t c summary opinion united_states tax_court richard gorkes jr and susan gorkes petitioners v commissioner of internal revenue respondent docket no 15415-02s filed date richard gorkes jr and susan gorkes pro sese brianna basaraba for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioners’ federal income taxes for the taxable years and in the amounts of dollar_figure dollar_figure and dollar_figure respectively after concessions by the parties the sole issue for decision is whether petitioners are entitled to investment_interest expense deductions for the taxable years and in excess of the amounts allowed by respondent we hold that they are not background some of the facts have been stipulated and they are so found petitioners resided in lilburn georgia at the time that their petition was filed with the court petitioners timely filed their form_1040 u s individual_income_tax_return for the taxable_year petitioners attached to their return schedule a itemized_deductions and claimed an investment_interest expense deduction of dollar_figure petitioners calculated this amount on an attached form_4952 investment_interest expense deduction as shown below all numbers are rounded to the nearest dollar part i total investment_interest expense line investment_interest expense paid_or_accrued in line disallowed investment_interest expense from form_4952 line line total investment_interest expense dollar_figure --- big_number part ii net_investment_income line 4a gross_income from property_held_for_investment excluding any net gain from the disposition of property_held_for_investment big_number line 4b net gain from the disposition of property_held_for_investment line 4c net_capital_gain from the disposition of property_held_for_investment line 4d subtract line 4c from line 4b line 4e enter all or part of the amount on line 4c that you elect to include in investment_income line 4f investment_income add line sec_4a sec_4d and sec_4e line investment_expenses line net_investment_income subtract line from line 4f big_number --- --- big_number dollar_figure --- --- --- part iii investment_interest expense deduction line disallowed investment_interest expense to be carried forward to subtract line from line line investment_interest expense deduction enter the smaller of line or big_number big_number petitioners timely filed their form_1040 for the taxable_year petitioners attached to their return schedule a and claimed an investment_interest expense deduction of dollar_figure petitioners calculated this amount on an attached form_4952 as shown below part i total investment_interest expense line investment_interest expense paid_or_accrued in line disallowed investment_interest expense from form_4952 line line total investment_interest expense dollar_figure big_number part ii net_investment_income line 4a gross_income from property_held_for_investment excluding any net gain from the disposition of property_held_for_investment big_number line 4b net gain from the disposition of property_held_for_investment line 4c net_capital_gain from the disposition of property_held_for_investment line 4d subtract line 4c from line 4b line 4e enter all or part of the amount on line 4c that you elect to include in investment_income line 4f investment_income add line sec_4a sec_4d and sec_4e line investment_expenses line net_investment_income subtract line from line 4f big_number --- --- big_number dollar_figure --- --- --- part iii investment_interest expense deduction line disallowed investment_interest expense to be carried forward to subtract line from line line investment_interest expense deduction enter the smaller of line or big_number big_number petitioners did not carry forward the disallowed investment_interest expense of dollar_figure from petitioners timely filed their form_1040 for the taxable_year petitioners attached to their return schedule a and claimed an investment_interest expense deduction of dollar_figure petitioners calculated this amount on an attached form_4952 as shown below part i total investment_interest expense line investment_interest expense paid_or_accrued in line disallowed investment_interest expense from form_4952 line line total investment_interest expense dollar_figure big_number big_number part ii net_investment_income line 4a gross_income from property_held_for_investment excluding any net gain from the disposition of property_held_for_investment big_number line 4b net gain from the disposition of property_held_for_investment line 4c net_capital_gain from the disposition of property_held_for_investment line 4d subtract line 4c from line 4b line 4e enter the amount from line 4c that you elect to include in investment_income line 4f investment_income add line sec_4a sec_4d and sec_4e line investment_expenses line net_investment_income subtract line from line 4f big_number --- --- --- big_number dollar_figure --- --- part iii investment_interest expense deduction line disallowed investment_interest expense to be carried forward to subtract line from line line investment_interest expense deduction enter the smaller of line or big_number big_number petitioners attached a schedule d capital_gains_and_losses to their tax_return for each taxable_year at issue petitioners reported total net capital losses for each taxable_year as follows net_short-term_capital_gain or loss dollar_figure dollar_figure dollar_figure net_long-term_capital_gain or loss big_number big_number big_number total net capital lo sec_3 big_number big_number big_number the net_short-term_capital_loss for each taxable_year included short-term carryover losses to and of dollar_figure dollar_figure and dollar_figure respectively the net_long-term_capital_loss for each taxable_year included long-term carryover losses to and of dollar_figure dollar_figure and dollar_figure respectively for each taxable_year petitioners deducted the maximum of dollar_figure of their overall capital losses against ordinary_income on their form_1040 line capital_gain or loss see sec_1211 in the notice_of_deficiency respondent disallowed a portion of petitioners’ investment_interest expense deductions for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively respondent contends that petitioners’ gross_income from property_held_for_investment for and was dollar_figure dollar_figure and dollar_figure respectively respondent also argues that because petitioners had a total net_capital_loss in each of the taxable years at issue petitioners had zero net gain from the disposition of property_held_for_investment for purposes of determining their net_investment_income for each taxable_year respondent concedes that the disallowed portion of investment_interest expense deduction for erroneously includes otherwise deductible mortgage interest petitioners concede these amounts of gross_income from property_held_for_investment for each taxable_year at issue respondent also concedes the amount of investment_interest expenses claimed by petitioners for each taxable_year at issue petitioners contend that for purposes of determining the net_investment_income for each taxable_year net gain from the disposition of property_held_for_investment includes only their items of capital_gain specifically petitioners argue that their capital losses and capital_loss carryovers are not included in the calculation of net gain from the disposition of property_held_for_investment discussion7 the parties do not dispute petitioners’ entitlement to an investment_interest expense deduction under sec_163 but the parties do dispute the calculation of that deduction the main issue of contention between the parties is whether the term investment_income as defined by sec_163 includes petitioners’ capital losses and capital_loss carryovers for purposes of calculating the limitation on the investment_interest expense deduction in resolving this issue we rely on sec_163 and its underlying framework and legislative_history petitioners contend that they failed to properly include their capital_gains for purposes of calculating the net gain from the disposition of property_held_for_investment on their form sec_4952 for each taxable_year at issue we decide the issue in this case without regard to the burden_of_proof see sec_7491 rule a 116_tc_438 a statutory framework the starting point for the interpretation of a statute is the language itself 447_us_102 see also 671_f2d_450 11th cir 118_tc_579 we interpret the statute with reference to the legislative_history primarily to learn the purpose of the statute and to resolve any ambiguity in the words contained in the text 118_tc_1 and cases cited therein see also 103_tc_481 affd 70_f3d_142 d c cir moreover even where the statutory language appears clear we may seek out any reliable evidence as to legislative purpose city of new york v commissioner supra sec_163 as a general_rule sec_163 allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness in the case of an individual however sec_163 limits the amount of the investment_interest expense deduction to the taxpayer’s net_investment_income for the taxable_year in other words the higher the taxpayer’s net_investment_income the more the tax reform act of publaw_91_172 83_stat_574 originally enacted sec_163 effective for taxable years beginning after date investment_interest expense the taxpayer is allowed to deduct for the taxable_year furthermore sec_163 allows the taxpayer to carryforward any investment_interest expense disallowed under the general limitation for the taxable_year and deduct it as investment_interest expense paid_or_accrued in the succeeding taxable_year to the extent that the taxpayer has net_investment_income in that year sec_163 defines net_investment_income as the excess of investment_income over investment_expense sec_163 in turn defines investment_income as follows b investment_income --the term investment_income means the sum of-- i gross_income from property_held_for_investment other than any gain taken into account under clause ii i ii the excess if any of-- i the net gain attributable to the disposition of property_held_for_investment over ii the net_capital_gain determined by only taking into account gains and losses from dispositions of property_held_for_investment plus iii so much of the net_capital_gain referred to in clause ii ii or if lesser the net gain referred to in clause the omnibus_budget_reconciliation_act_of_1993 publaw_103_66 sec d 107_stat_467 amended sec_163 effective for