internal_revenue_service number release date index number ------------------------------------- ----------------------------------------- ---------------------------- -------------------------- in re ---------------------------------------------------- ------------------------------------------------------------ -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- ------------------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-135971-15 date date legend trust grandfather beneficiary date date date state statute trial_court charity dear ----------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------------------------------------- this letter responds to your authorized representative’s letter dated date requesting a ruling concerning the generation-skipping_transfer gst tax consequences of the proposed modification of trust pursuant to sec_2601 of the internal_revenue_code the facts and representations submitted are summarized as follows on date a date prior to date grandfather executed an irrevocable_trust trust for the benefit of his grandchildren plr-135971-15 article of trust provides that the trustees are to promptly divide the trust property into equal parts one for the account of each now living child of grandfather each of said parts is to be a separate and distinct trust article of trust provides in relevant part that each trust for the account of a child of grandfather is to be held undivided during the period or periods when he or she has no living issue when a child is born to a child of grandfather the trustees are to create a share for the account of said grandchild of grandfather article b provides in relevant part that with respect to each share until termination of the trust the trustees may from time to time or at any time pay to the grandchild such amounts if any from the net_income and or principal of said share as they may determine adding to principal from time to time any income not so expended in addition if and when the grandchild has attained the age of the trustees are to distribute to him or her such amount of the principal of said share as he or she may from time to time or at any time demand in writing provided that the total subject_to withdrawal does not exceed one-half of the value of said share when the grandchild attains the age of article b provides in relevant part that the trust of said share is to terminate when the grandchild attains the age of or sooner dies upon such termination the trust property of said share is to be paid over to the grandchild if then living if the grandchild is not living the trust property of said share is to be paid over to his or her spouse grandfather’s issue other than the grandchild or spouses of such issue as the grandchild may have appointed by will executed after he or she attained the age of in default of appointment the remaining property of said share is to be paid to the issue of grandchild per stirpes or if grandchild has no issue then living to the then living issue of grandchild’s parent who is grandfather’s child per stirpes or if there is no such issue then living to said parent otherwise per stirpes to grandfather’s then living issue or if there is no issue of grandfather then living to charity beneficiary is a grandchild of grandfather beneficiary was born with cognitive deficits and other disabilities beneficiary does not have the capacity to execute the power_of_appointment provided in article b or article b on date beneficiary’s parents were appointed as her permanent conservators state statute provides that the court may modify the administrative or dispositive terms of a_trust or terminate the trust if because of circumstances not anticipated by the settlor modification or termination will further the purposes of the trust to the extent practicable the modification shall be made in accordance with the settlor's probable intent the court may modify the administrative terms of a_trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration plr-135971-15 the trustees of trust have petitioned trial_court to modify the terms of trust as they apply to the shares created for the benefit of beneficiary as modified article b of trust will provide that with respect to each share until termination of the trust the trustees may from time to time or at any time pay to beneficiary such amounts if any from the net_income and or principal of said share as they may determine adding to principal from time to time any income not so expended as modified article b of trust will provide that the trust of said share is to terminate upon the death of beneficiary if beneficiary is less than years of age at the time of her death the remaining trust property of said share is to be paid over to her issue per stirpes or if she has no issue then living to the then living issue of her parent who is grandfather’s child per stirpes or if there is no such issue then living to said parent otherwise per stirpes to grandfather’s then living issue or if there is no issue of grandfather then living to charity if beneficiary is at least years of age but less than years of age at the time of her death one-half of the remaining property of said share is to be paid over to the personal_representatives of her estate to be disposed of as part of her estate the balance of the property is to be paid over to her issue per stirpes or if she has no issue then living to the then living issue of her parent who is grandfather’s child per stirpes or if there is no such issue then living to said parent otherwise per stirpes to grandfather’s then living issue or if there is no issue of grandfather then living to charity if beneficiary is at least years of age at the time of her death the remaining property of said share is to be paid over to the personal_representatives of her estate to be disposed of as part of her estate it is represented that beneficiary's legal incompetency is a circumstance that was not anticipated by grandfather and that the modification to keep beneficiary’s inheritance in trust for her lifetime furthers the essential purpose of trust to provide financially for grandfather’s grandchildren on date trial_court ordered that trust be modified contingent upon a favorable ruling from the internal_revenue_service you have requested a ruling that after the proposed modification of the terms of trust trust will remain exempt from the application of the gst tax and that no distribution from or termination of any interest in trust will be subject_to the gst tax law and analysis sec_2601 imposes a tax on every gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip section b a of the tax_reform_act_of_1986 the act vol c b and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the gst tax shall not apply to any gst under a_trust that was irrevocable on date but only to the extent that such transfer was not made out of corpus added to the trust after date or out of income attributable to corpus so added plr-135971-15 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 b or b will not cause the trust to lose its exempt status the rules of sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst in the present case the proposed modification of trust under state statute provides that beneficiary's interest in trust will continue to be held in trust for the exclusive benefit of beneficiary during her lifetime since beneficiary does not have the capacity to execute the power_of_appointment provided in article b of trust if beneficiary dies before the age of the property in trust will pass under the terms of the modified trust in the same manner as under the terms of the original trust if beneficiary dies after the age of and before the age of one-half of the then remaining property of trust is includible in beneficiary’s gross_estate for federal estate_tax purposes and the other one-half portion will pass as it would have passed under the terms of the original trust if beneficiary dies after the age of upon beneficiary’s death the entire trust will terminate and all of the trust property will be includible in beneficiary’s gross_estate for federal estate_tax purposes accordingly based on the facts presented and the representations made we find that after the proposed modification of trust trust will remain exempt from the application of the gst tax and that no distribution from or termination of any interest in trust will be subject_to the gst tax in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives plr-135971-15 except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a copy of this letter should be attached to any gift estate or gst tax returns that you may file relating to this matter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely leslie h finlow leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


