t c memo united_states tax_court anclote psychiatric center inc petitioner v commissioner of internal revenue respondent docket no filed date robert williams and v jean owens for petitioner julie m t foster for respondent memorandum findings_of_fact and opinion wright judge respondent revoked recognition of petitioner's status as an organization exempt from income_tax under sec_501 effective date and determined the following deficiencies in federal_income_tax taxable_year ended1 deficiency date date date date date dollar_figure big_number big_number big_number big_number unless otherwise stated all section references are to the internal_revenue_code as in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the primary issue for decision is whether petitioner's tax- exempt status should be revoked this issue turns on the question whether petitioner's sale of its hospital in date was for less than fair_market_value resulting in prohibited inurement within the meaning of sec_501 if we decide that there was no such inurement we must decide whether petitioner's tax-exempt status should be revoked for failure to conduct exempt_activities for its fiscal years ended date and if we decide petitioner's tax-exempt status was properly revoked then we must decide whether petitioner is entitled to deduct certain amounts as ordinary and necessary business_expenses during the years for which its income is no longer tax- exempt the issuance of a notice_of_deficiency for the taxable_year ended date is barred by the period of limitations if petitioner's tax-exempt status is revoked effective date we must decide whether petitioner is entitled to a net_operating_loss_carryover from its fiscal_year ended date findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner had its principal_place_of_business in tarpon springs florida at the time it filed its petition petitioner filed its federal returns of organization exempt from income_tax under sec_501 of the internal_revenue_code forms for the years in issue with the atlanta service_center atlanta georgia for all relevant periods petitioner used a fiscal_year ending september its reports on form_990 reflected that petitioner utilized the accrual_method of accounting petitioner is a florida corporation organized under chapter of florida statutes as a corporation not-for-profit petitioner was originally incorporated in as a for-profit corporation and in date began operation of anclote manor hospital the hospital in petitioner became a nonprofit corporation and received a determination_letter that it qualified as a federal tax-exempt corporation under sec_501 when the hospital opened it provided every type of psychiatric treatment although the hospital began as a short- term treatment facility with an average length of stay of to weeks by it had become a long-term treatment facility with an average length of stay of days the hospital operated as a closed medical hospital in that its medical staff did not have independent outside medical practices by petitioner operated a 99-bed facility with a high occupancy rate the hospital was one of only five to seven long- term facilities at that time referrals came from short-term psychiatric hospitals nationwide by its beds were full and it was turning down patients for admission on date petitioner obtained a certificate of need from the state of florida department of health and rehabilitative services allowing it to increase its number of beds by dr walter h wellborn jr dr wellborn became petitioner's president and chief_executive_officer in he began working for petitioner in prior to the hospital's opening petitioner was governed by a board_of directors the board consisting of medical doctors and business persons from the local community and southeastern united_states during the 1950's and 1960's petitioner's patients generally paid for their own treatment during the 1970's and 1980's petitioner had patients whose private health insurance paid for their treatment and those who paid themselves however petitioner never admitted medicare or medicaid patients the hospital is situated on about acres in addition petitioner owned two nonadjacent unimproved parcels known as the belcher road property approximately acres and the county road property approximately acres and two waterfront lots across the street from the hospital blanton realty appraised the belcher road property for dollar_figure as of date as of date blanton realty appraised the county road property at dollar_figure and the two lots at dollar_figure the sale of the hospital in or about dr wellborn and a few board members attended several meetings of the national association of private psychiatric hospitals where information was given about restructuring psychiatric hospitals hospitals were changing from not-for-profit to for-profit organizations dr wellborn and the other board members were looking for ways to generate funds to expand the hospital and at the same time support petitioner's research and educational goals dr wellborn wished to continue running the hospital and the board supported that relationship sometime in the first half of the board engaged james o'donnell mr o'donnell a jacksonville florida tax attorney to advise them regarding converting to a for-profit entity with the possible sale of the hospital to an entity to be formed by some or all of the board members and the tax effects of such a transaction on petitioner's tax-exempt status it became clear to mr o'donnell that the board did not want to relinquish control of the hospital and that petitioner needed access to the hospital in order to conduct research these factors limited the options and effectively prevented selling to a third party mr o'donnell advised the board on the choice of purchasing entity eg partnership or s_corporation and the associated liability and tax implications for the purchasers on date mr o'donnell on behalf of petitioner requested a private_letter_ruling plr from the internal_revenue_service irs as to the income_tax consequences of a sale of the hospital to a private entity the request namely whether petitioner would retain its charitable qualification under sec_501 whether any unrelated_business_income would result and whether the proposed transaction was prohibited by any code provision rule_or_regulation under statement of facts the request states because of the highly specialized nature of the hospital's facilities there is a very limited market for its sale further the risks and uncertainties related to the operation of the hospital are best understood and therefore subject_to evaluation by the board_of directors of apc petitioner for these reasons apc has decided to sell the hospital at its appraised value to its board_of directors or an entity which they propose to form probably a limited_partnership under description of proposed transaction the request states an independent appraisal by a qualified competent appraiser will be obtained which determination will be the basis of the price and terms upon which the hospital will be sold all documents necessary for the closing of the proposed sale and related consents will be negotiated and prepared by separate counsel for apc and the purchasing entity following mr o'donnell's recommendation the board hired ray j sheldrick mr sheldrick a business appraiser to determine the fair_market_value of the hospital on date mr sheldrick submitted to petitioner his summary valuation report effective as of date using the asset- based approach mr sheldrick determined the fair_market_value for the hospital as of date to be in the range between dollar_figure and dollar_figure mr sheldrick's appraisal did not include the belcher road property or county road property on date the irs issued a plr to petitioner after reiterating the facts as submitted by petitioner and presenting the applicable law the plr states as noted arms-length standards will prevail during the negotiations and sale as you will certify by maintaining appropriate records attesting to the fact that the price was set at fair_market_value and that no loan abatements or other special concessions will be afforded to the present directors in their capacity as purchasers and or operators of the hospital thus the proposed sale as described will not benefit those in a controlling position with respect to you by virtue of the ability of such persons to unfairly manipulate the transaction the sale will not jeopardize your tax exempt status under sec_501 of the code on or about date mr o'donnell assisted in forming anclote manor hospital inc amh a florida for-profit corporation whose stock was owned by petitioner's board members individually to purchase petitioner's assets on date petitioner hired stanley w rosenkranz mr rosenkranz a partner in the law firm of holland and knight to negotiate the sale of the hospital in these negotiations mr o'donnell represented amh as buyer and mr rosenkranz represented petitioner as seller both lawyers knew the sale had to be for fair_market_value both relied in part on mr sheldrick's appraisal in setting the purchase_price both knew mr sheldrick's appraisal did not include the belcher road or county road properties negotiations between mr rosenkranz and mr o'donnell continued between date and date with the parties exchanging several drafts of a purchase and sale agreement mr rosenkranz insisted that amh assume petitioner's liabilities including the liability