taxable years beginning after date ii i as the taxpayer elects to take into account under this clause emphasis added at issue in the instant case is the calculation of sec_163 to that end the meaning of the term net gain is integral to our analysis net gain neither sec_163 the regulations the case law nor the statute’s legislative_history defines the term net gain if a term is used in the internal_revenue_code i r c without definition and the legislative_history fails to provide any insight or guidance as to the appropriate definition we use the ordinary and common usage of the term in applying that provision 101_tc_571 affd 98_f3d_825 5th cir see 380_us_563 331_us_1 96_tc_697 91_tc_32 40_tc_474 we look therefore to the ordinary and common usage of the term net gain in applying the statute neither black’s law dictionary 7th ed nor webster’s third new international dictionary specifically defines the term net gain however the ordinary and common usage of the term net gain connotes the pecuniary gain remaining after offsetting gains against losses presumably a prerequisite to the existence of net gain is that the taxpayer’s gains exceed the taxpayer’s losses black’s law dictionary 7th ed defines the term net_loss as the excess of all expenses and losses over all revenues and gains by analogy the natural ordinary and familiar meaning of the term net gain is the excess of all gains over all lossesdollar_figure as is relevant herein the terms gains and losses include short-term and long-term_capital_gains and short-term and long-term_capital_losses respectively for purposes of determining net_short-term_capital_gain the prior year’s short-term_capital_loss that is carried forward to the current taxable_year under sec_1212 is treated as a short- term capital_loss for such taxable yeardollar_figure sec_1_1222-1 income_tax regs likewise for purposes of determining net see eg similar definitions under sec_1222 that define capital_gain_net_income as the excess of the gains from the sales or exchanges of capital assets over the losses from such sales or exchanges and under sec_1 2t e ii e temporary income_tax regs fed reg date that define net gain for purposes of that section as the amount by which the gains from the sale of all of the property exceed the losses if any from such sale sec_1212 provides in pertinent part if a taxpayer other than a corporation has a net_capital_loss for any taxable year-- a the excess of the net_short-term_capital_loss over the net_long-term_capital_gain for such year shall be a short-term_capital_loss in the succeeding taxable_year and b the excess of the net_long-term_capital_loss over the net short- term capital_gain for such year shall be a long-term_capital_loss in the succeeding taxable_year long-term_capital_gain the prior year’s long-term_capital_loss that is carried forward to the current taxable_year under sec_1212 is treated as a long-term_capital_loss for such taxable_year sec_1_1222-1 income_tax regs furthermore the pertinent parts of the regulations provide the portion thereof which is a short-term_capital_loss carryover shall be carried over to the succeeding taxable_year and treated as a short-term_capital_loss sustained in such succeeding taxable_year and the portion thereof which constitutes a long-term_capital_loss carryover shall be carried over to the succeeding taxable_year and treated as a long-term_capital_loss sustained in such succeeding taxable_year the carryovers are included in the succeeding taxable_year in the determination of the amount of the short-term_capital_loss the net_short-term_capital_gain or loss the long-term_capital_loss and the net_long-term_capital_gain or loss in such year the net_capital_loss in such year and the capital_loss carryovers from such year sec_1_1212-1 income_tax regs emphasis added it follows that because short-term_capital_loss carryovers and long-term_capital_loss carryovers are treated as losses in the current taxable_year they are also losses for purposes of determining net gain in sec_163 accordingly we conclude as a matter of law that the term net gain for purposes of sec_163 means the excess if any of total gains over total losses including capital_loss carryovers from the disposition of property held for investmentdollar_figure we note that respondent has adopted this view and has continued b legislative_history sec_163 was enacted to curb the practice of using the investment_interest expense deduction to offset taxable_income eg noninvestment income in a current taxable_year ie to prevent the mismatching of investment_income and investment expensesdollar_figure as relevant to this case the tax reform act of tra publaw_91_172 83_stat_574 initially limited the deduction for investment_interest expense to dollar_figure plus the amount of net_investment_income plus the amount of long-term_capital_gain again as relevant to this case the tra amendment defined investment_income as i the gross_income from interest and dividends ii the net_short-term_capital_gain attributable to the disposition of property_held_for_investment and iii any amount treated under sec_1245 and sec_1250 a sec_12 continued utilized this definition on form_4952 general instructions for line 4b net gain from the disposition of property_held_for_investment is the excess if any of total gains over total losses from the disposition of property_held_for_investment h rept pincite 1969_3_cb_200 states in pertinent part where the taxpayer's investment however produces little current income the effect of allowing a current deduction for the interest is to produce a mismatching of the investment_income and related expenses of earning that income in addition the excess_interest in effect is used by the taxpayer to offset other income such as his salary from taxation ordinary_income see sec_163 i r c as amended by tra in congress revised sec_163 to reduce the use of this deduction to shelter noninvestment types of incomedollar_figure see sec a of the tax reform act of tra publaw_94_455 90_stat_1542 the definition of investment_income remained unchanged but the tra amendment eliminated any offset of investment_interest expense against long-term_capital_gain id in congress expanded the scope of the investment_interest expense limitation and altered the calculation of the limitation by including any net gain attributable to the disposition of property_held_for_investment tax_reform_act_of_1986 tra publaw_99_514 100_stat_2320 see h conf rept 1986_3_cb_152 wherein the conference committee articulated the intent to expand the definition of investment_income to include the same items as under tra plus the taxable_portion of net gain from the disposition of investment_property emphasis added see h rept pincite 1976_3_cb_695 s rept pincite 1976_3_cb_49 staff of joint comm on taxation general explanation of the tax reform act of pincite j comm print see also h rept pincite investment_income also includes the nondeductible portion of net_long-term_capital_gain on investment_property s rept pincite continued c analysis petitioners contend that respondent mischaracterized their investment_income for each taxable_year at issue by including capital losses and capital_loss carryovers petitioners argue that sec_163 requires inclusion of only their capital_gains and furthermore that net gain does not require inclusion of their capital losses and capital_loss carryovers petitioners’ reading of the statute is at odds with the plain language of the statute essentially petitioners attempt to omit the word net from the definition of investment_income even though the phrase is clearly found in sec_163 if we were to adopt petitioners’ reading of the statute we would render meaningless congress’s explicit reference in sec_163 to the term net gain emphasis added clearly congress did not intend this result nor do we adopt it we hold as a matter of law that petitioners’ capital losses and capital_loss carryovers are an integral part of the equation in calculating investment_income under sec_163 were these losses not included petitioners would receive a continued investment_income also includes the gain on investment_property staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite comm print investment_income includes gain whether long-term or short-term attributable to the disposition of property_held_for_investment double tax_benefit under petitioners’ approach capital_gains would be offset by capital losses and capital_loss carryovers and not subjected to taxation then those same capital_gains that escaped taxation would be used to increase investment_income and simultaneously the investment_interest expense deduction this double tax_benefit is clearly not permitted by sec_163 we now turn to petitioner’s investment_interest expense deductions for the taxable years at issue based on the amounts reported by petitioners on their schedules d petitioners had a total net_capital_loss in each taxable_year at issue it follows then that petitioners had zero net gain in and for purposes of sec_163 therefore petitioners have net_investment_income and allowable investment_interest expense deductions for the taxable years at issue as follows investment_interest expense dollar_figure dollar_figure dollar_figure disallowed investment_interest expense from prior taxable_year --- big_number big_number total investment_interest expense big_number big_number big_number gross_income from property_held_for_investment big_number big_number net gain from the disposition of property_held_for_investment --- --- --- net_investment_income big_number big_number disallowed investment_interest expense to be carried forward to the next taxable_year big_number big_number big_number investment_interest expense deduction big_number big_number d conclusion we hold that net gain as that term is used in sec_163 requires inclusion of petitioners’ capital losses and capital_loss carryovers for purposes of calculating the sec_163 limitation on the investment_interest expense deduction we hold further that petitioners’ investment_interest expense deductions for and are limited to dollar_figure dollar_figure and dollar_figure respectively in view of the foregoing we sustain respondent’s determination on the disputed issue we have considered all of the other arguments made by petitioners and to the extent that we have not specifically addressed them we find them to be without merit reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury