t c memo united_states tax_court phillip vazzana and estate of yvonne vazzana deceased phillip vazzana executor petitioners v commissioner of internal revenue respondent joseph m valenza and mildred valenza petitioners v commissioner of internal revenue respondent docket nos filed date ira m burman and richard l manning for petitioners rogelio a villageliu and david s weiner for respondent memorandum findings_of_fact and opinion foley judge respondent determined the following deficiencies in and additions to petitioners' federal income taxes phillip vazzana and estate of yvonne vazzana docket no additions to tax_year deficiency sec_6653 sec_6653 sec_6661 sec_6663 dollar_figure dollar_figure dollar_figure dollar_figure -- big_number -- -- -- dollar_figure joseph m valenza and mildred valenza docket no year deficiency sec_6653 sec_6653 sec_6661 sec_6663 additions to tax dollar_figure dollar_figure dollar_figure dollar_figure -- big_number -- -- -- dollar_figure all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issues for decision are as follows the extent to which petitioners underreported the gross_receipts of valenza vazzana construction co v v we hold that they underreported such receipts by dollar_figure for and dollar_figure for whether petitioners have substantiated certain v v expenditures we hold that they have to the extent provided below whether petitioners are each entitled to a depreciation deduction relating to their rental property we hold that they are not whether phillip vazzana and estate of yvonne vazzana correctly reported a capital_gain they recognized on the sale of a house we hold that they did not whether joseph m valenza and mildred valenza are entitled to deduct dollar_figure of business_expenses we hold that they are not whether petitioners are liable for additions to tax for fraud we hold that they are to the extent provided below whether petitioners are liable for additions to tax for negligence we hold that they are to the extent provided below whether petitioners are liable for additions to tax for substantial understatements of income_tax we hold that they are to the extent provided below whether assessment and collection of the deficiencies and additions to tax are barred by expiration of the statutory period of limitations we hold that they are not findings_of_fact some of the facts have been stipulated and are so found at the time they filed their respective petitions phillip vazzana resided in lockport illinois and joseph and mildred valenza resided in burr ridge illinois during the years in issue messrs vazzana and valenza each owned a 50-percent interest in v v an illinois general_partnership located in chicago illinois v v constructed and remodeled commercial and residential property it maintained a bank account at lakeside bank messrs vazzana and valenza did not deposit all of v v's gross_receipts into v v's bank account instead they cashed a substantial number of customer checks at other neighborhood banks on its and forms u s partnership return of income v v reported gross_receipts of dollar_figure and dollar_figure respectively the returns were prepared by v v's accountants barbara charal and michael j baumhart messrs vazzana and valenza knew that their accountants calculated v v's gross_receipts by totaling the deposits in v v's account and that the cashed checks would not be reported on v v's income_tax returns in early respondent audited v v's returns and revenue_agent john lee was assigned to the case mr lee asked messrs vazzana and valenza to provide records of v v's income and customer accounts they failed to cooperate with mr lee so he summoned v v's bank records and obtained information directly from v v's customers based on these documents mr lee determined that v v underreported its gross_receipts by dollar_figure for and dollar_figure for messrs vazzana and valenza each owned a one-half interest in rental property valued at dollar_figure the building was previously owned by shield development corp sdc a company in which messrs vazzana and valenza were stockholders in sdc liquidated and distributed the property to messrs vazzana and valenza during and they each received unreported gross_receipts from the property of dollar_figure and dollar_figure respectively in mr and mrs vazzana sold a house they had constructed on their joint federal_income_tax return they reported the dollar_figure realized on the sale a cost_basis of dollar_figure and a capital_gain of dollar_figure the vazzanas filed their and federal_income_tax returns on date and date respectively and reported adjusted_gross_income of dollar_figure for and dollar_figure for the valenzas filed their and federal_income_tax returns on date and date respectively and reported adjusted_gross_income of dollar_figure for and dollar_figure for on date petitioners executed form sec_872 extending the time for assessment of their taxes to date on date respondent issued notices of deficiency to petitioners i unreported v v gross_receipts opinion petitioners have conceded that they underreported v v's gross_receipts by dollar_figure for and dollar_figure for respondent however contends that v v received additional unreported gross_receipts of dollar_figure for and dollar_figure for respondent's additional gross_receipts computation was based in part on documents ie customer contracts and illegible checks which were not probative evidence that v v received income as a result respondent's computation overstated v v's gross_receipts by dollar_figure for and dollar_figure for accordingly we hold that messrs vazzana and valenza underreported v v's gross_receipts by dollar_figure for and dollar_figure for ii v v expenses petitioners contend that v v made substantial cash expenditures to subcontractors for which they did not claim deductions specifically they contend that v v paid j b johnson a handyman dollar_figure in and dollar_figure in petitioners have failed however to provide any documentation to establish that v v paid mr johnson such funds mr johnson's testimony was contradictory and unpersuasive he first stated that he had received the income and reported it on his tax returns he later stated that he did not report the income had no records of receiving such income and may not have received the amounts petitioners contend v v paid him petitioners contend that v v paid frank schmitt a carpenter dollar_figure in and dollar_figure in mr schmitt testified that he received these amounts and reported them as income on his federal_income_tax returns petitioners provided copies of mr schmitt's tax returns and respondent does not dispute their authenticity v v issued forms stating that it paid mr schmitt dollar_figure in and dollar_figure in mr schmitt explained that v v reported on the forms only the payments made by check not cash as a result we conclude that v v made cash payments to mr schmitt of dollar_figure in and dollar_figure in petitioners have failed however to establish the amount of any other cash expenditures that v v made to subcontractors iii depreciation deduction for rental property petitioners contend that for they are each entitled to a depreciation deduction of dollar_figure for their rental property respondent contends that petitioners have failed to establish their basis in the property we agree accordingly we hold that petitioners are not entitled to the depreciation_deductions iv the capital_gain from the sale of the house on their joint federal_income_tax returns mr and mrs vazzana reported dollar_figure realized from the sale of a house a basis of dollar_figure and a capital_gain of dollar_figure respondent contends that their basis should be limited to dollar_figure and that their gain should be dollar_figure the vazzanas have established ie through testimony checks and invoices however that their basis was dollar_figure accordingly we hold that the vazzanas recognized a capital_gain of dollar_figure on the sale of their house v unreimbursed business_expense deduction on their joint federal_income_tax returns mr and mrs valenza claimed a dollar_figure itemized_deduction for unreimbursed business_expenses we hold that petitioners are not entitled to this deduction because they have failed to present any evidence relating to this issue vi additions to tax for fraud respondent determined that petitioners pursuant to sec_6653 and sec_6663 were liable for additions to tax for fraud sec_6653 applicable to petitioners' returns and sec_6663 applicable to petitioners' returns provide for additions to tax equal to percent of the portion of the underpayment_of_tax that is attributable to fraud if respondent establishes that any portion of an underpayment is attributable to fraud the entire underpayment is treated as attributable to fraud except to the extent petitioners establish otherwise sec_6653 sec_6663 to prove fraud respondent must establish by clear_and_convincing evidence that for each year in issue an underpayment_of_tax exists and that some portion of the underpayment is due to fraud sec_7454 rule b 92_tc_661 a underpayment petitioners have conceded that they failed to report significant amounts of income that they received from v v and their rental property in addition they have failed to establish that such amounts are offset by