the taxable years and using the bank_deposits method the reconstruction report shows deposits of income into four of petitioner's bank accounts the main account the refund account the first interstate bank roseburg account fib roseburg account and the south umpqua bank account sub account transfers between petitioner's bank accounts adjustments and unreported gross_income for and as follows bank account main account total deposits transfers refunds charge backs interest_income refund account total deposits transfers refunds charge backs interest_income fib roseburg total deposits transfers income sub roseburg total deposits transfers income dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure -0- -0- -0- -0 -0 dollar_figure dollar_figure dollar_figure big_number big_number big_number -0- -0- -0- -0- -0- -0- -0- -0- -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- big_number big_number -0- dollar_figure dollar_figure -0- dollar_figure -0- -0- big_number -0- -0- dollar_figure total income reported gross_income unreported income dollar_figure dollar_figure dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure in the notice_of_deficiency respondent determined that petitioner had unreported income during and as follows bank account main account refund account fib roseburg sub roseburg total dollar_figure big_number -0- -0- big_number dollar_figure big_number -0- big_number dollar_figure -0- big_number big_number 1big_number respondent conceded before trial that the adjustment for unreported income for should be dollar_figure rather than dollar_figure as determined in the notice_of_deficiency respondent made additional concessions on brief regarding as discussed in the opinion section infra in the notice_of_deficiency respondent disallowed deductions of dollar_figure for and that petitioner claimed for alimony payments deductions of dollar_figure for and dollar_figure for of which dollar_figure in and dollar_figure in was paid to ms stanbery that petitioner claimed as outside business_expenses for those years and deductions of dollar_figure for and dollar_figure for that petitioner claimed as business rental expense respondent also disallowed deductions for dollar_figure that petitioner claimed for returns and allowances in dollar_figure of business_expenses claimed in that petitioner had previously claimed in and dollar_figure for unsubstantiated business_expenses claimed in opinion issue i whether petitioner failed to report gross_receipts of dollar_figure for dollar_figure for and dollar_figure for a taxpayer is required to maintain records sufficient to show whether or not he is liable for federal income taxes sec_6001 where a taxpayer has failed to maintain adequate_records respondent may reconstruct the taxpayer's income by any reasonable method that clearly reflects income sec_446 348_us_121 the bank_deposits method has long been approved by the courts as a method for computing income 64_tc_651 affd 566_f2d_2 6th cir petitioner bears the burden of proving that respondent's determinations including unreported income are incorrect rule a 70_tc_1057 in the notice_of_deficiency respondent determined that petitioner failed to report dollar_figure of gross_receipts from his business practice in dollar_figure in and dollar_figure in for the and taxable years petitioner has not contested that the deposits into the accounts were income from his medical practice therefore we find that petitioner failed to report dollar_figure of gross_receipts from his business for and dollar_figure for for the taxable_year respondent concedes that petitioner's income for does not include dollar_figure deposited in his sub account and that the unreported income from petitioner's deposits in the fib roseburg account is dollar_figure as set forth in the bank_deposits method rather than the dollar_figure determined in the notice_of_deficiency on the basis of respondent's concessions and petitioner's failure to show that any of the deposits were not income we find petitioner failed to report dollar_figure of gross_receipts in dollar_figure from the main account and dollar_figure from the fib roseburg account issue ii whether petitioner is entitled to offsets and business deductions in excess of those allowed by respondent for the taxable_year respondent acknowledges that the determination for has not taken into account any offsetting business_expenses petitioner contends that he is entitled to offsets or deductions totaling dollar_figure for amounts refunded to patients amounts paid to the billing service state license fee and miscellaneous expenses charged to his visa card petitioner has the burden of establishing that he is entitled to such offsets or deductions rule a 292_us_435 this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir a taxpayer must maintain records sufficient to permit verification of income and expenses sec_6001 sec_1_6001-1 income_tax regs that a taxpayer cannot prove the exact amount of an otherwise deductible item however is not necessarily fatal unless precluded by sec_274 we may estimate the amount of such an expense and allow the deduction for the estimated amount 39_f2d_540 2d cir the estimate however must have some reasonable evidentiary basis 85_tc_731 with respect to petitioner's claim that his income should be reduced for amounts he transferred into the refund account such transfers are not payments to his patients petitioner has provided no evidence of the amount of payments made from the refund account to his patients on the basis of the evidence in the record we are unable to reasonably estimate the amount of such payments petitioner paid the billing services between and percent of the amounts collected during the billing service collected a total