office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b02 hfrogers postf-100642-14 uilc date to date associate area_counsel --------------------------------------------------------------- large business international from kari fisher assistant to the branch chief branch income_tax accounting subject recurring_item_exception eligibility under sec_1_461-5 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer a b c d t issue -------------------------------------- ------------------------------------------------------------- --------- ---------------- --------------------- ---------------- ------------------------------ --------------------------------------------------------------- whether the recurring_item_exception under sec_1_461-5 of the income_tax regulations can be used for a liability to pay for damaged goods postf-100642-14 conclusion the recurring_item_exception under sec_1_461-5 cannot be used for the liability to pay for damaged goods facts taxpayer is a professional moving company when a customer engages taxpayer to provide moving services taxpayer and the customer execute a bill of lading or contract providing the level of taxpayer’s liability the contract states t and provides two options for placing a value on the customer’s shipment under the first option taxpayer’s liability is capped at an amount equal to the greater of a or b the customer also has the option to request a c for the shipment the second option limits taxpayer’s liability to d per article lost or stolen taxpayer’s liability for damaged or lost goods is limited to the maximum liability stated in the contract a customer may seek reimbursement or replacement of any lost or damaged goods only by submitting a claim in writing to taxpayer within of delivery the customer may then only file suit against taxpayer within from the date of claim disallowance taxpayer uses the accrual_method of accounting and deducts its liability for claims received and paid in the taxable_year and also pending at year-end that are paid within the first five months of the subsequent taxable_year taxpayer uses the recurring_item_exception under sec_1_461-5 to deduct the liability for claims paid subsequent to the taxable year-end law and analysis sec_461 provides that the amount of any deduction must be taken for the taxable_year that is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_1_461-1 provides that under an accrual_method of accounting a liability is incurred and generally taken into account in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_1_461-4 identifies types of liabilities in addition to liabilities arising out of workers’ compensation or out of any tort for which payment constitutes economic_performance liabilities arising out of a breach of contract liabilities arising from a violation of law rebates and refunds awards prizes and jackpots amounts paid for insurance warranty and service contracts and taxes other than creditable_foreign_taxes postf-100642-14 sec_1_461-4 provides that in the case of a taxpayer’s liability for which specific economic_performance rules are not provided elsewhere in the section or in any other regulation revenue_ruling or revenue_procedure economic_performance occurs as the taxpayer makes payments in satisfaction of the liability to the person to which the liability is owed sec_1_461-4 provides that if a liability arises out of the provision to a taxpayer of insurance or a warranty or service_contract economic_performance occurs as payment is made to the person to which the liability is owed sec_1_461-4 states that a warranty or service_contract is a contract that a taxpayer enters into in connection with property bought or leased by the taxpayer pursuant to which the other party to the contract promises to replace or repair the property under specified circumstances sec_1_461-4 states the term_insurance has the same meaning as is used when determining the deductibility of amounts paid_or_incurred for insurance under sec_162 sec_461 and sec_1_461-5 provide a recurring_item_exception to the normal economic_performance requirement for accrual_method taxpayers sec_1_461-5 provides in part that the recurring_item_exception does not apply to any liability of a taxpayer described in paragraph g other liabilities of sec_1_461-4 as an initial matter taxpayer’s payment for damaged goods constitutes a liability under sec_1_461-4 and economic_performance occurs as payments are made however the payment for damaged goods is not specifically enumerated in the list of liabilities under sec_1_461-4 consequently if it is a payment_liability it must fall under sec_1_461-4 insurance or warranty or service contracts or other liabilities sec_1_461-4 covers provision to a taxpayer of insurance or a warranty or service_contract see also sec_1_461-4 examples taxpayer is not purchasing or making payments for insurance or a warranty or service_contract in the liability arrangement it enters into with its customers further it is not insurance or a warranty or service_contract provided by another party to taxpayer but rather is a liability-limiting contract offered by taxpayer to its customers neither the internal_revenue_code nor the income_tax regulations defines the terms insurance or insurance_contract the standard for evaluating whether an arrangement constitutes insurance for federal tax purposes has evolved over the years and is at best a nonexclusive facts and circumstances analysis 972_f2d_858 7th cir of significance here however recent case law provides relevant instruction through a thorough analysis of the nature of a similar clause between a carrier of goods and its customer concluding the provision at issue was to limit liability and not an insurance arrangement thermal technologies inc v united parcel service inc u s dist lexis n d ok date postf-100642-14 consistent with statutory and common_law the court in thermal technologies determined that the tariff language in the common carrier’s contract solely imposed a limitation on the carrier’s liability for goods damaged in shipment and did not constitute insurance in this case taxpayer’s own contract explicitly states that the provision is not insurance but a tariff clearly this clause only serves to limit taxpayer’s liability for any damage sustained to customer goods during shipment thus the payment_liability for damaged goods is not for insurance under sec_1_461-4 in addition taxpayer’s contract covers property owned by customers not property bought or leased by taxpayer and taxpayer is obligated to pay damages if the other party to the contract taxpayer’s customer has property lost damaged or destroyed therefore the liability to pay for damaged goods also does not qualify as a warranty or service_contract in sec_1_461-4 accordingly because the payment_liability for damaged goods is not described in g by default it is a liability under sec_1_461-4 as such taxpayer cannot use the recurring_item_exception for its liability to pay for damaged goods see sec_1_461-5 case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number ted la é employer_identification_number tax_exempt_and_government_entities_division may date uniform issue list legend a b c d dear applicant this letter is in reply to a letter dated date and previous correspondence from a b and c's authorized representative who requested rulings on their behalf that income received by a b and c from d a limited_liability_company does not constitute unrelated_business_taxable_income under sec_512 of the internal_revenue_code a b and c are trade associations recognized by the internal_revenue_service as exempt from federal_income_tax under sec_501 of the code as organizations described in sec_501 a b and c have previously offered separate trade shows in furtherance of their exempt purposes since their respective memberships have similar interests and their exempt purposes are comparable a b and c decided to replace their separate trade shows with a single trade_show by combining their trade shows into one larger trade_show the three exempt_organizations will be able to reduce their administrative costs significantly and yet provide more comprehensive programs benefiting all of their members since the ruling_request was initially submitted c was merged into b with the surviving entity now named b even though a b and c had many similarities their membership and purposes were not identical accordingly a b and c did not want to merge their three organizations into only one organization in order to provide the single trade_show furthermore to protect their respective assets from any state tort law claims that might arise from the future operation of the single trade_show a b and c decided to form a separate limited_liability_company d for the operation of the trade_show as an initial deposit to d’s bank account a contributed one-half of the funds in return for a interest and b and c each contributed one-quarter of the funds in return for their respective interests d is a limited_liability_company that intends to be taxed for federal_income_tax purposes as a partnership and intends not to file an affirmative election to be taxed as other than a partnership d intends to report its activities annually on form_1065 u s partnership return of income currently a and b are the sole members of d organizations within the meaning of sec_513 of the code may join d in the future other qualifying in a letter dated date a b and c’s representative stated that as a limited_liability_company that is treated as a partnership d is itself not a qualifying_organization within the meaning of sec_513 of the code however d will otherwise engage in activities that constitute qualified_convention_and_trade_show_activity under sec_513 ina letter dated date a b and c's representative stated that all members of d will be qualifying organizations within the meaning of sec_513 of the code d’s operating_agreement states that it is organized to plan orchestrate market implement and host certain trade shows the agreement also states that a member is acquiring its units for such member’s own account as an investment and not with a view to the resale or distribution the agreement further states that no member solely by virtue of its ownership of units is an agent of d and no member shall have the authority to bind d subsequently a b and c may decide to sell the trade_show operation and they may be able to realize a greater return by selling their respective interests in d directly to the buyer income from trade shows represents a significant portion of a b and c’s respective annual revenues due to the exception contained in sec_513 of the code however none of the organizations’ net_revenues from prior trade shows resulted in unrelated_business_taxable_income