unreported expenses therefore we conclude that respondent has presented sufficient evidence that petitioners underpaid their taxes for the years in issue b fraudulent intent to prove fraud respondent must establish that petitioners intended to evade taxes through conduct designed to conceal mislead or otherwise prevent the collection_of_taxes 80_tc_1111 fraudulent intent is not to be imputed or presumed but may be established by circumstantial evidence and reasonable inferences drawn from the facts 317_us_492 petzoldt v commissioner supra 79_tc_995 affd 748_f2d_331 6th cir the mere existence of deficiencies in tax_liability does not establish fraud 53_tc_96 exceedingly large unexplained discrepancies between a taxpayer's actual income and reported income however do evidence fraud 56_tc_213 respondent has provided sufficient evidence that petitioners failed to report v v gross_receipts of dollar_figure for and dollar_figure for this underreporting resulted from messrs vazzana and valenza cashing a substantial number of v v customer checks rather than depositing them into v v's account messrs vazzana and valenza knew that their accountants calculated v v's gross_receipts by adding the deposits in v v's account and that the cashed checks would not be reported on v v's income_tax returns messrs vazzana and valenza contend that they used the cash proceeds to pay for unreported v v expenses and that the unreported receipts and expenses netted out respondent however has established that with the exception of the cash payments to mr schmitt ie dollar_figure in and dollar_figure in messrs vazzana and valenza did not substantiate any unreported cash expenditures therefore we reject their contention messrs vazzana and valenza concede that they each failed to report gross_receipts from their rental property of dollar_figure for and dollar_figure for they have offered no explanation for their failure to report this income accordingly we hold that the portions of the deficiencies relating to v v's gross_receipts and the rental property were due to fraud and that messrs vazzana and valenza are liable for the additions to tax for fraud relating to such portions respondent however has not established that mrs vazzana and mrs valenza acted with fraudulent intent as a result mrs valenza and mrs vazzana's estate are not liable for the additions to tax for fraud see sec_6653 sec_6663 petitioners have established that the remaining portions of the deficiencies did not result from their fraudulent intent vii additions to tax for negligence respondent determined that petitioners pursuant to sec_6653 are liable for additions to tax for negligence for petitioners concede that they were negligent accordingly we hold petitioners liable for the negligence additions to tax relating to the portions of the deficiencies that are not attributable to fraud see sec_6653 viii additions to tax for substantial_understatement respondent determined that petitioners were liable pursuant to sec_6661 for additions to tax for substantial understatements relating to sec_6661 provides that if there is a substantial_understatement_of_income_tax there shall be added to the tax an amount equal to percent of the amount of any underpayment attributable to such understatement sec_6661 an understatement is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return sec_6661 an understatement is substantial if it exceeds the greater of dollar_figure or percent of the amount of tax required to be shown on the return sec_6661 the understatement is reduced however to the extent that it is based on substantial_authority or adequately disclosed in the return sec_6661 petitioners have failed to establish that their understatements in tax were based on substantial_authority or adequately disclosed accordingly if the recomputed deficiencies satisfy the statutory_percentage or amount petitioners will be liable for such additions to tax see eg 105_tc_324 ix period of limitations petitioners contend that assessment and collection of the deficiencies and additions to tax are barred by expiration of the statutory period of limitations we disagree where returns are filed fraudulently with the intent to evade tax the tax may be assessed at any time sec_6501 accordingly we hold that assessment and collection are not barred all other contentions raised by the parties are either irrelevant or without merit to reflect the foregoing decisions will be entered under rule


internal_revenue_service number release date index number --------------------------- ------------------- -------------------------- ------------------------------------ ------------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b1-plr-168474-03 date january --------------------------- legend x --------------------------------------------------- date date dear -------------- ----------------------- ---------------------- this responds to a letter dated date submitted on behalf of x requesting relief under ' b of the internal_revenue_code facts x was incorporated on date the shareholders of x desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first plr-168474-03 two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under ' b however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no ' a election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and ' b shall not apply x did not timely file an election to be treated as an s_corporation under ' a x has however established reasonable_cause for not making a timely s election and is entitled to relief under ' b conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of sincerely s dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number info release date index number ------------------------- ---------------------------- in re ------------------------- ---------------------------- department of the treasury washington dc person to contact ---------------------- id no ----------------- telephone number --------------------------- refer reply to cc psi - genin-164252-03 date january dear this responds to your request for late s_corporation_election relief to be effective as of the taxable_year year of incorporation in revproc_97_48 the internal_revenue_service permits taxpayers in certain situations to obtain automatic late s_corporation relief instead of applying for a private_letter_ruling the facts presented in your situation appear to be covered by section dollar_figure of revproc_97_48 in order to receive relief you must resend a fully completed form_2553 copy enclosed and accompanying statement to the following facsimile number please retain your facsimile transmission receipt if you fail to receive an irs cincinnati service_center attn entity control - team acceptance notice within days after transmitting your form_2553 call the contact person listed in this letter keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope this information proves helpful sincerely dianna k miosi branch chief office of associate chief_counsel passthroughs special industries


t c summary opinion united_states tax_court efstratios aivatzidis and marilyn cribbs piek petitioners v commissioner of internal revenue respondent docket no 16691-12s filed date efstratios aivatzidis and marilyn cribbs piek pro sese anna a long for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure respondent issued a statutory_notice_of_deficiency to petitioners for in which he determined a deficiency in income_tax of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure the issues for decision are whether petitioners are entitled to deduct on schedule a itemized_deductions unreimbursed employee business_expenses in excess of those respondent allowed are entitled to deduct repair and maintenance_expenses on schedule c profit or loss from business in excess of those respondent allowed are entitled to deduct a loss on schedule e supplemental income and loss and are liable for the accuracy-related_penalty under sec_6662 some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioners resided in california when the petition was filed respondent’s adjustment for self-employment_tax is computational and will be resolved by the determination of the court on the other issues background petitioners timely filed their federal_income_tax return for petitioner efstratios aivatzidis during the years relevant to this opinion was in the business of contracting his services as a limousine driver during petitioner marilyn cribbs piek a registered nurse was employed first at tri-city medical center tri-city in an administrative position and then as an in-home health care worker with oasis in oceanside california petitioners purchased a house in oceanside in later that year in order to pursue certain business opportunities in and near los angeles california petitioners moved to santa monica california while living in santa monica petitioners rented out the oceanside house tenants subjected the house to substantial damages during through petitioners made repairs before receiving new tenants the oceanside house remained rented out through date petitioners attempted unsuccessfully to continue to rent it out in and they moved back in and remained there through date when petitioners filed their federal_income_tax return in addition to their schedule