of dollar_figure dollar_figure deposited into petitioner's main bank account plus dollar_figure deposited into his fib roseburg account on his return petitioner did not deduct any amount for the billing fees he paid we will allow petitioner a dollar_figure deduction percent of the amounts collected for billing fees on his return petitioner reported dollar_figure for supplies and dollar_figure for licenses and taxes petitioner stopped practicing medicine by and has not shown that the state license fee and miscellaneous expenses exceed the amounts deducted on his return issue iii whether petitioner is entitled to an embezzlement loss deduction for the taxable_year petitioner concedes the adjustments for alimony the portion of the adjustment related to payments to ms stanbery and the adjustments for the rental expenses 3petitioner has made an advance_payment of tax for the adjustment related to the payments made to ms stanbery for the taxable_year petitioner has offered no evidence with respect to the expenses disallowed by respondent petitioner however claims that between dollar_figure and dollar_figure was embezzled from his accounts according to petitioner employees of the billing service and the bank conspired to embezzle the funds petitioner asserts that the billing service employee improperly deposited funds collected from his patients to his refund account rather than the main account the funds were then transferred by a bank employee to petitioner's columbia daily income investment account and later a check for dollar_figure from the investment account was made payable to clackamas gold silver petitioner also asserts that clackamas gold silver has no record of the transaction ms stanbery testified at the trial in this case no one asked her about these transactions petitioner did not call any witnesses from the billing service the bank or clackamas gold silver to testify at the trial in this case sec_165 allows a deduction for a theft_loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 c sec_165 provides that the deduction for such a loss is treated as sustained in the taxable_year in which the taxpayer discovers the loss thus a loss arising from theft is not deductible in the taxable_year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss sec_1_165-8 income_tax regs petitioner testified that he did not learn of the loss until bank records for the refund account were obtained by the irs in the criminal investigation the criminal investigation did not begin until date we need not decide whether the purported loss occurred because for purposes of sec_165 the loss if any was sustained in and petitioner is not entitled to a deduction for the loss in the taxable_year issue iv whether petitioner is liable for the fraud_penalty under sec_6663 for the and taxable years respondent determined that petitioner is liable for an addition_to_tax for fraud under sec_6663 for each of the years at issue sec_6663 provides if any part of any underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud sec_6663 provides that if the secretary establishes that any portion of the underpayment is due to fraud the entire underpayment is treated as fraudulent except for the portion the taxpayer proves is not attributable to fraud fraud is intentional wrongdoing on the part of the taxpayer with specific intent to avoid tax known to be owing 796_f2d_303 9th cir affg tcmemo_1984_601 80_tc_1111 the commissioner must prove fraud by clear_and_convincing evidence sec_7454 rule b where fraud is determined for more than year the commissioner's burden applies individually to each year barbuto v commissioner tcmemo_1991_342 citing 25_tc_940 affd per curiam sub nom 250_f2d_798 2d cir to satisfy the burden_of_proof the commissioner must show two things an underpayment exists and the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 94_tc_654 92_tc_661 the first element requires respondent to establish the existence of an underpayment_of_tax to prove the underpayment respondent cannot rely solely on petitioner's failure to discharge his burden of proving error in respondent's determination of deficiencies 53_tc_96 respondent may prove an underpayment by proving a likely source of the unreported income holland v united_states u s pincite or where the taxpayer alleges a nontaxable source by disproving the specific nontaxable source so alleged 355_us_595 through the bank_deposits method respondent has proven petitioner received income from his practice of radiology that he did not report on his federal_income_tax returns for each of the years at issue additionally petitioner took deductions for alimony to his former wife and payments to ms stanbery to which he was not entitled the underreported income and improper deductions would result in an underpayment of petitioner's taxes for each of the years in issue therefore we find that respondent has satisfied the burden_of_proof regarding the first element the second element requires respondent to prove fraudulent intent on the part of petitioner fraud will never be presumed 743_f2d_309 5th cir affg tcmemo_1984_25 55_tc_85 fraud however may be proved by circumstantial evidence because direct proof of a taxpayer's intent is rarely available the existence of fraud is a question of fact to be determined on the basis of the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir courts have developed various factors or badges that tend to establish fraud 91_tc_874 although the list is nonexclusive some of the factors are a pattern of understatement of income inadequate records concealment of assets income from illegal activities attempting to conceal illegal activities implausible or inconsistent explanations of behavior dealing in cash failure to cooperate with