washington dc contact persona telephone number in reference to date op e ep t mar 1sy2 index no legend employer x plana plan b dear this is in response to a ruling_request submitted on your behalf by your authorized representatives dated date supplemented by additional correspondence dated date date and date by the letter dated date ruling_request was withdrawn the ruling_request concerns the proper tax treatment of elective_deferrals to a cash_or_deferred_arrangement in coordination with a nonqualified_plan of deferred_compensation the following facts and representations were submitted by your authorized representative employer x currently maintains plans a and b plan a is a qualified_plan under sec_401 of the internal_revenue_code the code its related trust is exempt under sec_501 of the code and its cash_or_deferred_arrangement is qualified under sec_401 of the code plan b is an unfunded nonqualified_plan established to benefit highly compensated management employees of employer x plans a and b operate on a calendar_year basis you are a participant in both plans under plan a participants are eligible to make both pre-tax and after-tax contributions from base salary pre-tax contributions to plan a are limited to the maximum elective_deferral permitted under sec_402 of the code contributions to plan a are also limited by application of sec_415 of the code and by the actual_deferral_percentage_test and the actual_contribution_percentage_test under sec_401 and sec_401 of the code under plan a employer x matches each participants’ contributions in an amount based on the participant’s years_of_service and employer x's profitability under plan b participants may elect to defer up to of their base salary plus all or a portion of other forms of compensation from employer x participants under plan b may also elect to defer amounts equal to excess_deferrals excess_contributions and excess annual_additions attributable to a prior year that were retumed to the participant under plan a employer x also matches plan b participants’ contributions from base salary predicated on the same formula used under plan a unlike plan a however elective_deferrals and matching_contributions are not subject_to the limitation of sec_402 and sec_415 of the code or the limitations imposed by either the actual_deferral_percentage_test or the actual_contribution_percentage_test of sec_401 and sec_401 of the code employer x credits plan b participants’ accounts with earnings based on a predetermined formula earnings are fully vested except with respect to any participants who voluntarily terminate employment in such case earnings are vested based on the participant’s years of eligibility under plan b at the rate of for each full year all deferrals matching_contributions and earnings credits under plan b are general assets of employer x those credits may be maintained as a book account or by the allocation of assets to a rabbi_trust established by employer x plan a requires that participants in plan b make an irrevocable election to make a salary deferral by the december preceding the calendar_year in which the compensation to which the salary deferral election relates is earned in addition plan a provides that the amount subject_to the salary reduction election will be the lesser_of the maximum amount of pre-tax deferrals that could be made to plan a for the calendar_year under sec_402 sec_401 and sec_401 of the code or the amount of base salary such participant actually elects to defer under the terms of plan b for the calendar_year plan b permits the transfer of pre-tax deferrals from base salary plus any related matching_contributions but without earnings gains or losses allocable thereto from plan b to plan a the transfer must be completed before march of the calendar_year following the year in which the salary deferral was made it is expected that the transfer provision will enable employer x to calculate for each participant of plan b the maximum permitted contribution under plan a under the limitations of sec_401 sec_401 and sec_402 of the code plan b requires that participants make an election to defer on or before december of the calendar_year preceding the year for which compensation is earned for a new participant an election may be made within thirty days following a participant’s initial selection for membership provided the election relates to compensation_for services to be performed subsequent to the election to defer by electing to defer from base salary under plan b a participant also authorizes a transfer from plan b to plan a the determination of the amount of elective contributions transferred from plan b to plan a will be calculated pursuant to a formula contained in plan a and plan b as reflected in the election form for plan b plan a requires employer x to contribute this amount to plan a these provisions preclude employer discretion with respect to the amount of elective_deferrals the election form for plan b also serves as the election form for plan a plan b permits refunds of deferrals to participants under certain circumstances the amount of refund will be determined as follows if a participant’s deferrals from base salary under plan b are equal to or greater than the maximum pre-tax contributions the participant could have contributed to plan a for a year then the difference between the actual pre-tax contributions a participant authorized to be made to plan a for such year and the maximum amount the participant could have contributed to plan a will be refunded and if a participant’s deferrals from base salary under plan b are less than the maximum pre-tax contributions the participant could have contributed to plan a for a year but are greater than the pre-tax contributions the participant authorized to be made to plan a for such year then the difference between the amount of deferrals from base salary under plan b for such year and the amount that the participant authorized to be made to plan a will be refunded any refund of deferrals will be included in a participant's taxable_income for the year with respect to which the deferral is made earnings and matching_contributions attributable to the refunded amount will continue to be credited to the participant under plan b with respect to the foregoing the following rulings are requested assuming that plan a otherwise satisfies the requirements for a qualified_cash_or_deferred_arrangement and that the elective_deferrals and actual_deferral_percentage limitations of sec_402 and sec_401 of the code are not exceeded elective_deferrals made by you under plan a that are initially held by employer x pursuant to the terms of plan b will be excluded from gross_income under sec_402 of the code for purposes of satisfying sec_402 of the code elective_deferrals under plan a made by you for a given plan and calendar_year that are initially held by employer x pursuant to the terms of plan b will be treated as having been made in the calendar_year in which they would have been otherwise received as wages by you sec_401 of the code provides in pertinent part that a qualified_cash_or_deferred_arrangement is any arrangement which is a part of a profit-sharing or stock_bonus_plan a pre- erisa money purchase plan or a rural_cooperative_plan which meets the requirements of sec_401 and under which a covered_employee may elect to have the employer make payments as contributions to a_trust under the plan on behalf of the employee or to the employee directly in cash sec_1 k -i a i of the income_tax regulations regulations provides that a cash or deferred election is any election or modification of an earlier election by an employee to have the employer either a provide an amount to the employee in the form of cash or some other taxable benefit that is not currently available or b contribute an amount to a_trust or provide an accrual or other benefit under a plan deferring the receipt of compensation a cash or deferred election includes a salary reduction agreement between an employee and employer under which a contribution is made under a plan only if the employee elects to reduce cash compensation or to forgo an increase in cash compensation under sec_1 k -i a ii of the regulations a cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election under sec_1 k -i a iii of the regulations cash or another taxable_amount is currently available to the employee if it has been paid to the employee or if the employee is able currently to receive the cash or other taxable_amount at the employee's discretion under sec_1 k - b i of the regulations an elective contribution is taken into account for purposes of the actual_deferral_percentage_test for a plan_year only if a the elective contribution is allocated to the employee's account under the plan as of a date within that plan_year and b the elective contribution relates to compensation that either would have been received by the employee in the plan_year but for the employee's election to defer under the arrangement or is attributable to services performed by the employee in the plan_year and but for the employee's election to defer would have been received by the employee within two and one-half months after the close of the plan_year an elective contribution is considered allocated as of a date within the plan_year only if the allocation is not contingent upon the employee's participation in the plan or performance of services on any date subsequent to that date and the elective contribution is actually paid to the trust no later than the end of the 12-month_period immediately following the plan_year to which the contribution relates sec_402 of the code provides in pertinent part that contributions made by an employer on behalf of an employee to a_trust which is a part of a qualified_cash_or_deferred_arrangement as defined in sec_401 shall not be treated as distributed or made available to the employee nor as contributions made to a_trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash under sec_402 of the code the elective_deferrals of any individual for any taxable_year are included in such individual's gross_income to the extent the amount of such deferrals for the taxable_year exceeds dollar_figure as adjusted under sec_402 of the code notwithstanding sec_402 of the code regarding elective_deferrals under a qualified_cash_or_deferred_arrangement 199924u0g with respect to ruling_request one you are eligible to defer compensation under plan