for contributions to the pension plans he also required that a bank hold the paper and foreclose on the mortgage if the payments were not made on date petitioner's board_of directors passed a resolution authorizing the sale of the hospital as negotiated by mr o'donnell and mr rosenkranz the purchase and sale agreement was executed on date the property to be exchanged included all of the petitioner's properties assets and business as a going concern but not petitioner's license to conduct or maintain a hospital or those assets considered as restricted funds ie the research education and children's psychiatric development funds in addition the buyer agreed to lease to petitioner big_number square feet of space and allow petitioner access to the premises of the hospital for conducting its research educational and charitable functions at this time petitioner had not made the renovations necessary for the additional beds approved by the certificate of need the agreed purchase_price was an amount equal to dollar_figure plus the amounts of a the liabilities shown on the date balance_sheet then outstanding and b those outstanding liabilities incurred in the normal course of business between the date of the date balance_sheet and the closing date plus to the extent required the amount to be contributed to petitioner's pension plans of the excess of the plans' actuarial present_value of accrued_benefits over the assets of the plans the agreement provided that the liabilities assumed included petitioner's liability for the florida patient's compensation fund assessments but such liability was limited to dollar_figure the amount of the liability assessed as of the time of the agreement the purchase_price was to be paid at closing as follows an executed assumption_of_liabilities agreement a check for dollar_figure plus a note for dollar_figure closing was held on date effective date the date statement of liabilities attached to the purchase and sale agreement included an accrued expense for retirement fund for employees funding by june sic subject_to adjustment by actuarial report in the amount of dollar_figure the attached date balance_sheet showed liabilities of dollar_figure petitioner's date balance_sheet showed liabilities of dollar_figure on date amh made a contribution to the pension_trust of dollar_figure for the plan_year ended date on date amh made a contribution of dollar_figure for the plan_year ended date amh terminated one of its defined benefit pension plans effective date replacing it with a defined_contribution_plan and received in excess of dollar_figure due to the termination in early amh sold the belcher road property for dollar_figure and the county road property for dollar_figure during may and june of amh received several preliminary offers to buy the hospital offers ranged from dollar_figure to dollar_figure million on date amh entered into a contract for the sale of the hospital's operating_assets for dollar_figure to amisub anclote inc a subsidiary of american medical international inc ami a large health care provider at this time the hospital was operating pincite beds and had a certificate of need for an additional beds of the total purchase_price the parties agreed that dollar_figure was to be placed in escrow to be used for expenses related to the transfer of the 36-bed certificate of need and that the remaining balance would be released to amh only if a certificate of need for all beds were approved otherwise the remaining amount would be prorated based on the number of beds approved the closing date was date in ami sold the hospital for about dollar_figure regulatory environment the state of florida department of health and rehabilitative services was the granting authority for the license to operate the hospital and the certificates of need the hospital's patient revenue and cost charges were subject_to review by the state's hospital cost containment board on date congress enacted the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 tefra sec_101 96_stat_335 provided in part the secretary of health and human services shall develop in consultation with the senate committee on finance and the committee on ways and means of the house of representatives proposals for legislation which would provide that hospitals skilled nursing facilities and to the extent feasible other providers would be reimbursed under title xviii of this the social_security act on a prospective basis the secretary shall report such proposals to such committees not later than date on date congress enacted the social_security amendments of ssa publaw_98_21 97_stat_63 replacing medicare's reasonable cost_basis payment system for hospital inpatient services with the diagnosis related group drg prospective pay system to be phased-in over a 4-year period with reporting periods beginning after date ssa tit vi 97_stat_149 under the drg system hospitals would receive medicare payments for inpatient services for each discharge at a specific rate to be determined by the secretary of health and human services based on drg's ssa at sec_601 97_stat_152 see fed reg date congress excluded psychiatric hospitals and distinct psychiatric units from the drg system ssa at sec_601 97_stat_152 as a result hospital care providers increased their interest in providing psychiatric care florida patient's compensation fund in the florida legislature enacted the medical malpractice reform act of which was designed to limit liability of medical providers and fund valid claims the medical malpractice reform act established the florida patient's compensation fund fpcf to provide liability coverage in excess of basic policy limits for its participant members each hospital was required to pay a yearly fee and assessments petitioner first became a participant in fpcf sometime during the fund year pursuant to the fpcf statute as in effect in the time frame petitioner was self-insured for the first dollar_figure per claim of liability and any excess liability was to be paid_by fpcf as of date petitioner had established a reserve fund of dollar_figure for this purpose subsequent to date petitioner was insured for medical malpractice with a commercial insurance carrier and the reserve fund reverted to working_capital fpcf made a series of assessments against its members to cover the deficits arising from the costs of the claims exceeding the membership fees it had collected with respect to a fund year these assessments represented a proration of the fund deficits among the members based on a formula composed of factors such as type of provider net fees and number of providers in each class as of date petitioner had been assessed dollar_figure for coverage provided for the fund years and and dollar_figure for the fund year for a total of dollar_figure member hospitals including petitioner filed a law suit against the state of florida department of insurance and fpcf in attempting to prevent collection of the assessments on date the florida supreme court issued its order and on date rendered its opinion that the statute governing the fpcf's imposition of fees and assessments was constitutional both on its face and as applied department of ins v southeast volusia hosp dist so 2d fla as of date the unpaid assessments against petitioner for the fund years through totaled dollar_figure of this total amount amh had assumed liability for dollar_figure upon purchase of the hospital as of date the unpaid assessments by fpcf against petitioner for those years totaled dollar_figure of which amh was liable for dollar_figure in addition petitioner owed interest on these amounts on date petitioner entered a settlement agreement with the fpcp and the state of florida department of insurance for the payment of petitioner's fpcf obligation petitioner made all payments to fpcf in accordance with the settlement agreement the total_amounts petitioner paid to fpcf during the years in issue were as follows year total paid dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure all amounts are attributable to assessments stemming from claims related to the years when petitioner operated the hospital grants to organizations and for patient care petitioner gave grants for education research and other charitable purposes and for indigent patient care at the hospital for through petitioner's financial statements reflected the following amounts as charity discounts and provisions for uncollectible accounts arising from patient care year amounts dollar_figure big_number big_number big_number following the sale of the hospital petitioner made grants totaling the following annual amounts year to organizations for patient care dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure all of the amounts paid for patient care were paid only for the benefit of the patients none of whom were related to or connected in any way personally with anyone on petitioner's board petitioner's returns petitioner timely filed forms on the basis of a september fiscal_year for through using the accrual_method of accounting on its fiscal form_990 petitioner reported the sale of the hospital for a net_loss of dollar_figure petitioner calculated this loss as follows sale price basis of assets sold dollar_figure cash dollar_figure treasury bills big_number patients accounts_receivable big_number other receivables big_number supplies big_number prepaid expenses big_number property plant equipment big_number