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 intl br1 - plr-138268-03 date march ---------- ty ------- -------------------------------- legend a -------------------------------------------- country b dear ------------------------- this is in response to your representative's letter dated date in which a ruling under sec_877 of the internal_revenue_code was requested to confirm that a’s loss of citizenship did not have for one of its principal purposes the avoidance of u s taxes under subtitles a or b of the code the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination the information submitted for consideration is substantially as set forth below states and is a dual citizen of country b and the united_states citizenship an individual who expatriates within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes for individuals who expatriate with a principal purpose to avoid u s taxes a will expatriate within a year of receiving this ruling she was born in the united sec_877 generally provides that a person who loses his or her u s a former citizen whose net_worth or average tax_liability exceeds these a’s net_worth exceeded the sec_877 threshold at the time of her plr-138268-03 a former citizen will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 thresholds will not be presumed to have a principal purpose of tax_avoidance if that person is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 a c notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes submission a is eligible to request a ruling because a is a citizen of country b and the united_states and will continue to be a citizen of country b after she expatriates submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 furthermore we conclude that a will not be treated under sec_877 as having the avoidance of u s taxes a principal purpose for her expatriation because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code concerning the tax consequences of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of citizenship or for taxable periods after her loss of citizenship under sections of the code other than sec_877 sec_2107 and sec_2501 which she obtained the ruling whether or not a is otherwise required to file a return the code provides that it may not be used or cited as precedent a copy of this letter must be attached to a’s u s income_tax return for the year in this ruling is directed only to the taxpayer requesting it sec_6110 of a submitted all the information required by notice_98_34 based on the facts except as expressly provided herein no opinion is expressed or implied plr-138268-03 letter is being sent to a in accordance with the power_of_attorney on file with this office a copy of this sincerely w ed wiliams senior technical reviewer office of office of associate chief_counsel international


t c memo united_states tax_court frederick w and candace j tiley petitioners v commissioner of internal revenue respondent docket no filed date frederick w and candace j tiley pro sese kelley blaine and robert v boeshaar for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and a penalty of dollar_figure under sec_6662 unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue the issue for decision is whether petitioners are liable for the accuracy-related_penalty findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in salem oregon at the time that they filed the petition in this case in petitioner frederick w tiley petitioner married kathleen ann tiley ms tiley in petitioner and ms tiley filed a stipulated judgment of dissolution of marriage in the circuit_court of the state of oregon for the county of polk on date petitioner and ms tiley entered into a settlement agreement set forth on the record in a transcript of proceedings in the circuit_court of the state of oregon for the county of polk as stated in the record among other things it is the stipulation of the parties that dr tiley will pay by cashier’s check the sum of dollar_figure on or before september 28th to ms tiley on condition--by the way that payment would all be classified as payment for attorney’s fees both present and past and back child_support none of the dollar_figure would be classified as payment of any back spousal support and both parties have agreed that dr tiley will not attempt to deduct any portion of that dollar_figure payment as spousal support and that ms tiley would not be required to recognize it as taxable_income petitioner was present at the time that the settlement agreement was stated in the record as shown by the following excerpt from the transcript the state court all right so you’re in agreement with the stipulation as recited by mr hemann ms tiley’s counsel mr wheeler petitioner’s counsel is that correct doctor dr frederick tiley yes the court i was going to ask you dr tiley for the record you are in agreement with it as well dr frederick tiley yes on date and date petitioner wrote checks to ms tiley in the amounts of dollar_figure and dollar_figure respectively on their form_1040 u s individual_income_tax_return petitioners deducted dollar_figure as alimony paid to ms tiley opinion in the petition in this case petitioner alleged that dollar_figure of the dollar_figure in payments made to ms tiley in was for deductible spousal support petitioner did not concede the deficiency until the time of trial although his claim was clearly contrary to the settlement agreement that he entered into in petitioner however contends that he should not be liable for the accuracy-related_penalty because he did not remember the settlement agreement entered into the record of the state court he asserts that at the time of the settlement approximately dollar_figure was owed to ms tiley as spousal support sec_215 allows a deduction for alimony paid during a taxable_year alimony is defined in sec_71 as a payment if the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 the settlement entered into by petitioner with his former wife expressly stated that the payments agreed to would not be income to ms tiley and would not be deductible by petitioner thus the amount_paid by petitioner to ms tiley during clearly was not alimony deductible by petitioner sec_6662 imposes a penalty in an amount equal to percent of the portion of an underpayment attributable among other things to negligence or disregard of rules or regulations ‘ n egligence’ includes any failure to make a reasonable attempt to comply with the provisions of title_26 and the term ‘disregard’ includes any careless reckless or intentional disregard sec_6662 this case clearly justifies the penalty petitioner expressly agreed in open court in response to questions from his counsel and from the court that the amounts that he paid to ms tiley would not be deductible_alimony he ignored that agreement and instead seeks to justify his deduction on the basis of his preexisting liabilities that were reduced and liquidated in the settlement even if we were to accept petitioner’s questionable assertion that he does not recall the agreement it was incumbent upon him as a reasonable person to refer to the settlement agreement before deducting as alimony the payments that he made decision will be entered for respondent


t c memo united_states tax_court lucy begay petitioner v commissioner of internal revenue respondent docket no filed date edward m dobson for petitioner miles b fuller for respondent memorandum opinion cohen judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether the relationship classification set forth in sec_152 violates petitioner’s right to free exercise of religion under the first amendment to the constitution and whether the relationship classification set forth in sec_152 violates petitioner’s equal protection rights under the fifth and fourteenth amendments to the constitution background this case was submitted fully stipulated under rule the stipulated facts are incorporated as our findings by this reference petitioner is a tribal elder of the navajo indian nation petitioner lived in arizona at the time the petition was filed petitioner filed a form 1040a u s individual_income_tax_return for petitioner claimed a dependency_exemption deduction for td head_of_household filing_status the earned_income_credit and the child_tax_credit petitioner identified td as her nephew on her federal_income_tax return the court refers to minor children by only their initials see rule a td is a member of the navajo indian nation and is a clan relative of petitioner in the navajo indian nation a clan relative is another member of the navajo indian nation and certain clan obligations exist between clan relatives petitioner supports td as a result of her clan obligation td is not a child of petitioner or a