t c memo united_states tax_court jimastowlo oil llc et al john j petito tax matters commissioner of internal revenue respondent partner petitioner v docket nos filed date j and oc llcs each purchased a working_interest in an oil_and_gas leasehold each deducted expenses on its returns for the audit years for j and for oc that were allegedly associated with its working_interest r issued notices of final_partnership_administrative_adjustment fpaas to the llcs denying the deductions treating reported losses as passive_activity the following cases are consolidated herewith oil coming we are humming llc john j petito tax_matters_partner docket no jimastowlo oil llc john j petito tax_matters_partner docket no oil coming we are humming llc john j petito tax_matters_partner docket no and jimastowlo oil llc john j petito tax_matters_partner docket no losses under sec_469 and asserting accuracy-related_penalties under sec_6662 after a trial addressing the issues raised in the fpaas substantive issues we issued an order directing the parties to address our concern that the so-called income programs purchased by the llcs constituted partnerships for federal_income_tax purposes so that we were without jurisdiction to consider the merits of what would then be the llcs' pass-through deductions from a source partnership ie computational adjustments at the llcs' partner level before the propriety of those deductions had been decided at the source partnership level citing 95_tc_243 87_tc_783 and alhouse v commissioner tcmemo_1991_652 aff'd sub nom 12_f3d_166 9th cir both parties moved to reopen the record which we did and we conducted a second trial to address the jurisdictional issue r argues that the income programs did not constitute partnerships for federal tax purposes and that therefore we have jurisdiction to decide the substantive issues p argues that the llcs were members of de_facto partnerships so that we lack jurisdiction to decide the substantive issues held each llc together with the other working_interest owners in the leasehold joined together to conduct an unincorporated business which for federal_income_tax purposes must be classified as a partnership held further the fpaas issued to the llcs to the extent that they make adjustments only with respect to the substantive issues partnership items are invalid because there have been no source partnership-level proceedings held further we will therefore on our own motion dismiss these consolidated cases for lack of jurisdiction insofar as the individual fpaas pertain to computational items john j petito pro_se theodore robert leighton diane r mirabito andrew ira ouslander and deborah aloof for respondent in docket nos and theodore robert leighton diane r mirabito andrew ira ouslander deborah aloof and joshua nachman for respondent in docket no memorandum findings_of_fact and opinion halpern judge these consolidated cases are partnership-level actions based upon petitions filed pursuant to sec_6226 jimastowlo oil llc jimastowlo and oil coming we are humming llc oil coming the two unless otherwise indicated all section references are to the internal_revenue_code as amended sec_6226 is one of a group of provisions currently comprising secs entitled tax treatment of partnership items that was added to the internal_revenue_code by the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite tefra partnership provisions in general those provisions establish special procedures for auditing partnership returns whereby the return is subject_to a single audit in which one partner acts for the partnership but all partners are bound by the results of the audit the audit results may be contested in court in a unified proceeding the results of which are also binding upon all partners see boris i bittker lawrence lokken federal taxation of income estates and gifts para at s112-88 cum supp no entities involved in these consolidated cases together llcs are new york limited_liability companies that pursuant to sec_301_7701-3 proced admin regs constitute partnerships for federal_income_tax purposes the petitioner in each case is john j petito presently tax_matters_partner who resided in new york when he filed the petitions consistent with their tax classification as partnerships both jimastowlo and oil coming filed forms u s return of partnership income for the audit years for jimastowlo and for oil coming the petitions were filed in response to respondent's notices of final_partnership_administrative_adjustment fpaas issued to the tax_matters_partner for each llc for each of the audit years respondent's fpaas disallow deductions claimed by the llcs in connection with their percentage shares in working interests in oil_and_gas leaseholds and determine accuracy-related_penalties under sec_6662 with respect to partnership items of the llcs in addition in the fpaa issued to jimastowlo for and in his answer to the petition filed on behalf of oil coming with respect to respondent asserts that the passive_activity_loss limitation rules of sec_469 apply ie that the exception to those rules afforded by sec_469 for working interests in oil_and_gas property is inapplicable to jimastowlo for and to oil coming for petitioner defends the challenged deductions denies that sec_469 applies denies that the sec_6662 accuracy-related_penalty applies and asserts presumably as an alternative to the challenged deductions that because both of the llcs invested in what was discovered in to be a ponzi scheme each is entitled to a theft_loss deduction for its entire investment under sec_165 we conducted a trial first trial in date after which the parties submitted briefs addressing the foregoing issues substantive issues during our consideration of the substantive issues we became concerned that certain so-called income programs purchased by the llcs which gave rise to the disputed deductions constituted partnerships for federal_income_tax purposes as will be more fully explained below the term income program was used by a company named energytec inc energytec to identify a group of oil_and_gas wells and the percentage working_interest therein purchased by a particular purchaser from energytec if our concern was borne out the substantive issues would within the meaning of sec_6231 constitute partnership items determinable pursuant to sec_6221 at the partnership level in that event we would be without jurisdiction to decide the substantive issues in the partner-level proceeding before us we ordered supplemental briefing addressing whether the income programs in which the llcs had invested constituted partnerships subject_to the tefra partnership provisions and if so whether we should dismiss these consolidated cases on our own motion for lack of jurisdiction we also directed that should either party consider it necessary to introduce additional evidence in order to properly address those issues that party should move to reopen the record for that purpose both parties so moved we granted the motions and we conducted a further trial second trial at which the parties introduced testimony and documentary_evidence after the second trial the parties submitted the supplemental briefs that we had ordered respondent argues that the llcs were not on account of their oil_and_gas investments partners in any partnerships and so we should not dismiss these cases for lack of jurisdiction petitioner argues that the investments were in de_facto partnerships and we should dismiss it is within our authority to raise the issue of jurisdiction e g 139_tc_418 as the party alleging jurisdiction respondent bears the burden of proving jurisdictional facts by a preponderance_of_the_evidence see 418_f2d_883 8th cir citing 298_us_178 we find that on account of each llc's purchase of an income program each was a member of a partnership for federal_income_tax purposes we are therefore precluded by sec_6221 from considering the substantive issues including the additional issues raised by respondent of whether if partnerships do exist those partnerships should be disregarded on account of a lack of economic_substance or on account of some other antiabuse doctrine we will dismiss for lack of jurisdiction insofar as the individual fpaas pertain to computational items findings_of_fact the llcs' investments in the schuyler and j b milstead oil leases energytec a nevada corporation was organized in to engage in oil- and gas-producing activities through the acquisition of oil_and_gas leaseholds that previously had been the object of exploration and producing activity and that no longer were producing or operating because of abandonment or neglect energytec's rights in those leaseholds constituted what are known as working interests each llc paid dollar_figure for its share of energytec's working_interest in certain leaseholds the working_interest in which jimastowlo shared involved black's law dictionary 9th ed defines a working_interest in oil_and_gas as the rights to the mineral_interest granted by an oil-and-gas lease so called because the lessee acquires the right to work on the leased property to search develop and produce oil_and_gas as well as the obligation to pay all costs oil wells on the schuyler leasehold rusk county texas schuyler leasehold the working_interest in which oil coming shared involved nine oil wells on the j b milstead leasehold rusk county texas milstead leasehold each llc obtained its share of energytec's working_interest pursuant to an assignment bill of sale and conveyance from energytec dated date in jimastowlo's case and date in oil coming's case the assignment to jimastowlo stated that it was to be effective as of december pincite a m and the one to oil coming stated that it was to be effective as of september pincite a m both assignments were executed on behalf of energytec by don lambert assistant to the president energytec inc the assignment to jimastowlo was not recorded under texas law until date and there is no