the revenue generated from these prior trade shows represented income generated from qualified convention and trade_show activities by qualifying organizations thereby satisfying the exception contained in sec_513 a b and c desire that the net revenue generated by the single trade_show will satisfy this same exception and not be characterized as unrelated_business_income which is subject_to tax as provided in sec_511 as amended rulings have been requested that income derived by a b and c from d does not constitute unrelated_business_taxable_income under sec_512 of the code as such income is generated by d’s conducting a qualified_convention_and_trade_show_activity under sec_513 sec_501 of the code provides for the exemption from federal_income_tax of business_leagues chambers_of_commerce real-estate boards or boards_of_trade not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 of the income_tax regulations in part provides that a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit the regulation provides that organizations otherwise exempt from tax under this section are taxable on their unrelated_business_taxable_income sec_511 of the code generally imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less certain allowable deductions and modifications sec_512 of the code provides that if a trade_or_business regularly carried on by a partnership of which an organization is a member is an unrelated_trade_or_business with respect to such organization such organization in computing its unrelated_business_taxable_income shail subject_to the exceptions additions and limitations contained in sec_512 include its share whether or not distributed of the gross_income of the partnership from such unrelated_trade_or_business and its share of the partnership deductions directly connected with such gross_income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption under sec_501 sec_513 of the code provides in part that the term unrelated_trade_or_business does not include qualified convention and trade_show activities of an organization described in sec_513 sec_513 of the code defines the term convention and trade_show activity’ as any activity of a kind traditionally conducted at conventions annual meetings or trade shows a convention_and_trade_show_activity includes but is not limited to any activity one or the purposes of which is to attract persons in an industry generally without regard to membership in the sponsoring_organization as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in and demand for industry products or services or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry sec_513 of the code defines the term qualified_convention_and_trade_show_activity as a convention_and_trade_show_activity carried out by a qualifying_organization described in sec_513 in conjunction with an international national state regional or local convention annual meeting or show conducted by an organization described in sec_513 if one of the purposes of such organization in sponsoring the activity is the promotion and stimulation of interest in and demand for the products and services of that industry in general or to educate persons in attendance regarding new developments or products and services related to the exempt_activities of the organization and the show is -designed to achieve such purpose through the character of the exhibits and the extent of the industry products displayed sec_513 of the code defines the term qualifying_organization as an organization described in sec_501 or which regularly conducts as one of its - substantial exempt purposes a show which stimulates interest in and demand for the products of a particular industry or segment of such industry or which educates persons in attendance regarding new developments or products and services related to the exempt_activities of the organization sec_1_513-3 of the regulations provides in part that convention and trade_show activities carried on by a qualifying_organization in connection with a qualified convention or trade_show will not be treated as unrelated_trade_or_business consequently income from qualified convention and trade_show activities derived by a qualifying_organization that sponsors the qualified convention or trade_show will not be subject_to the tax imposed by sec_511 of the code sec_1_513-3 of the regulations provides in part that a convention or trade_show activity as defined in sec_513 of the code and sec_1_513-3 will not be considered unrelated_trade_or_business if it is conducted by a qualifying_organization sec_1_513-3 of the regulations provides in part that the term qualified convention or trade_show means a show that is conducted by a qualifying_organization at least one purpose of the sponsoring_organization in conducting the show is the education of its members as a limited_liability_company that is treated as a partnership d is itself not a qualifying_organization within the meaning of sec_513 of the code however d will otherwise engage in activities that constitute qualified_convention_and_trade_show_activity under sec_513 with regard to a b and c each is a qualifying_organization within the meaning of sec_513 and each has regularly conducted as one of its substantial exempt purposes a qualified trade_show activity within the meaning of sec_51 d b the partnership pass-through principles under sec_512 apply to d a limited_liability_company that is taxed as a partnership thus the trade_show activities conducted by d and any revenues derived therefrom will be considered the activities and revenues of a b and c as noted previously all members of d will be qualifying organizations within the meaning of sec_513 and the activities engaged in by d other than the fact that d itself is nota qualifying_organization will constitute qualified_convention_and_trade_show_activity within the meaning of sec_513 therefore income received by a b and c from d will not be treated as income from an unrelated_trade_or_business accordingly based on the facts you have presented we rule as follows under the circumstances described in the original ruling_request as revised income derived by a b and c from d does not constitute unrelated_business_taxable_income under sec_512 of the code as such income is generated by d's conducting a qualified_convention_and_trade_show_activity under sec_513 this ruling is based on the understanding that there will be no material changes in the facts upon which it is based any such change should be reported to the - tax exempt and government entities te_ge customer service office because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records a copy of this ruling is being forwarded to the te_ge customer service office except as we have specifically ruled herein we express no opinion as to the consequences of these transactions under the cited provisions or under any other provisions of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours tevuly in febunhy- terrell m berkovsky manager exempt_organizations technical group


office_of_chief_counsel department of the treasury internal_revenue_service washington d c number info release date conex-104346-04 cc intl b01 index ----------------------- ----------------------------- ---------------------------------------------- ----------------------------------------------------------------------------- ---------------------------------------- --------------------------------- dear ------------ this letter is in response to your request for income_tax information concerning non- u s military members and their spouses who reside in the united_states under a north atlantic treaty organization nato visa you asked for information about the appropriate tax_return filing_status inclusion of amounts in gross_income and the availability of certain tax_credits when a non-u s military member’s income is exempt from u s taxation under article x of the agreement between the parties to the north atlantic treaty regarding the status of their forces nato sofa or sofa q a can a nato dependent spouse use the filing_status of single the marital status of every individual required to file a federal_income_tax return is determined by the individual’s status on the last day of his or her tax_year which is december for most taxpayers sec_7703 of the internal_revenue_code the code thus a taxpayer who is married and lives with his or her spouse on the last day of the tax_year is considered married for tax purposes the tax_return filing options available to a taxpayer who is married are married filing a joint_return or married filing a separate_return because no provision of the nato sofa changes this filing_status requirement a nato dependent spouse can not elect to file as a single_taxpayer q b if a non-u s military member present in the u s and his or her nato dependent spouse file a joint_return i must the non-u s military member’s nato sofa income be included in the joint_return and ii is the non-u s military member considered a resident_alien if a non-u s military member residing in the u s and his or her nato dependent spouse elect to file a joint_return the member’s nato salary would remain exempt from tax and would not be reported on their joint_return further if they file a joint_return the non-u s military member is considered a resident_alien a non-u s citizen is a resident_alien if he or she meets the substantial_presence_test described in sec_7701 of the code the first paragraph of article x of the nato sofa makes clear that the period in which a non-u s member is in the u s solely for purposes of performing his or her official duties is not taken into account in determining whether he or she satisfies the substantial_presence_test see sec_894 of the code which provides that the provisions of the code shall be applied to any taxpayer with due regard to any treaty obligation of the united_states which applies to such taxpayer only those days in which the non-u s military member is in the u s for reasons other than the performance of his or her official duties would be considered for purposes of the substantial_presence_test even if a non-u s military member does not meet the substantial_presence_test the member may file a joint_return if the member’s nato dependent spouse is a resident_alien article x of the sofa does not address the residence or domicile of the member’s dependents a nato dependent spouse will therefore be a resident_alien under the substantial_presence_test if the spouse is in the united_states for a sufficient number of days although days of presence as a member of the immediate_family of a full-time_employee of an international_organization are excluded for purposes of the substantial_presence_test nato is not an international_organization for this