t c memo united_states tax_court william g koenig petitioner v commissioner of internal revenue respondent docket no 10236-02l filed date william g koenig pro_se wendy s harris and glenn thomas for respondent memorandum opinion armen special_trial_judge this matter is before the court on respondent’s motion for summary_judgment and to impose a penalty under sec_6673 filed pursuant to rule respondent contends that there is no dispute as to any material unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure - - fact with respect to this lien action and that respondent’s determination to proceed with collection of petitioner’s outstanding tax_liability for should be sustained as a matter of law summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b see 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read ina manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 as explained in detail below there is no genuine issue as to any material fact and a decision may be rendered as a matter of law accordingly we shall grant respondent’s motion for summary_judgment background the record establishes and or the parties do not dispute the following a petitioner’s form_1040 for on or about date william g koenig petitioner submitted to respondent a form_1040 u s individual_income_tax_return for the taxable_year petitioner listed his address on his form_1040 as summer harvest avenue las vegas nevada petitioner’s las vegas address petitioner did not describe his occupation on his form_1040 although he did attach a form_w-2 wage and tax statement identifying him as an employee petitioner entered zeros on all lines of the income portion of his form_1040 specifically including line for wages line for total income line sec_33 and sec_34 for adjusted_gross_income and line for taxable_income petitioner also entered a zero on line for tax petitioner then claimed a refund in the amount of dollar_figure which was equal to the amount of federal_income_tax that had been withheld from his wages by his employer as previously indicated petitioner attached to his form_1040 a form_w-2 disclosing the payment of wages to him during the taxable_year in issue the form_w-2 was from tri-state fire protection inc of las vegas nevada it disclosed the payment q4e- of wages to petitioner in the amount of dollar_figure and the withholding of federal_income_tax in the amount of dollar_figure petitioner also attached to his form_1040 a two-page typewritten statement that stated in part as follows it william g koenig am submitting this as part of my income_tax return even though i know that no section of the internal_revenue_code establishes an income_tax_liability provides that income taxes have to be paid on the basis of a return in addition to the above i am filing even though the privacy_act notice as contained in a booklet clearly informs me that i am not required to file it does so in at least two places a in one place it states that i need only file a return for any_tax i may be liable for since no code section makes me liable for income taxes this provision notifies me that i do not have to file an income_tax return please note that my return also constitutes a claim_for_refund pursuant to code sec_6402 it should also be noted that i had zero income according to the supreme court’s definition of income see note i am also putting the irs on notice that my tax_return and claim_for_refund does not constitute a frivolous_return pursuant to code sec_6702 in addition don’t notify me that the irs is changing my return since there is no statute that allows the irs to do that you might prepare a return pursuant to code sec_6020 where no return is filed but as in this case a return has been filed no statute authorizes irs personnel to change that return note the word income is not defined in the internal_revenue_code but as stated above it can only be a derivative of corporate activity b respondent’s notice_of_deficiency on date respondent acting through deborah s decker director of the customer service_center in ogden utah issued a notice_of_deficiency to petitioner for the taxable_year respondent mailed the notice to petitioner at his las vegas address in the notice respondent determined a deficiency in petitioner’s federal_income_tax and an accuracy-related_penalty as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure dollar_figure insofar as his ultimate tax_liability was concerned respondent gave petitioner credit for the amount withheld from his wages however we observe that the determination of a statutory deficiency does not take such withheld amount into account see sec_6211 the deficiency in income_tax was based on respondent’s determination that petitioner failed to report wages in the amount of dollar_figure as well as interest in the amount of dollar_figure -- - petitioner did not contest respondent’s deficiency determination by filing a petition for redetermination with this court accordingly on date respondent assessed the determined deficiency and accuracy-related_penalty as well as statutory interest on that same day respondent sent petitioner a notice of balance due informing him that he had a liability for and requesting that he pay it petitioner failed to pay the amount owing about a month later on date respondent sent petitioner a second notice of balance due again petitioner failed to pay the amount owing cc respondent’s lien notice and petitioner’s response on date respondent filed a notice_of_federal_tax_lien with the county recorder of clark county las vegas nevada respondent filed the notice in respect of petitioner’s income_tax_liability for the unpaid assessed balance of which was dollar_figure at the time that the notice was filed ’ on date respondent mailed to petitioner at his las vegas address a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 in respect of his outstanding tax_liability respondent also filed