evidence that the assignment to oil coming was ever recorded before receiving the foregoing assignments the llcs received evaluation reports evaluation reports with respect to the oil wells included in the working interests in which they would share the evaluation reports dated date in the case of the schuyler leasehold and date in the case of the milstead leasehold were prepared for energytec by frank w cole engineering cole engineering the evaluation report with respect to the schuyler leasehold referenced income program no and the evaluation report with respect to the milstead leasehold referenced income program no as stated the term income program was used by energytec to identify the wells and the percentage share in the working_interest therein offered by it to a particular purchaser for example income program no identified the wells on the schuyler leasehold and the working_interest therein that jimastowlo purchased from energytec and income program no identified the wells on the milstead leasehold and the working_interest therein that oil coming purchased from energytec other persons or groups of persons identified in the record purchased percentage working interests in both the schuyler leasehold and the milstead leasehold income program no identified more in oil llc as the owner of a working_interest in the wells on the schuyler leasehold and income program no identified robert ackerman as the owner of a working_interest in the wells on the milstead leasehold energytec retained a working_interest in the wells on each of those leases each evaluation report describes the history of the field of which the leasehold in question was a part eg number of wells total production to date and the geological features of the leasehold area each recites that energytec acquired the leasehold in question and operates the wells on it each then states that energytec is offering to sell a program of units for a total price of dollar_figure with the program having a working_interest in each of the wells in the case of the schuyler lease or wells in the case of the milstead lease each evaluation report contains projections of the monthly pro_rata gross_income operating_expenses and net operating income for each program investor together with a table showing the projected 'turn-key' costs of acquiring and reworking the or wells the evaluation reports project monthly net operating income of dollar_figure for each investor in the schuyler leasehold wells and dollar_figure for each investor in the milstead leasehold wells the evaluation report with respect to the schuyler leasehold states effective date of the assignment is date and the first disbursement will be made in mid-date the evaluation report with respect to the milstead leasehold states an effective date-of-assignment of date and an initial disbursement date of mid-date each evaluation report concludes with a summary stating this is an old producing lease with a long history of satisfactory oil production these wells should produce economically for the next to years with a modest decline rate this should be an excellent long term investment operation of the wells usually the arrangement among the owners of working interests in the same well or wells is governed by the terms of a joint operating_agreement agreed to by all of the owners which sets forth the rights duties and obligations of each party to the agreement among other things the operating_agreement designates an operator who conducts and controls operations of the well ie producing the oil_and_gas from the well billing the nonoperators for costs incurred and distributing the profits if any during the audit years energytec operated the wells on the schuyler and milstead leaseholds on a cooperative basis ie as an economic activity collectively owned and cooperatively exploited for the working_interest owners but it did so without benefit of a joint operating_agreement executed by the working_interest owners to carry out the actual operation of the wells during the audit years energytec employed first cole engineering until date and thereafter commanche well service corp commanche a wholly owned subsidiary of energytec each collected oil from the wells in tanks sold the collected oil offset operating_expenses against sale proceeds and apportioned what proceeds remained among the working_interest owners in proportion to their percentage interests no working_interest owner could take in_kind or sell on its own its share of any oil production in date energytec presented the llcs and the other working_interest owners in the schuyler and milstead leaseholds with draft joint_operating_agreements formally designating commanche as operator of the wells on the respective leaseholds many of the leasehold owners including the llcs would not execute the draft agreements payments to working_interest owners the predictions in the evaluation reports regarding oil well production turned out to be wildly optimistic from the inception of their interests until date energytec did make monthly payments to the llcs as stated in the evaluation reports dollar_figure to jimastowlo and dollar_figure to oil coming but as stated in the evaluation reports those payments were based on projected net_income from drilling operations not actual net_income and the income projections were based on projected production which was substantially in excess of actual production as of date energytec categorized many of the wells included in both the schuyler and milstead leases as non producing operational hold the date and date payments to oil coming were dollar_figure and dollar_figure respectively as a result of the imbalance between net_income from production and payments to working_interest owners involved in energytec's various drilling operations including those with respect to the schuyler and milstead leaseholds energytec sent a working_interest report dated date to the llcs and the other working_interest owners the working_interest reports advise of commanche's replacement of cole engineering as operator of energytec's oil_and_gas interests and exhibit a attached to each report sets forth each llc's investment in its respective drilling program the total amount as of date paid to each and each's pro_rata share of the actual net revenue to that date from the program those pro_rata shares were the amounts each llc would have received had it been paid only its working_interest share of net_revenues the excess of the payments to each over its pro_rata share of net revenue is denominated an amount due energytec the working_interest report explains that normally in oil_and_gas operations of the kind in which the llcs were involved which the report calls joint interest operations sometimes referred to as joint ventures the operator bills the working_interest owners for their pro_rata shares of the monthly expenditures and monthly remits to them their pro_rata shares of the net_revenues from operations after expenses the report then notes that in the case of energytec's jointly owned oil_and_gas drilling operations the majority of the working_interest owners were receiving recurring payments that did not fluctuate regardless of production oil_and_gas prices or lease operating_expenses l ease operating expense and capital expenditures on the majority of the leases held by working_interest owners has been paid_by energytec with no provision for joint interest billings the effect of these recurring payments and the costs borne by energytec was the acceleration of the return on the investment by working_interest owners to the detriment of the cash position and earnings_of energytec after reiterating that i n many cases the recurring payments have exceeded the net revenue that was due to the working_interest owners the report states if this situation applies to you subsequent revenue distributions will be applied against the outstanding balance due to energytec until the balance is collected in full as an alternative the affected working_interest owners were offered the right to pay the outstanding balance due energytec and subsequently receive revenue distributions based upon actual revenues less applicable lease operating_expenses exhibit a attached to the working_interest report sent to jimastowlo lists amounts paid to jimastowlo as of date of dollar_figure and net revenue as of that date from actual production gross revenue of dollar_figure less actual expenses of dollar_figure of dollar_figure resulting in an amount due energytec of dollar_figure the corresponding figures for oil coming as of date were payments of dollar_figure and net revenue from actual production gross revenue of dollar_figure less actual expenses of dollar_figure of dollar_figure resulting in dollar_figure due energytec thereafter both jimastowlo and oil coming began receiving monthly statements of amount due to energytec from energytec showing a balance forward of the amount due reduced by each's pro_rata share of the net revenue from current month activity resulting in an ending balance of the amount due to be carried over to the subsequent month statements of account sent to jimastowlo show an amount due energytec of dollar_figure as of date the same amount due as set forth on exhibit a of the date working_interest report sent to jimastowlo indicating that there was no net revenue from production associated with the schuyler leasehold wells between date and date statements of account sent to oil coming show that by date oil coming's amount due energytec had been reduced from dollar_figure to dollar_figure by its pro_rata share dollar_figure of net revenue from production associated with the milstead leasehold wells litigation instituted by the working_interest owners many of the working_interest owners other than energytec were unhappy with the state of affairs described in the working_interest reports they sent letters to energytec objecting and demanding to be paid on the basis