purpose sec_7701 a i and b ii - iii of the code see also sec_301_7701_b_-3 defining international_organization as any public international_organization that has been designated by the president by executive_order as being entitled to enjoy the privileges exemptions and immunities provided for in the international organizations act u s c if the nato dependent spouse is a resident_alien because he or she is in the united_states for a sufficient number of days the spouse must file a form_1040 as a resident_alien unless as discussed in q below he or she claims benefits as a resident of another country under an income_tax treaty with the united_states the correct filing_status would be married_filing_separately rather than single unless the spouses elect to file a joint_return under sec_6013 of the code the first paragraph of article x of the nato sofa provides that w here the legal incidence of any form of taxation in the receiving state here the united_states depends upon residence or domicile periods during which a member of a force or civilian component is in the territory of that state by reason solely of his being a member of such force or civilian component shall not be considered as periods of residence therein or as creating a change_of residence or domicile for the purposes of such taxation emphasis added if the nato dependent spouse is a resident_alien by virtue of the substantial_presence_test the nato dependent spouse and the non-u s military member may elect to file a joint_return even if the member does not meet the substantial_presence_test sec_6013 of the code if they make this election then the non-u s military member is treated as a resident_of_the_united_states for purposes of chapter of the code for all of such tax_year sec_6013 of the code even if the non-u s military member is treated as a resident_of_the_united_states by reason of an election under sec_6013 of the code the member’s nato salary would remain exempt from tax under article x of the sofa which provides that m embers of a force or civilian component shall be exempt from taxation in the receiving state on the salary and emoluments paid to them as such members by the sending state or on any tangible movable property the presence of which in the receiving state is due solely to their temporary presence there q c can a nato dependent spouse use the head_of_household filing_status the head_of_household filing_status is available only to an individual who is not married as of the end of the tax_year and who maintains as his or her home a household that constitutes for more than one-half of such tax_year the principal_place_of_abode of an unmarried child as a member of that household sec_2 of the code because a nato dependent spouse is not considered unmarried at the close of the taxable_year he or she can not file as a head_of_household q d can a resident nato dependent spouse use the married_filing_separately filing_status a taxpayer who is married at the end of the taxable_year can elect to file a separate_income tax_return using the married_filing_separately status q can a nato dependent spouse claim his or her children as dependents for exemption purposes generally an individual may claim another as a dependent on his or her federal_income_tax return if he or she satisfies five tests these tests are the member of household or relationship_test the joint_return_test the citizen_or_resident_test the income test and the support_test if the dependent is a child of the nato dependent spouse the member of household or relationship_test would be met for that child further to be claimed as a dependent by the nato dependent spouse the child must not have filed a joint_return and must be a u s citizen or resident or a resident of canada or mexico for some part of the nato dependent spouse’s tax_year the nato dependent spouse meets the income test for any child who is under or under and a full-time_student finally without a multiple_support_agreement or a child of divorced or separated parents the nato dependent spouse must provide more than half of a child's total support during the calendar_year to meet the support_test to figure whether a person has provided more than half of a child's total support the person must compare the amount he or she contributed to the child's support with the entire amount of support that child received from all sources including support the child provided from his or her own funds although the salary earned by the non-u s military member is exempt from tax that amount is considered in the support_test of a child if it is used to support the child consequently if a nato dependent spouse files a married_filing_separately return he or she would most likely not meet the support_test for a child if the nato dependent spouse’s income is significantly less than the income of the non-u s military member conversely if they file a joint_return the spouses would likely meet the support_test for their child a taxpayer must list the social_security_number ssn of any person for whom he or she claims a dependency_exemption if the dependent is a resident or nonresident_alien who does not have and is not eligible to get an ssn the dependent must apply for an individual_taxpayer_identification_number itin q can a nato dependent spouse claim the non-u s military member as a dependent for exemption purposes a spouse is never a dependent for federal_income_tax purposes q is a nato dependent spouse eligible for the earned_income_tax_credit to claim the earned_income_credit eic a taxpayer must meet several eligibility requirements identified in sec_32 of the code an individual who is a nonresident_alien for any portion of the tax_year is not eligible to claim the eic unless he or she is married and makes a joint_return election under sec_6013 or h of the code sec_32 of the code the code allows an eic to an eligible_individual only if he or she includes on the tax_return the individual’s and spouse’s if filing a joint_return taxpayer_identification_number tin sec_32 of the code solely for purposes of the eic a tin is with certain exceptions not pertinent here an ssn issued to the individual by the social_security administration ssa sec_32 of the code in the case of a married individual the eic is available only if the individual and spouse file a joint_return sec_32 of the code thus a nato dependent spouse can claim the eic only if he or she files a joint_return on form_1040 1040a or 1040ez with the non- u s military member and they both have ssns the social_security administration is authorized to issue ssns to aliens in certain situations c b of the social_security act u s c sec_405 as we understand this provision the nato dependent spouse would be entitled to an ssn because he or she is entitled to work in the united_states you are correct that the non-u s military member is entitled to receive a not valid for employment ssn but some choose not to do so the not valid for employment ssn issued to these individuals is a valid ssn for purposes of the eic to claim the eic the non-u s military member must apply for and receive an ssn before filing the joint_return a taxpayer with a qualifying_child can claim the eic a taxpayer without a qualifying_child can also claim the eic if a taxpayer has a qualifying_child that taxpayer cannot claim the credit for taxpayers without a qualifying_child a qualifying_child is one who meets relationship age and residency requirements sec_32 of the code the taxpayer’s own child meets the relationship requirement a child meets the age requirement if he or she is under or under and a full-time_student or any age if permanently_and_totally_disabled the child meets the residency requirement if he or she has the same residence as the taxpayer in the united_states for more than half of the tax_year the child is treated as having the same residence as the taxpayer during periods of temporary absences such as for education generally the taxpayer’s own school-age child who lives with the taxpayer in the united_states for more than half of the taxable_year is the taxpayer’s qualifying_child even if the child is away at school during part of the u s residency a taxpayer claiming the eic with a qualifying_child must identify the child on the tax_return by name age and tin sec_32 of the code schedule eic is used for this purpose the child’s tin like that of the taxpayer must be an ssn not a foreign identification_number fin as we understand the ssa’s implementation of c b of the social_security act until when the irs began issuing itins to aliens unable to receive ssns the ssa issued ssns to aliens who needed an ssn for federal tax purposes until the ssa issued ssns to aliens living in a state that required an ssn to apply for a driver’s license or to register a vehicle in the past the ssa also issued ssns to children who needed an ssn for school as you pointed out some older children who are permitted to work are entitled to an ssn as a result a taxpayer may have a qualifying_child who has an ssn and one who does not in this case the taxpayer can claim the eic only for the child with an ssn if the taxpayer has one or more qualifying children but none of the children has an ssn the taxpayer cannot claim the eic in addition to the eligibility requirements for the taxpayer and the three requirements for the qualifying_child the statute includes certain income requirements the taxpayer must have earned_income earned_income for an employee is wages salaries tips and other employee compensation that he or she includes in gross_income for the taxable_year sec_32 of the code the nato dependent spouse’s wages the amount in box of form_w-2 are earned_income but the non-u s military member’s salary is not this is a change in the law effective in tax_year the taxpayer’s earned_income and adjusted_gross_income agi cannot exceed certain amounts for tax_year the credit phases out completely when the taxpayer’s earned_income or agi if higher reaches dollar_figure in the case of a joint_return and two qualifying children the limits are lower for other filing statuses and for taxpayers with fewer than two qualifying children the statute also limits the amount of investment_income the taxpayer can receive for tax_year the investment_income cannot exceed dollar_figure for this purpose_investment income generally includes taxable and tax-exempt_interest dividends capital_gain_net_income certain rent and royalty net_income and passive_activity net_income q is a nato dependent spouse entitled to the additional_child_tax_credit for his or her children under certain circumstances a taxpayer may claim a non-refundable child_tax_credit to reduce the taxpayer’s tax_liability sec_24 of the code for a taxpayer to claim the child_tax_credit for his or her