the notice_of_federal_tax_lien in respect of petitioner’s outstanding liability for civil penalties under sec_6702 relating to frivolous income_tax returns for and petitioner’s liability for those penalties is not before us in the instant case see 115_tc_324 on date petitioner filed with respondent form request for a collection_due_process_hearing the request which listed petitioner’s las vegas address was accompanied by a two-page typewritten statement that acknowledged receipt of the foregoing notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 the statement included inter alia a challenge to the existence of the underlying tax_liability for as well as allegations including petitioner never received a valid notice_of_deficiency or a statutory notice_and_demand for payment and the appeals officer failed to identify the statute that makes me ‘liable to pay’ the taxes at issue petitioner also requested verification from the secretary that all applicable laws and administrative procedures were followed with regard to the assessment and collection of the tax_liability in question d the appeals_office hearing by letter dated date appeals officer jerry l johnson the appeals officer scheduled an administrative hearing with petitioner in respondent’s appeals_office in las vegas nevada the appeals officer then went on to state in part as follows please note that in circumstances where it is allowable to dispute the underlying liability the administrative appeal procedures do not extend to the request was postmarked date arguments involving the failure or refusal to comply with the tax laws because of moral religious political constitutional conscientious or similar grounds to my knowledge such arguments have never been successful in a court of law and i will not consider as valid any arguments of that nature in the collection_due_process_hearing in preparation for the hearing i have requested transcripts showing the contested assessments and plan to have copies available for you by letter dated date the appeals officer contacted petitioner about the scheduled administrative hearing and stated in part as follows i believe the purpose of a cdp collection_due_process_hearing is to ensure that the government’s need to collect the proper tax is balanced with the taxpayer’s need that the collection process be no more intrusive than necessary to accomplish that goal sec_6320 of the i r c first places a requirement of investigation upon me the section does not state that i need to convince you that the requirements of law or procedure have been met or even that i provide such evidence to you it only requires that i obtain verification that the requirements of applicable law or administrative procedure have been met in the case of tanner v u s ca-9 u s t c the ninth circuit_court of appeals stated that the requirements of the section can be met by my review of a form_4340 certificate of assessment and payment i have obtained that document and though not required to do so it is provided to you with this letter my review of it and the other documents in your administrative file have convinced me that a the disputed amounts were properly assessed and b the disputed amounts were properly billed on date petitioner attended an administrative hearing in las vegas nevada conducted by the appeals officer at the hearing petitioner acknowledged receiving form_4340 --- - certificate of assessments payments and other specified matters pertaining to his account for the taxable_year at the hearing petitioner did not contradict the appeals officer’s assertion that petitioner had received the notice_of_deficiency see supra b however petitioner did allege that he never received a statutory notice_and_demand for payment emphasis in the original and he requested a copy of the summary record of assessment petitioner also requested that the appeals officer provide verification that all applicable laws and administrative procedures had been followed in the assessment and collection process in this regard petitioner was informed by the appeals officer that the transcript provided 1ie form was sufficient to satisfy the verification requirement of sec_6330 in addition petitioner stated that he was challenging the underlying liability finally in response to the appeals officer’s question whether petitioner wished to discuss collection alternatives petitioner stated that i’m prepared to pay if you can convince me where my liability is in a letter dated date that was sent immediately after the administrative hearing the appeals officer mailed petitioner copies of relevant statutes and court cases including davis v commissioner tcmemo_2001_87 in which this court imposed on the taxpayer a dollar_figure penalty pursuant to section -- - a for making frivolous and groundless arguments in a collection review proceeding ke respondent’s notice_of_determination on date respondent’s appeals_office mailed to petitioner at his las vegas address a notice_of_determination concerning collection action s under sec_6320 and or with regard to his tax_liability for in the notice the appeals_office concluded that respondent’s determination to proceed with collection should be sustained f petitioner’s petition on date petitioner filed with the court a petition for lien or levy action seeking review of respondent’s notice_of_determination in the petition petitioner identified his las vegas address as his current address and he attached as exhibits a number of documents including the notice_of_determination see supra e the petition includes allegations that the appeals officer failed to obtain verification from the secretary that the requirements of any applicable law or administrative procedure were met as required under sec_6330 the appeals officer failed to identify the statutes making petitioner liable for federal_income_tax petitioner never received a valid