of monthly projected production rather than actual net_revenues from production the former being consistent with what they believed to be their agreement or understanding with frank w cole representing both cole engineering and energytec and who before date was the chairman of the board chief_executive_officer and chief financial officer of energytec as to the nature of their working interests thereafter on date jomar oil llc jomar a working_interest owner involved in one of energytec's oil well drilling programs instituted suit against energytec frank w cole and other individuals in the u s district_court for the northern district of texas seeking rescission of the investment and monetary damages for alleged misrepresentation fraud violation of federal and state securities laws breach of contract and conversion of funds on the part of the defendants jomar litigation jomar was joined in that suit by numerous other working_interest owners involved in energytec drilling programs including the llcs by the filing of an amended consolidated complaint in date and a consolidated complaint in date jimastowlo alleged with respect to income program consisting of its share of the working_interest in the schuyler leasehold wells that energytec's evaluation report and the purchase agreement knowingly or recklessly made material misrepresentations and false statements in addition jimastowlo incorporated allegations common to all of the consolidated plaintiffs that energytec omitted material facts including the fact that the true nature of the income programs was a 'ponzi' scheme or part of a 'ponzi' scheme being perpetrated by energytec whereby the investment returns promised to the plaintiffs were illusory oil coming made essentially identical allegations with respect to income program consisting of its share of the working_interest in the milstead leasehold wells in its answer dated date energytec denied the allegations of the various plaintiffs including those of jimastowlo and oil coming sought rejection of all claims and asserted counterclaims for unreimbursed amounts paid in excess of net_revenues on june and date the court denied motions by two of the individual defendants in the jomar litigation to dismiss the consolidated complaint see jomar oil llc v energytec inc no 07-cv-1782-lecf wl n d tex date jomar oil llc v energytec inc no 07-cv-1782-l wl n d tex date subsequently in its order dated date the court having considered the parties' status report and having stayed the claims against energytec on account of its chapter bankruptcy determined that it is appropriate to stay the remaining claims brought by plaintiffs and third-party plaintiffs and it further determined that the case should be and is hereby administratively closed the court directed the parties to move to reopen the case within days of the end of bankruptcy proceedings or upon the lift of the bankruptcy stay to date there has been no decision on the merits in the jomar litigation llcs' returns none of the forms that the llcs filed for the audit years indicates that either was a member of any partnership or joint_venture nor do those returns identify any gross_receipts or deductions attributable to another source partnership on line of schedule b other information of each of those returns each llc answered no to the question whether it owned any interest in another partnership nor did those returns contain entries derived from a schedule_k-1 partner's share of income deductions credits etc issued to the llcs by any source partnership most if not all of the llcs' deductions that respondent challenges herein eg oil gas expenses-idc oil depletion exp oil gas production expenses qual production activities relate to the production or attempted production of oil all of the forms for the audit years state the llcs' principal business activity to be manufacturing and state its principal product or service to be oil_and_gas production energytec's returns the forms u s_corporation income_tax return filed by energytec for state its principal business activity as oil_and_gas exploration the form_1120 for reports gross_receipts of over dollar_figure million attributable to disposition of various working interests none of those returns reports any income from u s partnerships or pass-through entities or for from nonincludible in its consolidated_return u s entities no schedules k-1 are attached to any of those returns opinion i applicable principles of law a definitions of partnership and partner in pertinent part sec_761 defines a partnership for purposes of subtitle a income taxes as including a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business or venture is carried on see also sec_1_761-1 income_tax regs which provides the term partnership means a partnership as determined under sec_301_7701-1 sec_301_7701-2 and sec_301_7701-3 of this chapter in pertinent part sec_301_7701-1 proced admin regs provides whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law in pertinent part sec_301 a proced admin regs adds a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom it cautions however nevertheless a joint undertaking merely to share expenses does not create a separate_entity for federal tax purposes id sec_301_7701-2 proced admin regs defines a business_entity as any entity recognized for federal tax purposes that is not a_trust or otherwise subject_to special treatment in pertinent part sec_301_7701-2 proced admin regs states the term partnership means a business_entity that is not a corporation and that has at least two members see also 337_us_733 in which the supreme court defined a partnership as an organization for the production_of_income to which each partner contributes one or both of the ingredients of income-capital or services a domestic business_entity with two or more members that is not formed as a corporation under state or federal_law a per_se_corporation and that has not elected to be classified as a corporation is classified as a partnership see sec_301_7701-3 and b proced admin regs sec_6231 generally defines the term 'partnership' for purposes of the tefra provisions as any partnership required to file a return under sec_6031 sec_6031 applies to partnerships as defined in sec_761 sec_6231 defines a partner as a partner in the partnership and in pertinent part sec_6231 defines a pass-thru_partner as a partnership through whom other persons hold an interest in the partnership with respect to which proceedings under this subchapter the tefra provisions are conducted should we find that the operation of the wells on the schuyler and milstead leaseholds sometimes well operations for the benefit of energytec and the other working_interest owners including the llcs created separate entities classified as partnerships for federal_income_tax purposes with the llcs as partners therein it is clear that as llcs taxable as partnerships the llcs would constitute pass-thru partners under sec_6231 b jurisdiction over and definitions of partnership items and affected items sec_6221 provides sec_6221 tax treatment determined at partnership level except as otherwise provided in this subchapter eg sec_6223 sec_6227 and sec_6231 involving special circumstances in which partnership items are treated as nonpartnership_items the tax treatment of any partnership_item and the applicability of any penalty addition_to_tax or additional_amount which relates to an adjustment to a partnership_item shall be determined at the partnership level in pertinent part sec_6231 defines a partnership_item as any item required to be taken into account for the partnership's taxable_year to the extent irs regulations provide that such item is more appropriately determined at the partnership level than at the partner level sec_301_6231_a_3_-1 proced admin regs includes as partnership items more appropriately determined at the partnership level than at the partner level t he partnership aggregate and each partner's share of a number of listed items including i tems of income gain loss deduction or credit of the partnership and also including t he depletion_allowance under sec_613a with respect to oil_and_gas wells sec_301_6231_a_3_-1 vi d proced admin regs sec_6231 defines the term affected_item as any item to the extent such item is affected by a partnership_item the existence of an affected_item normally results in a computational adjustment defined as the change in the tax_liability of a partner which properly reflects the treatment of a partnership_item sec_6231 in the case of a computational adjustment that does not require a partner-level determination the commissioner is not required to issue a notice_of_deficiency before assessing the resulting tax_deficiency against each partner see sec a sec_301_6231_a_6_-1 proced admin regs a computational adjustment that does require a partner-level determination is subject_to the deficiency procedures sections see sec a sec_301_6231_a_6_-1 proced admin regs because affected items depend upon partnership-level determinations with respect to partnership items any issuance of notice_of_deficiency or fpaa regarding affected items and any resulting litigation must await the outcome of the partnership proceeding or the expiration of the time to initiate one see 87_tc_783 that rule applies equally to affected items reported by a pass-thru_partner that were derived from a lower tier or source partnership see 95_tc_243 see also rawls trading l p v commissioner t c wherein the commissioner simultaneously issued fpaas to two lower tier source partnerships and one upper tier or interim pass-thru partnership we held on our own motion that because the fpaa issued to the interim partnership reflected only computational adjustments resulting from adjustments to the source partnership returns the fpaa issued to the interim partnership was invalid and did not confer jurisdiction on us id pincite the principle enunciated in maxwell sente inv club p'ship