and other non-current assets liabilities assumed by buyer net assets sold dollar_figure big_number sales expenses loss big_number big_number big_number big_number for petitioner reported total revenue of dollar_figure and total expenses of dollar_figure included in the accrued expenses were dollar_figure for grants dollar_figure for assistance to individuals and dollar_figure for fpcf assessments of the amount accrued for fpcf assessments dollar_figure was unpaid in the year included in the expenses reported by petitioner for the years in issue were the following year grants dollar_figure big_number big_number big_number big_number assistance to individuals dollar_figure big_number big_number fpcf dollar_figure big_number big_number revocation and notice_of_deficiency on date respondent issued the notice_of_deficiency and on the same date issued the final adverse determination_letter revoking petitioner's tax-exempt status effective for all years beginning on or after date the reasons given for the revocation were that the sale of the hospital resulted in inurement of your earnings to the benefit of private shareholders or individuals contrary to the provisions of code sec_501 and additionally during examination of the forms which you filed for the taxable years ended date and you did not establish that you conducted the charitable educational research program which was represented as having been the altruistic goal motivating the sale of your hospital facility payments made by you for the provision of patient services although substantial were generally restricted to patients of anclote manor hospital who were not shown to have been members of a charitable_class research and education programs were minimal and poorly documented there was no evidence that donations made to a variety of public_charities schools hospitals and foundations were subjected to any direction or expenditure_responsibility based on the revocation of petitioner's tax-exempt status respondent determined the deficiencies in the federal_income_tax in the notice_of_deficiency respondent calculated petitioner's taxable_income as follows gross_income operating expense charitable_contributions total dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure in determining petitioner's taxable_income respondent disallowed the deductions reflected on petitioner's forms for assistance to individuals and payments to the fpcf respondent treated petitioner's grants to organizations as charitable_contributions but limited those deductions to percent of taxable_income opinion sec_501 requires among other things that an organization be operated exclusively for one or more specified purposes and that no part of the net_earnings of the organization inures to the benefit of any private_shareholder_or_individual see also sec_1_501_c_3_-1 income_tax regs an organization is not operated exclusively for an exempt_purpose unless it serves a public rather than a private interest sec_1_501_c_3_-1 income_tax regs an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 income_tax regs the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization sec_1_501_a_-1 income_tax regs the presence of a single substantial nonexempt purpose destroys the exemption regardless of the number or importance of the exempt purposes 326_us_279 92_tc_1053 when an organization operates for the benefit of private interests the organization by definition does not operate exclusively for exempt purposes american campaign academy v commissioner supra pincite prohibited benefits may include advantage profit or gain id pincite6 fair_market_value if petitioner sold the hospital to amh a corporation whose shareholders were directors of both petitioner and amh for less than fair_market_value such an advantage to the shareholders of amh would be a prohibited benefit constituting private_inurement fair_market_value has been defined as the price at which property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts 411_us_546 98_tc_554 see sec_1_170a-1 income_tax regs the determination of the fair_market_value of property is a question of fact which must be resolved after consideration of all of the evidence in the record 761_f2d_1195 6th cir affg tcmemo_1982_508 94_tc_193 in respondent determined that petitioner was exempt from federal_income_tax as an organization described in sec_501 the principal question before us is whether the circumstances of the sale by petitioner to amh were such as to confer a prohibited benefit ie inurement on amh and therefore on its shareholders who were directors of both petitioner and amh with the result that petitioner should lose its exemption at the outset we think it important to keep in mind the context in which the question arises and the role of fair_market_value in determining whether such inurement occurred this is not an estate or gift_tax case where it is necessary to determine a precise amount representing the fair_market_value of the property transferred in order to determine the amount if any subject_to tax rather the question to be resolved is whether the sale was the product of an arm's-length_transaction which produced a sale price that is sufficiently close to the fair_market_value of the property at the time of the sale so that one can fairly conclude that there was no prohibited inurement or to put it another way recognizing that what is fair_market_value presents an inherently imprecise issue which even respondent admits we see our task as one of determining whether the sale price was within a reasonable range of what could be considered fair market values in this respect our task is not unlike that which we face when inurement depends upon a determination whether payments of compensation are excessive or reasonable see 823_f2d_1310 9th cir the payments in this case cross_the_line between reasonable and excessive affg 83_tc_381 109_tc_326 the foregoing frame of reference is to be sharply distinguished from the situation involving the issue whether a sec_501 organization loses its exemption where there is inurement but it is de_minimis see 973_f2d_1479 n 9th cir majority opinion tang j concurring in part and dissenting in part 893_f2d_529 2d cir affg tcmemo_1988_380 church of scientology v commissioner supra compare also the manner in which the courts have dealt with the relationship between the sales_price and fair_market_value in determining the bona fides of a sale-leaseback transaction see 37_tc_461 the price was within a reasonable range affd 325_f2d_313 9th cir affd 380_us_563 see also 40_tc_789 n and cases cited thereat thus fair_market_value plays an important role but is not determinative herein as a consequence we reject respondent's insistence that we should determine a definite figure for fair_market_value which should then be compared with the sale price and automatically measure inurement such an approach would accord that value a preciseness it simply does not have see 48_tc_502 on the other hand we are not prepared to minimize as petitioner would have us do the influence of the fair_market_value element in determining whether the sale price should be treated as the product of arm's-length negotiations with the absence of inurement the result burden_of_proof and evidentiary matters there is one further preliminary matter in an earlier proceeding in this case we decided that petitioner had made a proper request for a determination in respect of its exemption under sec_501 within the meaning of sec_7428 that respondent had failed to make a determination with respect to such request and that petitioner had filed a proper and timely petition for a declaratory_judgment so that all the jurisdictional requirements prescribed by sec_7428 had been satisfied 98_tc_374 docket no 19530-91x given our conclusion that respondent had not made the required determination the burden_of_proof is on respondent with respect to the issue of whether petitioner is entitled to an exemption under sec_501 rule c b see also infra pp as to all other issues raised by the deficiency_notice petitioner has that burden rule a it is against the foregoing background that we proceed to examine the various elements of the sale in order to determine whether fair_market_value of petitioner's assets as compared to the sales_price cross es the line between reasonable and excessive see church of scientology v commissioner supra we see no purpose to be served by setting forth in detail the various steps in the negotiations between petitioner and amh which culminated in the sale both parties were represented by counsel who as far as the legal as distinguished from the financial aspects of the sale were concerned acted independently and in good_faith and sought to protect the interests of hi sec_3 respondent has accepted this burden and proceeded accordingly at trial but has reserved the right to reassert its position that we were without jurisdiction in 98_tc_374 docket no 91x we also note that there are two other docketed cases involving the revocation of petitioner's sec_501 status ie docket nos 4833-92x petition for declaratory_judgment after revocation letter issued and 27403-92x petition for declaratory_judgment that petitioner qualifies as tax-exempt in years subsequent to the sale none of the cases referred to in this footnote have been consolidated with the instant case see 102_tc_695 n client as will subsequently appear however there are serious questions as