child the child must be under age at the end of the tax_year a resident or citizen of the u s and claimed as a dependent on the taxpayer’s return for the tax_year for tax_year a taxpayer may reduce his or her tax_liability by dollar_figure for each qualifying_child the dollar_figure credit is reduced however if the taxpayer reported agi of dollar_figure or more on a jointly filed return or dollar_figure or more on a married_filing_separately return a refundable additional_child_tax_credit may be available to a taxpayer who is entitled to take the child_tax_credit for a child but does not get the full benefit of the credit because the taxpayer’s tax_liability before taking the credit into account is less than the credit a refundable_credit allows a taxpayer to receive a refund even if the taxpayer has no tax_liability for the year a nato dependent spouse would be entitled to the additional_child_tax_credit only if his or her child is under age at the end of the tax_year a resident or citizen_of_the_united_states and claimed as a dependent on the taxpayer’s return for the tax_year if available the amount of the additional_child_tax_credit would be affected by a number of factors including the amount of qualifying children the earned_income of the taxpayer the social_security_taxes paid_by the taxpayer and whether the taxpayer reported an earned_income_credit q what impact does a tax_treaty have on filing options for such personnel treasury regulations provide special rules for dual resident taxpayers ie alien individuals who are both residents of the united_states pursuant to the internal laws of the united_states and residents of a treaty country pursuant to the treaty partner’s internal laws sec_301_7701_b_-7 if an individual is a resident of a foreign_country for treaty purposes and claims a treaty benefit as a nonresident_alien of the united_states to reduce his or her u s income_tax_liability for any income covered by a tax_treaty during a tax_year when he or she was a dual_resident_taxpayer then the law treats that individual as a nonresident_alien for purposes of computing the tax_liability for the portion of the taxable_year he or she was a dual_resident_taxpayer sec_301_7701_b_-7 if a nato dependent spouse is a resident of a country with which the united_states has an income_tax treaty in force the nato dependent spouse may be able to avoid classification as a resident_alien by claiming benefits under the treaty as a resident of the other country in this case the nato dependent spouse would have to file a form 1040nr rather than a form_1040 however classification as a nonresident_alien would make the spouse ineligible for the eic see sec_32 of the code a nonresident_alien is not an eligible_individual unless he or she is treated as a resident_of_the_united_states by reason of an election under sec_6013 or h q what substantiation is required when claiming an exemption from tax pursuant to a treaty for income below a certain level a taxpayer who takes the position that a treaty of the united_states overrules or otherwise modifies an internal revenue law of the united_states must disclose that position on form_8833 treaty-based return position disclosure under sec_6114 or sec_7701 sec_6114 of the code treasury regulations waive the reporting requirements in a number of situations including inter alia the taxation of income derived from dependent_personal_services sec_301_6114-1 reporting also is waived for an individual if otherwise reportable payments or income items received by the individual during the course of the taxable_year do not exceed dollar_figure in total sec_301 c thus no substantiation is required with respect to remuneration for personal services performed for an employer or in cases where the dollar_figure de_minimis_rule is satisfied if the individual must provide documentation he or she should use form_8833 q must the nato dependent spouse obtain a certificate_of_compliance subject_to exceptions prescribed by treasury regulations no alien may depart from the united_states unless he or she first obtains a certificate indicating that he or she has complied with all the obligations imposed by the income_tax laws sec_6851 of the code the law provides no exception for a nato dependent spouse i hope this information is helpful we consolidated information from several offices for this response please call the primary contact person ------------------ identification_number ------------- at --------------------- if you have any further questions robert a berkovsky branch chief office of associate chief_counsel income_tax accounting sincerely


internal_revenue_service number release date index number ---------------------------------- ------------------ ----------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc corp b05 plr-109798-10 date date legend date a ----------------------- the investor --------------------------------------------------------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------------------------------------- q r s t u v w ------ ----------------- ----- -- ----------------- ---- ----------------- dear -------------- we respond to your letter dated date requesting a supplemental ruling with respect to our prior letter_ruling dated date plr-146103-09 the prior letter_ruling the information provided in that letter and in later correspondence is summarized below capitalized terms used but not defined in this letter retain the meanings originally assigned to them in the prior letter_ruling plr-109798-10 this letter supplements the prior letter_ruling with regard to the proposed transaction described therein the proposed transaction supplemental facts as described in the prior letter_ruling parent intends to undertake the proposed transaction to reduce its investment in industry b on date a seller entered into a binding agreement the purchase agreement with the investor pursuant to which the investor will purchase from seller shares of newco common_stock representing up to q percent of the fully diluted equity_interest in newco the purchased shares and a warrant the warrant and collectively with the purchased shares the securities to acquire from newco additional shares of newco common_stock the investor sale the aggregate purchase_price for the securities is capped at dollar_figurer the warrant will have an exercise price equal to s percent greater than percent of the price per share paid_by public investors in the initial_public_offering ipo of newco common_stock the public offering price and a term of t years in addition to the securities the investor has the right to purchase from seller up to dollar_figureu of shares of newco common_stock at a per share price equal to the public offering price the closing of the sale of this newco common_stock and the securities to the investor the closing will occur within v business days of the date on which the parties enter into the firm commitment underwriting agreement described in step of the proposed transaction as described herein and in the prior letter_ruling the underwriting agreement the purchased shares combined with the newco common_stock sold to third- party underwriters pursuant to the underwriting agreement will represent more than percent of the outstanding newco common_stock immediately following the transfers revisions to the proposed transaction parent would like to eliminate the issuance and sale of the newco preferred_stock from the proposed transaction unless the investor sale fails to close accordingly assuming that the investor sale is consummated as described above step sec_2 and of the proposed transaction will be revised to read as follows several months later seller entered into the purchase agreement to sell to the investor the securities that seller will receive in exchange for property as described in step such sale will occur pursuant to step investor will not transfer any money or other_property to newco in connection with the proposed transaction apart from any potential future exercise of the warrant seller will also enter into the underwriting agreement pursuant to which it will be obligated to sell newco common_stock in the ipo as described in step in the aggregate the newco plr-109798-10 common_stock sold to the investor pursuant to the purchase agreement and the newco common_stock sold to third-party underwriters will represent more than percent of the total outstanding newco common_stock immediately following the transfers an affiliate of parent may act as one of several underwriters in the ipo and for any additional dispositions seller will transfer to newco all of its equity in the purchased subsidiaries which includes the stock of target and target sub 1a together with the additional transferred assets in exchange for percent of the newco common_stock the warrant and a newco note with a face_amount of at least dollar_figurew the newco note seller newco and certain other parent affiliates will enter into a tax_sharing_agreement and other transitional and service agreements as part of the proposed transaction pursuant to the purchase agreement and the underwriting agreement executed in step seller will sell in exchange for cash i more than percent of newco’s common_stock to the investor and third-party underwriters ii the warrant to the investor and iii an additional_amount of newco common_stock to an underwriter that is an affiliate of parent the stock will be sold to the underwriters for resale to the public the ipo will be implemented within several business days of the completion of step seller and the investor will enter into a lock-up agreement pursuant to which they will not be allowed to dispose_of any newco common_stock for a period of days following the ipo if the investor sale is not consummated as described above step sec_2 and of the proposed transaction will remain as described in the prior letter_ruling supplemental representations in connection with its request for a supplemental ruling parent has reaffirmed all of the representations contained in the prior letter_ruling as modified below h the terms of the underwriting agreement will be and the terms of the purchase agreement were determined pursuant to arm's-length negotiations with the underwriters and the investor respectively l the newco note will constitute the indebtedness of newco for federal tax purposes will have a face_amount of at least dollar_figurew and will have terms that will have been negotiated at arms-length the newco note will not confer any voting rights in newco m the sales of newco common_stock described in clause i of step will not be to parties whose ownership of newco would be attributed to seller plr-109798-10 pursuant to sec_318 in measuring attributed ownership under sec_318 there shall be taken