of utah and rawls trading that we lack jurisdiction to redetermine affected items attributable to a source partnership before the source partnership-level proceedings have been completed applies even when the members of the source partnership have failed to recognize that they have created a separate_entity ie a partnership for federal_income_tax purposes and have not therefore filed a partnership return on its behalf and the commissioner has neither conducted a source partnership-level audit nor issued an fpaa to it see alhouse v commissioner tcmemo_1991_ aff'd sub nom 12_f3d_166 9th cir section c provides that if a partnership fails to file a return for any taxable_year which would be the case herein should we determine that the well operations created separate entities classified as partnerships any_tax attributable to a partnership_item or affected_item arising in such year may be assessed at any time c treatment of the sec_469 issue sec_469 provides rules limiting passive_activity_losses and credits sec_469 provides that a working_interest in any oil or gas property is per se not a passive_activity provided that the interest is not held through an entity that limits the interest holder's liability with respect to that interest assuming the well operations did in fact create separate entities classified as partnerships for federal_income_tax purposes the issue of whether the members of the llcs could avoid application of the passive_activity_loss rules pursuant to sec_469 should be considered an affected_item that conclusion is based upon the similarity between that issue ie applicability of the limited_liability proviso and the issue of whether partnership losses exceed the amounts for which the partners are at risk under sec_465 which we have held to constitute an affected_item see 94_tc_853 d treatment of the penalty issue the accuracy-related_penalties respondent imposed against the llcs are described as applying to all under-payments of tax attributable to adjustments of partnership items therefore should we determine that the alleged underpayments herein relate to partnership items attributable to source partnerships in which the llcs are partners the applicability of those alleged penalties would have to be determined at that source partnership level pursuant to sec_6221 see also sec_6226 granting a reviewing court in a tefra proceeding jurisdiction to determine the applicability of any penalty addition_to_tax or additional_amount which relates to an adjustment to a partnership_item sec_301_6221-1 proced admin regs states that partner-level defenses to any penalty or addition_to_tax such as the reasonable_cause exception of sec_6664 in these cases petitioner's claim that he reasonably relied on supporting documentation may not be asserted in the partnership-level proceeding but may be asserted through separate refund actions following assessment and payment sec_301_6221-1 proced admin regs also states that p artner-level defenses to such items can only be asserted through refund actions following assessment and payment see also sec c c together providing that a partner may file a claim_for_refund asserting the commissioner's improper imposition of any penalty or addition_to_tax at the partnership level including the assertion of any partner level defenses that may apply 131_tc_275 when considering the determination of penalties at the partnership level the court can consider the defenses of the partnership but not partner-level defenses of individual partners courts have deemed it appropriate however under certain circumstances to consider partner-level defenses to the imposition of penalties and additions to tax in the partnership-level proceeding see eg tigers eye trading llc v commissioner tcmemo_2009_121 wl at partnership-level defenses include all defenses that require factual findings that are generally relevant to all partners or a class of partners santa monica pictures llc v commissioner tcmemo_2005_104 wl at 472_fsupp2d_885 e d tex aff'd 568_f3d_537 5th cir in any event for reasons explained above partner-level defenses to the imposition of the sec_6662 accuracy-related_penalty may not be tried in a partner-level proceeding before the application of that penalty to the partnership has been determined in a partnership-level proceeding e disregarding a partnership assuming the well operations did in fact create separate entities classified as partnerships for federal_income_tax purposes the determination of whether the partnerships should be disregarded for tax purposes under a legal doctrine such as sham or economic_substance is a partnership_item 131_tc_84 aff'd on this issue 591_f3d_649 d c cir see also 491_f3d_732 8th cir f theft_loss deduction likewise petitioner's alternative claim--that because it was discovered in that the llcs had invested in a ponzi scheme each llc is entitled to a theft_loss deduction for that year for its entire investment under sec_165 e -- involves a partnership_item in 92_tc_958 aff'd without published opinion 921_f2d_280 9th cir a pre- tefra case we stated that when a general_partner embezzles limited partners' cash contributions he is not acting in this capacity as a partner since he has no authority to steal the partnership and not directly the individual partners is able to deduct the theft_loss as if a nonpartner had committed the embezzlement id in midcontinent drilling assocs v commissioner tcmemo_1994_119 wl at a tefra case we stated on the authority of marine a partnership may be entitled to deduct an embezzlement loss we found however that although the parties had stipulated that the general_partner had embezzled sums from the partnership the partnership failed to prove sufficient details to justify its claimed theft_loss implicit in our discussion is the assumption that the general partner's misappropriation of the limited partners' capital contributions was a partnership_item were it not we would have dismissed that portion of the petition for lack of jurisdiction respondent argues that should petitioner's ponzi scheme allegations eventually be proved correct then the income programs and the alleged source partnerships are not partnerships for federal_income_tax purposes respondent's argument about allegations that might eventually be proved correct is an argument that a genuine issue of material fact remains that should preclude a decision at this time we reject that argument we reopened the record and conducted the second trial so that the parties could introduce additional evidence as to whether the income programs constituted partnerships respondent has thus had adequate opportunity to present evidence of fraud and to argue presumably that fraud in the inducement to become partners negates the partnership we have neither adequate evidence of fraud nor a fleshed-out argument on brief the record is again closed and we will decide the existence-of-a-partnership issue on the record and arguments in front of us in passing we note that respondent's lawyers have perhaps inconsistently dealt with a similar argument administratively in an irs field_service_advisory wl date fsa the chief_counsel reconsidered a previous fsa wl date the two fsas addressed procedures for resolving theft_loss deductions claimed by victims of the ponzi schemes perpetrated by the operators of tefra partnerships in the first fsa the chief counsel's national_office took the position that the tefra partnership provisions would govern the theft losses only if the partnership entities directly incurred the losses which would be passed through to the partners under the provisions of subch k the partnership provisions of the internal_revenue_code if on the other hand the individual investors were defrauded into investing in the partnerships the fsa held the tefra procedures would not apply whether the general partners had in fact participated in the fraud by inducing innocent partners to invest in the sham partnerships had not been determined and the continued ii analysis a whether well operations created entities classified as partnership sec_1 introduction whether we are precluded from deciding the substantive issues in these consolidated cases and therefore must dismiss the cases for lack of jurisdiction depends on whether for federal tax purposes the well operations created entities separate from the coowners including llcs of the working interests if they did and the entities are properly classified as partnerships then the substantive issues involve partnership items or affected items and all partnership items including whether the partnerships are to be disregarded eg as shams or for lack of continued issue in the second fsa was whether the irs must issue protective statutory notices of deficiency for deficiencies attributable to theft losses claimed by tefra partners on their own returns the second fsa concluded that the irs need not issue the protective statutory notices because irrespective of whether the general_partner participated in the fraud the resulting loss is either a partnership_item or an affected_item and is thus properly determinable at the partnership level the second fsa relies principally on 92_tc_958 aff'd without published opinion 921_f2d_280 9th cir and midcontinent drilling assocs v commissioner tcmemo_1994_119 in reaching that result the second fsa appears to contradict respondent's position here that if the ponzi scheme allegations prove correct which has not yet been determined there are no partnerships respondent does not in his argument here address the question of as of when there would be no partnerships ab initio or when the ponzi scheme was discovered or proved cf sec_165 economic_substance must be determined first in a partnership-level proceeding before the consequences of any partnership-level determinations may be applied to the llcs ie to the partners it is true that had someone at or acting on behalf of energytec determined that the well