e they attached a form_8582 passive_activity_loss limitations showing a loss of dollar_figure for activities with net_loss and a loss of dollar_figure for prior years unallowed losses after application of the phase-out provision of sec_469 petitioners claimed a passive_activity_loss of dollar_figure for that they deducted on schedule e respondent upon examination of the return disallowed the deduction petitioners deducted on schedule c for the limousine driver business car and truck expenses of dollar_figure based on mileage for which respondent made no adjustment they also deducted dollar_figure as repair and maintenance_expenses which respondent disallowed and unreimbursed employee business_expenses of dollar_figure on schedule a of which respondent disallowed dollar_figure discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 the court finds that petitioners have not argued or shown that they have met the requirements of sec_7491 and the burden_of_proof does not shift to respondent the amount deducted after the sec_67 reduction of miscellaneous itemized expense deductions by of adjusted_gross_income employee business_expenses petitioners deducted unreimbursed employee business_expenses of dollar_figure with respect to mrs piek’s jobs as a health care professional respondent determined that petitioners were entitled to deduct dollar_figure of the amount shown on the return petitioners failed to offer any evidence to prove that they are entitled to a deduction in excess of what respondent allowed respondent’s determination of petitioners’ allowable unreimbursed employee business_expenses is sustained repair and maintenance_expenses petitioners deducted on the schedule c for mr aivatzidis’ limousine business car and truck expenses of dollar_figure based on mileage for which respondent made no adjustment and dollar_figure as actual vehicle repair expenses which respondent disallowed there is nothing on petitioners’ schedule c to indicate that they used more than one vehicle in the limousine business petitioners testified at trial however that mr aivatzidis used two vehicles in conducting his limousine business in a taxpayer may use a standard mileage rate as established by the internal_revenue_service irs in lieu of substantiating actual expenses for the business use of a passenger_automobile see sec_1_274-5 income_tax regs a taxpayer may use either method but not both larson v commissioner tcmemo_2008_187 according to mrs piek mr aivatzidis used an suv and a town car in mr aivatzidis used the optional standard mileage rate to calculate his expenses for the suv he testified and his actual repair and maintenance_expenses for the town car mr aivatzidis testified that he had had an accident in that damaged the front of the town car and the damage cost dollar_figure to repair mr aivatzidis testified that the car was involved in a second accident in either or that caused dollar_figure of damage he added that he paid for the repairs himself because he was afraid his insurance premiums would increase if he made an insurance claim petitioners’ problem here is that they failed to provide any substantiation for any automobile repair or maintenance expense paid in or in fact any evidence that they owned a town car that was damaged respondent’s adjustment to petitioners’ deduction for repair and maintenance_expenses on schedule c is sustained schedule e deduction respondent argues that sec_280a precludes petitioners’ schedule e deduction of a real_estate loss relating to the oceanside house the court agrees with respondent sec_280a provides that save for exceptions that do not apply to petitioners no deductions from income otherwise allowable may be taken with respect to a dwelling that is used by the taxpayer as a residence during the taxable_year the provision does not disallow deductions normally available to homeowners such as mortgage interest and real_estate_taxes sec_280a respondent did not adjust petitioners’ deductions on schedule a of real_estate_taxes of dollar_figure and mortgage interest of dollar_figure a dwelling is used as a residence of the taxpayer during the taxable_year if the taxpayer uses it for personal purposes more than the greater of days or of the number of days it is used as a rental unit sec_280a petitioners were unable to rent the oceanside house to third parties and lived in it for six months during because petitioners failed to rent the house at all during sec_280a also prevents petitioners from deducting rental expenses respondent’s determination to deny petitioners’ schedule e deduction is sustained accuracy-related_penalty sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 as petitioners did not dispose_of the oceanside property in they are not entitled to deduct passive losses accumulated in earlier years see sec_469 g 280a c trowbridge v commissioner tcmemo_2003_164 aff’d 378_f3d_432 5th cir in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate higbee v commissioner t c pincite respondent determined that for petitioners underpaid a portion of their income_tax because of negligence or intentional disregard of rules or regulations sec_6662 and b imposes a penalty equal to of the portion of the underpayment attributable to negligence or disregard of rules or regulations negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard see sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the accuracy-related_penalty is not imposed with respect to any portion of an underpayment if a taxpayer demonstrates that there was reasonable_cause for that portion of the underpayment and that they acted in good_faith with respect to that portion see sec_6664 sec_1_6664-4 income_tax regs specifically provides circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id on the basis of petitioners’ failure to keep adequate books_and_records or to substantiate items properly the court concludes that respondent has produced sufficient evidence to show that the imposition of the accuracy-related_penalty under sec_6662 is appropriate for petitioners for failed to substantiate itemized_deductions and schedule c expenses and deducted schedule e expenses for a home in which they lived during the year petitioners did not show that there was reasonable_cause for and that they acted in good_faith with respect to any portion of the underpayment_of_tax for therefore respondent’s determination of the accuracy-related_penalty under sec_6662 and b for is sustained to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp br4 plr-112179-99 date date distributing controlled controlled controlled a b c d plr-112179-99 state e business x business y a b c dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below distributing engages in business x and is owned a percent by a b percent by b and c percent by each of c and d distributing wholly owns controlled controlled and controlled the controlled corporations each of which engages in business y we have received financial documentation indicating that each of the businesses conducted by distributing and the controlled corporations has had gross_receipts and operating_expenses in each of the past five years differences of opinion have arisen between the shareholders of distributing concerning the operation and future direction of distributing and the controlled corporations to eliminate these differences it is proposed that distributing distribute its controlled stock to b its controlled stock to c and its controlled stock to d in exchange for the distributing stock held by each distributee collectively the distributions the taxpayer has made the following representations regarding the proposed transaction controlled as used in these representations and in the rulings that follow refers to each of the controlled corporations as appropriate a the fair_market_value of the controlled stock received by b c or d will approximately equal the fair_market_value of the distributing stock surrendered in the exchange plr-112179-99 b no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation c the five years of financial information submitted on behalf of distributing and controlled represents each corporation’s present operations and there have been no substantial operational changes since the date of the last submitted financial statements d following the proposed transaction distributing and controlled each will continue its business independently and with its own employees e the distributions are being carried out to alleviate differences of opinion that have arisen between the shareholders of distributing concerning the future direction and management of distributing and each of the controlled corporations the distribution is motivated in whole or substantial part by this and other corporate business purposes f there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in distributing or controlled after the distributions g there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the proposed transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 h there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the proposed transaction except in the ordinary course of business i no property has been or will be transferred by distributing to controlled in connection with the proposed transaction no property has