the internal_revenue_service and failure_to_file tax returns bradford v commissioner supra pincite 61_tc_249 affd 519_f2d_1121 5th cir petitioner acknowledges that he was irresponsible and negligent in the manner in which he handled his business affairs and by his failure to review his returns for the years in issue but he contends that he did not intend to evade taxes known to be owing petitioner contends that the understatement of income for was caused by a combination of the increase in the volume of procedures petitioner performed at the highline community hospital the inadequate system previously set in place and used by his accountant and erroneous assumptions made by the accountant regarding deductions for alimony payment of rent and payments to ms stanbery the understatement of income for was caused by the accountant's improper use of income reported for the washington state excise_tax which the accountant had estimated using petitioner's income and adjusted on the assumption petitioner stopped practicing medicine at the end of date although the accountant may have told petitioner that he was estimating the excise_tax there is no evidence that the accountant told petitioner that he had prepared petitioner's federal_income_tax returns using the estimated excise_tax the accountant prepared petitioner's based on form_1099 and 4petitioner reported taxable_income on his returns of approximately dollar_figure in dollar_figure in dollar_figure in and dollar_figure in petitioner's notes the accountant had petitioner's bank statements and canceled checks for and but he did not bother to use them in preparing petitioner's returns for those years petitioner admits that his bookkeeping was abhorrent the method petitioner used however was established by his accountant and used by the accountant for many years the accountant used petitioner's main bank statements and canceled checks to prepare petitioner's returns petitioner provided those records to the irs during the audit of his return although the billing services provided petitioner with monthly statements of his patients' receivables and collections petitioner did not keep those records respondent has not proven however that petitioner destroyed or otherwise failed to maintain those records in order to evade tax petitioner purchased gold krugerrands with substantial amounts of cash during the irs agent testified that he assumed the cash came from petitioner's safe-deposit box although the irs agent never determined where the cash came from the notice_of_deficiency did not include an increase in petitioner's income attributable to the cash payments for the gold there is no evidence that any of petitioner's patients paid in cash petitioner's fees were collected by his billing service and payments were deposited into petitioner's checking account based on all the evidence we find that respondent has failed to prove by clear_and_convincing evidence that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes we hold that petitioner is not liable for the fraud_penalty under sec_6663 for any of the years at issue issue v whether the assessment and collection of a deficiency for the taxable_year is barred by the statute_of_limitations petitioner asserts that the 3-year period of limitations bars respondent's assessment of the deficiency for the taxable_year respondent contends that petitioner filed a false_or_fraudulent_return for the year and therefore under sec_6501 the tax may be assessed at any time since we have found no fraud the sec_6501 exception to the 3-year period of limitations does not apply respondent alternatively contends that sec_6501 applies to extend the limitations_period for the taxable_year to years petitioner concedes that the notice_of_deficiency was issued within the 6-year period sec_6501 provides that if the taxpayer omits_from_gross_income an amount properly includible therein which is in excess of percent of the amount of gross_income stated in the return the tax may be assessed at any time within years after the return was filed for purposes of the 6-year limitations_period in the case of a trade_or_business the term gross_income means the total of the amounts received from the sale of services prior to diminution by the cost of such services sec_6501 for the taxable_year petitioner reported gross_receipts of dollar_figure from his practice plus dollar_figure of interest_income and dollar_figure of dividend income thus for purposes of sec_6501 petitioner reported dollar_figure of gross_income on his return twenty-five percent of that amount is dollar_figure petitioner failed to report dollar_figure of gross_receipts from his practice which is in excess of percent of the gross_income reported on the return if petitioner had suffered an embezzlement loss the loss would not reduce his gross_income for purposes of the 6-year limitations_period sec_6501 therefore the 6-year period of limitations under sec_6501 applies and respondent is not barred from assessing or collecting the deficiency in tax for the taxable_year issue vi whether petitioner is liable for the accuracy-related_penalty under sec_6662 for the and taxable years in the notice_of_deficiency respondent determined that if the fraud_penalty does not apply petitioner is liable for the accuracy-related_penalty under sec_6662 for negligence or substantial_understatement of tax for each of the years in issue petitioner admitted that he was negligent for the years at issue accordingly respondent's determination is sustained for each of the taxable years at issue to reflect the foregoing decision will be entered under rule