into account all events occurring or contemplated during the period beginning with step and ending with the completion of step of the proposed transaction supplemental ruling based solely on the information submitted and the representations made herein and submitted with the prior letter_ruling we rule as follows the supplemental facts submitted and the revisions to the proposed transaction described above will have no effect on the rulings contained in the prior letter_ruling accordingly those rulings will remain in full force and effect caveats except as expressly ruled herein no opinion is expressed regarding the consequences resulting from the sec_338 or sec_338 elections or whether the newco note will constitute the indebtedness of newco for federal tax purposes moreover no opinion is expressed concerning the tax treatment of the proposed transaction or of any other matter under other provisions of the code and regulations or about the tax treatment of any aspect of or effect resulting from the proposed transaction not specifically covered by the above rulings furthermore the effectiveness of this ruling is conditioned upon parent seller newco the purchased subsidiaries and the indirectly purchased subsidiaries agreeing if requested to an extension of their respective statutes of limitations with respect to any issues raised by this letter_ruling provided the extension is for a period acceptable to the service procedural statements the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by the appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process this letter is directed only to the taxpayer who requested it sec_6110 provides that this letter may not be used or cited as precedent a copy of this letter must be attached to the federal_income_tax return of each taxpayer involved in each taxable_year in which the transaction is consummated alternatively a taxpayer filing its return electronically may satisfy this requirement by plr-109798-10 attaching to the return a statement that provides the date and control number of this ruling letter pursuant to a power_of_attorney on file in this office we have sent a copy of this letter to your authorized representatives sincerely _debra l carlisle______ debra l carlisle chief branch office of associate chief_counsel corporate cc


t c memo united_states tax_court joe t kieffer and linda r kieffer petitioners v commissioner of internal revenue respondent docket no filed date joe t kieffer and linda r kieffer pro sese gregory m hahn and christal w hillstead for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined deficiencies in petitioners' federal income taxes for the taxable years and in the amounts of dollar_figure and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure dollar_figure respectively and accuracy-related_penalties in the amounts of dollar_figure and dollar_figure respectively the issues for decision are whether petitioners' income from the sale of lumber by petitioner joe t kieffer petitioner is exempt from income_tax and whether petitioners are liable for the accuracy-related_penalty under sec_6662 if we find that the income from lumber sales is subject_to income_tax the parties agree that petitioners are entitled to trade and business_expense deductions in the amounts of dollar_figure in and dollar_figure in and self-employment_tax deductions in the amounts of dollar_figure in and dollar_figure in all of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference petitioners resided in fruitland washington at the time their petition was filed background in and petitioners were and currently are enrolled members of the spokane indian_tribe tribe petitioner was self-employed in and he harvested diseased timber on the tribal reservation pursuant to a tribal permit allowing him to conduct such activity reservation land was and continues to be land not allotted to individual indians petitioner transported the timber he harvested on reservation land to his property where it was cut into lumber the property where petitioner cut the timber into lumber was and remains reservation land not allotted to an individual indian the lumber petitioner produced was sold to spokane indian_reservation timber products enterprises sirtpe in petitioner had lumber sales of dollar_figure to sirtpe and in his sales to sirtpe were in the amount of dollar_figure petitioner incurred lumber sales expenses of dollar_figure in and dollar_figure in on their joint individual federal_income_tax returns filed for and petitioners did not report income or expenses from lumber sales attached to the return for is a form 1099-misc reporting nonemployee compensation from sirtpe bearing the handwritten notation indian exempt discussion respondent takes the position that petitioners must report as income receipts from lumber sales and are allowed to deduct expenses associated with such sales for both years petitioners argue that income derived by an indian from activities which directly benefit the tribe is tax-exempt petitioners argue also that income derived by an indian from a natural resource on indian_reservation land is by analogy to sec_7873 exempt from income_tax we start from the premise that every item of a person's gross_income is subject_to federal_income_tax unless there is a statute or some rule_of law that exempts the person or the item from gross_income 450_us_1 tax exemptions including those affecting native peoples are not granted by implication if congress intends to exempt certain income it must do so expressly 78_tc_1014 lazore v commissioner tcmemo_1992_404 affd in part and revd in part 11_f3d_1180 3d cir it is well established that american indians are subject_to federal income_taxation unless an exemption exists in the language of a treaty or an act of congress 351_us_1 941_f2d_1384 10th cir 83_tc_561 affd sub nom 792_f2d_849 9th cir petitioners do not point to any treaty provision which they allege exempts their tribal lands from taxation and we are unable to find such a provision see 246_us_283 describes an agreement between the spokane tribe of indians the department of the interior and the department of war the only act of congress referred to by petitioners is sec_7873 under sec_7873 income derived by a member of an indian_tribe directly or through a qualified_indian_entity from a fishing_rights-related_activity of such tribe is not subject_to income_tax for purposes of sec_7873 income derived from fishing_rights-related_activity means income derived from activity directly related to harvesting processing transporting or selling fish in the exercise of recognized_fishing_rights of an indian_tribe sec_7873 petitioners' income from lumber sales is not income derived from indian fishing-rights-related activity and is not exempt under the statute see warbus v commissioner t c ___ petitioners' argument however is that the intent of congress as expressed by the protection of indian fishing- rights-related activity under sec_7873 should also apply to timber harvested and processed within the boundaries of the spokane indian_reservation a similar issue has been addressed and resolved contrary to petitioners' position petitioners' lumber sales income is arguably income derived from indian land which under some circumstances is exempt from income_tax in squire v capoeman supra it was held that income from allotted lands upon which a patent2 had not been issued is not subject_to income_tax the court concluded that a federal_income_tax exemption was created by the indian general allotment act of general allotment act ch 2the term patent as used here refers to an allotment certificate see 231_us_341 24_stat_388 u s c sec for income that an individual indian allottee derives directly from the land held in trust for him the court reasoned that there existed a congressional intent to exempt allotted lands from all charges and encumbrances until after the fee interest was conveyed to the individual allottee it held that income received by a noncompetent3 indian from the sale of standing timber logged off of his own allotment was exempt from federal_income_tax in 557_f2d_646 9th cir indian taxpayers contracted with a non-indian concern to cut timber from unallotted lands of an indian_reservation the taxpayers argued that their logging income should not be subject_to tax since the income that the tribe itself received from the logging was not subject_to tax citing squire v capoeman supra and 452_f2d_741 9th cir affg in part revg in part 54_tc_351 the opinion of the ninth circuit_court of appeals in the fry case pointed out that there was no treaty or statute that exempted the tribal lands in question from federal income_taxation it also stated that in both squire and stevens the income which was held to be exempt 3the trust under which the united_states holds the allotted lands makes the individual allottee noncompetent to alienate it without permission of the united_states the term noncompetent does not denote mental incapacity 452_f2d_741 n 9th cir affg in part revg in part 52_tc_330 to the allottee was from operations conducted on his own allotted land fry v united_states supra pincite another factor cited by the court was the taxpayers' failure to show that their income met the squire test of being derived directly from the land as opposed to being derived from a contract petitioners argue that but for the fact that the taxpayers in fry v united_states supra did not earn their income directly from the land as required by squire v capoeman supra the taxpayers would have prevailed petitioners' argument was addressed in 625_f2d_910 9th cir the issue there was whether the income a noncompetent indian derived from cattle ranching under a tribal license on land held in trust by the united_states for other indians and for the tribe was subject_to federal income_taxation the court in anderson found that the rationale of the squire v capoeman supra case was if an indian's allotted land or the income directly derived from it was taxed and the tax was not paid the resulting tax_lien on the land would make it impossible for him to receive the land free of 'incumbrance' at the end of the trust period by contrast 'taxation of the taxpayer's individual profit derived from his lease of tribal or other allottees' trust land cannot possibly represent a burden or encumbrance upon the tribe's or other allottees' interest in such land ' citing 364_f2d_38 8th cir affg 44_tc_686 united_states v anderson supra pincite the court_of_appeals for the ninth circuit held in anderson that the general allotment act provides no tax exemption for the income a noncompetent indian derives from other indians' or his tribe's trust land accord 44_tc_686 affd 364_f2d_38 8th cir contrary to the argument