department of the treasury employer_identification_number person to contact employee id number tel fax internal_revenue_service appeals_office royal palm one suite south pine island road plantation fl number release date date april uil a name b address certified mail dear this is a final adverse determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in sec_501 of the code we have hereby revoked the favorable determination_letter to you dated you are no longer exempt under sec_501 of the code effective as of the date of this letter and we made the adverse determination for the following reason s is not an organization described in sec_501 of the internal_revenue_code because ess than substantially_all of its activities are for pleasure recreation and other nonprofitable purposes and at least part of its net_earnings inure to the benefit of private shareholders is not operated exclusively for exempt purposes is not supported by membership fees dues and assessments and its net_earnings inure to the benefit of private shareholders under sec_1_501_c_7_-1 a social_club must be operated exclusively for pleasure recreation and other nonprofitable purposes must generally be solely supported by membership fees dues and assessments and its net_earnings must not inure to the benefit of private shareholders you're required to file federal_income_tax returns on forms u s_corporation income_tax return or u s income_tax return for estates and trusts mail your form to the appropriate internal_revenue_service center per the form’s instructions you can get forms and instructions by visiting our website at www irs gov forms-pubs or by calling 800-tax-form we'll make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you in a separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice lf you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in either united_states tax_court the united_states court of federal claims the united_states district_court for the district of columbia e e e you must file a petition or complaint in one of these three courts within days from the date we mailed this determination_letter to you contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment you can write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc u s district_court for the district of columbia constitution ave n w washington dc note we will not delay processing income_tax returns and assessing any taxes due even if you file petition for declaratory_judgment under sec_7428 of the code please refer to the enclosed publication how to appeal an irs determination on tax - exempt status for more information about the appeals process you also have the right to contact the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you if you qualify for tas assistance which is always free tax will do everything possible to help you visit www taxpayeradvocate irs gov or call tas assistance is not a substitute for established irs procedures such as the formal appeals process tas 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 if you have any questions contact the person at the top of this letter appeals team manager cc enclosure sincerely department of the treasury internal_revenue_service irs tax exempt and government entities exempt_organizations examinations date date taxpayer_identification_number eg form tax_year s ended person to contact id number contact numbers telephone fax manager's name id number manager’s contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation letter rev catalog number 34809f if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this fetter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely maria d hooke director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items year period ended xxxxx 20xx proposed revocation issue should xxxxx continue to be exempt under internal_revenue_code sec_501 when all of the organization’s income was generated from two sources of income rents from non-member as well investment_income issue does xxxxx meet the commingling aspect requirement under sec_501 of the internal_revenue_code issue if the organization’s only source_of_income is derived from leasing and rental activities does the organization continue to qualify for exemption issue does xxxxx meet the title holding corporation provisions under sec_501 of the internal_revenue_code issue should the proposed date of revocation be changed from august 20xx to the date the report is issued facts xxxxx was granted exemption in august of 19xx as an organization described in sec_501 of the internal_revenue_code per a review of the articles of incorporation as well as the organization’ sec_1024 application the purpose of xxxxxx is to finance construct maintain own and be the beneficiary of any land trust which owns a fraternal or dormitory type lodging at xxxxx university and any or all lawful business for which corporations may be incorporated most of the articles focus on maintenance and operation of a fraternity house however xxxxxx itself is not a fraternity or sorority form 886-a rev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service year period ended xxxxx 20xx while touring the facility it was noted that xxxxx leased its property to xxxxx and xxxxxx fraternity these are two separately incorporated entities xxxxx paid for repairs taxes and utilities for the maintenance of these properties while conducting the initial interview reviewing the general ledger and profit and loss statement it was noted that the only two sources of income received by xxxxx was interest_income and rents from undergraduate members from xxxxx and xxxxx fraternity xxxxx and xxxxx fraternities are not members of xxxxx xxxxx did not receive income from membership dues or any other sources of income that would be considered exempt_function_income all of the income was generated from the general_public xxxxx did not provide a newsletter calendar or minutes pertaining to the organization’s activities and there did not appear to be any structured activities provided to the students by xxxxx during a review of the books_and_records for fiscal periods ending july xxxx and july xxxx one of the responses to idr response number dated 20xx indicated that although xxxxx corporation has historically published newsletters and other communications for distribution among members and the members of the organization residing in the chapter houses owned by xxxxx xxxxx did not publish a communications during fiscal_year ending july 20xx also while reviewing the expenditures it was noted that minimal expenditures were incurred for social educational and recreational activities as most of this was attributable to sdollar_figure travel related expenses the remainder of the expenses_incurred were relating to the maintenance and operation of a rental property the total amount of expenditures incurred for this purpose amounted to sxxxxx or over of the expenses_incurred by xxxxx were for repairs and maintenance the organization suggested that i have an interview with xxxxx son a xxxxx upon conducting the interview over the phone it was noted that he lived in another state and had only come to the campus three or four times a year most of the discussion pertaining to the day to day operations came over the telephone and that none of the officers of the organization actually lived in the xxxxx area see exhibit for detail in order to receive additional clarification with respect to whether xxxxx met the commingling requirements under internal_revenue_code sec_501 idr number was issued 20xx requesting that the organization provide documentation regarding the activities conducted by xxxxx besides the maintenance and operation of a fraternity house the idr issued that the information document response could include