notice_of_deficiency petitioner never received a statutory notice_and_demand for payment and petitioner was denied the opportunity to challenge the existence or amount of his underlying tax_liability the petition contains no facts in support of any of these allegations g respondent’s motion for summary_judgment as stated respondent filed a motion for summary_judgment and to impose a penalty under sec_6673 respondent also filed a declaration in support of the motion attached to the declaration is inter alia form_4340 for petitioner’s account for the form_4340 shows inter alia an assessment on date in respect of the taxable_year and the issuance of a notice of balance due on the date of the assessment see supra b petitioner filed an objection to respondent’s motion disagreeing inter alia with the imposition of any penalty under sec_6673 in part because i r code sec_6673 does not have the ‘force and effect of law ’ petitioner also repeated his allegation that he never received a valid notice_of_deficiency ie one signed by the secretary or someone with delegated authority from the secretary thereafter pursuant to notice respondent’s motion was called for hearing at the court's motions session in washington d c petitioner did not attend the hearing nor did he submit any written_statement pursuant to rule c discussion sec_6321 imposes a lien in favor of the united_states on all property and rights to property of a person when demand for payment of that person’s liability for taxes has been made and the person fails to pay those taxes the lien arises when the assessment is made sec_6322 sec_6323 requires the secretary to file notice_of_federal_tax_lien if such lien is to be valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor 118_tc_572 sec_6320 provides that the secretary shall furnish the person described in sec_6321 with written notice of the filing of a notice of lien under sec_6323 the notice required by sec_6320 must be provided not more than business days after the day the notice of lien is filed sec_6320 sec_6320 further provides that the person may request administrative review of the matter in the form of an appeals_office hearing within the 30-day period beginning on the day after the 5-day period described above sec_6320 c provides that the appeals_office hearing generally shall be conducted consistent with the procedures set forth in sec_6330 d and e sec_6330 provides for review with respect to collection issues such as spousal defenses the appropriateness of the commissioner's intended collection action and possible alternative means of collection sec_6330 b provides that the existence or the amount of the underlying tax_liability can be contested at an appeals_office hearing if the person did not receive a notice_of_deficiency or did not otherwise have an earlier opportunity to dispute such tax_liability 114_tc_176 see 114_tc_604 sec_6330 provides for judicial review of the administrative determination in the tax_court or federal district_court a summary_judgment in his petition petitioner challenges the existence of the underlying tax_liability respondent contends that petitioner is barred under sec_6330 b from challenging the existence or amount of his underlying tax_liability in this collection review proceeding because petitioner received a notice_of_deficiency for the tax in question respondent deduces the factual predicate for this contention from the fact that the notice_of_deficiency was mailed to petitioner at his last_known_address and from petitioner’s failure to deny receiving the notice_of_deficiency rather petitioner only denied receiving a valid notice_of_deficiency see kiley v commissioner tcmemo_2002_315 taxpayer’s denial of receiving valid notice_of_deficiency did not mean that taxpayer failed to receive notice_of_deficiency rennie v commissioner tcmemo_2002_296 taxpayer’s denial of receiving legal notice_of_deficiency did not mean that taxpayer failed to receive notice_of_deficiency schmith v commissioner tcmemo_2002_252 taxpayer’s denial of receiving valid notice_of_deficiency did not mean that taxpayer failed to receive notice_of_deficiency see also 118_tc_162 sec_6330 b bars a taxpayer from challenging the existence or amount of the taxpayer’s underlying tax_liability in a collection review proceeding if the taxpayer received a notice_of_deficiency and disregarded the opportunity to file a petition for redetermination with this court rule d provides in relevant part as follows when a motion for summary_judgment is made and supported as provided in this rule an adverse_party may not rest upon the mere allegations or denials of such party’s pleading but such party’s response by affidavits or as otherwise provided in this rule must set forth specific facts showing that there is a genuine issue for trial if the adverse_party does not so respond then a decision if appropriate may be entered against such party in his petition petitioner does not indicate on what basis he challenges the existence of the underlying liability his failure to do so is contrary to rule b requiring clear and concise lettered statements of the facts on which the petitioner bases each assignment of error cf 117_f3d_785 5th cir white v - - commissioner tcmemo_1997_459 petitioner’s failure to do so after the filing of respondent’s motion for summary_judgment is contrary to rule d and justifies summary_judgment for respondent on this issue see kiley v commissioner supra petitioner also challenges the appropriateness of the collection action again however he fails to allege any facts in support of this assignment of error see rule b moreover he fails to suggest any alternative means of collection see eg sec_6330 a iii as before petitioner’s failure to do so after the filing of respondent’s even if petitioner were permitted to challenge his underlying tax_liabilities it is clear that the arguments he has advanced see