to the extent to which the negotiations adequately took into account certain financial aspects of the transaction which may cause the negotiations and the resulting sale price to be categorized as not being at arm's length and therefore giving rise to inurement among the elements involved are consideration or lack of consideration given to the changes in values of items reflected in petitioner's balance_sheet between date and date the proper valuations of the belcher road and county road parcels the measure of petitioner's obligations under its pension_plan the value if any of the certificate of need for additional beds and the impact of changes in methods of reimbursement in respect of medicare reimbursements and of the sales of the hospital in and these elements bear directly on the determination of the range of fair market values and consequent inurement if any an element in resolving the question of fair_market_value and therefore inurement is the extent to which evidence as to events and actions occurring after the date of the sale can be taken into account petitioner has raised a number of objections to such evidence particularly the evidence relating to the sale of the property and the circumstances surrounding such sale on the ground of relevancy rule of the federal rules of evidence rules that apply to this court under rule a tax_court rules_of_practice and procedures provides generally that all relevant evidence is admissible and that evidence which is not relevant is not admissible rule of the federal rules of evidence defines relevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence in examining all the facts and circumstances involved in determining fair_market_value events occurring subsequent to the valuation_date are not considered except to the extent that such events were reasonably foreseeable on the valuation_date 763_f2d_891 7th cir 88_tc_1197 however the price set by a freely negotiated agreement made reasonably close to the valuation_date is persuasive evidence of fair_market_value except where a material_change in circumstances occurs between the valuation_date and the date of sale first natl bank of kenosha v united_states supra pincite estate of spruill v commissioner supra pincite a useful distinction may be drawn between later events which affect fair_market_value as of the valuation_date and later events which may be taken into account as evidence of fair_market_value as of the valuation_date 101_tc_412 in short evidence as to latter category of events may be admitted because of its potential relevance even though it may ultimately be determined that such evidence does not have an impact on the determination of fair_market_value here again we see no purpose to be served by analyzing each stipulation exhibit or testimony relating to post-date events these items include matters not only relating to the and sales of the hospital but also the payments made to and from petitioner's pension_plan which was transferred as part of the sale sales of the belcher road and county road parcels and the amh audit report we think it sufficient to observe that the evidence to which petitioner objects may be relevant to our determination herein ie to the extent that other evidence could provide a basis for concluding that the elements which impacted the sale may have been sufficiently known or anticipated at the time of the sale we previously ruled twice that such evidence was admissible reserving to petitioner the right to reargue its position on brief this petitioner has done but we remain unpersuaded accordingly petitioner's objections to evidence relating to post-1983 events are overruled we likewise overrule petitioner's objections to the other described material on the ground that such material may provide information relevant to our determination of whether there was inurement the parties primarily rely upon their experts' testimony and reports to support their respective positions regarding the fair_market_value of the hospital expert opinion sometimes aids the court in determining valuation other times it does not see 92_tc_101 we evaluate such opinions in light of the demonstrated qualifications of the expert and all other evidence of value in the record estate of newhouse v commissioner t c pincite we are not bound however by the opinion of any expert witness when that opinion contravenes our judgment id we may accept the opinion of an expert in its entirety 74_tc_441 or we may be selective in the use of any portion thereof 86_tc_547 initially we deal with petitioner's objection to the admission of the report of respondent's expert mr shelton on the ground that he assumed the role of an advocate see laureys v commissioner supra petitioner points to mr shelton's use of terms such as collusion in secrecy the closed and secret sale and inside knowledge when describing the appraisal of mr sheldrick and amh's purchase of the hospital that appraisal was utilized by messrs o'donnell and rosenkranz in their negotiations which culminated in the sale additionally when analyzing petitioner's revenues and expenses for purposes of the income approach to valuation set forth in his appraisal mr shelton states prior to the sale and at the time when the hospital was owned by a not-for-profit organization maximizing patient revenues per patient day and net_income were not priority matters as they were consumed with their totally in-secret plans to purchase the hospital however the board did not want to do anything to make the contemplated sale suspect as the members of the board covertly made preparations to sell the hospital to themselves thus expenses in the years immediately prior to and in the year_of_sale were higher than normal because of fees and costs related to the preparation and the related sale expenses finally in his overall conclusion mr shelton states that the board_of directors of petitioner covertly schemed and planned the successful purchase of the hospital to their inurement and at the expense of thi sec_501 corporation we think that mr shelton's report is more characteristic of the work of a revenue_agent than of an impartial disinterested appraiser in this connection we note that mr shelton's report was received and adjusted by respondent's national_office we reject respondent's suggestion that we exclude mr shelton's objectionable comments and admit the balance of his report those comments impart a pervasive negative impact on the report we conclude that petitioner's objection based on bias is well founded and accordingly rule that mr shelton's report should not be received in evidence cf laureys v commissioner supra our conclusion makes it unnecessary for us to rule on petitioner's further objection to the admission of mr shelton's report on the ground that it is significantly inadequate particularly in respect of his use of comparables we are constrained to add that even if we had decided to overrule petitioner's objections and admit mr shelton's report into evidence we would have given it minimal weight because of mr shelton's inexperience at the time of his appraisal the defects in the report such as listing a claimed comparable sale as having taken place in instead of the value he ascribes to the impact of the change in the medicare system in the failure to take into account the impact of income taxes on his projected income stream only partially corrected by the subsequent adjustment of the report by respondent's national_office the internal contradictions reflected in his analysis of projected profitability and the seeming excessive value for goodwill see furman v commissioner tcmemo_1998_157 mr shelton's report represented the bulk of respondent's case and its exclusion raises the question of the impact of its inadmissibility on respondent's burden_of_proof the case law is clear that the determination whether that burden has been satisfied is not limited to respondent's affirmative evidence but can be made on the basis of the whole record see 266_f2d_698 9th cir remanding on other grounds tcmemo_1957_129 87_tc_178 affd without published opinion 833_f2d_303 3d cir 22_tc_1002 accordingly we proceed with our task on the basis of the record herein in its entirety inurement we first address the question of how much amh paid petitioner for the assets which petitioner sold to it in date the agreement of sale provided purchase_price buyer and seller agree that the total purchase_price the purchase_price to be paid for all property assets and business being acquired hereunder shall be an amount equal to the sum of i dollar_figure and ii the sum of x the amount of all liabilities shown on the balance_sheet and not heretofore paid or discharged y the amount of all liabilities incurred by the seller in the ordinary course of its business between the date of the balance_sheet and the closing date and not heretofore paid or discharged and iii to the extent the same is required to be contributed to said plans the excess of total actuarial present_value of accrued_benefits over the assets of the seller's pension plans the amounts referred to in ii and iii being sometimes hereinafter collectively referred to as the assumed_liabilities anything herein contained to the contrary notwithstanding there shall be deemed included within the amount of assumed_liabilities the seller's liability for florida patient's compensation fund assessments provided however that buyer shall not be deemed to