petitioners urge us to adopt policy alone cannot support a federal tax exemption in the absence of express exemptive language in a statute or treaty united_states v anderson supra pincite petitioners earned_income from logging pursuant to a tribal permit on trust land and lumber sales to the tribe petitioners were not allottees and did not derive income from sales of lumber produced from timber on their own allotted lands petitioners' income from lumber sales is not income derived from indian fishing-rights-related activity and is not income that is exempt under any treaty provision petitioners' lumber sales income is not exempt from federal_income_tax respondent determined that a sec_6662 accuracy-related_penalty is due with respect to both of petitioners' tax returns for and sec_6662 imposes a penalty equal to percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations sec_6662 and b 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 sec_6662 the accuracy-related_penalties will apply unless petitioners demonstrate that there was reasonable_cause for the under- payments and that they acted in good_faith with respect to the underpayments sec_6664 whether a taxpayer acted with reasonable_cause and good_faith depends on the pertinent facts and circumstances mccallson v commissioner tcmemo_1993_ sec_1_6664-4 income_tax regs petitioners must show that they were not negligent 105_tc_324 petitioners failed to produce any evidence to show that they were not negligent for either of the years at issue they have failed to carry their burden_of_proof we sustain respondent's determination that they are liable for the accuracy-related_penalty for and to reflect the foregoing decision will be entered for respondent


t c summary opinion united_states tax_court ricky r williams petitioner v commissioner of internal revenue respondent docket no 18147-98s filed date ricky r williams pro_se philip g owens for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority - - respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issues for decision are whether petitioner qualifies as a head_of_household and whether petitioner is entitled to an earned_income_tax_credit the resolution of both issues depends upon petitioner’s marital status for certain purposes as of the close of background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in jeffersonville indiana petitioner and sheila eggleston petitioner’s spouse were married in and remained married as of the date of trial they are the parents of three children one of whom died before the year in issue in petitioner and his spouse purchased a house in louisville kentucky that was used as the family residence the louisville residence starting sometime in and from time to time thereafter petitioner and his spouse separated due to marital difficulties typically one or the other moved from the louisville residence and resided elsewhere periodic separations were followed by reconciliations when they resumed living together at the louisville residence at times petitioner and his spouse resided together solely for financial reasons in date they were living together at the louisville residence in april of that year petitioner’s spouse moved into her mother’s house which was vacant at the time due to her mother’s death petitioner’s spouse left various items of personal_property including clothing jewelry and furniture at the louisville residence sometime around july she removed her clothing jewelry and other possessions from the louisville residence as of the close of she had not formally changed her address the address of the louisville residence was shown on her driver’s license and used by her as her mailing address during those periods when petitioner moved from the louisville residence he too maintained that address as his mailing address at least one of petitioner’s children lived at the louisville residence throughout from time to time after petitioner’s spouse moved from the louisville residence she returned there to visit with or pick up her child gather her clothing or other personal items or collect her mail she continued to contribute towards the expenses of maintaining the louisville residence throughout the year petitioner’s spouse moved back to the louisville residence in date petitioner moved out in february of that year and they maintained separate residences until at least date when petitioner moved back into the louisville residence q4e- petitioner filed his timely federal_income_tax return as a head_of_household he claimed an earned_income_credit on that return petitioner filed an amended_return on date but because of agreements between the parties nothing reported on the amended_return is relevant here in a date letter written by petitioner to respondent’s examining agent during the course of the examination that preceded this case petitioner stated my spouse moved into her mom’s home in date in the notice_of_deficiency respondent determined that petitioner did not qualify as a head_of_household for and treated petitioner as a married individual who files a separate_return respondent further determined that he was not entitled to an earned_income_credit for that year according to the explanation contained in the notice_of_deficiency both determinations were made because petitioner did not establish that he met the qualifications of certain married individuals living apart discussion subject_to a variety of conditions requirements and limitations that need not be discussed petitioner gualifies as a head_of_household and is entitled to an earned_income_credit for only if he is considered as not married as of the close of that year see sec_2 d - petitioner and his spouse were neither divorced nor legally_separated as of the close of however for purposes of the issues here in dispute an individual will not be considered as married as of the close of a taxable_year if during the last months of the taxable_year such individual’s spouse is not a member of the individual’s household sec_7703 b see sec_2 d during the situs of petitioner’s household was the louisville residence the parties disagree as to how long petitioner’s spouse was a member of petitioner’s household during that year petitioner claims that his spouse was a member of his household only until april when she moved from the louisville residence to her deceased mother’s house respondent takes the position that the move occurred in july and that she was a member of petitioner’s household up until that time obviously if petitioner’s version 1s correct then he satisfies the 6-month requirement of sec_7703 if respondent’s version is correct then he does not see becker v commissioner tcmemo_1995_177 the determination of petitioner’s marital status under sec_7703 a question of fact see sharer v commissioner tcmemo_1994_453 petitioner’s position is supported by his testimony and the testimony of his wife from their demeanor and behavior at trial the court concludes that -- - their relationship at that time was less than cordial nevertheless both testified that she moved from the louisville residence in date both testified that after moving in april she returned to the louisville residence from time to time to retrieve personal items stored there and to visit with her son and both testified that in early date she removed her personal_property from the louisville residence respondent disputes petitioner’s claim that his spouse moved from the louisville residence in april respondent points to the petition filed date in which petitioner alleges that his spouse moved in date respondent further relies upon petitioner’s date letter to the examining agent in which petitioner states my spouse moved into her mom’s home in date the line of guestions put to petitioner during his cross-examination strongly suggests that as far as respondent is concerned petitioner’s claim that his wife moved in april was concocted after petitioner realized that a separation that began in date would be too late to allow him to be considered as not married under sec_7703 as of the close of that year respondent’s suggestion is well taken but not persuasive given petitioner’s plausible explanation of the references to date we are inclined to accept his version of the relevant events as corroborated by his spouse and find that she moved from the louisville residence during date we further find that petitioner’s spouse was not a member of his household during the remainder of that year that being so in accordance with sec_7703 petitioner is not considered as married within the meaning of sec_2 and d as of the close of he therefore qualifies as a head_of_household and for the earned_income_credit here in dispute for that year reviewed and adopted as the report of the small_tax_case division based on the foregoing decision will be entered for petitioner


internal_revenue_service index no ruling release date march cc dom p si - plr-117664-98 x b d1 dear this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in d1 of year the shareholders of x were a and b a the president of x represents that although it was the intent of x and the shareholders of x for x to be an s_corporation beginning with year its first taxable_year a form_2553 election by a small_business_corporation was not filed by the accountant for x for year x filed its tax_return for year using form_1120s and the shareholders of x each filed their form_1040 based on x being an s_corporation for year sec_1362 of the code provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year year accordingly provided that x makes an election to be an s_corporation by filing a form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita lfnolanii pref-127815-09 uilc date date to grant e gabriel motor_vehicle industry counsel lmsb area detroit michigan from jeffery g mitchell branch chief branch income_tax accounting subject chief_counsel_advice on the acceleration of a sec_481 adjustment this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent questions if an automobile dealer that loses one of its five dealer franchises franchises properly obtains automatic consent to terminate its election to use the last-in_first-out lifo_method for the dollar-value_pool that includes only the new vehicles sold under that lost franchise must the taxpayer accelerate the corresponding sec_481 adjustment because its ending inventories for the year_of_change do not include any of those new vehicles is the answer to question the same if the automobile dealer loses its only franchise but still operates the remaining portions of its trade_or_business if the automobile dealer maintains one pool for all new vehicles may the automobile dealer change from the lifo_method for only the vehicles sold under the lost franchise