supra background a are frivolous and groundless e g keene v commissioner tcmemo_2002_277 in addition petitioner’s argument that the notice_of_deficiency was invalid because it was not signed by the secretary or someone with delegated authority from the secretary is itself frivolous and groundless see 118_tc_162 we regard as nothing other than tax protest theatrics petitioner’s assertion that he was prepared to pay the tax at issue if only the appeals officer would show him where my liability is regarding petitioner’s liability suffice it to say petitioner is a taxpayer subject_to the federal_income_tax see secs l c a compensation_for labor or services rendered constitutes income subject_to the federal_income_tax sec_61 640_f2d_1014 9th cir see also sec_61 petitioner is required to file an income_tax return sec_6012 a and the commissioner and his agents are authorized to enforce the provisions of the internal_revenue_code see i r c chs see davich v commissioner tcmemo_2002_255 see also 737_f2d_1417 5th cir -- - motion for summary_judgment is contrary to rule d and justifies summary_judgment for respondent on this issue we likewise reject petitioner’s argument that the appeals officer failed to obtain verification from the secretary that the requirements of all applicable laws and administrative procedures were met as required by sec_6330 the record shows that the appeals officer obtained and reviewed a transcript of petitioner’s account for federal tax assessments are formally recorded on a record of assessment sec_6203 the summary record through supporting records shall provide identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment sec_301_6203-1 proced admin regs sec_6330 does not require the commissioner to rely on a particular document eg the summary record itself rather than a transcript of account to satisfy the verification requirement imposed therein 118_tc_365 ndollar_figure standifird v commissioner tcmemo_2002_245 weishan v commissioner tcmemo_2002_88 lindsey v commissioner tcmemo_2002_87 tolotti v commissioner tcmemo_2002_86 duffield v commissioner tcmemo_2002_53 kuglin v commissioner tcmemo_2002_51 in this regard we observe that the form_4340 furnished to petitioner by the appeals officer and attached to respondent’s declaration contained all the information prescribed in sec_301_6203-1 proced admin regs see weishan v commissioner supra lindsey v commissioner supra tolotti v commissioner supra duffield v commissioner supra kuglin v commissioner supra petitioner has not alleged any irregularity in the assessment procedure that would raise a legitimate question about the validity of the assessment or the information contained in the form_4340 see 115_tc_35 mann v commissioner tcmemo_2002_48 accordingly we hold that the appeals officer satisfied the verification requirement of sec_6330 cf 117_tc_117 petitioner also contends that he never received a statutory notice_and_demand for payment of his tax_liability for the requirement that the secretary issue a notice_and_demand for payment is set forth in sec_6303 which provides in pertinent part to the extent that petitioner may be arguing that the appeals officer failed to provide him with a copy of the verification we note that sec_6330 does not require that the appeals officer provide the taxpayer with a copy of the verification at the administrative hearing 118_tc_162 sec_301_6330-1 proced admin regs in any event both the appeals officer and respondent’s counsel provided petitioner with a form_4340 for the taxable_year in issue -- - sec_6303 general_rule ---where it is not otherwise provided by this title the secretary shall as soon as practicable and within days after the making of an assessment of a tax pursuant to sec_6203 give notice to each person liable for the unpaid tax stating the amount and demanding payment thereof xk k in particular form_4340 shows that respondent sent petitioner a notice of balance due on the same date that respondent made the assessment against petitioner for the tax and accuracy-related_penalty determined in the notice_of_deficiency a notice of balance due constitutes a notice_and_demand for payment within the meaning of sec_6303 see eg 953_f2d_531 9th cir schaper v commissioner tcmemo_2002_203 weishan v commissioner supra see also 7_f3d_137 9th cir in addition other notices were sent to petitioner at least one of which the notice of tax_lien_filing discussed supra background c petitioner admittedly received likewise petitioner received the form_4340 such notice and form were sufficient to constitute notice_and_demand within the meaning of sec_6303 because they informed petitioner of the amount owed and requested payment standifird v commissioner supra hack v commissioner tcmemo_2002_244 hack v commissioner tcmemo_2002_243 see klias v connett 908_f2d_521 9th cir the form on which a notice of assessment and demand for payment is made is irrelevant as long as it provides the - - taxpayer with all the information required under sec_6303 finally petitioner has failed to raise a spousal defense and any such issue is now deemed conceded rule b in the absence of a valid issue for review we conclude that respondent is entitled to judgment as a matter of law sustaining the notice_of_determination dated date b imposition of a penalty under sec_6673 we turn now to that part of respondent’s motion that moves for the imposition of a penalty on petitioner under sec_6673 as relevant herein sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the court has indicated its willingness to impose such penalty in lien and levy cases 115_tc_576 and has in fact imposed a penalty in many such cases ’ ’ e g 119_tc_252 imposing a penalty in the amount of dollar_figure 118_tc_365 imposing a penalty in the amount of dollar_figure hiselstein v commissioner tcmemo_2003_ imposing a penalty in the amount of dollar_figure gunselman v commissioner