have assumed and therefore the same is not deemed within the assumed_liabilities liability for florida patient's compensation fund assessments to the extent the same exceed dollar_figure the parties appear to be in agreement that the purchase_price was at least dollar_figure consisting of dollar_figure million payable by way of cash and a promissory note plus dollar_figure of assumed_liabilities they differ on whether the latter amount includes some dollar_figure claimed to represent petitioner's liability to its pension funds as of date in respect of the excess of vested benefits over net assets in the funds petitioner asserts that such amount should not be so included but rather should be added to the foregoing amount of assumed_liabilities petitioner's position finds support in the separate treatment accorded this item in the above-quoted excerpt from the sale agreement further support for petitioner's position can be found in mr sheldrick's report4 which clearly indicates that this liability is an off-the-balance-sheet item and in footnote g to petitioner's date audit report on the other hand petitioner's form_990 for the fiscal_year ended date shows liabilities of dollar_figure as part of the basis used in computing the claimed loss from the sale to amh it is difficult to reconcile this figure with the figure of dollar_figure which is the updated total amount of liabilities shown on we note that since mr sheldrick was deceased at the time of trial his report was not admitted as an expert report but is part of the record because it was utilized by messrs o'donnell and rosenkranz as a basis for their negotiations petitioner's date balance_sheet additional difficulties arise when one takes into account that amh on date paid dollar_figure in respect of date plan_year and on date paid dollar_figure in respect of date plan_year to be sure as petitioner points out neither of these figures was available on date the closing date of the purchase and sale agreement but the dollar_figure figure was available when petitioner's form_990 for its date fiscal_year was filed and presumably could have been included in the amount of assumed_liabilities had this been done the amount of such liabilities would have exceeded the amount shown on the form_990 dollar_figure without taking into account the net increase if any of liabilities incurred between date and the date closing date as will subsequently appear whether or not the dollar_figure which respondent appears to accept as the purchase_price is increased by the amount of the liability in question will not be critical in deciding the inurement question we reject respondent's argument that there was an overfunding of the pension plans and therefore there is no liability to be taken into account the overfunding upon which respondent relies appears to relate to the calculations applicable when a plan is being terminated which the comparable figure in the date balance_sheet annexed to the purchase and sale agreement was dollar_figure are different from those which determine the liability for contributions in any event there is insufficient evidence in the record to satisfy respondent's burden_of_proof in this aspect of the inurement issue on this basis we accept the testimony of messrs o'donnell and rosenkranz that they thought the figure was approximately dollar_figure and that this was the figure they used in the negotiations as a result we conclude that the purchase_price should be dollar_figure the next question is what was the value of the assets transferred by petitioner to amh we think that the best way to approach this question is to take the date balance_sheet which was mr sheldrick's starting point and make three adjustments to reflect the increase in the amount of cash and treasury bills mr sheldrick's adjustment of dollar_figure to reflect an increase in the value of the hospital land and the values of the belcher road and county road real_estate above the value of dollar_figure at which they were carried on petitioner's books if these three adjustments produce an this round figure is quite close to the actual payments by amh ie dollar_figure for fiscal and dollar_figure the pro_rata portion of fiscal payment for the period prior to sale - x dollar_figure or dollar_figure we have concluded that dollar_figure attributable to the value of two vacant lots should not be a separate item because it may well be that these lots were included in mr shelton's valuation of the hospital's land buildings and improvements excess of asset values over the purchase_price which falls outside a reasonable range of values as related to purchase_price the conclusion that there was inurement will follow and no further analysis will be necessary in respect of the first adjustment the following figures in thousands of dollars rounded are revealing date treasury bills cash and increase over assets over increase book_value dollar_figure big_number big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number it is apparent that between date and the date closing date there was an increase of approximately dollar_figure million in assets or dollar_figure million if one is guided by the date value reflected in the purchase and sale agreement assets as to which there can be no question as to their values as of the pertinent dates and their liquidity at those values the significance of these increases is confirmed when one takes into account that balance_sheet liabilities in thousands of dollars rounded remained relatively unchanged date amount dollar_figure big_number big_number big_number the second adjustment is an increase over book_value of dollar_figure as of date which mr sheldrick made in order to reflect what he considered to be the fair_market_value of the land buildings and improvements of the central hospital complex in this connection we note that there is insufficient evidence in the record for us to arrive at any additional_amount of such adjustment as of the closing date finally we note that mr sheldrick excluded from his valuation of petitioner any consideration of the real_estate not in use and the dollar_figure reflected for such real_estate on petitioner's books this fact was apparently inadequately considered by messrs o'donnell and rosenkranz in their negotiations and by petitioner's officers and directors a defect which is significant in light of the availability of the appraisals dated date and date made for petitioner by herbert blanton which valued such land as follows property county road belcher road total amount dollar_figure big_number big_number dollar_figure if one adds the increase of dollar_figure dollar_figure less dollar_figure reflected for such real_estate on petitioner's date balance_sheet and the dollar_figure adjustment made by mr sheldrick in respect of the value of the hospital complex or a total of approximately dollar_figure to the asset values as of date see supra p which reflected the changes in the values of the cash and treasury bills one arrives at a figure of dollar_figure as the indicated fair_market_value of the assets transferred comparing this figure with the dollar_figure purchase_price see supra p it is apparent that the sale price was almost dollar_figure less than the fair_market_value of the assets acquired this is a substantial amount in relation to the purchase_price and causes us to conclude that the dollar_figure falls outside the upper limit of any reasonable range of fair market values we reach the same conclusion when one compares the increase in the net_worth of petitioner adjusted to take into account the dollar_figure additional liability to the pension funds with the similarly adjusted net_worth reflected in petitioner's date balance_sheet this increase is dollar_figure not we note that the belcher road property was sold on date for dollar_figure and county road property on date for dollar_figure or a total of dollar_figure this would indicate that our use of dollar_figure which is over dollar_figure less may unduly favor petitioner we note that the gap between sale price and asset value would have been even greater if we had not resolved the dollar_figure pension liability question in petitioner's favor taking into account the further increase attributable to the month ending date which when added to the aforementioned increase of dollar_figure related to petitioner's real_estate produces a net increase of dollar_figure finally we note that in addition to the likelihood of increased values for the hospital complex land and the unimproved_real_estate see supra notes and we have not sought to include the values if any attaching to the certificate of need for an additional beds the enhanced value if any of petitioner as a long-term psychiatric hospital facility attaching to the exemption of psychiatric hospitals from the anticipated changes in medicare reimbursement standards which occurred later in but stemmed from legislation antedating the date sale or to the fact that the hospital was resold in for some dollar_figure million we also find it unnecessary to attempt to consider the impact of a prohibition against sale for a 2-year period which was present adjusted net_worth in thousands date adjusted net_worth increase over dollar_figure big_number big_number dollar_figure big_number in the drafts but somehow was omitted in the final purchase and sale agreement under the foregoing circumstances we find it unnecessary to