descendant of such child as described in sec_152 td is not a brother sister stepbrother or stepsister of petitioner or a descendant of any such relative as described in sec_152 with respect to td petitioner met the requirements set forth in sec_152 c d and e in the notice_of_deficiency respondent disallowed petitioner’s dependency_exemption deduction head_of_household filing_status earned_income_credit and child_tax_credit discussion the internal_revenue_code allows as a deduction an exemption for each dependent of a taxpayer in computing taxable_income sec_151 sec_152 defines a dependent as a qualifying_child or a qualifying_relative of the taxpayer in addition to other requirements a qualifying_child must be the taxpayer’s child brother sister stepbrother stepsister or a descendant of any such relative sec_152 a qualifying_relative however may be an individual who for the year in issue has the same principal_place_of_abode as the taxpayer and is a member of the taxpayer’s household and for whom the taxpayer provides over one-half of the support sec_152 h petitioner concedes that her relationship to td does not satisfy the relationships set forth in sec_152 in order for td to be considered petitioner’s qualifying_child similarly td does not satisfy the relationships set forth in sec_152 and c to be considered petitioner’s eligible_foster_child an eligible_foster_child is an individual who is placed with the taxpayer by an authorized_placement_agency or by judgment decree or other order of any court of competent jurisdiction sec_152 c taxpayers who have a qualifying_child may claim a number of tax benefits such as head_of_household filing_status the earned_income_credit and the child_tax_credit see sec_2 c a i a a c taxpayers who have a qualifying_child or a qualifying_relative may claim a dependency_exemption deduction see sec_151 c respondent now concedes that td met the requirements as petitioner’s dependent qualifying_relative under sec_152 and h and petitioner is entitled to a dependency_exemption deduction although petitioner concedes that td is not her qualifying_child under sec_152 she argues that the exclusion from the sec_152 relationships of certain obligatory clan-based relationships in navajo culture violates her constitutional rights under both the free exercise clause of the first amendment to the constitution and the fifth and fourteenth amendments to the constitution according to petitioner in navajo culture and tradition children are not only children of the parents they are also children of the clan petitioner submits that a navajo clan consists of the first clans of the child’s mother father maternal grandfather and paternal grandfather and that the clan relationship may extend beyond the foregoing if for example the child is adopted free exercise clause of the first amendment the first amendment to the constitution provides that congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof the test to determine the constitutionality of a statute that is challenged as violating the free exercise clause of the first amendment is set forth in the religious freedom restoration act of rfra pub_l_no 107_stat_1488 the first of rfra’s two stated purposes is to restore the compelling interest test as set forth in 374_us_398 and 406_us_205 id sec_2 stat pincite the compelling interest test as set forth in sherbert and yoder means that g overnment may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to the person is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that compelling governmental interest id sec_3 stat pincite the second of rfra’s two stated purposes is to provide a claim or defense to persons whose religious exercise is substantially burdened by government id sec_2 a person whose religious exercise has been burdened in violation of rfra may assert that violation as a claim or defense in a judicial proceeding and obtain appropriate relief against a government id sec_3 petitioner argues that the failure of the sec_152 relationship classification to recognize td as her qualifying_child unreasonably burdens her religious rights respondent does not challenge either the existence of petitioner’s clan relationships and obligations or that such obligations to clan relatives stem from the navajo religion where the government conditions receipt of an important benefit upon conduct proscribed by a religious faith or where it denies such a benefit because of conduct mandated by religious belief thereby putting substantial pressure on an adherent to modify behavior and to violate beliefs a burden upon religion exists 450_us_707 while the compulsion may be indirect the infringement upon free exercise is nonetheless substantial id under rfra a substantial burden is imposed only when individuals are forced to choose between following the tenets of their religion and receiving a governmental benefit 374_us_398 or coerced to act contrary to their religious beliefs by the threat of civil or criminal sanctions 406_us_205 any burden short of that described by sherbert and yoder is not a substantial burden within the meaning of rfra and does not require the application of the compelling interest test set forth in those two cases 535_f3d_1058 9th cir en_banc see also 545_f3d_1207 9th cir the sec_152 relationship classification does not condition petitioner’s receipt of tax benefits on her forgoing her clan obligations to td or force her to choose between following her clan obligations to td and receiving tax benefits furthermore the sec_152 relationship classification does not deny petitioner tax benefits because she fulfills her obligations to td or force her to abandon her clan obligations to td by threat of civil or economic sanctions regardless of petitioner’s ineligibility for tax benefits such as the earned_income_credit she is at liberty to fulfill her clan obligations to td petitioner’s argument for the burden on her religious rights is instead financial hardship and continuing navajo child poverty however the supreme court has rejected the notion that a taxpayer’s free exercise of her religious beliefs is somehow not fully realized unless it is subsidized by tax benefits such as the earned_income_credit see eg 461_us_540 constitutional protection of fundamental freedoms ‘does not confer an entitlement to such funds as may be necessary to realize all the advantages of that freedom ’ see eg 123_tc_269 quoting 448_us_297 consequently although we do not disregard petitioner’s assertions of financial hardship these conditions standing alone do not establish that the sec_152 relationship classification substantially burdens her rights under the free exercise clause although rfra requires respondent to demonstrate that the sec_152 relationship classification satisfies the compelling interest test the government is not required to prove a compelling interest for its action or that its action involves the least restrictive means to achieve its purpose unless the plaintiff first proves the government action substantially burdens his exercise of religion see navajo nation f 3d pincite hence in the absence of petitioner’s showing of a substantial burden on her rights under the free exercise clause the government is not required to prove a compelling interest for its action or that its action involves the least restrictive means to achieve its purpose for the foregoing reasons the sec_152 relationship classification does not violate petitioner’s rights under the free exercise clause of the first amendment equal protection clause the fourteenth amendment to the constitution provides that no state shall deny to any person the equal protection of the laws the fifth_amendment imposes on the federal government the same standard required of state legislation by the equal protection clause of the fourteenth amendment 450_us_221 n generally statutory classifications are valid if they bear a rational relation to a legitimate governmental purpose taxation with representation u s pincite ‘ a classification neither involving fundamental rights nor proceeding along suspect lines cannot run afoul of the equal protection clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose ’ armour v city of indianapolis ___ u s ___ ___ 132_sct_2073 quoting 509_us_312 the equal protection component of the fifth_amendment prohibits only purposeful discrimination 426_us_229 and when a facially neutral federal statute is challenged on equal protection grounds it is incumbent upon the challenger to prove that congress selected or reaffirmed a particular course of action at least in part ‘because of’ not merely ‘in spite of’ its adverse effects upon an identifiable group citations omitted 448_us_297 ndollar_figure quoting 442_us_256 ‘ t he presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes ’ taxation with representation u s pincite quoting 309_us_83 for the reasons discussed above the sec_152 relationship classification does not violate petitioner’s fundamental rights under the free exercise clause of the first amendment furthermore the sec_152 relationship classification does not employ a suspect classification such as race that would constitute proceeding along suspect lines see eg 411_us_1 stewart j concurring however according to petitioner without conceding that low-income navajo taxpayers and navajo clan children must receive prior designation as protected classes for fifth_amendment protection petitioner asserts protected class status under the navajo treaty of petitioner offers nothing further in support of protected class status instead petitioner appears to rely on the navajo treaty of to emphasize her financial need petitioner also relies on the indian child welfare act of pub_l_no 92_stat_3069 current version pincite u s c secs to emphasize the special needs of indian children which she asserts are needs largely based on continuing poverty neither financial need nor poverty standing alone identifies a suspect class for purposes of equal protection analysis see mcrae u s pincite 432_us_464 there is no proof or even an indication that congress selected or reaffirmed the sec_152 relationship classification because of or in spite of any adverse effects on petitioner or the navajo or that the sec_152 relationship classification is a hostile and oppressive discrimination against her and the navajo for the foregoing reasons the sec_152 relationship classification neither involves petitioner’s fundamental right to the free exercise of her religion nor proceeds along suspect lines because the sec_152 relationship classification neither involves petitioner’s fundamental right to the free exercise of her religion nor proceeds along suspect lines the sec_152 relationship classification is valid if it bears a rational relation to a legitimate governmental purpose see armour ___ u s at ___ s ct pincite taxation with representation u s pincite as long as the classificatory scheme chosen by congress rationally advances a reasonable and identifiable governmental objective we must disregard the existence of other methods of allocation that we as individuals perhaps would have preferred see wilson u s pincite the government has especially broad latitude in creating classifications and distinctions in tax statutes armour ___ u s at ___ s ct pincite and a broad public interest in maintaining a sound tax system free of myriad exceptions flowing from a wide variety of religious beliefs pixley v commissioner t c pincite a strong presumption of constitutionality is granted to legislation conferring monetary benefits because congress should have discretion in deciding how to expend necessarily limited resources wilson u s pincite respondent argues that the governmental purpose of the sec_152 relationship classification is to create a less burdensome and more administrable standard petitioner does not deny that the government has an appropriate interest in providing a benefit to distressed low-income taxpayers with dependents and an equally appropriate interest in limiting the definition of a qualifying_child hence petitioner does not challenge the reasonableness of or the legitimacy of the governmental purpose instead petitioner argues that the sec_152 relationship classification does not bear a rational relationship to the governmental purpose because the binding familial ties and obligations of the navajo are similar to the relationships set forth in sec_152 but are not so well known and were apparently overlooked in the drafting of the sec_152 relationships even if we assume arguendo the unique attributes of the navajo culture and the similarity of navajo clan relationships to the sec_152 relationships neither unique cultural attributes nor similarity of clan relationships to the sec_152 relationships defeats congress’ broad latitude in creating classifications in tax statutes or overcomes the strong presumption of constitutionality granted to legislation conferring monetary benefits as here congressional action awarding monetary benefits such as the earned_income_credit inevitably involves the kind of line drawing that will leave some comparably needy person outside the favored circle see wilson u s pincite moreover the sec_152 classificatory scheme chosen by congress rationally advances a reasonable identified governmental purpose because the classification scheme is objective and readily verifiable by taxpayers and the internal_revenue_service for the foregoing reasons the sec_152 relationship classification does not violate petitioner’s equal protection rights under the fifth and fourteen amendments to the constitution a rule computation will be required because respondent agrees that td met the requirements for dependent qualifying_relative including the relationship_test under sec_152 for the year in issue petitioner is still entitled to a dependency_exemption deduction for td under sec_151 and c we have considered all of the arguments raised by the parties some are not supported by the stipulated record to the extent not discussed above they are irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service commerce street dallas tx tax_exempt_and_government_entities_division date date number release date legend org organization name xx date address address person to contact badge number contact telephone number contact address employer_identification_number deadline to petition_tax_court june 20xx org address uil certified mail dear this is a final notice of adverse determination that your exempt status under sec_501 of the internal_revenue_code is revoked recognition of your exemption under internal_revenue_code sec_501 is retroactively revoked to january 20xx for the following reason s you have not been operated exclusively for an exempt_purpose as required by internal_revenue_code sec_501 you have not demonstrated that you primarily engage in activities which accomplish one or more of such exempt purposes specified in sec_501 as required by sec_1_501_c_3_-1 contributions to your organization are no longer deductible effective january 20xx since your exempt status has been revoked you are required to file form_1120 u s_corporation income_tax return for all years beginning on or after january 20xx income_tax returns for subsequent years are to be filed with the appropriate service_center identified in the instructions for those returns it is further determined that your failure_to_file a written appeal constitutes a failure to exhaust your available administrative remedies however if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia - before the ninety-first 91st day after the date that this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment to secure a petition form write to the following address please understand that filing a petition for a declaratory_judgment under sec_7428 will not delay the processing of subsequent income_tax returns and assessment of any taxes due the last day for filing a petition for declaratory_judgment is june 20xx you also 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 you tax information and can help you get answers you can call and ask for the taxpayer_advocate assistance or you can contact the advocate from the site where this issue was determined by writing to taxpayer_advocate assistance cannot be used as substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determination nor extend the time fixed by law that you have to file a petition in 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 this letter should be kept within your permanent records if you have any questions please contact the person whose name and telephone number are shown above sincerely marsha a ramirez director eo examinations enclosures publication tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service ms dal kt commerce street dallas tx date taxpayer_identification_number form tax_year s ended 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 revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code 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 norma channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f department of the treasury - internal_revenue_service form_886 a name of taxpayer org schedule no or exhibit year period ended december 20xx explanation of items legend org organization name xx date xyz state non-profit organization operating like a commercial business issue fact sec_1 whether org is operated exclusively for exempt purposes described within internal_revenue_code sec_501 a b c whether org is engaged primarily in activities that accomplish an exempt_purpose whether