pref-127815-09 conclusions no the automobile dealer must include only one-fourth of the sec_481 adjustment in the taxable_income of each year of the four taxable years that begin with the year_of_change four-year adjustment period yes the automobile dealer may not change its method_of_accounting for some of the vehicles that are within the scope of a single dollar-value_pool however the automobile dealer may either change from the lifo_method for its single dollar- value pool that includes all new vehicles or change its dollar-value pooling_method to a method of pooling based on vehicles sold under each franchise and change from the lifo_method for the dollar-value_pool that includes only the vehicles sold under the lost franchise facts situation in an automobile dealer taxpayer obtained a franchise to sell new pontiac-brand vehicles pontiacs at taxpayer’s dealership taxpayer also sells used vehicles and new automotive parts and accessories in addition taxpayer’s service_department provides vehicle maintenance and repair service for customers as well as for used vehicles acquired for resale taxpayer has treated all these activities as a single trade_or_business since taxpayer obtained its pontiac franchise between and taxpayer expanded its single trade_or_business as it obtained the following franchises new ford-brand vehicles fords new chevrolet-brand vehicles chevys new toyota-brand vehicles toyotas and new honda-brand vehicles hondas effective for the taxable_year ending date taxpayer elected to use the dollar-value lifo_method for all inventories and to maintain multiple pools based on the vehicles sold under each franchise thus taxpayer maintains five dollar- value lifo pools pontiacs fords chevys toyotas and hondas on date taxpayer’s lifo reserve attributable to each pool was dollar_figurex dollar_figurex total on date taxpayer lost its pontiac franchise and quickly liquidated its inventories of new pontiacs taxpayer did not have any new pontiacs in ending inventories on date despite the loss of its pontiac franchise taxpayer still sells fords chevys toyotas and hondas and still operates the other activities of its trade_or_business ie selling used vehicles selling vehicle parts and accessories and servicing and repairing vehicles in march of taxpayer decided it wants to cease using the lifo_method and to begin using the specific_identification_method for new pontiacs effective for the pref-127815-09 taxable_year ending date year_of_change from reading revproc_2008_52 2008_36_irb_587 taxpayer determined that it can obtain automatic consent to change its inventory-identification method from the lifo_method to another permissible inventory_method for one or more dollar-value pools see sec_22 a of the appendix of revproc_2008_52 i r b pincite taxpayer also determined that the sec_481 adjustment attributable to a change from the lifo_method to the specific_identification_method is dollar_figurex a positive amount see section dollar_figure of revproc_2008_52 i r b pincite finally taxpayer determined that one-fourth of the sec_481 adjustment dollar_figurex must be included in the taxable_income of each year of the four-year adjustment period see sec_5 of revproc_2008_52 i r b pincite on date taxpayer carefully completed and signed a form_3115 application_for change in accounting_method and attached that copy to its timely filed original federal_income_tax return for the year_of_change on the same day taxpayer mailed a duplicate copy to the national_office see section a of revproc_2008_52 taxpayer computed its taxable_income for the year_of_change using the new method for pontiac vehicles and included one-fourth of the sec_481 adjustment in the taxable_income computation on its timely filed original federal_income_tax return for the year_of_change upon examining that return the revenue_agent questions whether taxpayer’s inclusion of only one-fourth of the sec_481 adjustment in the taxable_income of the year_of_change was proper given the fact that taxpayer’s inventories on date contained no pontiacs subject_to the new method stated differently the revenue_agent wants to know whether taxpayer must accelerate the reporting of the sec_481 adjustment and thus must include the entire amount of the adjustment in the taxable_income of the year_of_change situation the facts are the same as situation except that taxpayer never acquires the ford chevy toyota and honda franchises after losing the pontiac franchise taxpayer continues to operate the remaining activities of its trade_or_business ie selling used vehicles selling automotive parts and merchandise servicing and repairing vehicles in situation the facts are the same as situation except that effective for the taxable_year ending date taxpayer elected to use the vehicle-pooling method for all new vehicles see revproc_2008_23 2008_12_irb_664 on date the lifo reserve attributable to the single pool was dollar_figurex if taxpayer used its lifo_method for the taxable_year ending date the lifo reserve would be reduced by dollar_figurex as a result of having no pontiac vehicles in ending inventory pref-127815-09 law analysis law sec_446 of the internal_revenue_code provides in relevant part that a taxpayer who changes the method_of_accounting on the basis of which he regularly computes his income in keeping his books shall before computing his taxable_income under the new method secure the consent of the secretary sec_481 provides that in computing the taxpayer's taxable_income for any taxable_year year_of_the_change if such computation is under a method_of_accounting different from the method under which the taxpayer's taxable_income for the preceding_taxable_year was computed then there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted except there shall not be taken into account any adjustment in respect of any taxable_year to which this section does not apply unless the adjustment is attributable to a change in the method_of_accounting initiated by the taxpayer sec_481 provides that in the case of any change described in sec_481 the taxpayer may in such manner and subject_to such conditions as the secretary may by regulations prescribe take the adjustments required by sec_481 into account in computing the tax imposed by this chapter for the taxable_year or years permitted under such regulations sec_1_446-1 of the income_tax regulations explains how a taxpayer may secure the commissioner’s consent to change a method_of_accounting in relevant part the regulation generally requires the taxpayer to compute a sec_481 adjustment to prevent the omission or duplication of income sec_1_481-1 and sec_1_481-4 provide guidance concerning sec_481 adjustments revproc_97_27 provides procedures concerning method changes that require the commissioner’s advance consent section dollar_figure of revproc_97_27 requires shortened or accelerated adjustment periods for the sec_481 adjustments of three categories of taxpayers taxpayers who elect to accelerate under the de_minimis_rule taxpayers classified as cooperatives under sec_1381 and taxpayers that cease to engage in the trade_or_business before the adjustment period ends revproc_2008_52 provides procedures concerning automatic method changes section dollar_figure of revproc_2008_52 provides in relevant part that sec_481 requires those adjustments necessary to prevent amounts from being duplicated or omitted to be taken into account when the taxpayer's taxable_income is computed under a method_of_accounting different from the method used to compute taxable_income for the preceding_taxable_year when there is a change in method_of_accounting to which sec_481 is applied income for the taxable_year preceding the year_of_change must be determined under the method_of_accounting that was then employed and income for the year_of_change and the following taxable years must be determined under the new method of pref-127815-09 accounting as if the new method had always been used sec_5 of revproc_2008_52 provides that except as otherwise provided in sec_5 of revproc_2008_52 in the appendix of revproc_2008_52 or in other guidance published in the irb the sec_481 adjustment period is four taxable years for a net positive sec_481 adjustment for an accounting_method change and one taxable_year for a net negative sec_481 adjustment for an accounting_method change sec_5 of revproc_2008_52 requires shortened or accelerated adjustment periods for the sec_481 adjustments of three categories of taxpayers taxpayers who elect to accelerate under the de_minimis_rule taxpayers classified as cooperatives under sec_1381 and taxpayers that cease to engage in the trade_or_business before the adjustment period ends sec_22 a of the appendix of revproc_2008_52 applies to a taxpayer that wants to change from the lifo_method for all its lifo inventory or for one or more dollar-value pools and that changes to a permitted method or methods as determined in sec_22 b of this appendix sec_22 b of the appendix of revproc_2008_52 provides in relevant part that a taxpayer may change to one or more non-lifo inventory methods for the lifo_inventories that are the subject of this accounting_method change but only if the selected non-lifo inventory_method is a permitted method for the inventory goods to which it will be applied for purposes of section dollar_figure of this appendix an inventory_method identification or valuation or both is a permitted method if it is specifically permitted by the code the regulations a decision by the united_states supreme court a revenue_ruling a revenue_procedure or other guidance published in the irb for the inventory goods and if the taxpayer is neither prohibited from using that method nor required to use a different inventory_method for those inventory goods revproc_2008_23 authorizes a reseller of cars and light-duty trucks to use the vehicle-pooling method under this method the reseller assigns all new cars and new light-duty trucks to one pool and assigns all used cars and used light-duty trucks to a second pool analysis in situation taxpayer is required to include only one-fourth of the sec_481 adjustment in the taxable_income of the year_of_change taxpayer properly obtained automatic consent under revproc_2008_52 to change from the lifo_method to the specific_identification_method for new pontiacs thus the terms and conditions of revproc_2008_52 apply to this case sec_5 of revproc_2008_52 does not require the acceleration of a sec_481 adjustment attributable to a change in inventory_method when there is no ending inventory of the goods for which the change was made thus taxpayer may continue to spread the sec_481 adjustment over the four- year period in accordance with revproc_2008_52 previous revenue procedures governing inventory-accounting method changes would have required the acceleration of the sec_481 adjustment when a taxpayer changed from the lifo_method for the pref-127815-09 in situation taxpayer is required to include only one-fourth of the sec_481 adjustment in the taxable_income of the year_of_change the rationale applicable to situation applies here too however if taxpayer actually ceases to engage in this trade of business or terminates its existence the acceleration rules of sec_5 c of revproc_2008_52 will apply and will likely require taxpayer to include any remaining sec_481 adjustment in the taxable_income of the taxable_year that includes the cessation or termination in situation taxpayer uses a single dollar-value_pool to account for all of its lifo_inventories taxpayer may not change from the lifo_method for some of the goods properly includible in a single dollar-value_pool taxpayer may change from the lifo_method for the entire dollar-value_pool under revproc_2008_52 alternatively taxpayer may change its pooling_method to a method of pooling based on the vehicles sold under each franchise pursuant to revproc_97_27 by filing a form_3115 before the end of its taxable_year and change from the lifo_method for the dollar-value_pool that includes vehicles sold under the pontiac franchise by filing a form_3115 pursuant to revproc_2008_52 goods in a dollar-value_pool and had none of those goods in ending inventory see section dollar_figure of revproc_84_74 1984_2_cb_736 and section of revproc_92_20 1992_1_cb_685 this acceleration condition is not included in revproc_97_27 or in revproc_2008_52