tcmemo_2003_11 imposing a penalty in the amount of dollar_figure young v commissioner tcmemo_2003_6 imposing a penalty in the amount of dollar_figure robinson v continued - - we are convinced that petitioner instituted the present proceeding primarily for delay in this regard it is clear that petitioner regards this proceeding as nothing but a vehicle to protest the tax laws of this country and to espouse his own misguided views which we regard as frivolous and groundless e g tolotti v commissioner tcmemo_2002_86 in short having to deal with this matter wasted the court's time as well as respondent's and taxpayers with genuine controversies may have been delayed also relevant is the fact that the petitioner was made aware of the fact that he could be subject_to a penalty for instituting or maintaining a lien or levy action primarily for delay or for advancing frivolous or groundless arguments in such an action in this regard the appeals officer’s letter dated date furnished petitioner with a copy of davis v commissioner tcmemo_2001_87 a case in which this court imposed on the taxpayer a dollar_figure penalty pursuant to sec_6673 for making frivolous and groundless arguments in a collection review continued commissioner tcmemo_2002_316 imposing a penalty in the amount of dollar_figure kiley v commissioner tcmemo_2002_315 imposing a penalty in the amount of dollar_figure rennie v commissioner tcmemo_2002_296 imposing a penalty in the amount of dollar_figure tornichio v commissioner tcmemo_2002_291 imposing a penalty in the amount of dollar_figure keene v commissioner tcmemo_2002_277 imposing a penalty in the amount of dollar_figure and numerous other cases cited therein at n --- - proceeding prior letters from the appeals officer also furnished petitioner with relevant information in this regard under the circumstances we shall grant that part of respondent’s motion that moves for the imposition of a penalty in that we shall impose a penalty on petitioner pursuant to sec_6673 in the amount of dollar_figure c conclusion we have considered all of petitioner’s arguments that are not discussed herein and we find them to be without merit and or irrelevant in order to give effect to the foregoing an appropriate order granting respondent's motion and decision for respondent will be entered


internal_revenue_service number release date index number ------------------- ------------------------------------------------- ---------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-147239-08 date date legend x y ----------------------------------------------------------------------------------------------------- ----------------------- --------------------------------------------------- state ------------- date -------------------------- dear ------------- we received your letter dated date submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 this letter responds to your request facts x was formed on date as a state limited_liability_company x is wholly-owned by y y intended that x be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis plr-147239-08 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion plr-147239-08 based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n number release date tege eo date date legend foundation state u v w x dear ------------------ this is in reference to your ruling_request dated date concerning the federal_income_tax consequences stemming from your ongoing and proposed activities to promote economic development in state you have constructed an innovation and incubator center funded through a combination of third party commercial lending and government grants the intent is to attract high technology companies to state creating not only employment opportunities but also demand for the post-secondary high technology education needed to build a skilled workforce you plan to rent part of the innovation center at market rates to anchor tenants and other parts at below market rates to startup small businesses you are concerned that receipt of market-rate rental income might give rise to liability for unrelated_business_income_tax facts foundation is a nonprofit corporation established date and has been found to be an organization exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 foundation has been classified as other than a private_foundation under sec_509 its purposes include improving use of educational technology in state schools training educators and educating unemployed and underemployed citizens to better take advantage of employment opportunities in emerging technological industries in addition foundation supports using technology research as a catalyst for economic development and advocates construction of office space for high- technology companies and related support services in pursuing these objectives foundation manages a computer training program for students teachers and businesses provides internships for high school and college students interested in high technology careers manages a summer computer camp establishes and monitors statewide technology standards for teachers and develops training program for miners laborers and other occupations that have been impacted by technological change the region in which foundation operates has been plagued by poverty poor education and low standards of living for more than a century the unemployment rates and poverty levels of the population are grim foundation says adding that the local poverty level is almost one and a half times the national average per capita income lags behind the national average due to lack of quality jobs the population and workforce are shrinking due to lack of jobs and high unemployment infrastructure weaknesses mean bleak employment prospects foundation has provided extensive statistics and other data reflecting high poverty levels and high numbers of low-income households within its service