been or will be transferred by controlled to distributing in connection with the proposed transaction j no debt will exist between distributing and controlled at the time of or after the proposed transaction no debt between distributing and controlled has been or will be canceled in connection with the proposed transaction k immediately before the distributions items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in plr-112179-99 controlled stock will be included in income immediately before the distributions to the extent required by applicable regulations see sec_1_1502-19 l there will be no continuing transactions between distributing and controlled after the distributions m the proposed transaction is not part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of distributing or controlled stock entitled to vote or percent or more of the total value of all shares of all classes of distributing or controlled stock within the meaning of sec_355 of the internal_revenue_code n distributing is not an s_corporation under sec_1361 and there is no plan or intention for distributing or controlled to make an s election under sec_1362 following the proposed transaction based solely on the information submitted and the representations set forth above we rule as follows on the proposed transaction no gain_or_loss will be recognized by distributing on the distributions sec_355 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of b c or d on receipt of controlled stock in exchange for distributing stock sec_355 the basis of the controlled stock received by b c or d will equal the basis of the distributing stock surrendered in exchange therefor sec_358 the holding_period of the controlled stock received by b c or d will include the holding_period of the distributing stock surrendered in exchange therefor provided the distributing stock is held as a capital_asset on the date of the exchange sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 of the income_tax regulations we express no opinion about the tax treatment of the proposed transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered in the above rulings this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-112179-99 a copy of this letter must be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the proposed transaction is completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely assistant chief_counsel corporate by wayne t murray senior technician reviewer branch


internal_revenue_service number release date index numbers ----------------------------- ----------------------------------------- -------------------------------------------- ---------------------------------------------- ----------------------- 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 plr-133887-09 date jan ---------------------------- -------------------------------------- ------------- ---------------- ---------------------- ---------------------------------------------------------- ------- ------- ----------------------- ------------------------------------ legend taxpayer property state a state b state_agency a state_agency b date date date dollar_figuredollar_figuredollar_figure dear ------------------ in a letter dated date you requested a private_letter_ruling on behalf of taxpayer under revproc_2009_1 you asked that pursuant to sec_1033 of the internal_revenue_code taxpayer not be required to recognize gain on funds it receives as a result of a putative involuntary_conversion from the taking of certain real_estate interests by a public authority facts as set forth in the original ruling_request and other documents and representations submitted the relevant facts may be summarized as follows plr-133887-09 taxpayer has held certain land in state a hereinafter property for investment and development purposes since date since that acquisition state_agency a instituted eminent_domain proceedings and asserted the right to acquire fee title to property in connection with state_agency a’s intent to use part of property for state- interested purposes in litigation of that matter on date state_agency a prevailed over taxpayer nevertheless while state_agency a has established its legal right to condemn property it never actually did so despite the foregoing events taxpayer negotiated and reached an agreement for commercial development of property with another unrelated party in doing so taxpayer determined that it was unlikely that state_agency a would ever exercise its right to condemn the property and even if the agency did the condemnation_award would then be appropriately adjusted subsequently in a separate development state_agency b also determined that it may be necessary to acquire certain rights in property for a different public purpose the eminent_domain claims of state_agency b are by operation of law superior to those of state_agency a in light of the state_agency b determination on or before date taxpayer and state_agency b negotiated an agreement granting state_agency b certain temporary easement rights for a term of years with an option for limited extensions and a permanent easement interest in property hereinafter the agreement taxpayer will receive dollar_figuredollar_figuredollar_figurefrom state_agency b as consideration for the taking of those property rights notwithstanding the agreement state_agency a would continue to have the right to take a fee interest in pursuit of its purposes once the easement term of state_agency b in property lapsed as such the state_agency a condemnation right constitutes an additional threat to taxpayer’s interests in property as a result of these significant encumbrances upon the taxpayer’s interests and rights in property taxpayer maintains that its ability to develop property has been significantly and perhaps permanently proscribed consequently it intends to use the dollar_figuredollar_figuredollar_figurereceived pursuant to the agreement to acquire and develop other real_property taxpayer seeks nonrecognition treatment under sec_1033 for the funds paid in consideration of the taking and threat thereof of its various rights in property law and analysis plr-133887-09 sec_61 indicates that except as otherwise provided in the income_tax provisions of the code gross_income means all income from whatever source derived gains from dealings in property are included among the specifically listed items of gross_income sec_61 sec_1033 provides in part that if property as a result of its destruction in whole or in part theft seizure or requisition or condemnation or threat or imminence thereof is compulsorily or involuntarily converted into money or into property not similar_or_related_in_service_or_use to the converted property the gain if any shall be recognized except to the extent provided sec_1033 allows a taxpayer to limit current recognition of gain with respect to property that is compulsorily or involuntarily converted into money the recognized gain is limited to the excess of the amount_realized upon such conversion over the cost of other_property qualified_replacement_property similar_or_related_in_service_or_use to the converted property or the cost of purchasing stock in the acquisition of control of a corporation owning such other_property purchased by the taxpayer within a specified period sec_1033 b generally requires the replacement_property to be purchased during the period beginning with the date of the disposition_of_the_converted_property or the earliest date of the threat or imminence of requisition or condemnation of the converted property whichever is the earlier and ending years after the close of the first taxable_year in which any part of the gain upon the conversion is realized sec_1033 provides in part that the period referred to in subparagraph a shall be the period beginning with the date of the disposition_of_the_converted_property or the earliest date of the threat or imminence of requisition or condemnation of the converted property whichever is the earlier and ending generally years after the close of the first taxable_year in which any part of the gain upon the conversion is realized sec_1033 only defers gains resulting from compulsory or involuntary_conversions the conversion into money or other_property must occur from circumstances beyond the taxpayer's control 41_tc_468 aff'd per 342_f2d_996 3d cir thus in an extreme example a taxpayer who in an attempt to obtain insurance proceeds commits arson by voluntarily paying a third party to burn down the taxpayer's building is not entitled to the benefits of sec_1033 revrul_82_74 1982_1_cb_110 in a more routine example in revrul_69_654 1969_2_cb_162 the service concluded that a property owner who voluntarily consented to the subsequent plr-133887-09 conversion of part of his property for the purpose of constructing a school as a condition to receiving approval for the development of his remaining property was not entitled to the tax benefits of sec_1033 with regard to the sale of the land on which the school would be constructed therefore if a taxpayer takes voluntary action to cause the conversion of the taxpayer's property into other_property or money such a conversion does not constitute an involuntary_conversion within the meaning of sec_1033 taxpayer has not intentionally failed