operations did create partnerships for its many joint drilling ventures including those to which the llcs were parties and on account of that determination did file partnership returns on behalf of those relationships then the question of whether the well operations did in fact give rise to partnerships for federal_income_tax purposes would appropriately be determined in partnership-level proceedings directed at the putative partnerships see sec_6233 sec_301_6233-1 proced admin regs there are however no partnership returns for such putative partnerships nor any fpaas and we must make that determination in this non-partnership- level proceeding see alhouse v commissioner tcmemo_1991_652 since no partnership return was filed and no notice of final_partnership_administrative_adjustment fpaa issued if we find that a partnership existed we must dismiss for lack of jurisdiction insofar as the individual notices of deficiency pertain to partnership items or affected items respondent's argument in his opening brief respondent argues thus for and while jimastowlo and oil coming nominally held working interests received cash payments and claimed expenses the whole arrangement lacked any real economic connection to an actual business_enterprise the cash payments were unrelated to production and the expenses claimed were unrelated to operations w hile the arrangements between jimastowlo oil coming and energytec nominally involved joint_ownership of working interests in substance there was never a coming together to share profits and losses we understand respondent's argument to be that notwithstanding that each llc was among the coowners of a working_interest that entitled those coowners to explore for and extract oil_and_gas in neither case did the coowners actually join together to exploit their rights and therefore their status as coowners was insufficient to create an entity a business_entity classified as a partnership for federal tax purposes we disagree that the coowners did not actually join together to exploit their rights and we further disagree that they failed to create an entity classified as a partnership our reasons follow coowners of a working_interest consistent with the dictionary definition of a working_interest quoted supra note we have said generally a working_interest in an oil field is a leasehold interest granted by the fee simple owner of the land to explore for and extract oil from the land 91_tc_222 energytec had working interests in the schuyler and milstead leaseholds and it assigned interests in those working interests to the llcs respondent argues that the assignment to jimastowlo was not valid until recorded in and that the assignment to oil coming was not valid since never recorded respondent overstates the case there were written assignments of percentage working interests to the llcs executed by an officer of energytec which even though unrecorded were valid under texas law as between the llcs and energytec see tex bus com code ann sec dollar_figure west tex prop code ann sec b west each llc was thus a cotenant ie coowner with energytec and others of the respective leasehold see glover v union pac r r co s w 3d tex app owners of undivided portions of oil_and_gas interests are tenants in common respondent also agues that because the assignments were not executed until then even if valid under texas law they could not have been effective for as noted supra however each assignment stated that it was to be effective as of and evidence in the record indicates that the llcs invested in the drilling programs and at least oil coming began receiving distributions in evidence of investments by both jimastowlo and oil coming is also furnished by energytec's return which reports gross_receipts of over dollar_figure million attributable to disposition of various working interests no amount is so denominated on either its or return we find on those facts that the llcs effectively received their percentage working interests in carrying_on_a_trade_or_business cooperatively mere coownership of property even if it is maintained kept in repair and rented or leased does not constitute an entity separate from the coowners for tax purposes see sec_301_7701-1 proced admin regs nevertheless as stated supra a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom id emphasis added during the audit years energytec operated the wells on the schuyler and milstead leaseholds and while both production and sales of oil were minimal there were both production and sales indeed during the second trial one of respondent's counsels conceded that during the audit years there was a business in existence with respect to each of the schuyler and milstead leaseholds a business consisting of drilling for oil and selling it counsel added energytec owned the business or was conducting the operations of the business activity counsel's statements about the existence of businesses with respect to each leasehold are consistent with our findings the business in question was exploiting the rights coowned by the working_interest owners including the llcs to explore for and extract oil from each leasehold during the years energytec did not itself directly operate the wells on the schuyler and milstead leaseholds it employed first cole engineering and then commanche to do so we have found that during those years each collected oil from the wells in tanks sold the collected oil offset operating_expenses against sale proceeds and apportioned what proceeds remained among the working_interest owners in proportion to their percentage interests we have further found that no working_interest owner could take in_kind or sell on its own its share of any oil production we have not made those findings primarily on the basis of the evaluation reports or other documents in evidence but we have made them primarily on the basis of testimony of respondent's witness paul willingham who beginning in spring was first employed by energytec as controller and then as vice president controller he was a credible witness familiar with energytec's operating procedures he testified that the oil produced in connection with any one of energytec's drilling programs went into a tank and it was sold as a load and then once the revenue came in it would be distributed amongst whoever was the owner based upon its ownership percentage he testified that neither llc could take its share of the oil in_kind mr willingham's description of the drilling sales and apportionment-of- proceeds process is indicative that energytec operated the wells on the schuyler and milstead leaseholds on a cooperative basis for the working_interest owners and indeed we have so found in so finding we recognize that during the audit years no written joint operating_agreement governed operation of the wells on either the schuyler or the milstead leasehold that energytec would operate the wells on a cooperative basis without a written joint operating_agreement was however prefigured by the evaluation reports which the llcs had received before receiving assignments of their percentage working interests the reports describe energytec as operating the wells on the leaseholds they state that energytec is offering to sell programs consisting of working interests in the wells and they project the monthly net return to each program it is implicit in the evaluation reports that energytec would directly or indirectly operate the wells and share the net_proceeds proportionately among the working_interest owners that jimastowlo understood that it was in a cooperative relationship as regards the schuyler lease drilling program was certainly the understanding of another of respondent's witnesses steven d white petitioner's predecessor as tax_matters_partner for jimastowlo when asked by respondent's counsel about his decision to invest in income program mr white responded i would say i didn't invest i became partners with them energytec mr white further testified that he came away from a meeting with an energytec representative with the understanding that jimastowlo would be participating in a partnership in that it would be owning part of a well that other people would have shares in the oil would be produced and i would get my allotted i guess return back on the basis of the testimony of messrs willingham and white we think that energytec may accurately be described as the common agent of the coowners of each working_interest for the purpose of exploiting the appurtenant leasehold although it is true that until date the llcs received fixed payments in excess of their shares of actual net_revenues from production in date energytec initiated the originally intended arrangement by requiring each llc's future share of actual net revenue from production to offset the excess portion of what energytec has been treating as prior advance_payments based upon projected net revenue moreover as mr willingham testified the coowners including the llcs were credited with their shares of whatever net_income the wells did produce jimastowlo's net revenue from its share of the working_interest in the schuyler leasehold as of date was minimal gross revenue of dollar_figure actual expenses of dollar_figure net revenue of dollar_figure oil coming fared somewhat better as of that date from its share of the working_interest in the milstead leasehold gross revenue of dollar_figure actual expenses of dollar_figure and net revenue of dollar_figure after date when energytec ceased making payments to the llcs based on projected net_income and through date there was no net revenue from production associated with the schuyler leasehold wells and jimastowlo was credited with none on the other hand through that period oil coming was credited with dollar_figure its pro_rata share of net revenue from production associated with the milstead leasehold wells thus while it is undoubtedly true that at least in major portion the cash payments that the llcs