area as well as population declines and grim employment prospects for its residents in promoting research foundation seeks to help meet the manpower needs of local high technology employers in such areas as product line engineering biometrics and identification technologies broadband and collaborative computing technologies and information warfare security technology its virtual company project includes a model for operation of an online office in addition it has created testing standards for commercial off-the-shelf_software used in architecture-based system development and maintenance and has established advanced software reuse and architecture technology for the national aeronautics and space administration another research project seeks to develop a technological resource center for high technology and communications businesses operating in state the innovation center cost nearly dollar_figure million to build and currently carries a mortgage foundation’s approximate annual gross_income from this building is u and its net_income is approximately v the building’s fair_market_value is in excess of its cost further foundation has constructed a training center in large part to meet the commercial space needs of a relocated company with a federal support services contract and the computer laboratory and training space sought by a regional college this building cost about dollar_figure million and currently carries a mortgage foundation’s approximate annual gross_income from this building is w and its net_income is approximately x the building’s fair_market_value is in excess of its cost cash_flow on both buildings has not been adequate to provide for sufficient reserves for facilities upkeep and the lender has had to waive this requirement foundation initially intended to use government and private grants and contributions to accomplish its exempt purposes it wants to independently develop real_property and use the resulting cash_flow from leases to pursue such purposes since its inception a small number of foundation employees have been responsible for property management and office space development no professional real_estate development or management company has been engaged foundation declares further foundation does not contemplate hiring a professional management company to oversee its existing or proposed real_estate projects foundation has said that it anticipates that a portion of its proposed new development will offer below-market rental rates however it asserts that the existing market-rate tenants act as anchor tenants which nurture smaller entrepreneurial companies and bring more high- technology jobs to state these jobs are vital to an improved standard of living in state foundation says it has provided letters from the governor of state the president of state’s most prominent public university and other state officials attesting to the importance of foundation’s role in economic development and its efforts to promote growth of high-technology businesses and jobs in addition foundation asserts that the private sector would not devote the resources needed to build this type of economic development project since state lacked a history of technology-based companies or workers private investors would be unlikely to commit the millions of dollars needed for this type of venture thus foundation maintains it is not taking any opportunities away from would-be private investors foundation further points out that the protective covenants for its technology park coupled with the covenants required for grant funds issued by the u s economic development administration preclude its use for purposes other than technology-based economic development foundation emphasizes that it does not contemplate selling the site any time soon w ith a downtrodden state economy coupled with a history of slower than average growth it is not fiscally prudent to consider a financial circumstance such that sale of the property would be necessary foundation says it advances technology education providing numerous computer training seminars for teachers and additional computer access to area residents it funds internship programs for high school and college students promotes workforce education and training programs through local universities and sponsors ongoing courses and training on technological subjects foundation asserts that state views its efforts as a shining star for economic development based on past accomplishments and future positioning to attract potential new employers foundation says it supplements the work of several federal_agency facilities and provides appropriate office space that would otherwise not exist in an economically disadvantaged area foundation asks the service to confirm its understanding that this development activity will not constitute debt financed property within the meaning of sec_514 of the code that it will not subject foundation to unrelated_business_income_tax under sec_511 and that it will not endanger foundation’s overall exempt status under sec_501 ruling requests you have requested the following rulings the rental revenue earned by foundation through publicly and privately financed real_estate development projects which includes to market-rate tenants does not constitute unrelated_debt-financed_income under sec_514 of the code foundation’s participation in a public and privately financed real_estate development project which includes leases to market-rate tenants furthers its exempt_purpose by lessening the burdens of government under sec_501 of the code foundation’s participation in a public and privately financed real_estate development project which includes leases to market-rate tenants furthers its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom further its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom further its exempt_purpose by lessening the burdens of government