to exercise or protect ownership rights with regard to property thus it should not be precluded from the tax benefits of sec_1033 the involuntary element of the statute is met the nature and intent of taxpayer’s intent in holding property is also no bar to sec_1033 treatment in revrul_83_70 1983_1_cb_189 the taxpayer was the lessee under a net_lease with a remaining term of fifteen years neither the lessee nor the lessor had a renewal option under the lease the taxpayer used the leased property in its furniture storage business upon the involuntary_conversion of its fifteen-year leasehold interest the taxpayer acquired a fee simple interest in property that was also suitable for use in taxpayer's furniture storage business the service ruled that the fee interest_in_real_property acquired by the taxpayer constituted property similar_or_related_in_service_or_use to the 15-year leasehold interest that had been involuntarily converted the ruling was based on the fact that both the property subject_to the fee interest and the property subject_to the leasehold interest housed office and warehouse space and would be used by the taxpayer in its furniture storage business under sec_1033 for the purposes of subsection a if real_property not including stock_in_trade or other_property held primarily for sale held for productive use in trade_or_business or for investment is as a result of its seizure requisition or condemnation or threat or imminence thereof compulsorily or involuntarily converted property of a like_kind to be held either for productive use in trade_or_business or for investment shall be treated as property similar_or_related_in_service_or_use to the property so converted the service has expressly noted that the like_kind standard of g under which a leasehold interest qualifies as being of like_kind to a fee interest only if the lease will continue at least additional years is separate and distinct from the similar_or_related_in_service_or_use standard under a a therefore the requirement that a lease have a remaining term of at least years is inapplicable to the determination of whether a fee interest is similar_or_related_in_service_or_use to a leasehold interest see 36_bta_437 acq c b revrul_64_237 1964_2_cb_319 discussing several plr-133887-09 factors to consider in determining whether the replacement_property is similar to the converted property of the owner-investor including the nature of the business risks connected with the properties and the extent and type of management activities the property requires of the owner thus when an investor's property is involuntarily converted the investor is entitled to consider the manner in which the converted property was held in determining whether the proposed replacement_property will be similar_or_related_in_service_or_use taxpayer plans to use the fee simple property that it acquires with the proceeds from the takings of the temporary easements for the same purpose that it has used_property ie holding for commercial development accordingly like in revrul_83_70 taxpayer here would be permitted to treat the fee interest s acquired as property similar_or_related_in_service_or_use to property investing in a fee simple interest for purposes of investment or development permits taxpayer to continue to hold property that is similar_or_related_in_service_or_use the right taken from the taxpayer is not-as it was in rev_rul 1953_1_cb_16 nonrecognition held unavailable ---the right to use the property in its current state rather it is the right to develop the property and realize the capital appreciation that may result from such development conclusion under the facts and circumstances presented herein state_agency b’s taking of certain eminent_domain rights in property for a payment of dollar_figuredollar_figuredollar_figureis an involuntary_conversion within the meaning of sec_1033 if during the period specified in sec_1033 the taxpayer purchases with the proceeds realized real_property similar_or_related_in_service_or_use gain if any shall be recognized only to the extent provided in sec_1033 further we conclude that a fee interest_in_real_property constitutes property similar_or_related_in_service_or_use to the easements involuntarily converted purchase of a fee interest with the proceeds therefore will defer recognition of those proceeds under sec_1033 this ruling does not address the treatment of basis in property under sec_1033 b or any required holding_period see sec_1223 this letter is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it may be relevant including the taxable_year in which the replacement of the converted property is made if taxpayer files its return electronically it may satisfy this plr-133887-09 requirement by attaching a statement to the return that provides the date and control number of this letter_ruling in accordance with the provisions of a power_of_attorney currently on file the original of this letter is being sent to you as the authorized representative of taxpayer sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting


department of the treasury washington dc person to contact ------------------------------- --------------------- --------- telephone number --------------------- refer reply to cc psi - plr-129661-04 date date internal_revenue_service number release date index numbers - ---------------------- --------------------------- ---------------------- ------------------------ --------------------------- ---------------------- --------------------- ------------------------ legend legend ---------------------- x --------------------------------------------------- y a ----------------------------------------------------- b ----------------------------------------------------- c ----------------------------------------------------- state d1 d2 d3 d4 d5 dear -------------------- ----------------- --------------- ------------------------------ ----------------------------- -------------------------------- -------------------------------- -------------------------------- ---------------- this letter responds to a letter dated date submitted on behalf of x by sec_301_7701-3 provides that a business_entity that is not classified as a its authorized representative requesting a ruling that x be given an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes and be granted relief under sec_1362 of the internal_revenue_code according to the information submitted y was incorporated in state and elected to be an s_corporation effective d1 on d2 a b and c the shareholders of y formed x a state limited_liability_company on d3 y merged with and into x with x surviving x represents x intended to be classified as an association_taxable_as_a_corporation and that the merger was intended to qualify as a reorganization under sec_368 however due to inadvertence no form_8832 entity classification election was filed for x additionally x’s operating_agreement provided for distribution rights that may have created a second class of stock in d4 it was discovered that no form_8832 had been filed and that the agreement may have created a second class of stock on d5 x executed a new operating_agreement that provided for identical rights in distribution and liquidation x represents that it did not intend to terminate its s election x and its shareholder agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner b unless the entity elects otherwise a domestic eligible_entity is a partnership if it has two or more members sec_301_7701-3 provides in general that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the applicable service_center c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines sec_301_9100-1 provides that the commissioner may grant a reasonable sec_301_7701-3 provides that an election made under sec_301 sec_301_7701-3 provides that except as provided in sec_301 sec_301_9100-1 through provide the standards the requests for relief under sec_301_9100-3 will be granted when the taxpayer the term regulatory election as 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 commissioner will use to determine whether to grant an extension of time to make a regulatory election provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines the term small_corporation as a domestic_corporation which is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1362 provides that an election under sec_1362 shall be sec_1362 provides that if an election under sec_1362 by any based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied consequently x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective d2 a copy of this letter should be attached to the form_8832 further we conclude that if the conversion from a state corporation to a state limited_liability_company created a second class of stock and thereby terminated x’s s_corporation_election then the termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 to d5 and thereafter provided that x’s s election is not otherwise terminated under sec_1362 and that x and its shareholders treat x as an s_corporation during this period except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion concerning whether x otherwise was eligible to make the election or whether x otherwise qualifies as an s_corporation being sent to x's authorized representative may not be used or cited as precedent enclosures heather c maloy associate chief_counsel passthroughs and special industries this ruling is directed only to the taxpayer requesting it under sec_6110 it pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes sincerely