more than an insubstantial part of org’s activities are in furtherance of a non- exempt_purpose whether org was operated for the purpose of serving a private benefit rather than public interest whether org conducted commercial activities in such a manner that these activities became its primary purposes org hereinafter org whose employer_identification_number is was incorporated on may 19xx in the state of xyz org applied for exemption on september 19xx the activities and operational information as described in the form_1023 were our sole function is to provide consumers with a service that will help them get out of debt without resorting to bankruptcy we act as a liaison for our clients by negotiating with the credit granting institutions banks finance companies credit card companies hospitals collection agencies lawyers etc to accept reduced monthly payments and in some cases reduced interest rates we determine what our clients can afford to pay based upon income and expenditure statement that is submitted the creditors are responsive to our proposals primarily because we undertake a critical study and provide them with a detailed analysis of their customer’s financial problem in addition once the creditors receive a proposal from us they see this as a serious attempt on the part of the customers client to make a committed effort to manage their financial problems and ultimately to get out of debt we also utilize literature provided by the federal trade commission in helping to make consumers aware of their rights as debtors under the fair debt collection act this service is totally free to our clients org’s sources of financial support contributions by the credit granting community ie banks credit unions finance companies medical centers and hospitals this represents of our financial support in the final_determination letter dated august 20xx org was recognized as an organization exempt from federal_income_tax as described in sec_501 org was recognized as not a private_foundation within the meaning of sec_509 and b a vi since org reported on form_8734 all revenue received as gifts grants and contributions org’s goals are to assist those individuals in consolidating their debts credit cards while at the same time reducing the interest rate on these debts additionally org assists in setting up a monthly disciplined payment plan org assists these individuals in budgeting and money management skills form 886-a rev department of the treasury - internal_revenue_service page -1- department of the treasury - internal_revenue_service form_886 a name of taxpayer org schedule no or exhibit year period ended december 20xx explanation of items legend org organization name xx date xyz state the main issue of contention is whether the current mode of operation by the exempt_organization will preclude the tax exempt status of org the total org’s revenue for 20xx the year under audit is dollar_figure this includes dollar_figure reported as fair-share payments from the creditors and dollar_figure as payment from the clients who enrolled in org’s debt management plans dmp of the gross revenue came from the client payments under dmp and came from the fair-share payments from the creditors org is getting most of its revenues from the payment collected from the customers on dmp and fair-share payments from creditors there is no contribution from general_public or governmental agencies clients must pay dollar_figure set up fee maximum monthly fee is dollar_figure some clients paid only dollar_figure due to financial hardship at present in the year 20xx the org operation is on a much smaller scale compared to the year under audit currently org stopped paying compensation to the officer but she is still helping org org had only one part time employee currently org rarely has new clients the organization ha sec_43 clients on dmp at the end of october 20xx based on conversations with the president besides providing services in the form of dmp this organization does little else during the year under audit org used to employ certified credit counselors they were certified by national association of certified credit counselor naccc counselors were being paid a flat hourly rate org did provide credit counseling and help clients with budget before they enrolled in dmp org sent monthly newsletter to clients who were enrolling in dmp the board_of directors does not represent a cross-section of the community served it comprises of three people one of who is the president and the other two are inactive law sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_tax sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual the term charitable includes relief of the poor and distressed see sec_1 c -1 d income_tax regulations the term educational includes a instruction or training of the individual for the purpose of improving or developing his capabilities and b instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 in other words the two components of education are public education and individual training sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer org explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december 20xx legend org organization name xx date xyz state sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 302_f2d_934 ct_cl the court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt an organization must establish that it serves a public rather than a private interest and that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private prohibited private interests include those of unrelated interests sec_1_501_c_3_-1 third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit fruit privilege gain or interest 78_tc_280 in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational nor scientific but rather commercial the court found that the corporation had completely failed to demonstrate that its services were not in competition with commercial businesses the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation had failed to limit its clientele to organizations that were sec_501 exempt_organizations an organization formed to educate people in hawaii in the theory and practice of est was determined by the tax_court to a part of a franchise system which is operated for private benefit and therefore should not be recognized as exempt under sec_501 of the code 71_tc_1067 although the organization was not formally controlled by the same individuals who controlled the for-profit entity that owned the license to the est body of knowledge publications and methods the for-profit entity exerted considerable control_over the applicant’s activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and form 886-a rev department of the treasury - internal_revenue_service page -3- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended december 20xx legend org organization name xx date xyz state management personnel who are responsible to it in addition to setting price for the training the court stated that the fact that the organization’s rights were dependent upon its tax-exempt status showed the likelihood that the for-profit entities were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether the for-profit entity benefited substantially from the operation of the organization the court determined that there was a substantial private benefit because the organization was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations sec_1_513-1 of the regulations recognizes that in certain cases activities carried on by an organization in the performance of exempt functions may generate good will or other intangibles which may be exploited in commercial endeavors where an organization exploits such an intangible in commercial activities the mere fact that the resultant income depends in part upon an exempt_function of the organization does not make it gross_income from related trade_or_business in such cases unless the commercial activities themselves contribute importantly to the accomplishment of an exempt_purpose the income which they produce is gross_income from the conduct of unrelated_trade_or_business example of this section describes advertising by business firms in an exempt organization’s journal that promotes only products that are within the general area_of_interest of the organization’s members the example indicates that the advertising is not an educational activity of the kind contemplated by the exemption statute and that therefore the organization’s publication of advertising does not contribute importantly to the accomplishment of its exempt purposes the service has issued two rulings holding credit counseling organizations to be tax exempt revrul_65_299 1965_2_cb_165 granted exemption to a c organization whose purpose was