under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom does not result in unrelated_business_income under sec_511 of the code and further its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation is not a private_foundation and instead is properly classified as a public charity under sec_509 of the code law sec_501 of the code provides in part for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable and educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_511 of the code in part imposes a tax on the unrelated_business_income of organizations exempt from tax under sec_501 sec_512 of the code defines unrelated_business_taxable_income as gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by such organization sec_513 of the code defines an unrelated_trade_or_business to include any trade_or_business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable educational or other exempt purposes sec_514 of the code provides that in computing unrelated_business_taxable_income under sec_512 there shall be included certain amounts of income less allowable deductions derived from debt-financed_property sec_514 of the code excludes from the definition of debt-financed_property for purposes of sec_514 any property substantially_all the use of which is substantially related aside from the organization’s need for income or funds to the organization’s exercise or performance of its exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations provides that a tax-exempt_organization operates exclusively for sec_501 purposes only if it engages primarily in activities that accomplish such purposes sec_1_501_c_3_-1 of the regulations provides that the term charitable as used in sec_501 of the code is used in its generally accepted legal sense and is not limited by the separate enumeration in sec_501 of purposes that fall within the broad outline of charity as developed by judicial decisions thus the term charitable includes relieving the poor distressed or underprivileged lessening the burdens of government and promotion of social welfare by organizations designed to lessen neighborhood tensions eliminate prejudice and discrimination defend human and civil rights secured_by law and combat community deterioration and juvenile delinquency sec_1_501_c_3_-1 of the regulations provides that scientific research is regarded as carried out in the public interest if such research is b performed for the united_states or any of its agencies or instrumentalities or for a state or political_subdivision thereof or c directed toward benefiting the public sec_1_512_b_-1 of the regulations provides that rents_from_real_property and the deductions directly connected therewith shall also be excluded in computing unrelated_business_taxable_income sec_1_513-1 of the regulations delineates when a trade_or_business is substantially related to an organization’s exempt_purpose it provides that for the conduct_of_a_trade_or_business to be substantially related to purposes for which an exemption was granted producing or distributing the goods or performing the services must contribute importantly to accomplishing those purposes revrul_76_419 1976_2_cb_146 holds that an organization that encourages businesses to locate new facilities in an economically distressed area in order to provide more employment opportunities for low-income residents in the area was organized and operated for the charitable purpose of promoting social welfare by organizations designed to relieve the poor and distressed to lessen neighborhood tensions or to combat community deterioration revrul_74_587 1974_2_cb_162 holds that an organization that devotes its resources to programs to stimulate economic development in high-density urban areas inhabited mainly by low-income minority or other disadvantaged groups qualifies for exemption under sec_501 of the code the organization made loans to and purchased equity interests in businesses unable to obtain funds from conventional sources the investments were not undertaken for profit or gain but to advance charitable goals funds for this program were obtained from foundation grants and public contributions the organization was not penalized for benefiting non-needy taxpayers as long as those taxpayers were instruments by which charitable purposes were accomplished rev ruls and 1985_1_cb_178 describe organizations that are lessening the burdens of government and therefore qualify for exemption under sec_501 of the code these revenue rulings identify the following criteria to determine whether an organization’s activities lessen the burdens of government whether a governmental_unit considers the organization’s activities to be its burden whether these activities actually lessen the burden of the governmental_unit analysis foundation’s primary purpose is to stimulate the economy of state and particularly those regions of state that are economically distressed foundation seeks to create not only employment opportunities but also demand for the post-secondary education needed to build a skilled workforce rev ruls and hold that an organization that encourages business development in an economically disadvantaged area meets the charitable purpose of promoting social welfare within the parameters of sec_1_501_c_3_-1 of the regulations foundation was and continues to be organized to improve the economic conditions in state through the development of high technology industry this purpose is consistent with foundation’s original grant of exemption and rev ruls and further to the extent foundation spurs economic development and assists in education it lessens the burdens of government in keeping with rev ruls and revrul_85_2 specifically states that a determination of whether an organization is lessening the burdens of government requires consideration of whether the organization’s activities are activities that a governmental_unit