department of the treasury internal_revenue_service washington d c may number release date uilc cor cc tege eoeg et1 memorandum for from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-108109-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business is not a covered employer under the railroad retirement act and the railroad unemployment insurance act we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that is not an employer under the railroad_retirement_tax_act please take the appropriate action regarding this business cc will e mcleod


department of the treasury internal_revenue_service washington d c date number info release date uilc cc tege eoeg et1 genin-146141-02 memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-146141-02 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business ceased to be an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that ceased to be an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


t c summary opinion united_states tax_court joshua smith petitioner v commissioner of internal revenue respondent docket no 24635-12s filed date joshua smith for himself erin k neugebauer for respondent summary opinion gustafson judge this case was heard pursuant to the provisions of sec_7463 in effect when the petition was filed pursuant to sec_7463 sec_1 all section references are to the internal_revenue_code u s c in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case the internal_revenue_service irs determined a deficiency of dollar_figure in and a sec_6662 accuracy-related_penalty of dollar_figure on petitioner joshua smith’s federal_income_tax for this case arises from mr smith’s timely petition for redetermination of the tax and penalties in the statutory_notice_of_deficiency respondent has conceded that the unreported income at issue is not subject_to self-employment_tax additionally respondent has conceded that mr smith is not liable for the corresponding sec_6662 accuracy-related_penalty of dollar_figure thus the only issue remaining for decision is whether the unreported income at issue was a settlement payment for physical injuries or physical sickness and therefore excludable from mr smith’s gross_income under sec_104 we hold that it was not background the parties jointly moved to submit this case for consideration pursuant to rule reflecting their agreement that the relevant facts could be presented without a trial and we granted that motion we incorporate by this reference the parties’ stipulation of facts filed date and the exhibits attached thereto mr smith resided in the state of pennsylvania when he filed his petition mr smith’s diagnosis mr smith was formerly employed as a server with mbfgmtw limited_partnership d b a monterey bay fish grotto mbfg from approximately date until mbfg terminated his employment on date while he was employed by mbfg mr smith was diagnosed with attention deficit hyperactivity disorder adhd and major depressive disorder mdd both adhd and mdd are disabilities within the definition of disability in the americans with disabilities act of ada pub_l_no 104_stat_327 as part of his treatment regimen he was prescribed a stimulant medication called desoxyn methamphetamine hydrochloride one of desoxyn’s side effects the burden_of_proof is generally on the taxpayer see rule a and the submission of a case under rule does not alter that burden see 95_tc_82 aff’d 943_f2d_22 8th cir rule b the stipulated record consists of the facts alleged in mr smith’s petition filed with this court on date to the extent they are admitted in respondent’s answer filed on date the stipulation of facts and the exhibits attached thereto is appetite suppression this was problematic for mr smith who is small in stature he is only five feet six inches tall and his weight fluctuated between and pounds before he began taking the medication mr smith’s primary care physician was concerned about the appetite suppressive effects of desoxyn on his general physical and mental health particularly if he lost any weight as a result the physician recommended that he consume as many calories as possible whenever he was able to do so mbfg’s employee meal policy this medical advice conflicted with mbfg’s longstanding policy prohibiting servers from eating during a shift the only exception that mbfg allowed to the policy was that a food server could eat if less than minutes remained before the restaurant stopped seating guests and if that server had no guests remaining at his or her assigned tables first and second violations of the policy resulted in written warnings while a third violation resulted in termination of the server’s employment mr smith recognized the tension between his physician’s recommended eating regime and mbfg’s restrictive meal policy he informed mbfg of his disability and requested to be excepted from the policy for a brief period mbfg initially excepted mr smith from the policy and he was permitted to eat without restrictions as his appetite demanded however management’s patience with mr smith’s accommodation quickly waned and on date mr smith was informed that mbfg would no longer accommodate his disability and that he was again subject_to the meal policy at that meeting mbfg explained the terms of the meal policy to mr smith as follows mr smith was permitted to take up to two eight-minute breaks per shift but only after first receiving permission from the manager mr smith was permitted to eat only pre-prepared food that was bought outside the restaurant and mr smith was permitted to consume his food only while standing in a particular location in the kitchen in full view of all kitchen employees less than two weeks later mr smith was called to a meeting with mbfg management and disciplined for violating the meal policy he was told that he would be terminated if he violated the meal policy again administrative complaint and district_court lawsuit mr smith submitted a questionnaire to the pennsylvania human relations commission phrc on date alleging that mbfg had engaged in discriminatory conduct the following day mr smith notified mbfg in writing of his decision to pursue formal charges of discrimination as a result of its meal policy retaliatory conduct and refusal to accommodate his disability on date the phrc dismissed mr smith’s complaint because the complaint did not establish probable cause to show discrimination mbfg terminated mr smith on date in response to his termination mr smith filed on date a civil lawsuit against mbfg in the u s district_court for the western district of pennsylvania civil no pursuant to the ada and the pennsylvania human relations act pa cons stat secs west in the lawsuit mr smith alleged that mbfg discriminated and retaliated against him because of his disability mr smith alleged that he suffered emotional distress anxiety depression and other consequential damages mr smith’s amended complaint filed date stated as a direct and proximate result of defendant’s actions toward plaintiff as described herein plaintiff has suffered and will continue to suffer severe emotional distress anxiety depression and other consequential damages settlement of the discrimination claims in date mr smith and mbfg executed a confidential settlement agreement and general release the settlement agreement described mr smith’s claims as follows mr smith does hereby fully and forever release discharge and hold harmless mbfg from any and all liability upon claims causes of action or obligations of every nature whatsoever whether known or unknown arising out of or relating to his employment and termination from employment or to any other act event failure to act or thing which has occurred or was created at any time before the date on which this agreement is signed without limiting the generality hereof this release covers claims or causes of action based upon torts such as for example negligence fraud defamation wrongful discharge express and implied contracts federal state or local statutes and ordinances including those which regulate employment practices such as for example the age discrimination in employment act of the american sic with disabilities act title vii of the civil rights of the pennsylvania human relations act and every other source of legal rights and obligations whatsoever this description includes no specific mention of physical injury or sickness in this settlement agreement mbfg agreed to pay dollar_figure in exchange for mr smith’s release and discharge of any claims or causes of action he had against mbfg mr smith and mbfg’s agreement allocated the settlement payment as follows plaintiff has requested and the parties have agreed that five thousand dollars of the total_payment be allocated to lost wages mbfg shall report this portion of the payment to the internal_revenue_service through an irs form_w-2 and such payment shall be subject_to applicable employment_tax withholdings plaintiff has requested and the parties have agreed that the remainder of the sum be allocated