received were unrelated to production and while it may be true we have no evidence that an equally major portion of the claimed expenses was unrelated to operations it is nonetheless true that during the audit years each of the llcs was the owner of of a working_interest in oil_and_gas wells that were producing at least minimal amounts of oil in which each owned a share moreover the evidence indicates that energytec intended the fixed payments to be reflective of actual anticipated well production as noted supra however because the revenue and profit projections upon which those payments were based proved to be overly optimistic it was necessary to stop payments in date and attempt to carry out the original intent to have the coowners receive no more than their pro_rata shares of the actual profits from well production the llcs were thus because of their coownership of working interests in the schuyler and milstead leaseholds and by virtue of the common agency of energytec participants in actual oil drilling and sales businesses those actual oil drilling and sales businesses undoubtedly incurred expenses and other deductible items and because as stated in the evaluation reports each working_interest owner's share of drilling proceeds was only net of its share of expenses each llc's share of proceeds was burdened by its share of those expenses notwithstanding that at least initially distributions did not reflect those net shares each llc claimed deductions for what it says is its share of those items which respondent disallowed and which are at issue in these cases eg oil gas expenses-idc oil depletion exp oil gas production expenses qual production activities respondent's argument set forth above that the llc's lacked any real economic connection to an actual business_enterprise is that t he cash payments were unrelated to production and the expenses claimed were unrelated to operations that argument ignores the testimony of respondent's witness mr willingham about the actual functioning of well operations it also ignores the fact that fixed payments stopped in date in favor of a truing up consistent with a characterization of the prior cash payments as advance_payments against actual revenues indeed respondent concedes on brief that the llcs nominally held working interests moreover by the fpaa in jimastowlo's case and by the answer in oil coming's case respondent would limit to passive loss status any losses resulting from the llcs' deductions not because the losses did not result from working interests in an oil_and_gas property but because the losses did result from working interests which were held through the llcs see sec_469 each llc was thus a coowner with energytec and others of a working_interest in an oil_and_gas leasehold which working_interest entitled the coowners thereof to find and extract oil_and_gas to exploit the working_interest the coowners had to cooperate during the audit years energytec acting as common agent operated the wells on a cooperative basis for the working_interest owners no working_interest owner could take his share of production in_kind or sell it independently of the other owners the coowners were not merely sharing expenses they were jointly carrying_on_a_trade_or_business and dividing the proceeds therefrom classification for tax purposes because the coowners of the working interests in each of the schuyler and milstead leaseholds jointly carried on a trade_or_business dividing the proceeds therefrom among themselves each trade_or_business constituted for federal tax purposes an entity separate from the coowners of the appurtenant working_interest see sec_301_7701-1 proced admin regs there being no argument that the resulting entity should be classified as a_trust or otherwise specially classified the entity is within the meaning of the regulations a business_entity classified as either a partnership or a corporation see sec_301_7701-2 proced admin regs since it is a domestic business_entity with more than two members that is not a per_se_corporation and not electing to be classified as a corporation it is by default classified as a partnership see sec_301_7701-3 and b proced admin regs we need not at this time get into an extended discussion of whether promulgation of the so-called check-a-box regulations sec_301_7701-1 sec_301_7701-2 and sec_301_7701-3 proced admin regs effective in can be reconciled with the prior caselaw defining partnerships since we see no conflict in these cases our conclusion that the coowners of each working_interest were jointly carrying_on_a_trade_or_business and dividing the proceeds therefrom would be sufficient to satisfy the multifactor test for determining partnership classification that we emphasized in 42_tc_1067 and subsequent cases e g superior trading llc v commissioner tcmemo_2012_110 wl at n the import of these so-called luna factors has not dissipated any after the promulgation of sec_301_7701-3 proced admin regs wb acquisition inc v commissioner tcmemo_2011_36 wl at comtek expositions inc v commissioner tcmemo_2003_135 wl at aff'd 99_fedappx_343 2d cir alhouse v commissioner tcmemo_1991_652 we also note that the question of whether the joint exploitation of a working_interest in an oil_and_gas leasehold creates an entity has a long contentious history culminating in a series of cases that conclude that working_interest owners and well operators create a pool or joint_venture for operation of the wells in 20_tc_565 the taxpayer bentex had joined with two other coowners of an oil_and_gas leasehold to exploit it they operated under an oral agreement providing that each coowner would separately take and sell his share of the lease production the operation identifying itself as a joint_venture filed partnership returns for through in which it elected to expense rather than capitalize intangible drilling costs later because it was to its advantage bentex attempted to disavow the idc election made by the organization arguing that the organization was not a partnership or a joint_venture and had no right to make the election we summarily dispensed with that argument stating that on the facts before us we entertain no doubt that the organization was a joint_venture or partnership within the broad definition of that term in what is now sec_7701 and while it may be that the underlying rationale for our conclusion was that because the organization filed a partnership return the members were estopped from denying partnership status in cokes v commissioner t c pincite without any mention of the partnership return we said in in a unanimous court-reviewed opinion we held that a taxpayer who held a one-quarter interest in an oil_and_gas lease was a participant in a partnership or joint_venture and so an election to currently deduct or to capitalize certain expenditures could be made only by the partnership or joint_venture and could not be made separately by the taxpayer 20_tc_565 in perry v commissioner tcmemo_1994_215 involving self-employment_tax the taxpayer owned percentage working interests in numerous wells under agreements providing that in proportion to their respective percentage interests the working_interest owners owned the oil_and_gas produced by the wells and the equipment and the materials to operate the wells the taxpayer's liability for self- employment_tax turned on whether he was a member of a partnership carrying_on_a_trade_or_business there was no partnership_agreement although the taxpayer's percentage working interests in each well were subject_to a standard form operating_agreement relying on bentex and cokes we concluded t he working_interest owners and well operators created a pool or joint_venture for operation of the wells accordingly petitioner's income from the working interests was income from a partnership of which he was a member under the broad definition of 'partnership' found in sec_7701 there were here no written partnership agreements among the coowners of the working interests in either the schuyler or the milstead leasehold nor had the coowners executed joint_operating_agreements nevertheless during the audit years energytec operated the wells on both leaseholds on a cooperative basis for benefit of the working_interest owners the working_interest coowners and energytec in its role as common agent for the coowners thereby created pools or joint ventures without distinction joint ventures for operation of the wells that would on the authority of cases particular to the classification of arrangements for the exploitation of working interests in oil_and_gas_properties like bentex cokes and perry be classified as partnerships for federal tax purposes conclusion to summarize jimastowlo and oil coming were partial owners of working interests in the schuyler and milstead leaseholds the well operations carried out by energytec on those leaseholds for the benefit of the owners of the working interests created separate entities joint ventures classified as partnerships for federal tax purposes and by virtue of their shares of the working interests the llcs were members of those joint ventures ie partners in partnerships respondent may still argue that for lack of economic_substance or on account of some other antiabuse doctrine the classification of those joint ventures as partnerships must be disregarded we do not and may not under rjt invs x v commissioner f 3d pincite and 131_tc_84 address that issue in this partner-level proceeding respondent must make that argument in proceedings against the two drilling program partnerships b application of sec_6231 sec_6231 provides in its entirety sec_6231 partnership return to be determinative of whether subchapter applies -- determination that subchapter applies --if on the basis of a partnership return for a taxable_year the secretary reasonably determines that this subchapter applies to such partnership for such year but such determination is erroneous then the provisions of