b by making two irrevocable elections the election under plan b is required to be made on or before december of the calendar_year preceding the year for which compensation is earned the election under plan a is required to be made no later than december of the calendar_year preceding the year for which the compensation is earned plan b provides for the transfer of pre- tax deferrals from base salary plus any related matching_contributions from plan b to plan a the election form for plan b also reflects the transfer the amount to be transferred is determined in accordance with the provisions of plan a and plan b plan a requires employer x to contribute such amount to plan a these provisions preclude employer discretion with respect to the amount of elective_deferrals the transfer must be completed on or before march of the calendar_year following the year for which the deferral was made under plan b if your plan b pre-tax deferral from base salary is more than the pre-tax deferral you authorized to be made to plan a then the difference between the maximum permissible contribution to plan a and the pre-tax deferral you authorized to be made to plan a will be refunded to you any refund will be taxable_income for the year with respect to which the deferral was made in addition for purposes of the actual_deferral_percentage_test under sec_401 of the code for a calendar_year plan_year elective_deferrals irrevocably and prospectively elected under plan b made by you for a calendar_year plan_year that are initially held in the general assets of employer x and then contributed to plan a will be treated as having been made under plan a in the calendar_year in which the compensation to which the deferrals relate was earned by you provided that the elective_deferrals are allocated to your account by the end of that calendar plan_year and the elective_deferrals continue to relate to compensation that either would have been received by you in the calendar_year plan_year but for his election or is attributable to services performed by you in the calendar_year plan_year and would have been received by you within months after the calendar_year plan_year but for your election an election to make a contribution to plan a regulations because it is an election to have employer x provide a benefit under a plan deferring compensation rather than providing an amount in cash to the employee is a cash or deferred election within the meaning of sec_1_401_k_-1 of the accordingly with respect to ruling_request one we conclude that assuming plan a otherwise satisfies the requirements for a qualified_cash_or_deferred_arrangement and that the elective_deferral and actual_deferral_percentage limitations of sec_402 g and k of the code are not exceeded elective_deferrals made by you under plan a that are initially held by employer x pursuant to the terms of plan b will be excluded from gross_income under sec_402 e of the code when contributed to plan a provided such contribution is timely paid and allocated with respect to ruling_request two you will make an irrevocable election to have your maximum permissible contribution to plan a transferred from plan b to plan a if your plan b pre-tax deferral from base salary is more than the pre-tax deferral you authorized to be made to plan a then the difference between the maximum permissible contribution to plan a and the pre- 19y924u67 tax_deferral you authorized to be made to plan a will be refunded to you the amount distributed will be taxable_income to you in the year it was earned rather than the year it was actually distributed if the maximum permissible deferral under plan a is contributed to plan a it would be subject_to the g limitation applicable to the year when it was eamed rather than the year in which it was contributed to plan a accordingly with respect to ruling_request two we conclude that for purposes of satisfying the limitations of sec_402 of the code contributions made to plan a by employer x on your behalf assuming that such contributions are timely made and timely allocated to your account under plan a which are initially held by employer x pursuant to the terms of plan b will be treated as deferrals under plan a having been made in the year in which they would have been taxable to you but for your election under plan b to have such deferrals contributed to plan a the above rulings are based on the assumption that at all times relevant to these tulings plan a is qualified under sec_401 a of the code and its cash_or_deferred_arrangement is qualified under sec_401 k of the code this ruling is directed only to the taxpayer that requested it and applies only with respect to plan a as submitted with this request sec_6110 of the code provides that this private_letter_ruling may not be used or cited as precedent title i of employee_retirement_income_security_act_of_1974 erisa is within the jurisdiction of the department of labor accordingly we express no opinion as to whether the subject transactions comply with title of erisa finally no opinion is expressed as to the income_tax consequences of establishing plan b and participating in it except as expressly stated herein in accordance with a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representatives sincefely yours an g hitarre fi riddle jr employee_plans jehn cc technical branch enclosures deleted copy of the letter notice


internal_revenue_service department of the treasury uil po box ben franklin washington dc station person to contact tere une inuiioet neler nepiy tv ce dom p st 7--plr-115464-98 sep re legend b d p p o c i date dear we received your representative's letter dated submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code responds to that request this letter the represented facts are as follows x was incorporated on a and b the shareholders of x intended x to be an s date corporation effective date but form_2553 election by a small_business_corporation was not filed timely requests a ruling that it will be treated as an s_corporation effective date accordingly x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides in relevant part that if an s an election is made within the first two and one-half months of corporation's taxable_year then the corporation will be treated s_corporation for the year in which the election is made as under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed a sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 b shall not apply x did not file a timely election to be treated as an corporation under sec_1362 a reasonable_cause for not making a timely election and is entitled to relief under sec_1362 b has established however xx based solely on the facts and representations made in x's we conclude that x will be treated as submission and provided that x otherwise qualifies as an corporation as of date an s_corporation effective as of date completed form_2553 along with a copy of this letter to the relevant service_center within days of receipt of this letter except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the above-described facts under any other provision of the code specifically we express or imply no opinion concerning whether xx qualifies as an sdollar_figure corporation for federal tax purposes please submit a this ruling is directed only to the taxpayer who requested sec_6110 provides that it may not be used or cited it as precedent sincerely yours cent lab urath enior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purpose


internal_revenue_service number release date uil r -------------------- ----------------------------- -------------- -------------------------- -------------- --------------------------------- - department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 - plr-140287-01 date date re request for private_letter_ruling regarding normalization taxpayer -------------- ----------------------------- -------------------- ------------------------------------------------------- -------------------------------- -------- --------------------------- ------------------------ --------------------- state commission a ------------------------------------------------------------------------------ commission b ------------------------------------------------------------------------ plant buyer a b c d dear -------------- this letter responds to a letter dated date submitted on behalf of taxpayer for a determination as to the normalization requirements under former sec_46 of the internal_revenue_code and section e of the tax_reform_act_of_1986 vol c b the act for the excess deferred federal income taxes edfit associated with certain generation assets that were sold by taxpayer taxpayer represents that the facts are as follows taxpayer is a corporation that provides electric service in several states prior to the transaction at issue in this letter taxpayer owned a a percent taxpayer's accumulated deferred federal income taxes adfit were reversed plr-140287-01 facts taxpayer is subject_to the regulatory jurisdiction of commission a with regard to its retail sales and certain conditions of service in state and to the regulatory jurisdiction of commission b with regard to its wholesale and wheeling rates interest in the plant the plant located in state has at all times since it was placed_in_service been used in the provision of regulated electric service and has been regulated on a rate-of-return basis on b taxpayer filed an application with commission a to sell its interest in plant and related assets to buyer the application included requests for approval of the sale and a determination of the amount and the proper ratemaking treatment of the gain associated with the sale the application was approved by commission a on c and the sale was consummated on d as a result of the sale and are not at issue in taxpayer's request taxpayer has not reflected the reversal of the excess deferred federal income taxes edfit with respect to the plant as an increase to its computation of net gain as an offset to income_tax expense on the sale of its interest in the plant in its order authorizing the sale of taxpayer's interest in the plant commission a required that taxpayer request the approval of the internal_revenue_service to include the edfit as an offset to income_tax expense rulings requested permitted to pass through the edfit associated with the plant as part of the net gain from the sale of these assets without violating the depreciation normalization