department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date of f i c e of c h i ef c ou n sel number info release date conex-118073-09 uil the honorable susan collins united_states senate washington dc attention ------------------------- dear senator collins i am responding to your inquiry dated date on behalf of your constituents --- ---- and ------ ---------------- ------ ----------- a retired federal employee asked about the recently enacted dollar_figure credit for certain government retirees specifically she believes requiring retired federal employees to file a tax_return before they can receive the credit is unfair the american_recovery_and_reinvestment_act_of_2009 the act provides a special dollar_figure credit for certain government retirees and sets forth the eligibility requirements for receiving the credit sec_2202 of the act only individuals who include their social_security account number on their tax_return are eligible to receive the credit sec_2202 of the act consequently congress would need to change the law for an individual to claim the credit other than by filing a tax_return please call --------------------at ---------------------or me at ---------------------if you have further questions sincerely george j blaine associate chief_counsel income_tax accounting


internal_revenue_service number release date index number ---------------------- ----------------------------------- ------------------------------ ------------------------------------------------------------ ---------------- --------------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------ telephone number --------------------- refer reply to cc corp b05 plr-129043-08 date date ty ------- fcorp1 fcorp2 ---------------------------------------------------------------------------------------- -------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------------------------------------ old common parent ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------- new common parent ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------ taxpayer sub1 sub2 ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- --------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- plr-129043-08 -------------------------- tax professionals ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------------------------------------------------ date1 date2 date3 year1 year2 year3 x dollar_figurey ------------------- -------------------------- --------------------- ----------------------------------- -------------------------------------- ------------------------------------- --- ---------------- dear ----------------- this letter responds to a letter dated date requesting on behalf of taxpayer an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for taxpayer to file an election under sec_1_1502-21 of the income_tax regulations hereinafter referred to as the election to relinquish the entire carryback period for the consolidated_net_operating_loss cnol of the consolidated_group of which taxpayer was the common parent for the short taxable_year ending date3 additional information was received in subsequent correspondence dated july november and date the material information is summarized below prior to and including year1 fcorp1 a foreign_corporation wholly owned old common parent a u s_corporation and old common parent owned directly and indirectly more than eighty percent of the outstanding_stock of taxpayer at all times prior to and including year1 taxpayer and its lower-tier subsidiaries joined old common parent in the filing of a u s consolidated tax_return based on a calendar_year plr-129043-08 on or about date1 taxpayer issued additional shares to employees that caused old common parent’s ownership_interest in taxpayer to be less than that required for continuing to file a u s consolidated_return as a result of the stock issuance taxpayer and its lower-tier subsidiaries became a separate u s consolidated_group with taxpayer as the common parent on date2 sub1 and sub2 a separate consolidated_group became members of taxpayer’s consolidated_group after taxpayer acquired stock of the common parent sub1 taxpayer filed a separate short_period consolidated_return for year2 on date3 all of the issued and outstanding_stock of taxpayer was acquired by new common parent new common parent is owned x percent by fcorp2 a foreign_corporation and has its own lower-tier subsidiaries that prior to date3 joined in the filing of a u s consolidated tax_return with new common parent taxpayer as the common parent of its group filed a second separate short_period consolidated_return for year3 that ended on date3 and on which a dollar_figurey cnol was reported a portion of the cnol was attributable to sub2 taxpayer intended to relinquish the carryback period for its consolidated group's cnol on its tax_return for the taxable_year ending date3 however for various reasons a valid election was not filed subsequent to taxpayer filing the year3 return it was discovered that a valid election had not been filed thereafter this request was submitted under sec_301_9100-3 for an extension of time to file a valid election the period of limitations on assessments under sec_6501 of the internal_revenue_code has not expired for the taxable_year for which the election should have been filed or for any subsequent taxable_year taxpayer represents that the consolidated_group of which it was the common parent for the tax_year that ended date3 has not and will not carry any portion of the cnol back to a prior consolidated_return_year of the taxpayer consolidated_group taxpayer also represents no member of the consolidated_group of which taxpayer was the common parent for the tax_year that ended date3 other than sub1and sub2 had a separate_return_year within the meaning of sec_1_1502-1 at any time during the carryback period other than a separate_return_year