this subchapter are hereby extended to such partnership and its items for such taxable_year and to partners of such partnership respondent citing the lack of any reference to or indicium of a joint_venture in the llcs' and energytec's returns and the effective denial in those returns that such partnerships existed argues that he reasonably relied on the forms filed by the llcs in determining that the tefra partnership provisions applied only at their level and not to any alleged source partnerships respondent's reliance on sec_6231 is misplaced sec_6231 was added to the tefra partnership provisions by the taxpayer_relief_act_of_1997 pub_l_no sec_1232 sec_111 stat pincite both the statutory language and the house ways_and_means_committee report7 make clear that the intent of the provision was to alleviate the commissioner's difficulties in determining whether to follow the tefra partnership procedures or the regular deficiency procedures a problem generally caused by the inability to ascertain with certainty whether the partnership in question had or fewer partners and therefore was a small_partnership exempt from the tefra partnership provisions see h_r rept no 1997_4_cb_319 that is not respondent's problem in these consolidated cases as it is undisputed that the tefra partnership provisions apply to the llcs ie that the provision originated in the house and was adopted verbatim by the senate and the house-senate_conference committee respondent properly issued fpaas to the llcs which pursuant to sec_301_7701-2 proced admin regs are taxable as partnerships respondent's problem is that all of the adjustments in those fpaas represent flow-through items from source partnerships over which we lack jurisdiction in what would then be a partner-level proceeding see rawls trading l p v commissioner t c pincite sente inv club p'ship of utah v commissioner t c pincite c respondent's authority to issue fpaas to the joint ventures respondent argues that even though the ostensible joint ventures' failures to file partnership returns permit respondent to assess tax_liabilities against their partners and therefore to issue fpaas to the ostensible drilling program partnerships at any time see sec c as a practical matter the issuance of fpaas to the joint ventures would be impossible in reaching that conclusion respondent points to the absence of joint_venture returns resulting in the failure to identify a tax_matters_partner as defined in sec_6231 or indeed any of the partners and information as to the name ein address or principal_place_of_business of either alleged source partnership respondent also posits that if he issues fpaas to the llcs as partners in the alleged source partnerships the legitimacy of those fpaas more than likely will be contested in this court respondent also fears that the issuance of additional fpaas to any alleged source partnerships could expose respondent to a charge that they are arbitrary and capricious and thus invalid citing 814_f2d_1363 9th cir rev'g 81_tc_855 like all courts we are a court of limited jurisdiction as we stated in rawls trading l p v commissioner t c pincite in determining the outer limits of the ambit of our subject matter jurisdiction we cannot consider the consequences howsoever harsh they may be that our decision inflicts upon one of the parties moreover as in that case we believe respondent's concerns are overblown there are exhibits in the record identifying the coowners of both the schuyler and milstead leaseholds and enough evidence of joint ventures to preclude a successful argument that the fpaas should be considered arbitrary and capricious and therefore invalid under scar we also note that pursuant to sec_6231 and sec_301_6231_a_7_-1 and q proced admin regs respondent may be able to select as the tax_matters_partner any one of a number of working_interest owners including mr petito on behalf of each of the joint-venturer llcs for purposes of serving the fpaas d application of sec_6222 we have also considered on our own motion the possible application of sec_6222 which requires consistency between how a partner treats a partnership_item on his return and how the partnership treats it on its return see sec_6222 the consequence of any inconsistency between how a partner treats a partnership_item on his return and how the partnership treats it on its return is that unless the partner notifies the secretary of the inconsistency sec_6225 which requires a partnership-level proceeding before assessment of a deficiency does not apply to computational adjustments necessary to bring the partner's treatment of the partnership items on his return into consistency with the partnership's treatment of the items on its returns see sec_6222 sec_6225 the llcs did not notify the secretary of any inconsistencies with the joint ventures so that there is at least the potential for respondent on the authority of sec_6222 to bypass sec_6225 and to immediately assess deficiencies in tax resulting from computational adjustments necessary to bring consistency respondent's authority to bypass partnership-level proceedings against the joint ventures and to make immediate assessments attributable to computational adjustments at the llc partner level is limited to the circumstances described in sec_6222 ie where the partnership has filed a return but the partner's treatment of a partnership_item is inconsistent with the partnership's treatment of the item and the partner has failed to notify the commissioner of the inconsistency see sec_6222 as one commentator has suggested that authority does not exist in the case of a partner's failure_to_file a notice of inconsistent treatment arising under sec_6222 solely from the partnership's failure_to_file a return steven r mather audit procedures for pass-through entities 624-2d tax management bna at a-29 t here is no apparent consequence within the scope of the tefra provisions for an inconsistency arising from the failure of the partnership to file a partnership return we find sec_6222 to be inapplicable herein iii conclusion the joint ventures of which each of the llcs was a member were partnerships required to file partnership returns and thus subject_to the tefra partnership provisions the substantive issues all involve partnership items of the sec_6222 clearly contemplates a partner's filing a notice of inconsistency with respect to any partnership_item if the partnership has not filed a return see sec_6222 since the partnership may file a delinquent_return after the partner has filed his return a partner filing a notice of inconsistency will in that case be excused from the consistency_requirement pursuant to sec_6222 flush language subsection a shall not apply to such item joint ventures the llcs were pass-thru partners and with respect to them the substantive issues all involve what would be computational adjustments if the substantive issues partnership items were decided adversely to the joint ventures see sec_6231 rawls trading l p v commissioner t c pincite sente inv club p'ship of utah v commissioner t c pincite the fact that the joint ventures failed to file partnership returns and that the commissioner has neither initiated nor completed partnership proceedings does not change that analysis see alhouse v commissioner tcmemo_1991_652 the fpaas issued to jimastowlo and oil coming appear to reflect only computational adjustments if that is true the fpaas are invalid and do not confer jurisdiction on us rawls trading l p v commissioner t c pincite we will confer with the parties to determine whether there are any issues other than computational adjustments properly addressed in this proceeding we must dismiss for lack of jurisdiction insofar as the individual fpaas pertain to computational items to reflect the foregoing an appropriate order will be issued there are other items on some of the fpaas respondent issued with respect to the llcs those items make no adjustments to the llcs' returns thus eliminating the adjustments that appear to be computational adjustments the fpaas appear to make no changes to the llcs' returns


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jul uniform issue list se t ca t2 xxxxxxxxxxxxx xxxxxxxxxxxxx xxxxxxxxxxxxx legend taxpayer a ira x xxxxxxxxxxxx xxxxxxxxxxxx investment account y xxxxxxxxxxxx company c amount d company e financial advisor f dear xxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx this is in response to your request dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that on date he received a distribution from ira x totaling amount d taxpayer a asserts that his failure to accomplish a rollover within the day period prescribed by sec_408 of the code was due to an error committed by financial advisor f of company c taxpayer a held ira x an individual_retirement_annuity ira issued by company e within investment account y on date taxpayer a met with financial advisor f a representative of company c and determined that ira x was no longer a suitable investment for his retirement goals taxpayer a was advised that ira x could be surrendered and re-invested into another type of ira upon the advice and assistance of company c on date taxpayer a executed a request to liquidate ira x on date company e issued and mailed a check totaling amount d to taxpayer a on date taxpayer a gave the check to company c with the instructions that the check should be deposited into another ira however company c erroneously deposited amount d investment account y as a non-ira investment into taxpayer represents that he was not aware that amount d was not deposited into an ira within investment account y until he received form 1099-r from company e in january taxpayer a asserts that he relied upon the advice of financial advisor f and complied with all the instructions given him by company c for depositing amount d into an ira in a letter dated february acknowledged its mistake and agreed to pay the filing fee to