to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy its primary activity appears to have been meeting with people in financial difficulties to analyze the specific problems involved and counsel on the payment of their debts the organization also advised applicants on proration and payment of debts negotiated with creditors and set up debt repayment plans it did not restrict its services to the needy it made no charge for the counseling services indicating they were separate from the debt repayment arrangements it made a nominal charge for monthly prorating services to cover postage and supplies for financial support it relied upon voluntary contributions from local businesses lending agencies and labor unions _ in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low- income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications it aided low-income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization holding the funds in a_trust account and disbursing the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon contributions primarily from the creditors participating in the organization’s budget plans for its support form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer org explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december 20xx legend org organization name xx date xyz state the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code in the case of consumer credit counseling service of alabama inc v u s a f t r 2d d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community treas reg the court found that the counseling programs were c -1 d i b for this it charged no fee also educational and charitable the debt management and creditor intercession activities were an integral part of the agencies’ counseling function and thus were charitable and educational even if this were not the case the court viewed the debt management and creditor intercession activities as incidental to the agencies’ principal functions as only approximately percent of the counselors’ time was applied to debt management programs and the charge for the service was nominal the court also considered the facts that the agency was publicly supported and that it had a board dominated by members of the general_public as factors indicating a charitable operation see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts and legal analysis were virtually identical to those in consumer credit counseling centers of alabama inc v united_states discussed immediately above the organizations included in the above decision waived the monthly fees when the payments would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs the participants in the dmp received full credit against their debts for the amounts paid moreover the agencies charged a nominal fee of up to dollar_figure per month for the dmp this fee was waived in instances when payment of the fee would work a financial hardship the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_179 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs revrul_70_640 1970_2_cb_117 free marriage counseling revrul_68_71 c b career planning education through free vocational counseling and publications sold at a nominal charge overwhelmingly the counseling activities described in these rulings were provided free and the organizations were supported by contributions from the public internal_revenue_code sec_501 specifies that an exempt_organization described therein is one in which no part of the net_earnings inures to the benefit of any private_shareholder_or_individual words private_shareholder_or_individual in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1_501_a_-1 the inurement prohibition provision is designed to prevent the siphoning of charitable receipts to insiders of the charity 165_f3d_1173 cir reasonable_compensation does not constitute inurement 276_f2d_476 cir the form 886-a rev department of the treasury - internal_revenue_service page -5- form 886a name of taxpayer org explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december 20xx legend org organization name xx date xyz state where an organization provided a source of credit to companies of which a private shareholder was either an employee or an owner the court found that a portion of the organization’s net_earnings inured to the that such loans benefit of that private shareholder easter house v united_states cl_ct were made showed that the companies controlled by the private shareholder had a source of loan credit in the organization in easter house v united_states 846_f2d_78 fed cir aff'g c1 ct the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the adoption activity was a non-exempt commercial purpose it found that the adoption services did not further the exempt purposes of providing educational and charitable services to the unwed mothers and children rather the services for unwed mothers and children were merely provided incident to the organization’s adoption service business moreover the court found that adoption services do not in and of themselves constitute an exempt_purpose the court also agreed with the irs’ determination that the agency operated in a manner not distinguishable from a commercial adoption agency because it lacked the following traditional attributes of acharity first the agency’s operation made substantial profits and there was a substantial accumulation of capital surplus in comparison to direct expenditures by the agency for charitable and educational_purposes second the agency’s operation was funded completely by substantial fixed fees charged adoptive parents it relied entirely on those fees and sought no funds from federal state or local sources nor engaged in fund raising programs nor did it solicit contributions in fact the agency had no plans nor intention to seek contributions government grants or engage in fund raising relative to its operations third the fixed fees the agency charged adoptive parents were not subject_to downward adjustment to meet potential adoptive parents’ income or ability to pay fourth the agency’s single life member had near total control of the operations of the agency and fifth the agency functioned by means of a paid staff of to persons with no volunteer help in addition to furthering a substantial non-exempt purpose the court found that a portion of the organization’s net_earnings inured to the benefit of a private_shareholder_or_individual as defined by sec_1_501_c_3_-1 and sec_1_501_a_-1 of the regulations the organization provided a source of credit ie loans to companies in which the private shareholder was either employed by or owned the fact that the loans were made showed that the companies controlled by the private shareholder had a source of loan credit in the organization in p l l scholarshi82_tc_196 an organization operated bingo at a bar for the avowed purpose of raising money for scholarships the board included the bar owners the bar’s accountant also a director of the bar as well as two players the board was self-perpetuating the court reasoned that because the bar owners controlled the organization and appointed the organization’s directors the activities of the organization could be used to the advantage of the bar owners the organization claimed that it was independent because there was separate_accounting and no payments were going to the bar the court was not persuaded a realistic look at the operations of these two entities however shows that the activities of the taxpayer and the pastime lounge were so interrelated as to be functionally inseparable separate accountings of receipts and disbursements do not change that fact the court went on to conclude that because the record did not show that the organization was operated for exempt purposes but rather indicates that it benefited private interests exemption was properly denied in church by mail inc v commissioner t c memo aff'd 765_f2d_1387 cir the tax_court found that a church was operated with a substantial purpose of providing a market for an advertising and mailing company owned by the same people who controlled the church the church argued that the contracts between the two were reasonable but the court_of_appeals pointed out that the critical form 886-a rev department of the treasury - internal_revenue_service page -6- department of the treasury - internal_revenue_service form_886 a name of taxpayer org schedule no or exhibit year period ended december 20xx explanation of items legend org organization name xx date xyz state inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church the credit repair organizations act croa u s c et seq effective date imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed u s c 1679b significantly sec_501 organizations are excluded from regulation under the croa the croa