rules set forth in former code sec_167 code sec_168 and section e of the act law and analysis sec_168 shall not apply to any public_utility_property within the meaning of sec_168 if the taxpayer does not use a normalization method_of_accounting requires the taxpayer in computing its tax expense for establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account sec_168 provides that the depreciation deduction determined under in order to use a normalization method_of_accounting sec_168 taxpayer requests the internal_revenue_service to rule that taxpayer is sec_168 provides that one way the requirements of plr-140287-01 to use a method_of_depreciation with respect to public_utility_property that is the same as and a depreciation period for such property that is not shorter than the method and period used to compute its depreciation expense for such purposes under sec_168 if the amount allowable as a deduction under sec_168 differs from the amount that would be allowable as a deduction under sec_167 using the method period first and last year convention and salvage_value used to compute regulated tax expense under sec_168 the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference sec_168 will not be satisfied is if the taxpayer for ratemaking purposes uses a procedure or adjustment which is inconsistent with such requirements under sec_168 such inconsistent procedures and adjustments include the use of an estimate or projection of the taxpayer's tax expense depreciation expense or reserve for deferred taxes under sec_168 unless such estimate or projection is also used for ratemaking purposes with respect to all three of these items and with respect to the rate base accelerated methods for depreciation if they used a normalization method_of_accounting a normalization method_of_accounting was defined in former sec_167 in a manner consistent with that found in sec_168 sec_1_167_l_-1 provides that the normalization requirements for public_utility_property pertain only to the deferral of federal_income_tax liability resulting from the use of an accelerated method_of_depreciation for computing the allowance for depreciation under sec_167 and the use of straight-line_depreciation for computing tax expense and depreciation expense for purposes of establishing cost of services and for reflecting operating results in regulated books of account these regulations do not pertain to other book-tax timing differences with respect to state income taxes f i c a taxes construction costs or any other taxes and items property should reflect the total amount of the deferral of federal_income_tax liability resulting from the taxpayer's use of different depreciation methods for tax and ratemaking purposes sec_1_167_l_-1 provides that the amount of federal_income_tax liability deferred as a result of the use of different depreciation methods for tax and ratemaking purposes is the excess computed without regard to credits of the amount the tax_liability would have been had the depreciation method for ratemaking purposes been used over the amount of the actual tax_liability this amount shall be taken into account for the taxable_year in which the different methods of depreciation are used former sec_167 generally provided that public_utilities were entitled to use sec_1_167_l_-1 provides that the reserve established for public_utility section e of the act provides that a normalization method_of_accounting section e of the act provides another way in which a normalization method plr-140287-01 sec_1_167_l_-1 provides that the taxpayer must credit this amount of deferred taxes to a reserve for deferred taxes a depreciation_reserve or other reserve_account this regulation further provides that the aggregate amount allocable to deferred taxes shall not be reduced except to reflect the amount for any taxable_year by which federal income taxes are greater by reason of the prior use of different methods of depreciation under sec_1_167_l_-1 or to reflect asset retirements or the expiration of the period of depreciation used in determining the allowance for depreciation under sec_167 of accounting is not being used for public_utility_property shall not be treated as being used with respect to any public_utility_property for purposes of sec_167 or sec_168 if the taxpayer in computing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account reduces the excess_tax_reserve more rapidly or to a greater extent than this reserve would be reduced under the average rate assumption method aram excess of i the reserve for deferred taxes as described in former sec_167 or sec_168 as in effect on the day before the date of the enactment of the act over ii the amount that would be the balance in this reserve if the amount of the reserve were determined by assuming that the corporate rate reductions provided in the act were in effect for all prior periods under this method aram is the method under which the excess in the reserve for deferred taxes is reduced over the remaining lives of the property as used in its regulated books of account that gave rise to the reserve for deferred taxes under the aram if timing differences for the property reverse the amount of the adjustment to the reserve for the deferred taxes is calculated by multiplying i the ratio of the aggregate deferred taxes for the property to the aggregate timing differences for the property as of the beginning of the period in question by the term excess_tax_reserve is defined in section e a of the act as the section e b of the act defines the aram and explains the calculations ii the amount of the timing differences that reverse during this period plr-140287-01 revproc_88_12 1988_1_cb_637 provides further guidance as to the application of the aram to the excess_tax_reserve section dollar_figure of revproc_88_12 provides that under the aram excess tax_reserves pertaining to a particular vintage or vintage_account are not flowed through to ratepayers until such time as the timing differences in the particular vintage_account reverse moreover it is a violation of section e of the act for taxpayers to adopt any accounting treatment that directly or indirectly circumvents the rule set forth in the previous sentence section dollar_figure also provides that section e of the act does not modify the normalization requirements of former sec_167 or of sec_168 sec_3 and dollar_figure of revproc_88_12 provide that a taxpayer who lacks for a public_utility to use accelerated_depreciation in determining its federal sufficient vintage_account data necessary to apply the aram can use the reverse south georgia method in general a taxpayer uses that method if it a computes the excess_tax_reserve on all public_utility_property included in the plant account on the basis of the weighted average life or composite rate used to compute depreciation for regulatory purposes and b reduces the excess_tax_reserve ratably over the remaining regulatory life of the property income_tax_liability section e of the act requires that normalization_accounting be used to reduce the excess_tax_reserve in calculating the rates to be charged the utility's customers and in maintaining the regulated books of account under section e of the act the immediate flow through of the excess_tax_reserve to the utility's customers is prohibited instead the excess_tax_reserve is to be reduced and flowed through to cost of service no more rapidly that this reserve would be reduced under the aram or where appropriate the reverse south georgia method reduced and flowed through to the utility's customers in setting rates it does not require the utility to flow through the excess_tax_reserve to its customers but permits the utility to do so provided the reduction to cost of service is not more rapidly than would be under the aram thus section e of the act imposes a limitation on when the excess_tax_reserve may be returned to the utility's customers in the form of reduced rates retirements of public_utility_property subject_to the normalization requirements of sec_168 are reflected in adjustments to taxpayer's deferred tax reserve as well as its excess_tax_reserve see sec_1_167_l_-1 and revproc_88_12 c b pincite as a result of the sale these reserves cease to exist a violation of the depreciation normalization rules will occur if there is any return to ratepayers after the sale date of the unamortized edfit attributable to accelerated_depreciation on public_utility_property that is sold further both aram and the reverse south georgia method section e of the act limits the rate at which the excess_tax_reserve may be in the present case taxpayer has sold the aforementioned public_utility_property plr-140287-01 rely on mechanisms requiring a regulatory life once the asset is sold the regulatory life ceases to exist hence in the ruling requested by taxpayer there would be a normalization conclusions violation if the remaining unamortized edfit balance or a proportionate part thereof existing at the date of sale is returned to ratepayers because taxpayer has sold the assets that generated the edfit the unamortized edfit associated with the sold generating assets ceased to exist at the date of sale consequently a violation of the depreciation normalization rules will occur if there is any return to ratepayers after the sale date of those unamortized edfit amounts attributable to accelerated_depreciation on public_utility_property plant as part of the net gain from the sale of these assets without violating the depreciation normalization rules set forth in former code sec_167 code sec_168 and section e of the act consequently taxpayer may not pass through the edfit associated with the this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the industry director natural_resources and construction lm nrc cc peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries sincerely