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division benes release number release date beeoeen name org address february 20o address address xx date person to contact identification_number contact telephone number in reply refer to te_ge review staff ein uil last date for filing a petition with the tax_court may 20xx certified mail - return receipt requested dear a final adverse determination_letter as to your exempt status under section this i sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons organizations described in lr c sec_501 and exempt under sec_501 must be organized and operated exclusively for an exempt your organization has not performed any activities since your purpose inception and you have provided no information regarding your receipts you have not established that the org has expenditures or activities been operated exclusively for an exempt_purpose you have failed to meet the requirements of sec_501 and sec_1_501_c_3_-1 in that you have failed to provide information and establish that you were operated exclusively for an exempt_purpose contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 filed with the appropriate service_center for the year ending these returns should be december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code 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 claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment 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 your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or you can contact the taxpayer_advocate nearest you by calling or writing to internal_revenue_service office of taxpayer_advocate taxpayer_advocate assistance cannot be used as a substitute for established irs procedures the taxpayer_advocate is not able to reverse legal or formal appeals processes etc technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations form 886-a rasy taentary schedule number or exhibit explanations of items tax identification_number year period ended name of taxpayer org 20xx12 issue whether org qualifies for exemption under sec_501 of the internal_revenue_code facts exhibit a provides copies of the internal_revenue_service correspondence to exempt_organization eo or power_of_attorney poa requesting that exempt_organization file the form_990-pf for the tax period ending december 20xx december 20xx december 20xx december 20xx and december 20xx summary of exhibit a contact type correspondence sent date sent certified mail y n receipt signed eo advised returns would be filed n n a n letter xx letter letter letter phone letter xx xx xx xx xx n n a n n a y initial letter pf letter letter revocation letter n a letter w f8822 and copy of letter y n y n a y n n n n n org failed to respond to the internal_revenue_service correspondence or file the forms 990-pf for the tax period ending december 20xx december 20xx december 20xx december 20xx and december 20xx law sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number year period ended form 886-a rev date name of taxpayer org 20xx12 sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number year period ended form 886-a rev date name of taxpayer org 20xx12 the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax organization’s position due to the lack of response the organization’s position is unknown conclusion it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 furthermore the organization has failed to establish that it continues to qualify for tax exempt status accordingly the organization's exempt status is revoked effective january 20xx form s u s_corporation income_tax return should be filed for the tax periods ending on or after january 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


internal_revenue_service number release date index number ------------------- ------------------- ------------------------- -------------------------------- ------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc corp b02 plr-117917-05 date date ----------------- ------------------ ------------------- ---------------------------------------------------- ty ------------------- legend parent ---------------------------------------------------------------------- electing subsidiary ---------------------------------------------------------------------------------- year date date company official ---------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------- tax professional ------------------------------------------------------------------------------------------------- dear ------------ subsidiary dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested in order to allow parent and electing subsidiary to file an election to this letter responds to a letter submitted on behalf of parent and electing ----------------------------- --------------------- ------------------ pursuant to sec_1_382-8 the value of parent stock was reduced by the value plr-117917-05 restore value under sec_1_382-8 of the income_tax regulations hereinafter referred to as the election additional information was received in letters dated june and date the material information submitted in the request and subsequent correspondence is summarized below at the end of year parent was the parent of a controlled_group_of_corporations the parent group and owned directly or indirectly percent or more of the stock of electing subsidiary electing subsidiary is a foreign_entity treated as a corporation for federal tax purposes and is not engaged in the conduct_of_a_trade_or_business within the united_states parent underwent an ownership_change as defined under sec_382 of the code on date therefore the use of the parent’s net operating losses for carryovers are subject_to limitation under sec_382 for year of the stock it owned directly in electing subsidiary sec_382 provides that the amount of the taxable_income of any new_loss_corporation for any post-change_year which may be offset by pre-change losses shall not exceed the sec_382 limitation for such year under sec_382 the sec_382 limitation is determined by multiplying the value of the old_loss_corporation by the applicable long term tax-exempt rate a special rule designed to prevent double counting by controlled groups is set forth in sec_1_382-8 sec_1_382-8 requires the value of the stock of each component_member of the controlled_group be reduced by the value of the stock directly owned by that component_member in any other component_member component members of a controlled_group can elect to restore some or all of the value to another component_member under sec_1_382-8 the election to restore value is made following the procedures set forth in sec_1_382-8 parent and electing subsidiary are component members of a controlled_group under sec_1_382-8 the election to restore the value of electing subsidiary was due on date however for various reasons parent and electing subsidiary failed to make the election in a timely manner extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 under sec_301_9100-1 the commissioner has discretion to grant a reasonable sec_301_9100-1 through provide the standards the in this case the time for filing the election is fixed by the regulations ie based on the facts and information submitted including the representations plr-117917-05 sec_1_382-8 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and electing subsidiary to file the election provided parent and electing subsidiary show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the government the information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent and electing subsidiary reasonably relied on a qualified_tax professional who failed to make or advise parent and electing subsidiary to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 made we conclude that parent and electing subsidiary have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time for parent and electing subsidiary to file the statement described in sec_1_382-8 is granted under sec_301_9100-3 until days from the date on this letter a copy of this letter must be attached to the statement electing subsidiary’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion with respect to whether an ownership_change occurred whether parent and electing subsidiary are component members of a controlled_group the amount of value if any that may be restored or as to values or amounts of nols in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling statements and representations made by parent parent's authorized representative the above extension of time is conditioned on the taxpayers' parent's and except as expressly provided herein no opinion is expressed or implied for purposes of granting relief under sec_301_9100-3 we relied on certain plr-117917-05 company official and tax professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply provides that it may not be used or cited as precedent sent to your authorized representatives pursuant to a power_of_attorney on file in this office copies of this letter are being this letter is directed only to the taxpayer s who requested it sec_6110 sincerely ken cohen senior technician reviewer branch office of associate chief_counsel corporate