in which it was a member of the old common parent’s consolidated_group taxpayer further represents that a portion of the cnol for the tax_year that ended date3 was attributable to sub2 but that none was attributable to sub1 sub1 as the common parent for sub2 represents that none of the cnol for the tax_year that ended date3 that was attributable to sub2 has been carried back or will be carried back to offset income of the sub1 consolidated_group finally old common parent represents that it has not and will not deduct any portion of any cnol sustained by taxpayer’s consolidated_group for the tax_year that ended date3 sec_1_1502-21 provides that a consolidated_group may elect to relinquish the plr-129043-08 carryback period with respect to a cnol for any consolidated_return_year the election is made in a separate statement entitled this is an election under sec_1_1502-21 to waive the entire carryback period pursuant to sec_172 for the insert consolidated_return_year cnols of the consolidated_group of which insert name and employer_identification_number of common parent is the common parent sec_1_1502-21 provides that the statement must be filed with the group's income_tax return for the consolidated_return_year in which the cnol arises under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election see sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 b i therefore the commissioner has discretionary authority under sec_301 to grant an extension of time for taxpayer to file the election provided taxpayer shows that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted on behalf of taxpayer and by tax professionals explain the circumstances that resulted in the failure to timely file the election the information establishes that taxpayer reasonably relied on a qualified_tax professional who failed to make or advise taxpayer to make a valid election and that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that taxpayer has shown that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-3 until forty-five days from the date on this letter for taxpayer to file the election plr-129043-08 the above extension of time is conditioned on the taxpayer's consolidated group's tax_liability and the tax_liability of any consolidated_group of which a member of taxpayer's consolidated_group becomes a member if any being not lower in the aggregate for all years to which the election applies and all subsequent years than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the amount of tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the amount of tax_liability is lower see sec_301_9100-3 taxpayer should file the election in accordance with sec_1_1502-21 taxpayer's return must be amended to attach the election statement required by sec_1 b i a copy of this letter should be attached to the election statement alternatively if taxpayer files its amended_return electronically taxpayer may satisfy this requirement by attaching to the return a statement that provides the date and control number plr-129043-08 of this ruling letter caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any matter or item discussed or referenced in this letter in addition we express no opinion as to the tax effects or any other tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by taxpayer tax professionals sub1 and old common parent however the appropriate service office should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-129043-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _ken cohen________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date vil contact person identification_number telephone number employer_identification_number i w_i m o w d u o i w o b n b d u o n x _ - this is in response to your fetter dated date in which you requested certain rulings with respect to sec_512 of the internal_revenue_code code background according to your ruling_request you are an exempt_organization under sec_501 of the code you are a social and recreational club located in town formed for the purpose of outdoor recreation you have been operated continuously as a social_club for several decades being recognized as exempt for most of that time you have annually filed your form_990 with a fiscal_year beginning date you were formed for the primary purpose of providing space and activities for social interaction among families and enjoying outdoor recreation throughout hundreds of acres of woodland and waterways your members enjoy hiking mountain and road biking trail running cross- country skiing snow shoeing horseback riding sailing swimming canoeing and kayaking ice skating tennis field sports archery fishing and trap shooting your facilities currently include two lodges six tennis courts playing fields a stable a trap range a boathouse picnic areas a skating house clubhouse and a waterfront snack bar there is a well developed system of trails that run throughout your property that were originally developed within your first decade of operations and are continuously maintained by members these trails which consist of a primary system and many connector trails have various uses but many are dedicated to specific uses such as horseback riding hiking or mountain biking one central feature of your property is a sixty acre lake used for recreation and forbidden to power boats your land also holds the head waters to this lake as well as one other smaller pond your land includes an area of approximately x1 acres which constitutes a little more than a quarter of your land in the northwest portion of your property known as forest your club has owned this land since its inception your members use the land for many activities including hiking skiing horseback riding snow shoeing camping picnicking running