to pain and suffering emotional distress and the expense of suit this portion shall be reported to the internal_revenue_service through an irs form_1099 emphasis added the settlement agreement also provided that mr smith was solely responsible for the tax_liabilities due from him if any which result from his receipt of money under this agreement mbfg issued mr smith a form 1099-misc miscellaneous income and reported the dollar_figure of nonemployee compensation paid to him during tax_year mr smith did not report the dollar_figure of nonemployee compensation on hi sec_2010 federal_income_tax return on date the irs mailed mr smith the notice_of_deficiency which determined a deficiency in tax of dollar_figure and on date mr smith filed his petition in this court on date the parties filed their stipulation of facts and jointly moved to submit the case under rule by order dated date the court ordered the parties to submit simultaneous memoranda briefs by date mr smith did not file a brief but we construe his position to be that the unreported income is excludable from his gross_income pursuant to sec_104 because it was allocated to pain and suffering respondent’s brief argues that the unreported income represents settlement proceeds that were not received on account of personal physical injuries or physical sickness and therefore are not excludable from gross_income under sec_104 discussion as a general_rule the irs’s determinations are presumed correct and the taxpayer has the burden of establishing that the determinations in the notice_of_deficiency are erroneous rule a 290_us_111 mr smith has not contended that the burden_of_proof has shifted pursuant to sec_7491 and the record shows no basis for such a contention the record shows that mr smith did receive the unreported income thus the presumption of correctness attaches in this unreported income case see eg harris v commissioner tcmemo_2012_333 i taxability of settlement awards sec_61 provides the following broad definition of the term gross_income except as otherwise provided in this subtitle gross_income means all income from whatever source derived sec_61 is thus broad in its scope and exclusions from gross_income must be narrowly construed 515_us_323 sec_104 provides that gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal physical injuries or physical sickness for purposes of paragraph emotional distress shall not be treated as a physical injury or physical sickness the preceding sentence shall not apply to an amount of damages not in excess of the amount_paid for medical_care described in subparagraph a or b of sec_213 attributable to emotional distress the legislative_history shows that i t is intended that the term emotional distress includes symptoms eg insomnia headaches stomach disorders which may result from such emotional distress h_r conf rept no pincite ndollar_figure 1996_3_cb_741 therefore to be excludable from gross_income under sec_104 a settlement award must be paid to a taxpayer on account of physical injuries or physical sickness which does not include emotional distress or symptoms thereof where damages are received pursuant to a settlement agreement like mr smith’s the nature of the claim that was the actual basis for settlement controls whether those damages are excludable under sec_104 504_us_229 whether the settlement payment is excludable from gross_income under sec_104 depends on the nature and the character of the claims asserted in the lawsuit see 87_tc_236 aff’d 835_f2d_67 3d cir 80_tc_1104 76_tc_116 aff’d without published opinion 676_f2d_682 1st cir the determination of the underlying nature of the claim is factual 102_tc_116 aff’d in part rev’d in part and remanded on another issue 70_f3d_34 5th cir 58_tc_32 where there is a settlement agreement the determination of the nature of the claim is usually made by reference to the agreement see 349_f2d_610 10th cir aff’g tcmemo_1964_33 robinson v commissioner t c pincite if the settlement agreement lacks an express statement of the claims that payment was to settle the intent of the payor here mbfg is critical to that determination knuckles v commissioner f 2d pincite see also 290_f2d_283 2d cir aff’g per curiam tcmemo_1960_21 ii the nature of mr smith’s claim against mbfg we surmise from mr smith’s petition that his position is that the unreported income is excludable from his income under sec_104 because it was partially allocated as damages for pain and suffering under the settlement agreement he makes no contention that the amounts were for medical_care cf sec_104 flush language because the unreported income arose from mr smith’s settlement agreement with mbfg we must first look to the settlement agreement to determine the nature of the claims it was intended to settle the settlement payment is excludable from gross_income only if it was paid on account of physical injuries or physical sickness alternatively if the settlement payment was paid on account of general pain and suffering or emotional distress then it would not be excludable from gross_income under sec_104 as we have noted the settlement agreement does not specifically mention any claims for physical injuries or physical sickness and by its terms quoted above the settlement agreement does not provide that any portion of the payment was allocable to claims for physical injuries or physical sickness rather it allocates the payment to lost wages pain and suffering emotional distress and the expense of suit this court has noted however that ‘pain and suffering’ is a broad term that includes emotional distress and its symptoms see longoria v commissioner tcmemo_2009_162 settlement payments for non-physical injuries such as emotional distress are not excludable from income under sec_104 see id hawkins v commissioner tcmemo_2007_286 aff’d 386_fedappx_697 9th cir see also blackwood v commissioner tcmemo_2012_190 holding that depression is a non-physical injury under sec_104 when we look to mr smith’s federal court complaint to see whether it states more particular claims ie physical injuries or physical sickness that would justify exclusion see burke u s pincite church v commissioner t c pincite7 we find it does not the claims mr smith asserted against mbfg were for discrimination and retaliation and the damages mr smith claimed were severe emotional distress anxiety depression and other consequential damages these injuries are non-physical as we have previously held sec_104 and the flush language of sec_104 require that to be excluded from income any damages must arise from personal injuries or personal sickness other than emotional distress or the symptoms thereof see longoria v commissioner tcmemo_2009_162 thus we cannot hold that mr smith’s claims for damages were for physical injuries that might give rise to a settlement award that is excludable from income pursuant to sec_104 the character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment see agar v commissioner f 2d pincite 79_tc_680 aff’d without published opinion 749_f2d_37 9th cir mr smith has not met his burden to establish that he received the dollar_figure settlement payment or any identifiable part thereof from mbfg on account of personal physical injuries or physical sickness for that reason we find that the dollar_figure of unreported income is not excludable from mr smith’s gross_income under sec_104 for his tax_year to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------ ------------------------------------------------------------ --------------------------- ----------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- telephone number ---------------------- refer reply to cc tege eb hw plr-124480-17 date date legend taxpayer ----------------------------------------------------------------------------------------------------- plan ----------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- state x ---------- date x ---------------------- date y -------------------------- dollar_figurex ---------------- dear -------------------- this responds to your letter dated --------------------- requesting a ruling that the proposed transaction described below will not result in prohibited inurement under sec_501 of the internal_revenue_code code facts taxpayer received a determination_letter dated date x stating that it is a voluntary employees’ beneficiary association under sec_501 of the code effective date y taxpayer is an association that provides medical benefits to employees of its participating members taxpayer sponsors plan taxpayer represents that it is also a plr-124480-17 multiple_employer_welfare_arrangement mewa under the employee_retirement_income_security_act_of_1974 and must comply with state x non-profit mewa act taxpayer represents that it is required under the laws of state x to maintain a fund balance of dollar_figurex at all times taxpayer further represents that in its first year of operation premiums it collected from its members were insufficient to maintain the required fund balance and as required under the laws of state x it assessed additional contributions from its members taxpayer represents that a substantial portion of the additional contributions was memorialized by interest-free promissory notes with taxpayer as issuer and the members as payees