pu ts ie ast os a department of the treasury internal_revenue_service mc dal commerce street dallas tx tax_exempt_and_government_entities_division february uil release number release date legend org organization name nx date adagress acaress employer identification a org address dear person to contact id contact telephone number taxpayer advocate’s office address and telephone number certified mail last date to file a petition in tax_court may 20xx this is a final adverse determination that you do not qualify for exemption from income_tax under sec_501 of the internal_revenue_code i r c as an organization described in sec_501 in addition you do not qualify as an organization described in sec_509 internal_revenue_service recognition of your status as an organization described in sec_501 is revoked effective january 20xx our adverse determination is made for the following reason s you have not established you operated exclusively for exempt purposes within the meaning of sec_501 you failed to provide adequate documentation to confirm the organizations exempt_activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose your organization has not provided any evidence you engaged in any activities that furthers your exempt purposes contributions made to you are no longer deductible as charitable_contributions by donors for purposes of computing taxable_income for federal_income_tax purposes see revproc_82_39 1982_2_cb_759 for the rules concerning the deduction of contributions made to you between january 20xx and the date a public announcement such as publication in the internal_revenue_bulletin is made stating that contributions to you are no longer deductible you are required to file income_tax returns on form_1120 and form_1041 for all years beginning after january 20xx returns for the years ending december 20xx december 20xx and december 20xx must be filed with this office within days from the date of this letter unless a request for an extension of time is granted send such returns to the following address tax returns for subsequent years are to be filed with the appropriate campus identified in the instructions for those returns if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the district_court of the united_states for the district of columbia the united_states court of federal claims or the united_states tax_court before the ' day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the following address the processing of income_tax returns and assessment of any taxes due will not be delayed because a petition for declaratory_judgment has been filed under r c sec_7428 if you have questions about this letter please write to the person whose name and address are shown on this letter if you write please attach a copy of this letter to help identify your account keep a copy for your records also please include your telephone number and the most convenient time for us to call so we can contact you if we need additional information 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 or you can contact the taxpayer_advocate office located nearest you at the address and telephone number shown in the heading of this letter taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by r c sec_6104 this is a final revocation letter sincerely marsha a ramirez director eo examinations form 886-a rev date explanations of items schedule number or exhibit name of taxpayer org __ legend org organization name ar company co-2 pte on - fe f company bs tax identification_number _ year period ended -12 20xx xx date president issue is the org an organization exempt from tax under sec_501 of the internal_revenue_code facts internal_revenue_service records show that the org hereinafter the foundation was incorporated on january 20xx and received recognition as an organization exempt under internal_revenue_code sec_501 private_operating_foundation in january of 20xx with a deductibility year of 20xx the organization filed form_990-pf for the year ended january 20xx at the ogden service_center on november 20xx on november 20xx the internal_revenue_service sent letter and form_4564 to the organization along with publication your rights as a taxpaver the form asked the organization for information and documents about its activities the information was due on november 20xx the date of the examination the examination took place at the representative’s office president did not attend the representative had bank statements check stubs profit and loss statements balance_sheet all for the year ending december 20xx also form_1023 determination letters and printouts dated 20xx from the organization’s website were provided it should be noted that the website is currently inactive the foundation reported total revenue of dollar_figure schedule b of the form_990-pf and records submitted show the foundation’s sole source_of_income was from the founder and president the taxpayer was unable to provide the actual activities conducted by the foundation nor purpose of the expenditures made by the foundation during the initial examination at the representative’s office form_4564 information_document_request was mailed to the representative on december 20xx requesting additional information the material sent included a spreadsheet listing all of the payments made by the foundation asking for invoices purpose of the payments and descriptions on how these payments further the foundation’s exempt_purpose the foundation spent dollar_figure on legal fees dollar_figure was paid to individuals and an organization called co-1 for religious research from the dollar_figure spent on religious research dollar_figure was paid for rent for an individual named employee dollar_figure was given to various individuals the foundations spent dollar_figure on publicity dollar_figure on professional fees investigating dollar_figure on printing and dollar_figure on meetings and conferences the conference and meeting expense of dollar_figure was paid to conductor for conductor - co-2 in addition to other information requested the service asked the organization to explain how these payments furthered its exempt_purpose form 886-a rev date name of taxpayer _ org schedule number or exhibit explanations of items tax identification_number year period ended 20xx rganicaci ame ax date president presiqent kol company co-2 company no response was received from the organization's representative by the due_date of december 20xx an extension was granted to the representative on form_4524 on january 20xx to the fist week of february 20xx on february 20xx the internal_revenue_service sent a letter along with form_4564 idr that was mailed on 20xx to the organization asking for e e e e e e an explanation and supporting documentation for the payments to various individuals during the year under audit including invoices types of services provided for the religious research how do these payments further the foundation’s exempt_purpose where grants to individuals for travel study or similar purposes what were the purposes of the grants a list of ein and addresses for grants made to organizations how the payments to professional fees for investigation further the foundation’s exempt_purpose for cd’s totaling dollar_figure under publicity and the dollar_figure in the due_date for this information was february 20xx the representative informed the revenue_agent on february 20xx that she called president of the foundation to gather the requested information but he has not returned her call all the above items had previously been requested in the document request dated december 20xx no response was received to this letter law sec_501 of the internal_revenue_code provides for exemption from taxation for organizations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur athletic competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations states that an organization will be regarded as ‘operated exclusively’ for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -1 d ii of the income_tax regulations states that an organization ts not organized or operated exclusively for one or more of the purposes specified unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to schedule number or exhibit explanations of items form 886-a rev date name of taxpayer org legend crg organization name company co-2 campany tax identification_number year period ended 20xx xx date président resident co establish that it individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests is not organized or operated for the benefit of private interests such as designated sec_1_6033-2 of the income_tax regulations provides that every organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose in inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code rev_rul an organization previously held exempt from federal_income_tax was requested to produce a financial statement as of the end of the year and a statement of its operations during such year however its records were so incomplete that it was unable to furnish such statements sec_6033 of the internal_revenue_code of provides that every organization except as provided therein exempt from taxation under sec_501 of the code shall file an annual return stating specifically the items of gross_income receipts and disbursements and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary_of_the_treasury or_his_delegate may from time to time prescribe held failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code 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 an exempt status revrul_56_304 organizations privately established and funded as charitable foundations which are organized and actively operated to carry on one or more of the purposes specified in sec_501 of the internal_revenue_code of and which otherwise meet the requirements for exemption from federal_income_tax are not precluded from making distributions of their funds to individuals provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized however organizations of this character which make such distributions should maintain adequate_records and case histories to show the name and address of cach recipient of aid the amount distributed to cach the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor in order that any or all distributions made to individuals can be substantiated upon request by the internal_revenue_service government's position the internal_revenue_service asked the foundation to provide specific information about its actual activities during the year ending december 20xx other than printouts from the foundation’s website from 20xx the organization provided no information on how it conducts its charitable activity explanations of items schedule number or exhibit form 886-a rev date name of taxpayer - tax identification_number year period ended org ee _ a 20xx_ org company co-2 company crganization name xx date preslaent president i the internal_revenue_service asked the organization to describe the activities that produced the legal expenses in the amount of dollar_figure