defines a credit repair organization as a any person who uses any instrumentality of interstate commerce or the mails to sell provide or perform or represent that such person can or will sell provide or perform any service in return for the payment of money or other valuable consideration for the express or implied purpose of- i improving any consumer’s credit record credit history or credit rating or ii providing advice or assistance to any consumer with regard to any activity or service described in clause i u s c 1679a the courts have interpreted this definition broadly to apply to credit counseling agencies the federal trade commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation it is providing a service covered by the croa 21_fsupp2d_424 n d n j businesses are prohibited from cold-calling consumers who have put their phone numbers on the national do-not-call registry which is maintained by the federal trade commission c f_r b iii b c f_r sec_64 c sec_501 organizations are not subject_to this rule against cold-calling because c organizations are exempt from regulation under the croa and the cold-calling restrictions organizations that are involved in credit repair have added incentives to be recognized as sec_501 organizations even if they do not intend to operate primarily for exempt purposes taxpayer’s position the organization consents to the proposed revocation government’s position org does not meet the operational_test because more than an insubstantial part of its activities are commercial in nature by definition sec_501organizations will only qualify for tax exempt status if it is organized and operated exclusively for charitable purposes thus to meet the requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests org is operating in a commercial manner which is not an exempt activity described under internal_revenue_code sec_501 although org during the year under audit appeared to be meeting some of the educational requirements for a credit counseling agency it fails to satisfy other operating tests in that almost the entire revenue form 886-a rev department of the treasury - internal_revenue_service page -7- department of the treasury - internal_revenue_service form_886 a name of taxpayer org schedule no or exhibit year period ended december 20xx explanation of items legend org organization name xx date xyz state stream is from debt management plan and fair share payments from customers and creditors respectively no charity payment from general_public or any governmental agencies the board_of directors of org is not represented by the community the board is a small_group of individuals one of them is the president of org the current operation of org appears to be nothing more than the maintenance of the client base on the debt management plan and collecting the regular monthly fee this activity is not in furtherance of the educational_purposes within the meaning of sec_501 conclusion in the case of org it is held that where the primary purpose or activity of the credit counseling agency is the maintenance of debt management plans for customers it is not entitled to exemption from federal_income_tax as an organization described in sec_501 of the code ruling and determination letters which have been issued granting exemption from income_tax under sec_501 of the code to such organization should be revoked effective january 20xx form 886-a rev department of the treasury - internal_revenue_service page -8-


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc ebeo br5-plr-117172-98 date date number release date legend shareholder a shareholder b shareholder c shareholder d shareholder e company esop dear this responds to your letter requesting a ruling on behalf of the above-named shareholders regarding the substantial compliance of the shareholders with the requirements of sec_1042 of the internal_revenue_code_of_1986 code and the applicable regulations in connection with the sale of stock of the company to the employee_stock_ownership_plan esop maintained by the company plr-117172-98 the company is a domestic_corporation with only one class of common_stock outstanding at the time of the sale to the esop the company has never had any stock outstanding that was readily_tradable on an established_securities_market the company maintains an esop which was effective as of date and which qualifies under sec_401 and meets the requirements of sec_4975 of the code the esop has received a favorable determination_letter from the internal_revenue_service the shareholders of the company prior to the sale of their interests to the esop were as follows shareholder a held big_number shares shareholder b held big_number shares shareholder c held big_number shares shareholder d held big_number shares shareholder e held big_number shares the esop purchased all of the outstanding common_stock of the company from the shareholders through a transaction which occurred in two phases phase one was the acquisition of big_number shares of common_stock from shareholder a on date which represented of the value and of the total number of shares outstanding as of that date with an option to the esop to purchase the remaining shares phase two of the transaction was the purchase of the big_number additional shares of common_stock pursuant to the exercise of the option as follows shareholder b- big_number shares shareholder a- big_number shares shareholder c- big_number shares shareholder d- big_number shares shareholder e- big_number shares phase two of the esop acquisition occurred on date after which the esop held of the outstanding common_stock of the company in both phase one and phase two of the esop acquisition the shareholders sold at a substantial gain shares of company stock representing their interests in the company to the esop in a sale that taxpayers represent satisfied the requirements of sec_1042 of the code each shareholder had held such common_stock for more than years and had not received the stock in a distribution from a plan described in sec_401 or in a transfer pursuant to an option or other right to acquire stock to which sec_83 sec_422 or sec_423 applied prior to the sale the shareholders inexperienced in esop matters contacted their legal and accounting professionals involved in the esop acquisition and sought their advice regarding the technical requirements of sec_1042 based on this advice the shareholders determined that it would be prudent to retain an experienced investment counselor with respect to the election that could be made under sec_1042 to defer recognition of gain from a sale of qualified_securities to an esop the shareholders interviewed various brokerage firms and investment counselors with respect to the issues involved in connection with the sec_1042 election and compliance with the applicable_requirements set forth in the code and regulations each of the brokerage firms and investment advisors represented that it plr-117172-98 had expertise in employee_benefits matters in general and leveraged employee_stock_ownership_plans in particular including investment counseling regarding the sec_1042 election procedures shortly after completion of the esop acquisition the shareholders selected an investment counselor a national trust company where they had not previously maintained an account in order to segregate the funds from the esop acquisition from other investments the trust company upon being retained by the shareholders to provide professional advice in connection with the sec_1042 election assumed full responsibility for the investments as well as compliance requirements associated with sec_1042 including preparation of the various statements required to complete the election the trust company represented to the shareholders that it had the expertise required to satisfy these responsibilities the shareholders indicated to the trust company their intention to make the election under sec_1042 and defer recognition of gain from the sale accordingly the shareholders deposited the proceeds of the sale with the trust company relying on them to complete the transaction and comply with the requirements of the code and applicable regulations within the period beginning three months before each sale and ending twelve months after the shareholders through their professional advisors purchased securities in numerous transactions that were intended to be qualified_replacement_property within the meaning of sec_1042 of the code in several telephonic conferences involving the shareholders the trust company and the accountants the trust company repeatedly assured the shareholders and their advisors that it was an esop specialist throughout this period of time the accountants for the shareholders discussed compliance with the requirements