taxpayer is now adequately funded for members that were assessed additional contributions as described in the preceding paragraph taxpayer proposes to extinguish the promissory notes over a five-year period by applying the amount of the notes to the contributions that the members otherwise would be required to pay to taxpayer taxpayer represents that members will not receive any funds from taxpayer and that there will be no disproportionate benefits to officers shareholders or other highly paid employees of members ruling requested taxpayer has requested a ruling that the proposed transaction extinguishing the promissory notes over a five-year period by applying the amount of the notes to the contributions that the members otherwise would be required to pay to taxpayer will not result in prohibited inurement under sec_501 law sec_501 provides for the exemption from federal_income_tax of voluntary_employees'_beneficiary_associations providing for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net_earnings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-1 provides that for an organization to be described in sec_501 of the code it must be an employees' association membership in the association must be voluntary the organization must provide for the payment of life sick accident or other_benefits to its members and there can be no inurement other than by payment of permitted benefits to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-3 provides that the life sick accident or other_benefits provided by a voluntary employees' beneficiary association must be payable to its members their dependents or their designated beneficiaries life sick accident or plr-124480-17 other_benefits may take the form of cash or noncash benefits a voluntary employees' beneficiary association is not operated for the purpose of providing life sick accident or other_benefits unless substantially_all of its operations are in furtherance of the provision of such benefits further an organization is not described in this section if it systematically and knowingly provides benefits of more than a de_minimis amount that are not permitted by paragraphs b c d or e of this section sec_1_501_c_9_-3 provides in pertinent part that the term sick_and_accident_benefits means amounts furnished to or on behalf of a member or a member’s dependents in the event of illness or personal injury to a member or dependent such benefits may be provided through reimbursement to a member or a member’s dependents for amounts expended because of illness or personal injury or through the payment of premiums to a medical_benefit or health insurance program sick_and_accident_benefits may be provided directly by an association to or on behalf of members and their dependents or may be provided indirectly by an association through the payment of premiums or fees to an insurance_company medical clinic or other program under which members and their dependents are entitled to medical services or to other sick_and_accident_benefits sec_1_501_c_9_-4 provides in pertinent part that no part of the net_earnings of an employees’ association may inure to the benefit of any private_shareholder_or_individual other than through the payment of benefits permitted by sec_1_501_c_9_-3 whether prohibited inurement has occurred is a question to be determined with regard to all of the facts and circumstances taking into account the guidelines set forth in the regulations analysis and conclusion based on the information submitted by taxpayer we conclude that the proposed transaction extinguishing the promissory notes over a five-year period by applying the amount of the notes to the contributions that the members otherwise would be required to pay to taxpayer will not result in prohibited inurement to a private_shareholder_or_individual other than through the payment of permissible benefits as described in sec_1_501_c_9_-3 accordingly the proposed transaction will not result in prohibited inurement under sec_501 of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically this ruling does not address tax consequences of the described transaction to any member who made contributions to taxpayer this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-124480-17 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely kevin knopf senior technician reviewer health welfare branch office of associate chief_counsel tax exempt government entities


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date legend x scholarship program y county state b dollars amount c dollars amount dear you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 description of your request your letter indicates you will operate a scholarship program called x you previously sought and received advance approval of your scholarship program but you are now modifying your program and are again seeking advance approval the purpose of x is to award scholarships to residents of y to be used for tuition to study at a tax-exempt private or public post-secondary educational_institution there is no geographic limitation on the college university or other school that a recipient may letter catalog number 58263t attend the scholarship awards may also be used for other qualified_scholarship expenses such as books equipment and fees there is no set amount for the scholarship awards but the awards typically range from b dollars to c dollars you publicize your scholarship award program by annually notifying all the superintendents of the school districts in the county of the availability of the scholarships in addition you publicize the availability of the scholarship on your website and by newspaper your have a scholarship selection committee your board_of directors selects the members of the committee from the community the scholarship committee at all times has at least three members relatives of selection committee members are not eligible for your scholarship awards eligibility for x is determined by the following e e e applicant must be a resident of y and accepted by an exempt educational_institution of postsecondary education applicant must not be one of your current or former directors or a spouse lineal descendant or spouse of a lineal descendant of any current or former director applicant must not be a current or former member of the scholarship committee or a spouse lineal descendant or spouse of a lineal descendant of a member of the scholarship committee when selecting recipients the scholarship committee considers prior academic record prior academic achievement recommendations financial need motivation and character as determined from an interview and or narrative included with the application each year you request that the scholarship committee grant awards of up to a certain amount in total to the scholarship recipients the individual scholarship awards are nota set amount and there are not a set number of scholarships awarded each year instead the committee has discretion to vary the amount of the scholarship awards among the various scholarship recipients scholarship awards are for one year only there is no restriction placed on an applicant or scholarship grantee as to his or her course of study the only restrictions placed on the educational_institution attended by a scholarship recipient is that the institution is one that normally maintains a regular faculty and curriculum normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on and is tax-exempt pursuant to the federal tax law scholarship awards are designated for the entire school year and the scholarship awards are divided into two terms one-half of the award is paid for the fall term and if the recipient qualifies academically a like amount is paid for the spring term to qualify for the spring term a transcript of a student's first term grades and an invoice for the spring letter catalog number 58263t semester must be submitted to you the transcript is then reviewed and you determine the student's eligibility for a second term award scholarship awards are provided directly to educational institutions on behalf of the scholarship recipients to ensure they are applied to tuition and other qualifying scholarship expenses only scholarship recipients must reapply to receive a scholarship for subsequent years of study you attest that you maintain case histories showing recipients of your scholarships fellowships educational loans or other educational grants including names addresses purposes of awards amount of each grant manner of selection and relationship if any to officers trustees or donors of funds to you you attest that relatives of members of the selection committee or of your officers directors or substantial contributors are not eligible for awards made under your program you attest that you will arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversions of funds from their intended purposes and take all reasonable and appropriate stops to recover diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you also attest that you will maintain all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 letter catalog number 58263t other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely jeffrey cooper director exempt_organizations rulings and agreements letter catalog number 58263t