the foundation did not provide any invoices for the legal expenses the foundation did not explain how the legal fees help to accomplish its exempt_purpose - religious research the organization did not show the legal fees were for the benefit of the foundation the internal_revenue_service asked the organization to describe the activities that produced religious research expenses totaling dollar_figure the organization did not provide any information showing what activities were performed by the foundation what activities constitute religious research or how these payments benefited a charitable_class the internal_revenue_service asked the organization to show how it determined the payments made to individuals totaling dollar_figure or how these payments benefited a charitable_class as required by revrul_56_304 the foundation did not provide adequate_records to show the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor in order that any or all distributions made to individuals can be substantiated upon request by the internal_revenue_service the internal_revenue_service asked the organization to describe its activities that produced expenses for cd’s totaling dollar_figure dollar_figure in professional fees for investigation dollar_figure was paid to conductor for conductor - co-2 and dollar_figure on printing further the foundation’s exempt_purpose an exempt_organization must respond to internal_revenue_service inquiries to establish that it is entitled to tax exempt status in this case the taxpayer had failed to establish that it was engaged in exempt_activities that its expenditures were for the purpose of exempt_activities or that its assets did not inure to private shareholders or individuals taxpayer's position the organization has not submitted its position conclusion exemption under code sec_501 for the org is revoked effective january 20xx the organization is required to file form_1120 for all taxable years beginning after december 20xx cte gen government entities oivision org address department of the treasury internal_revenue_service irs tege division golden gate avenue m sec_7401 san francisco ca taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f i lf we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha a ramirez director eo examinations letter catalog number 34809f


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-126946-01 date date legend x d1 this responds to a letter dated date submitted on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a corporation for federal tax purposes under sec_301_7701-3 facts according to the information submitted x was formed on d1 x and x’s sole owner intended from inception to elect to classify x as a corporation for federal tax purposes however form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with one member can elect to be classified as either an association and thus a corporation under sec_301 b or to be treated as an entity disregarded from its owner sec_301_7701-3 provides in part that unless a domestic eligible_entity elects otherwise it is disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the applicable service_center sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the plr-126946-01 election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable 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 code except subtitles e g h and i if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting the relief will not prejudice the interests of the government sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 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 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time for making the election to be treated as a corporation for federal tax purposes effective d1 until days following the date of this letter x should make the election by filing form_8832 with the appropriate service_center a copy of this letter should be attached to that form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court ernest a and berniece c hunter petitioners v commissioner of internal revenue respondent docket no filed date ernest a and berniece c hunter pro_se shawna barly for respondent memorandum opinion powell special_trial_judge respondent determined a deficiency in petitioners' federal_income_tax in the amount of dollar_figure unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue the issue is whether petitioners are entitled to deduct dollar_figure for expenses_incurred by petitioner ernest a hunter petitioner in going to the new york city municipal reference and research center and the new york public library - - petitioners resided in new york new york at the time the petition was filed the facts may be summarized as follows during the year before the court petitioner was not an employee and was not engaged in any trade_or_business petitioner testified that his wife contributes dollar_figure every weeks for his library attendance petitioners deducted dollar_figure on their tax_return which represents the cost of petitioner’s transportation to and from the libraries and his meals as far as we can determine since at least to petitioner has had an ongoing employment or wrongful discharge dispute with the state of new york the following excerpt from the transcript explains petitioner’s position the court but you are not engaged in a trade_or_business are you the witness t am not but what happens is in the civil service law in order to get paid you have to maintain a posture of ready willing and able to be restored from the preferred list or whatever and what happens is that has been my method or means of keeping myself ready willing and able to be employed t am not receiving a penny of income see what happens is when the state of new york refused to restore me from the preferred list they refused to provide me with any interpretation of whatever it was that they -- reasons they the record does not explain the difference between dollar_figure every weeks dollar_figure and the dollar_figure deduction petitioners claimed on their return used for doing so so i might confront it therefore my pay is still going on as a technical matter the court i am not sure that the state of new york would agree with you the witness they certainly haven’t as the supreme court has noted the ‘familiar rule’ 1s that ‘an income_tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer ’ 503_us_79 sec_162 allows deductions for ordinary and necessary expenses in carrying on any trade_or_business an employee is in a trade_or_business of being an employee see 89_tc_310 sec_212 further allows deductions for ordinary and necessary expenses_for_the_production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income the expenses claimed do not fall within either sec_162 or sec_212 even if we consider these expenses to be bona_fide educational expenses petitioner admittedly was not engaged in a trade_or_business or other income-producing activity during the time that the expenses were incurred or paid see 71_tc_568 mere membership in good standing in a profession does not constitute - - carrying_on_a_trade_or_business respondent’s determination is sustained decision will be entered for respondent


internal_revenue_service department of the treasury index numbers washington dc number release date person to contact telephone number refer reply to cc ebeo 2-plr-122543-98 date date legend x y dear mr this is in response to your request for a letter_ruling dated date concerning whether x is a religious_order for purposes of the internal_revenue_code and whether goods services and cash allowances received by members of x in connection with services performed by them in the exercise of duties required by x are subject_to federal_insurance_contributions_act fica tax and federal_income_tax withholding x is a nonprofit corporation organized and operated for the purpose of providing christian education of the young and care of the sick and elderly in accordance with the historic beliefs of y church specifically x provides christian education in the form of small self-supporting schools or missionary training centers the underlying religious philosophy of that educational approach is that christians should learn to live independently of the world’s support and work cooperatively to support each other education at x is part academic and part vocational students faculty and staff learn and maintain their independence by building and maintaining their campus growing their own food and taking care of the sick and elderly in the surrounding community the educational program also includes intensive religious instruction worship and service members of x agree to donate their services without compensation and acknowledge that any compensation paid for services they perform as directed by x belongs to x x represents that members of x are under a vow of poverty revproc_91_20 1991_1_cb_524 states that the service will use the plr-122543-98 following characteristics in determining whether an organization is a religious_order the organization is described in sec_501 of the code the members of the organization vow to live under a strict set of rules requiring moral and spiritual self-sacrifice and dedication to the goals of the organization at the expense of their material well-being the members of the organization after successful completion of the organization’s training program and probationary period make a long-term commitment to the organization normally more than two years the organization is directly or indirectly under the control and supervision of a church_or_convention_or_association_of_churches or is significantly funded by a church_or_convention_or_association_of_churches the members of the organization normally live together as part of a community and are held to a significantly stricter level of moral and spiritual discipline than that required of lay church members the members of the organization work or serve full-time on behalf of the religious educational or charitable goals of the organization the members of the organization participate regularly in activities such as public or private prayer religious study teaching care of the aging missionary work or church reform or renewal the following is an analysis of the above characteristics used to determine whether an organization is a religious_order as they apply to x c status x is exempt from federal_income_tax under sec_501 of the code pursuant to a determination_letter