request a waiver of the day rollover requirement from financial advisor f company c based upon the above documentation and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408of the code with respect to the distribution of amount d sec_408 of the code provides that except as otherwise provided in sec_408 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 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 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 the day on which the individual receives the payment or distribution or 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 60th day after i 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 60th 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 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 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 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 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 revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 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 the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was due to an error committed by financial advisor f of company c therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x taxpayer a is granted a period of days from the issuance of this letter to contribute an amount not to exceed amount d into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution of amount d will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code 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 ruling is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative pursuant to a power_of_attorney on file in this office if you wish to inquire about this ruling please contact xxxxxxxx xxxxxxxxxx at xxxxxxxx xxxxxxxxxx please address all correspondence to se t ep ra t2 sincerely yours ee m edelman manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc xxxxxxxxxx


' department of the treasury internal_revenue_service commerce dallas texas may person to contact identification_number contact telephone number uil release number release date f24 org address legend org name of organization date xx address address of org dear this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code _ our adverse determination was made for the following reasons organization's facilities and common areas maintained by the association are not open to the general_public but rather restricted to or primarily for the benefit of its members the org fails to meet the requirement for exemption under sec_501 and sec_1 c -1 of the income_tax regulations which states an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community as a result of a recent audit of your organization's activities and form_990 for the period ended december 20xx the operation is organized and operating solely as a homeowner's association for the mutual benefit of its members which do not qualify for exempt status under sec_501 c based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx you are required to file federal_income_tax returns on form 1120-h these returns should be filed with the appropriate service_center for all years beginning after december 20xx you have executed the form_6018 agreeing to this revocation you are required to file form 1120-h u s_corporation income_tax return form 1120-h must be filed by the 15‘ day of the third month after the end of your annual_accounting_period a penalty of dollar_figure a day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less this penalty may also be charged if a return is not complete so please be sure your return is complete before you file it you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by writing to internal_revenue_service taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely marsha a ramirez director eo examinations department of the treasury internal_revenue_service government entities oivision date legend org name of org address address of org date date of org org address taxpayer_identification_number form tax_year s ended december 20xx person to contact id number contact numbers telephone fax certified mail - return receipt requested dear ' we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you letter catalog number 34801v thank you for your cooperation enclosures publication publication form report of examination envelope sincerely marsha a ramirez director eo examinations letter catalog number 34801v department of the treasury- internal_revenue_service form 886a name of taxpayer org explanation of items schedule no or exhibit l year period ended 20xx12 legend org name of organization state - name of state date xx issue whether the org qualifies for exemption under sec_501 revenue code of of the internal facts the org was incorporated in the state on januaty 19xx the articles of incorporation include the development's rules regarding what owners can or cannot do while living there community rules include animal restrictions insurance coverage and utility information the community is comprised of homes all owners ate tequited to be membets of the association and pay monthly dues of dollar_figure as stated in the declaration of covenants conditions and restrictions the organization has the power duty and responsibility of maintaining and administering the common properties and collecting and disbursing the assessments and chatges the association also has the right to administer and enforce the covenants and restrictions the common properties shall mean and refer to those areas devoted to the common use and enjoyment of the owners and include the following those certain landscaping improvements plantings screening walls fencing sprinlder systems and recreational facilities to be placed as shown on the plat for each phase the association provides maintenance and improvements to the common ateas in the development including the swimming pool security lights trees and roads the association is responsible for maintaining the common ateas to ensure compliance with the city ordinances residents are responsible for the upkeep of the exterior of their homes the swimming pool and common ateas ate not open to the general_public the association conducts meetings to discuss the safety and repairs of the common ateas the association publishes a newsletter to inform members of upcoming or proposed maintenance projects and to address any concerns voiced by residents the newsletters ate distributed to the members most of the association's receipts have been from membership dues transfer fees and interest law sec_501 of the internal_revenue_code_of_1986 provides for exemption from federal_income_tax of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 of the income_tax regulations provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in form 886a department of the treastuy- internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended mxx12 org promoting in some way the common good and general ‘welfare of the community le for the purposes of bringing about civic betterment and social improvements in revrul_74_17 1974_1_cb_130 jan the service held that a organization formed by the unit owners of a condominium housing ptoject to provide for the management maintenance and cate of the common ateas of the ptoject as defined by state statute with membership assessments paid_by the unit owners does not qualify for exemption under sec_501 of the code in revrul_74_99 1974_1_cb_131 jan the service held that a homeowners_association to qualify for exemption under sec_501 of the code must setve a community which bears a reasonable recognizable relationship to an atea otdinatily identified as governmental it must not conduct activities directed to the exterior maintenance of private residences and the common areas or facilities it owns and maintains must be for the use and enjoyment of the general_public in 305_f2d_814 it was held that a corporation that provided housing on a cooperative basis lacked the necessaty requirements of an otganization described in sec_501 of the code the court held the operation to be a private self-help enterprise with only an incidental benefit to the community as a whole the coutt also held that the organization is operated ptimarily for the private benefit of members and any benefits to the community are not sufficient to meet the requitement of the regulation that the organization be operated ptimarily for the common good and general welfate of the people of the community government's position based on the applicable law and facts the org is not operating ptimarily for social welfare within the meaning of sec_501 a if it restricts access by the general_public to its common areas such as recreational facilities streets sidewalks and green areas the homeowner's association is opetating primarily for the mutual benefit of its members taxpayer's position org agtees to the revocation of its exempt status from as otganization described in sec_501 the proposed effective date of the revocation is january 20xx conclusion although org was gtanted exemption as an organization described in the intemal revenue code sec_501 it is obvious that the facilities and common ateas maintained by the association are not open to the general_public but rather testticted to or primarily for the benefit of its members this otganization does not qualify for exemption under sec_501 c of the intemal department of the treasury- internal_revenue_service form_886 a name of taxpayer explanation of items org schedule no or exhibit year period ended - 20xx12 revenué code of because it is not promoting social welfare within the meaning of the irc regulations since you will no longer be an exempt_organization you will be required to file federal_income_tax returns on form 1120-h u s income_tax return for homeowners associations forms 1120-h should be filed for years ended december 20xx and subsequent years form s86- al department of the treasury - internal revenue - -rev service page