engage in any detailed analysis of the report of petitioner's expert mr mard who arrived at a fair_market_value of dollar_figure approximately dollar_figure more than petitioner reported as the purchase_price on its form_990 for the fiscal_year ended date we think it appropriate to note however that we examined his report and testimony sufficiently to conclude that his analysis would probably require adjustment which would produce a fair_market_value of at least dollar_figure million an amount not insignificantly in excess of the dollar_figure8 million purchase_price we have accepted and an even greater excess over the dollar_figure8 million figure shown on petitioner's above-mentioned form_990 the long and the short of the matter is that the negotiations between mr o'donnell and mr rosenkranz were fatally flawed because of their apparent failure to take into account the obvious and substantial adjustments to mr sheldrick's appraisal as of date in respect of changes between that date and march dollar_figure petitioner' sec_11 the record contains numerous indications of such failure either directly or inferentially from their inability to recall significant aspects of the date sale one example is continued effort to avoid this consequence by arguing that mr sheldrick's report satisfied the independent appraisal condition of respondent's private_letter_ruling see supra p is clearly without merit nothing in that condition can be construed as validating an appraisal which was more than months old at the time of the closing of the transaction to which the ruling relates we hold that respondent has satisfied the burden of proving that the date sale by petitioner to amh resulted in a prohibited inurement and that petitioner was not an exempt_organization under sec_501 during the years at issue exempt_activities for and our holding makes it unnecessary to consider respondent's alternative argument that even if petitioner continued to be exempt after date it lost its exemption in fiscal continued reflected in the following testimony of mr rosenkranz with respect to the belcher road and county road properties q mr rosenkranz did -- by the conclusion of this transaction did you satisfy yourself that the two parcels of land that component of this entire transaction was subsumed within the purchase_price that was ultimately agreed upon a i have no recollection q one way or the other a i have no recollection one way or the other and because the major portion of its expenditures during those years namely payments to fpcf and to amh for patient care constituted prohibited inurement to the board members petitioner also treats respondent's argument as an alternative and does not ask us to grant it exempt status during the aforesaid years if we conclude as we do that it lost such status at an earlier date in this connection petitioner points out that this issue is subsumed in the issues involved in docket no 27403-92x wherein petitioner filed a petition in response to respondent's action in respect of its request for exempt status after date seeking a declaratory_judgment that it was exempt in the years after the sale we now turn to the question of whether petitioner as a taxable entity during the years at issue herein is entitled to certain deductions in computing its taxable_income these deductions are for amounts due fpcf for grants to organizations and patient care and for a claimed net_operating_loss carryforward from its fiscal_year fpcf petitioner had contingent liabilities to the fpcf at various times during its fiscal_year and subsequent taxable years with respect to its hospital activities prior to the date sale the deductibility of those liabilities to the extent that they became fixed or paid during the years is at issue herein first respondent seems to argue that petitioner is not entitled to any deduction because it was no longer in the hospital business to which the expenses attached at the time of payment or accrual this position is without merit it has long been established that if an expense relates to a trade_or_business a taxpayer is still entitled to a deduction for payment in a later year even though the taxpayer is no longer engaged in that trade_or_business 68_tc_294 38_bta_236 second given that the fpcf payments related back to petitioner's hospital business prior to date what is the impact of the fact that at that time petitioner was exempt under sec_501 respondent argues that this exempt status precludes petitioner from claiming the deductions under sec_162 because such deductions are precluded by sec_265 which denies deductions allocable to tax-exempt_income and as provided in sec_161 and sec_261 has priority over sec_162 petitioner's argument fails to take into account sec_265 now sec_265 provides no deduction shall be allowed for-- expenses --any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest whether or not any amount of income of that class or classes is received or accrued wholly exempt from the taxes imposed by this subtitle the tax-exempt status of petitioner during the periods to which the fpcf expenses relate and completely ignores sec_265 petitioner's position is to say the least curious on the one hand it utilizes the relation-back argument in order to relate the fpcf liabilities to its earlier income-producing hospital activities since its activities during the years at issue could not be considered a trade_or_business within the meaning of sec_162 on the other hand it rejects any relation back to take into account that the income produced by its hospital activities was exempt from tax because of its sec_501 status this it may not do we are satisfied that the fpcf liabilities are allocable to petitioner's hospital income in the periods prior to the sale of the hospital and that sec_265 applies that being the case the fact that those payments might have been deductible under sec_162 had petitioner's hospital business produced taxable_income becomes irrelevant since sec_265 prevails over sec_162 by disallowing deductions falling within its ambit which are otherwise allowable see supra note see also 906_fsupp_990 d s c affd in part and vacated in part without published opinion 94_f3d_642 4th cir 88_tc_188 the fact that the nontaxability of the hospital income derived from petitioner's status rather than from the character of the income as such does not prevent the application of sec_265 as we stated in rickard v commissioner supra pincite where the tax exemption attaching to the taxpayer's farm income derived from his status as an indian and the location of the farm on indian land the legislative purpose behind sec_265 is abundantly clear congress sought to prevent taxpayers from reaping a double tax_benefit by using expenses attributable to tax-exempt_income to offset other sources of taxable_income 78_tc_989 affd 710_f2d_1400 9th cir more importantly the supreme court has concluded that congress intended to limit deductions to those expenses related to taxed income 292_us_382 fn refs omitted nor is it relevant that the tax-exempt_income to which fpcf relates was earned by petitioner in an earlier year in stroud v united_states supra the taxpayer was denied a deduction for amounts paid in the taxable_year because of a breach of contract to provide medical service in return for a tax-exempt scholarship received in an earlier year we hold that the fpcf payments in question are not deductible grants to organizations and for patient care respondent disallowed further deductions for petitioner's grants to charitable organizations because of the limit contained in sec_170 which provides that a corporation's deductions for charitable_contributions may not exceed percent of the taxpayer's taxable_income petitioner does not dispute the 10-percent limitation if we sustain the revocation of its tax-exempt status respondent also disallowed the grants for patient care on the basis that the patients were not eligible donees as specified in sec_170 we agree with respondent that the grants for patient care are not eligible charitable_contributions petitioner's reference to revrul_56_304 1956_ 2_cb_306 which provides the basis for allowing sec_501 organizations to distribute funds to individuals is misplaced that ruling assumes that the taxpayer is tax exempt which is not the case during the taxable years involved herein thus we sustain respondent's determination of the amounts allowed for charitable deductionsdollar_figure net_operating_loss_carryover from at the outset we note the facts that the taxable_year is not before us or that it may be a barred year do not preclude us from considering that year for carryforward to the taxable years at issue herein see 95_tc_437 for petitioner reported grants to organizations as dollar_figure and to individuals as dollar_figure whereas the parties agree that petitioner gave dollar_figure to organizations and dollar_figure for patient care since respondent has not requested an increase in the deficiency we sustain the amounts respondent originally allowed petitioner argues that it should be allowed a net_operating_loss carryforward from of dollar_figure respondent argues that petitioner has no loss for because the dollar_figure loss reported on the sale of the hospital was a capital_loss the deduction of which is limited to capital_gain under sec_1211 or zero in this case and the dollar_figure fpcf expense is not deductible in the alternative if any loss is