of sec_1042 with the trust company and were assured that the sec_1042 requirements were being handled in a timely manner while preparing the income_tax returns for the shareholders the accountant discovered that the trust company had failed to properly advise the client as to the notarization requirements associated with the statements of purchase required by sec_1_1042-1t of the temporary income_tax regulations after several conversations with the investment_advisor and its counsel in which the trust company denied that an issue had arisen and after research undertaken by both the trust company and its attorney the compliance problem was recognized by the trust company which admitted its failure to satisfy the notarization requirements associated with the statements of purchase once the error was discovered all future investments were properly notarized however since some of the purchases had been made prior to the day period preceding the discovery a portion of the statements of purchase were not executed and notarized in a timely manner plr-117172-98 for the taxable_year the shareholders will be filing the appropriate income_tax returns in a timely manner all returns are on extension to elect under sec_1042 to defer the recognition of gain from the sale of the company stock to the esop with the return each shareholder will submit i a statement of election as described in q a- of sec_1_1042-1t of the temporary income_tax regulations including a statement of the cost of the qualified_replacement_property purchased the allocation of unrecognized_gain to the replacement_property and the adjusted_basis of the replacement_property ii notarized statements of purchase with respect to the qualified_replacement_property and iii a verified written_statement of the company consenting to the application of sec_4978 and sec_4979a of the code the shareholders represent that they have complied with all of the requirements of the code and applicable regulations with respect to the sec_1042 election except that some of the statements of purchase were not notarized within the period prescribed by the temporary_regulation based on the shareholders reliance on their professional advisor you have requested a ruling that based on the specific facts of this case the shareholders will be treated as having substantially complied with the requirements for an election for the nonrecognition of gain under sec_1042 of the code and that the elections will be treated as having satisfied the requirements of sec_1_1042-1t of the temporary income_tax regulations sec_1042 of the code provides that a taxpayer or executor may elect in certain cases not to recognize long-term_capital_gain on the sale of qualified_securities to an esop as defined in sec_4975 or eligible worker owned cooperative if the taxpayer purchases qualified_replacement_property as defined in sec_1042 within the replacement_period of sec_1042 and the requirements of sec_1042 and sec_1_1042-1t of the temporary income_tax regulations are satisfied a sale of qualified_securities meets the requirements of sec_1042 if the qualified_securities are sold to an esop as defined in sec_4975 or an eligible worker owned cooperative the plan or cooperative owns after application of a immediately after the sale at least percent of - a each class of outstanding_stock of the corporation other than stock described in sec_1504 which issued the securities or b the total value of all outstanding_stock of the corporation other than stock described in sec_1504 the taxpayer files with the secretary a verified written_statement of the employer whose employees are covered by the esop or an authorized officer of the cooperative consenting to the application of sec_4978 and sec_4979a with respect to such employer or cooperative and the taxpayer’s holding_period with respect to the qualified_securities is at least years determined as of the time of the sale plr-117172-98 for taxable years beginning after date sec_1042 provides that the term qualified_securities means employer_securities as defined in sec_409 which are issued by a domestic c_corporation that has no stock outstanding that is readily_tradable on an established_securities_market and were not received by the taxpayer in a distribution from a plan described in sec_401 or in a transfer pursuant to an option or other right to acquire stock to which sec_83 sec_422 or sec_423 applied the taxpayer must purchase qualified_replacement_property within the replacement_period which is defined in sec_1042 as the period which begin sec_3 months before the date on which the sale of qualified_securities occurs and end sec_12 months after the date of such sale sec_1042 defines qualified_replacement_property qrp as any security issued by a domestic operating_corporation which did not for the taxable_year preceding the taxable_year in which such security was purchased have passive_investment_income as defined in sec_1362 in excess of percent of the gross_receipts of such corporation for such preceding_taxable_year and is not the corporation which issued the qualified_securities which such security is replacing or a member of the same controlled_group_of_corporations within the meaning of sec_1563 as such corporation sec_1_1042-1t q a-3 of the temporary income_tax regulations states that the election shall be made in a statement of election attached to the taxpayer’s income_tax return filed on or before the due_date including extensions of time for the taxable_year in which the sale occurs sec_1_1042-1t q a-3 of the temporary income_tax regulations states that the statement of election shall provide that the taxpayer elects to treat the sale of securities as a sale of qualified_securities under sec_1042 and shall contain the following information a description of the qualified_securities sold including the type and number of shares the date of the sale of the qualified_securities the adjusted_basis of the qualified_securities the amount_realized upon the sale of the qualified_securities the identity of the esop or worker-owned cooperative to which the qualified_securities were sold plr-117172-98 if the sale was part of a single interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified_securities the names and taxpayer identification numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers sec_1_1042-1t q a-3 of the temporary income_tax regulations further provides that if the taxpayer has purchased qualified_replacement_property at the time of the election the taxpayer must attach as part of the statement of election a statement of purchase describing the qualified_replacement_property the date of the purchase and the cost of the property and declaring such property to be qualified_replacement_property with respect to the sale of qualified_securities the statement of purchase must be notarized no later than days after the purchase literal compliance with procedural directions in treasury regulations on making elections is not always required see 67_tc_736 acq in result 1979_1_cb_1 regulatory requirements that relate to the substance or the essence of the statute on the other hand must be complied with strictly with respect to the present ruling_request the shareholders requested relief before the expiration of the time for filing the return on which the election must be made the taxpayer relied on investment professionals experienced with esop transactions to advise them as to the preparation of any forms necessary to complete the sec_1042 election in a timely and correct manner immediately upon discovering that the statements of purchase were incorrectly notarized the shareholders requested that their professional advisors review the statements of purchase to verify compliance with the day requirement and to ensure that all future statements of purchase be executed in a timely manner therefore based on the specific facts of this case and representations made by the taxpayers we conclude that the shareholders have substantially complied with the requirements for an election under sec_1042 of the code and that the elections will be treated as satisfying the requirements of sec_1_1042-1t of the temporary income_tax regulations at q a-3 concerning the notarized statements of purchase with respect to qualified_replacement_property purchased by the shareholders except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-117172-98 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer s the rulings contained in this letter are based upon information and representations submitted by the taxpayer s 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 yours james l brokaw chief branch associate chief_counsel employee_benefits and exempt_organizations enclosures copy of this letter copy for purposes