considers to be its burdens and whether such activities actually lessen such governmental burdens an activity is a burden of government if there is an objective manifestation by the governmental_unit that it considers the activity to be part of its burden the fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of government likewise the fact that the governmental_unit or an official thereof expresses approval of the organization and its activities does not establish that the organization is lessening the burdens of government foundation works closely with state and its economic development authority state considers the development of its economy to be a crucial burden and its legislature has allocated money to foundation to advance its work in fact the legislature has passed a statute which provides t hat in order to attract new business commerce and industry to this state to retain existing business and industry providing the citizens of this state with economic security and to advance the business prosperity of this state and the economic welfare of the citizens of this state it is necessary to provide public financial support for constructing equipping improving and maintaining economic development projects capital improvement projects and infrastructure which promote economic development in this state in implementing the statute state has issued revenue bonds and created a special fund to provide grants on a competitive basis to economic development projects foundation submitted a grant proposal and received substantial funding from the state legislature in the form of grant funding state officials including the governor and the president of the largest university in state have written letters testifying to the importance of foundation’s role in developing jobs and fostering education of the workforce the department of commerce also has praised foundation’s success in promoting economic development in state while recognizing that so much more needs to be done as state ranks among the highest in unemployment and lowest in per capita income accordingly foundation is performing work customarily done by state government and is lessening the burdens of state government as provided by rev ruls and as noted above sec_1_501_c_3_-1 of the regulations provides that scientific research is regarded as carried out in the public interest if such research is b performed for the united_states or any of its agencies or instrumentalities or for a state or political_subdivision thereof or c directed toward benefiting the public examples cited in the regulation include research carried on for the purpose of aiding in the scientific education of college or university students research carried on for obtaining scientific information which is published in a treatise thesis trade publication or in any other form that is available to the interested public and research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of or retention of an industry in the community or area emphasis added moreover foundation’s development and subsequent lease of two office buildings and the building of an addition to its training center to house high technology companies and a minimal amount of related support services are substantially related to the organization’s exempt purposes in revrul_76_419 the organization developed real_estate and leased the property to third parties in an effort to develop an urban economy foundation is acting in a similar manner to foster rural development the project is expected to provide significant employment in an underutilized area both through construction activity and in long-term jobs to be created the foundation’s development project is financed through substantial commercial lending thus the project would be considered debt-financed_property which would lead to the prospect of incurring unrelated_business_income unless there is an applicable exception however since the project is inextricably intertwined with and related to the accomplishment of the foundation’s exempt purposes the two buildings are not considered debt-financed_property therefore the rents received by foundation will not be considered unrelated_business_income and thus will allow foundation to further its technology-based economic development charitable mission rulings therefore we rule that the rental revenue earned by foundation through publicly and privately financed real_estate development projects which includes leases to market-rate tenants does not constitute unrelated_debt-financed_income under sec_514 of the code foundation’s participation in a public and privately financed real_estate development project which includes leases to market-rate tenants furthers its exempt_purpose by lessening the burdens of government under sec_501 of the code foundation’s participation in a public and privately financed real_estate development project which includes leases to market-rate tenants furthers its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom further its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom further its exempt_purpose by lessening the burdens of government under sec_501 of the code foundation’s investments in small technology-based companies and its income therefrom does not result in unrelated_business_income under sec_511 of the code and further its exempt_purpose by providing economic development to an underprivileged local area under sec_501 of the code foundation is not a private_foundation and instead is properly classified as a public charity under sec_509 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of the provisions of the sections of the code as noted above this ruling is based on the understanding that there will be no material changes in the facts on which it is based 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 robert c harper jr manager exempt_organizations technical group sincerely