allowable on the hospital sale respondent points out certain discrepancies between the amounts used to calculate the loss on the sale as reported on the return and those on petitioner's earlier financial statements petitioner's response to respondent's capital_loss limitation argument is that the assets of the hospital must be analyzed separately to determine their nature as capital or ordinary items having made that analysis petitioner then allocates the sales_price among those assets in order to measure the extent of its deductible loss petitioner recognizes that capital losses can only be carried forward against capital_gains see sec_1212 as a result petitioner will not benefit from any portion of its claimed loss which is a capital_loss because it had no capital_gains during the taxable years before us the sale of a business involves the sale of its assets the nature of its assets determines the nature of the gain_or_loss the purchase_price must be allocated among the assets sold based on their fair_market_value and then the gain_or_loss on the individual assets determined other than the assets of cash and treasury bills the record before us contains little information with which to ascertain the fair_market_value of the individual assets in this connection we note that any such allocation would require us to determine specific fair market values in contrast to the range standard which we were able to apply in respect of the inurement issue petitioner's allocation of the purchase_price has several defects one of which is that it is based upon book values of assets rather than fair market values in any event we have increased the purchase_price and therefore decreased petitioner's loss by dollar_figure representing obligations to petitioner's pension plans assumed by amh we have also determined that the fpcf expenses are not deductible in the post- years and the same reasoning applies to the dollar_figure reported as an fpcf item on the form_990 for fiscal these two adjustments total dollar_figure and reduce petitioner's claimed loss to dollar_figure we are satisfied that a sufficient portion of the loss on the sale of the hospital would be capital so as to eliminate any remaining loss if there was a loss at all regardless petitioner has not met its burden of proving see supra p that it had a net_operating_loss for in keeping with the above holdings decision will be entered for respondent


internal_revenue_service number release date index number --------------------------------------------------- ----------------------------------------- -------------------- ------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------ telephone number --------------------- refer reply to cc ita b05 plr-147524-10 date date legend taxpayer ------------------------------------------------------- --------------------------------------- year ----------- year ----------- date ------------------ date ---------- date -------------- dear --------------- this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above-named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending date to a taxable_year ending date effective date year the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in of the procedure and administration regulations the taxpayer’s form_1128 requesting a change in annual_accounting_period to a tax_year ending date was due on or before date year but was not timely filed the information furnished indicates that the taxpayer intended to make the change in a timely manner but that due to an error or misunderstanding the form was not timely filed the error was not due to any lack of due diligence or prompt action on the part of the taxpayer sec_301 a of the regulations provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of plr-147524-10 sec_301_9100-3 requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer’s late-filed form_1128 requesting permission to change to a tax_year ending date effective for the tax_year ending date year will be considered timely filed a copy of this letter_ruling taxpayer’s form_1128 and other relevant documents are being forwarded to the service_center where the taxpayer files its federal_income_tax returns with instructions that the form_1128 be considered timely filed and processed in accordance with established procedures under revproc_2006_45 the ruling contained in this letter is based upon facts and representations furnished by the taxpayer and is limited to the filing of form_1128 except as specifically addressed herein no opinion is expressed as to whether the taxpayer qualified for the automatic consent procedure or regarding the tax treatment of the subject transaction under the provisions of any other section of the internal_revenue_code or income_tax regulations that may be applicable thereto this office has not verified any of the materials submitted in support of the requested ruling verification of factual information representations and other data is within the examination jurisdiction of the taxpayer’s irs industry director copies of this letter_ruling are being provided to the taxpayer’s authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s william a jackson william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy for sec_6110 purposes copy of this letter_ruling


department of the treasury internal_revenue_service se t ep ral ts uniform issue list ed legend ira x amount a date date company a dear nak ek kkk kkk ake this is in response to a request submitted on your behalf by your authorized representative dated date as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 d of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you have not attained age ira x which was maintained by company a you represent that a distribution was made from ira x and that the distributed_amount was not invested in an ira as you intended this distribution was made on date and totaled amount a you had an individual_retirement_arrangement ira you assert that your failure to accomplish a rollover of amount a within the 60-day period prescribed by sec_408 d was due to the actions of a financial representative of company a and your lack of knowledge regarding the investment of the distribution a financial representative of company a effectuated a distribution on date company a discovered the distribution on or before date company a notified you when they discovered that the above-referenced financial representative had used the distributed funds for his own benefit and contrary to your intention that amount a remain in an ira you and company a have entered into a settlement agreement pursuant to which company a is holding funds totaling amount a for your benefit ve page pending the service’s response to this ruling_request you seek a ruling waiving the day period to roll over amount a based on the facts and representations stated above the following rulings are requested you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 d of the code regarding amount a you request a ruling the internal_revenue_service allow a reasonable amount of interest accrued during the distributed period related to amount a to be rolled over sec_408 d of the code provides that except as otherwise provided in sec_408 d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 d of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 d of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 d sec_408 d b of the code provides that sec_408 d does not apply to any amount described in sec_408 d a i received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 d a i from an ira which was not includible in gross_income because of the application of sec_408 d sec_408 d d of the code provides a similar 60-day rollover period for partial rollovers sec_408 d e of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 a kkk page sec_408 d i of the code provides that the secretary may waive the 60-day requirement under sec_408 d a and d d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 d i of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred with respect to your first ruling_request the information presented and documentation you submitted is consistent with your assertion that your failure to accomplish a timely rollover was caused by the unauthorized use of the ira x distribution totaling amount a therefore pursuant to sec_408 d of the code the service hereby waives the 60-day rollover requirement with respect to distribution totaling amount a from ira x you are granted a period of days from the issuance of this ruling letter to contribute into a rollover ira provided all other requirements of sec_408 d of amount a the code except the 60-day requirement are met with respect to such contribution contributing amount a into one or more iras described in code sec_408 will be considered a rollover_contribution within the meaning of sec_408 d of the code with respect to your second ruling_request waiver of the 60-day requirement allows for a rollover of the amount distributed from the qualified_plan or qualified retirement account but does not allow for the rollover of interest accrued during the distributed period therefore pursuant to sec_408 d a of the code in response to your second ruling_request the service concludes as follows a reasonable amount of interest accrued during the distributed period with respect to amount a may not be rolled over and the contribution of said interest into one or more iras described in code sec_408 will not constitute a tax-deferred rollover within the meaning of code sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter expresses no opinion as to whether ira x satisfied the requirements of sec_408 of the code this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent kak page pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t3 sincerely yours frances v sloan manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc wae