mountain biking and general enjoyment included on this land is the tallest point on your property which is a popular destination for hiking and picnicking as well as two prominent trails other enjoyable features include an intact root cellar a cliff for rope climbing and a cave activities occurring on forest are enjoyed by members throughout the year on date2 you entered into an agreement with department a city department of environmental protection for a conservation_easement attaching to forest department is interested in an easement attaching to this property since forest contains a watershed leading to one of the reservoirs used by the residents of city after department has conducted its due diligence and appropriately surveyed the land you will close on date3 department will pay approximately x2 for the easement to prevent pollution of water running through or collecting on forest as part of the easement you have agreed that you will not construct new paved roads create new_building envelopes with subsurface sewage treatment systems paved surfaces or wells commercially mine gravel sand shale or bluestone of more than x3 square feet or store bury or dispose_of hazardous materials designated by local state or federal regulations or dispose_of cars trash sewage or uncomposted animal waste furthermore the easement restricts your ability to farm build and remove timber though it does not remove those options entirely additionally department will have the right to enter the land for inspections in order to monitor your use of the land the easement will run with the land in perpetuity thus restricting any future sale of the land your members can and will continue to use the land for all of your traditional recreational activities such as hiking mountain biking and horseback riding you decided to enter the agreement with department so that you could raise capital to demolish and rebuild one of your two lodges the lodge was constructed not long after your inception and has reached the end of its usable life you represented that you are committed to using all of the funds earned through the sale of the easement in the demolition and construction of the new lodge within the statutory period this lodge is located at the center of your property near many of your other buildings tennis courts the central athletic field the largest playground and the dining room it also contains your administrative offices meeting and map rooms tennis office and shop locker rooms and mail rooms due to its location this lodge serves as a natural meeting point for your members and is the starting point for many of your guided hikes and other tours rulings requested you request a ruling that the gain on the sale of the conservation_easement approximately x2 given your nominal basis in the property is exempt from tax under code sec_512 provided that the proceeds are reinvested entirely on property to be used in your exempt social and recreational function within the period beginning one year prior to the sale and concluding three years after the sale law sec_512 of the code provides that in the case of an organization described in c the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income sec_512 of the code provides that if property used directly in the performance of the exempt_function of an organization described in c is sold by such organization and within a period beginning year before the date of such sale and ending years after such date other_property is purchased and used by such organization directly in the performance of its exempt_function then gain from such sale shall be recognized only to the extent that the sales_price exceeds the cost of purchasing the other_property in 980_f2d_1409 cir the court determined that the statute speaks in terms of use rather than intent therefore the tax_court correctly observed that the club's various plans for the land were irrelevant the analysis must concentrate on the ways in which the westside property was or was not ‘used directly ’ this process entails factual findings as to the activities that occurred on tracts a and b of the westside property and legal conclusions as to whether those activities constituted sufficient recreational uses by the club in 84_tc_756 the court interpreted organization’s sale price to mean the amount_realized reduced by the aggregate of the expenses for work performed on the old property to assist in its sale when discussing use of the funds to pay debts of the organization and refund money to members the court stated by discharging the indebtedness on its loan and by currently refunding the assessment which its membership previously had agreed was refundable only upon death or resignation from the club petitioner did not ‘merely reinvest’ its funds from the land sale in other types of assets in the language of the committee report funds were ‘withdrawn for gain by the members of the organization ‘ who benefited through decrease in petitioner's debt and return of the assessment petitioner's gain therefore constitutes unrelated_business_taxable_income additionally the court provides an example of an allowable transaction stating where a social_club sells its clubhouse and uses the entire proceeds to build or purchase a larger clubhouse the gain on the sale will not be taxed if the proceeds are reinvested in the new clubhouse within three years id pincite citing s rept 1969_3_cb_423 in deer park country club v commissioner 70_tcm_1445 the court concludes that the plain and ordinary meaning of the phrase used directly in the performance of the exempt_function of an organization as set forth in sec_512 connotes an exempt organization's use of assets or property that is both actual and direct in relation to the performance