from the service dated date vows x proposes to adopt a membership agreement to be signed by present and prospective members which requires members to affirm their adherence to the standards and beliefs of church y the membership agreement requires both men and women to adhere to standards of dress that are stricter than those required of members in the church y generally prohibits the consumption of meat tobacco or caffeine or alcoholic drinks limits all reading and music material to that of an uplifting nature and limits television viewing to special occasions with the approval of x members also agree to donate their services without compensation to x to live a simple sacrificial lifestyle to remain morally pure and to obey the authority of x leaders plr-122543-98 members will engage in daily prayer and scripture study commitment after a probationary period of two years members make a solemn commitment to remain part of x for at least five years church controlled under the membership agreement each member of x must be a member of the church y and subscribe to its teachings while not an official agency of the church y x has registered as a supporting cooperative organization within it and includes representatives of agencies of it as ex-officio members and members of its board_of directors x maintains a church congregation on its premises which its members must attend in addition all members agree to have any dispute between a member of x and x resolved by binding arbitration by a person or persons designated by church y community x is in a remote location x enhances the communal spirit among its members by providing them with on-campus housing this includes rooms in the student dormitories for the dormitory supervisors and their families and modest homes at various places around the campus the location of the members makes them available for emergency calls enables them to better host students for social events and work projects and keeps them in close proximity of the students for observation and religious conversation the members’ standards of dress and other rules required for members demonstrate a significantly stricter level of moral and spiritual discipline than is required of other members of church y full-time service members of x agree to donate all their time to performing without reservation whatever educational and charitable work x assigns and will not carry on any enterprises without the permission of x type of activities members of x engage in public and private prayer and private religious study the teaching of young people in academic and vocational subjects the care of the sick and aging and witnessing to their faith in the community including their students based upon the information submitted x possesses the characteristics in revproc_91_20 to a substantial degree accordingly based on our consideration of all of the facts and circumstances we conclude that x is a religious_order for purposes of the internal_revenue_code taxes under the fica apply to remuneration for employment as defined in code sec_3121 sec_3121 excepts from employment for fica purposes service performed by a member of a religious_order in the exercise of duties required by such order sec_31_3121_b_8_-1 employment_tax regulations provides plr-122543-98 service performed by a member of a religious_order in the exercise of duties required by such order includes all duties required of the member by the order the nature or extent of such service is immaterial so long as it is a service which he is directed or required to perform by ecclesiastical superiors code sec_3402 provides that every employer making payment of wages shall deduct and withhold federal_income_tax sec_3401 provides that wages means all remuneration for services performed by an employee for his employer with specific exceptions sec_3401 of the code excepts from wages for income_tax_withholding purposes remuneration for services performed by a member of a religious_order in the exercise of duties required by such order sec_31_3401_a_9_-1 of the income_tax regulations provides that service performed by a member of a religious_order in the exercise of duties required by such order includes all duties required of the member by the order the nature or extent of such service is immaterial so long as it is a service that the member is directed or required to perform by ecclesiastical superiors various precedents have addressed the issue of whether remuneration received by a member of a religious_order is remuneration for service performed in the exercise of duties required by the order within the meaning of sec_3121 and sec_3401 see 743_f2d_884 fed cir aff’g cl_ct revrul_81_267 1981_2_cb_196 revrul_83_127 1983_2_cb_25 revrul_79_132 1979_1_cb_62 revrul_77_290 1977_2_cb_26 revrul_76_323 1976_2_cb_18 revrul_68_123 1968_1_cb_35 whether remuneration for services comes within the exceptions of sec_3121 and sec_3401 depends on the facts of the particular case based on the information submitted we rule as follows x qualifies as a religious_order for purposes of the internal_revenue_code and regulations thereunder x and its members are not subject_to fica tax on remuneration including goods services and cash allowances received by a member for services performed by the member in the exercise of duties required by x x is not liable for fica tax withholding on remuneration including goods services and cash allowances it provides to its members for services performed by the members in the exercise of duties required by x x is not liable for federal_income_tax withholding on remuneration including plr-122543-98 goods services and cash allowances it provides to its members for services performed by the members in the exercise of duties required by x except as specifically ruled on above no opinion is expressed as to the federal tax consequences of the transaction described above under any other code provision in particular in accordance with our telephone conversations with x’s attorney no opinion is expressed regarding whether members of x are subject_to federal_income_tax or self-employment contributions act seca_tax 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 pursuant to the provisions of a power_of_attorney and declaration of representative currently on file with the internal_revenue_service a copy of this letter has been sent to your representative sincerely jerry e holmes chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosures copy of this letter copy for sec_6110 purposes cc district_director


internal_revenue_service department of the treasury index no number info release date dear mr washington dc person to contact telephone number refer reply to cc dom it a - cor-107520-00 date date this is in response to your letter dated date requesting a special exception to cover nonprescription sunglasses in an attachment to your letter your optometrist stated that you need to wear sunglasses over your rigid contact lenses when you are outdoors in daylight because you have a congenital retina condition that makes your eyes very intolerant of light your flexible_spending_account fsa administrator refused to honor your claim stating that under internal_revenue_service guidelines nonprescription sunglasses are not eligible expenses since you did not request a letter_ruling under the procedures set forth in revproc_2000_1 2000_1_irb_4 we are able to provide only general information that should not be construed as a final_determination by the internal_revenue_service of this matter an fsa also referred to as a flexible spending arrangement in general is a benefit program that provides employees with coverage under which specified incurred expenses may be reimbursed subject_to reimbursement maximums and any other reasonable conditions the maximum amount of reimbursement that is reasonably available to a participant in an fsa cannot be substantially in excess of the total premium of the participant’s coverage an fsa may include among its program of benefits a requirement that medical and dental expenses will be reimbursed if they are expenses that would be deductible under the internal_revenue_code sec_213 of the internal_revenue_code allows a deduction for expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer a spouse or a dependent to the extent that those expenses exceed percent of the taxpayer’s adjusted_gross_income sec_213 defines medical_care to include amounts paid for the diagnosis cure mitigation treatment or prevention of disease or for the purpose of affecting any structure or function of the body sec_1_213-1 of the income_tax regulations further states that medical_care under sec_213 is strictly limited to expenses_incurred primarily for the prevention or alleviation of a physical or mental defect or illness an expenditure that is merely beneficial to the general health of an individual is not for medical_care and therefore is a nondeductible personal_expense code sec_262 states that except as otherwise expressly provided for no deduction shall be allowed for personal living or family_expenses an item ordinarily used for cor-107520-00 personal living or family purposes will be recognized as an item purchased primarily for medical_care in the absence of objective evidence of such primary purpose only if it is readily apparent that it prevents or alleviates a disease or disability revrul_76_80 1976_1_cb_71 there are numerous instances in which items that are ordinarily used for personal living or family purposes but were nonetheless found to constitute a valid medical_expense_deduction for example in revrul_58_8 1958_1_cb_154 a medical_expense_deduction was allowed for an autoette a small three-wheel vehicle used primarily to alleviate the individual’s sickness or disability and not merely to provide transportation between his residence and place of employment revrul_55_261 1955_1_cb_307 held that a deduction under sec_213 was permissible for the cost of a special mattress and plywood boards needed for the relief of an arthritic condition the cost of a reclining chair acquired for the purpose of obtaining the maximum and optimum of rest by a taxpayer with a cardiac condition was found to qualify as a medical expense in revrul_58_155 1955_1_cb_156 we hope this information is helpful please contact number at if we may be of further assistance identification sincerely deputy assistant chief_counsel income_tax accounting by robert a berkovsky chief branch