internal_revenue_service number release date index number ------------------ ------------------------------------- ------------------------------------------------- ---------------------------------- in re ------------------------------------- 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 intl b06 plr-104420-15 date date ty ------- legend taxpayer law firm law firm parent year date date date date date dear --------------- ------------------------------------- ----------------------------- ----------------------------- ------------------- ------- ---------------------- ------------------------ ------------------------ --------------------------- -------------------------- this responds to a letter dated date submitted by law firm requesting that the internal_revenue_service service grant taxpayer an extension of time under sec_301_9100-1 and sec_301_9100-3 to file form 4876-a election to be treated as an interest_charge_disc for taxpayer’s first taxable_year the rulings contained in this letter are based upon information and representations submitted by taxpayer law firm and law firm and accompanied by penalties of perjury statements executed by appropriate parties this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-104420-15 facts taxpayer is a domestic_corporation wholly owned by parent parent is owned by seven individuals taxpayer operates under a commission arrangement with parent law firm is a full-service law firm law firm is a regional law firm that specializes in business and litigation matters in year parent engaged law firm to incorporate a new entity taxpayer and relied on law firm to arrange for taxpayer to qualify as an interest charge domestic_international_sales_corporation ic-disc including but not limited to the preparation and filing of form 4876-a taxpayer was incorporated on date and was intended to be treated as an ic-disc from inception on date law firm sent form 4876-a to the service law firm received from the service a return copy of the form 4876-a with the date stamp of receipt of date taxpayer timely filed its form 1120-ic-disc interest charge domestic_international_sales_corporation return for its first taxable_year ended date in a letter dated date the service stated that it was unable to process the form 1120-ic-disc because taxpayer did not have an approved form 4876-a on file with the service and that form 4876-a had previously been denied both taxpayer and law firm represent that they did not receive any notification that form 4876-a had been denied prior to date taxpayer believes the reason for the denial of the form 4876-a was an inadvertent omission of information on the form 4876-a as originally filed taxpayer relied on law firm to correctly prepare form 4876-a and had no knowledge of the omission law firm submitted this request for relief under sec_301_9100-3 for an extension of time to file form 4876-a effective date law and analysis sec_992 of the internal_revenue_code code provides that an election by a corporation to be treated as a disc1 shall be made by such corporation for a taxable_year at any time during the 90-day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate sec_992 of the code provides that such election shall be made in such manner as the secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on such first day of the first taxable_year for which such election is effective consent to such election as used in this letter the terms ic-disc and disc have the same meaning plr-104420-15 temp sec_1_921-1t provides in part that a corporation electing ic- disc status must file form 4876-a and that a corporation electing to be treated as an ic-disc for its first taxable_year shall make its election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 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 that the grant of relief will not prejudice the interests of the government based on the facts and representations submitted with taxpayer’s ruling_request we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic-disc for taxpayer’s first taxable_year the granting of an extension in this ruling letter is not a determination that taxpayer is otherwise eligible to make the election or to claim ic-disc status or benefits see sec_301_9100-1 taxpayer should attach a copy of this ruling letter to its federal_income_tax return for the taxable years to which this letter applies 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 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 plr-104420-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _____________________________________ angela e holland acting assistant to branch chief branch office of associate chief_counsel international


third party communication none date of communication not applicable cca_2015082514312741 id 6050i uilc number release date from sent tuesday date pm to cc bcc subject fw 6050i question hi -------- it is our view that payment of an option fee in the context of a pawnshop business transaction constitutes a retail_sale for purposes of defining cash under sec_6050i which requires reporting of cash receipts of more than dollar_figure as we understand the transaction under colorado law pawnshop transactions are structured as either as a purchase transaction or a contract for purchase with the customer as the seller and the pawnbroker as the buyer purchase transactions are outright sales to the pawnbroker with no later right to recover the item the colorado pawnbroker statute defines a contract for purchase as a contract entered into between a pawnbroker and a customer pursuant to which money is advanced to the customer by the pawnbroker on the delivery of tangible_personal_property by the customer on the condition that the customer for a fixed price and within a fixed period of time to be no less than thirty days has the option to cancel such contract colo rev stat we understand however that in some cases the consumer delivers title to the vehicle to the pawnbroker rather than deliver the vehicle itself see colorado office of the attorney_general administrative interpretation no date under sec_6050i and its regulations the term cash includes coin and currency of the united_states sec_1_6050i-1 or of any foreign_country sec_6050i which circulate in and are customarily used and accepted as money in the country of issue sec_1_6050i-1 and whether or not in bearer form sec_1 6050i d a cashier’s check by whatever named called including treasurer’s check or bank check bank draft traveler’s check or money order sec_1_6050i-1 with a face_amount of dollar_figure sec_1_6050i-1 and which is received in a designated reporting transaction or any transaction in which the recipient knows that the specified monetary instrument is being used in an attempt to avoid these reporting requirements specified monetary transactions are treated as cash if they are received in a designated reporting transaction a designated reporting transaction is a retail_sale or the receipt of funds by a broker or other intermediary in connection with a retail_sale of a consumer durable a collectible or a travel or entertainment activity sec_1_6050i-1 for purposes of the definition of a designated reporting transaction a retail_sale is any sale whether for resale or for any other purpose made in the course of a trade_or_business if that trade_or_business principally consists of making sales in the course of such trade_or_business of items that will be resold see publication reporting cash payments of over dollar_figure received in a trade_or_business pincite date we believe this definition is broad enough to encompass option payments made with respect to a contract for purchase in the course of a pawn business subject_to colorado law the definition of a contract for purchase under section appears to describe a sales contract that may be cancelled for purposes of the internal_revenue_code the term sale is given its ordinary meaning and is generally defined as a transfer of property or a promise to pay money see 380_us_563 691_f3d_1119 9th cir anschultz co v commissioner 664_f3d_313 10th cir in the case of a contract for purchase the customer is transferring the automobile or title document in exchange of a cashier’s check by whatever named called including treasurer’s check or bank check bank draft traveler’s check or money order with an ability to later cancel the contract moreover publication on page states for example you may have to file form_8300 if you are a pawnbroker although irs publications are not authoritative bobrow v commissioner docket no order on motion for reconsideration irs publication is not binding precedent and does not constitute substantial_authority for any position we believe it is instructive for purposes of setting forth irs policies and interpretation of tax law we hope this has been helpful please contact this office if we can be of further assistance ---------------- ------------ ------------------ --------------------