of its exempt_function given petitioner's concession that no part of the 8-acre tract on which the homesites are situated was ever physically used by petitioner for recreational activities it follows that the gain realized on the sale of the homesites does not qualify for nonrecognition under sec_512 but rather is subject_to the unrelated_business_income_tax analysis you have requested a ruling that gain from the sale of a conservation_easement will not be taxable_income if reinvested in a lodge used by your members sec_512 of the code provides special rules defining taxable_income for organizations described in c specifically gains from the sale of property which has been used for the exempt_purpose of certain organizations will not be recognized and therefore will not be taxed to the extent that the sale price is reinvested in property used for the organization’s exempt_purpose if that reinvestment occurs within one year prior to and three years following the sale of property sec_512 this statute is further clarified by case law which stipulates that the property being sold must have been directly used for the exempt purposes of the organization see 980_f2d_1409 not for some other benefit of the organization see deer park country club 70_tcm_1445 and must be reinvested into property up to the organization’s sales_price and not withdrawn for the gain by the members of the organization see 84_tc_756 the sale of the easement is widely considered by the service to be a sale of property within the internal_revenue_code the easement will be attached to the land in perpetuity affecting all future transactions regarding the land the easement removes your ability to construct new paved roads create new_building envelopes with subsurface sewage treatment systems paved surfaces or wells commercially mine gravel sand shale or bluestone of more than x3 square feet or store bury or dispose_of hazardous materials it additionally hinders your ability to farm build and remove timber though it does not remove those options entirely the easement also gives access of your land to department in order to ensure such activities are not taking place given the significant restrictions on you and any purchaser of the land and the rights provided to department you have sold property you are selling an easement to land that is substantially used by your members for the social and recreational activities for which you were formed these activities include hiking mountain biking horseback riding picnicking skiing and snow shoeing among others you also provided several trails through this land and picnic tables to encourage these activities the land contained other popular features visited by members specifically the highest point on the property a cave and an active root cellar based on the above factors we conclude that the easement property was used heavily for recreational purposes your use of the forest appears to be more frequent than the activities found to constitute exempt_purpose use in atlanta athletic club f 2d pincite where the organization held foot races pasture parties kite flying contests fishing contests and allowed jogging by members on the land sold furthermore the court states that an activity need not be organized by the club in order to be sponsored by the club id pincite thus we conclude that the sale of the easement meets the first criteria because it is attached to land directly used for your exempt purposes the fact that you continue to use the land under the easement for your exempt purposes does not alter the conclusion that you have sold property that you used for an exempt_purpose the restriction of your rights and the rights granted to department remain thus you have still sold property used for an exempt_purpose you have represented that you are committed to using the sales proceeds from the sale of the easement to demolish and reconstruct one of two lodges on your property the court in tamarisk country club t c pincite cites s rept c b pincite providing by way of example that where a social_club sells its clubhouse and uses the entire proceeds to build or purchase a larger clubhouse the gain on the sale will not be taxed if the proceeds are reinvested in the new clubhouse within three years your lodge has been and will continue to serve as the home of your administrative offices the starting point for many hiking and skiing tours the mail rooms and a prominent meeting point for your members as such the gains from your sale of the easement will be reinvested in property that will be directly used for your exempt purposes within the meaning of sec_512 of the code finally you said that you would fulfill the statutory requirement by making these investments within one year prior and three years following the closing of your sale of the easement in doing so you will have met all three requirements under sec_512 and gain will not be recognized on your sale of the easement to the extent that your sale price is reinvested within the four year window you also stated that you understand that any money not spent in this time period is subject_to tax ruling the gain on the sale of the conservation_easement approximately x2 given your nominal basis in the property is exempt from tax under code sec_512 provided that the proceeds are reinvested entirely on property to be used in your exempt social and recreational function within the period beginning one year prior to the sale and concluding three years after the sale this ruling 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 intention 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 you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely ronald shoemaker manager exempt_organizations technical group enclosure notice