a information relative to scholarship b mentor programs c fund- raising d and social activities form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items year period ended xxxxx 20xx the response dated 20xx reflected that the organization met in person maybe three to four times a year with the majority of the meeting occurring on line commingling of members is a material part in the life of an organization commingling is present if such things as meetings gatherings and regular facilities are evident with respect to the membership again it appears that the predominant activity is the leasing and rental of a property in which all of the renters happen to be fraternity members during a review of line of the forms for tax years ending july 20xx and july 20xxx it was noted that excess revenue over expenses amounted to sxxxxx and sxxxxx respectively during these tax years also the net assets of fund balances increased from sxxxxx to dollar_figuresxxxxx at the end of fiscal period ending july 20xx the organization did not turn any of this income over to another exempt_organization which is generally required in order to meet internal_revenue_code sec_501 furthermore as mentioned above the organization was given a determination_letter in august of 19xx the application and form_990 for tax_year ending july 20xx indicated that the organization’s primary purpose was the operation and maintenance of a fraternity house the stated purpose has not changed since the organization was granted exemption during the examination did not note any social recreational or educational activities that were conducted by this organization the organization has been operating in this manner and the irs approved the organization’s exempt status due to the fact that the irs approved this activity it did not appear that the correct course of action would be to propose revocation retroactively to the determination_letter which is august of 19xx but the effective date of revocation should be the first day of the first year under examination law internal_revenue_code sec_501 describes organizations organized and operated exclusively for social pleasure and recreational purposes and no part of the net_earnings of which inures to the benefit of any private shareholder internal_revenue_code sec_512 discusses special rules applicable to organizations described in paragraph and of sec_501 the term unrelated_business_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter exempt_function_income for purposes of this sub-section means the gross_income from dues fees charged or similar amounts paid_by members of the organization or consideration for providing goods and services in furtherance of the purposes constituting exemption form 886-a rev department of the treasury - internal_revenue_service page -3- hoe 886a department of the treasury - internal_revenue_service name of taxpayer year period ended explanation of items xxxxxk 20xx public law amended sec_501 to reflect a two-fold change under irc first it made it clear that c organizations may receive some investment_income without losing its exemption second it permits a higher level of non-member use of club facilities public law defines gross_receipts as those receipts from normal and usual activities of a club including charges admission fees membership dues fees assessments investment_income but excluding initiation fees and capital contributions public law also states that it its intended that social clubs can receive up to of its gross_income from investments from outside sources of their memberships without losing its tax-exempt status and up to of its income cannot be received from the general_public revrul_67_428 holds that an organization whose membership consists of entirely of artificial entities does not qualify for exemption revrul_67_428 emphasizes that artificial entities are incapable of producing the personal contacts and fellowship corporate members of a club are not the kind of members contemplated by the statute a club in permitting such a type of membership is such as the same dealing with corporations that have no connection with the club revrul_55_716 provides evidence with respect to definition of commingling in this instance the only activity done by the c was the operations and maintenance of the television antenna system providing television antenna service to its members in this instance fellowship does not constitute a material part of the operations the response provided in idr only reflected two instances of personal contact all of the rest of the meetings were held over the telephone in revrul_69_635 the principal purpose of this organization is rendering automobile services to its members there is no significant commingling with respect to this activity and therefore the membership did not qualify for exemption under internal_revenue_code sec_501 revrul_68_168 indicates that a non-profit organization that leases its building lots to its members on a long-term basis is not exempt revrul_64_118 indicates that an organization does not qualify for exemption as an educational_organization where its primary activity is to furnish on a rental basis a chapter house to a fraternity house composed of students internal_revenue_code c exempts from federal_income_tax corporations organized for the exclusive purpose of holding title to property collecting income therefrom and turning over the entire amount thereof less expenses to an organization which itself is exempt under sec_501 form 886-a rev department of the treasury - internal_revenue_service page -4- d form_886 a name of taxpayer explanation of items partment of the treasury - internal_revenue_service year period ended treasury - servi xxxxx 20xx sec_601_201 of the treasury regulations provides that a taxpayer may continue to rely ona determination_letter provided that the taxpayer acts within the scope for which it received its exemption sec_7805 of the internal_revenue_code_of_1986 as amended the code provides that the secretary of the department of treasury may prescribe the extent to which any ruling relating to the internal revenue laws shall be applied without retroactive effect to this end section dollar_figure of revproc_2017_5 indicates that revocation of a determination_letter may be retroactive when there has been a change in applicable law the organization omitted or misstated material information in its organizational documents or its exemption application the organization operated in a manner materially different from that originally represented in its application_for exemption section dollar_figure of revproc_2017_1 indicates that revocation will not be retroactive when there has been no change in applicable law there was a letter_ruling ie a determination that was originally issued for a proposed transaction and the taxpayer acted in good_faith in relying on the letter_ruling taxpayer’s positon xxxxx believes that the income that it received is considered exempt_function_income and that none of the income is taxable the taxpayer and his representatives indicate that the organization’s activities are consistent with its operations as stated in its form_1024 exhibit d of form_1024 indicated that xxxxx ’s predominant activities were owing a fraternity house on the campus of xxxxx university and leasing the house to a fraternity or sorority recognized as exempt under internal_revenue_code section because xxxxx provides a physical space that allows the fraternity or sorority lessee to engage in communal and social activities and therefore the income is considered exempt_function_income xxxxx proposed to amend its organizational documents so that the undergraduate members of xxxxx corporate members are also members of xxxxx the organization indicated that it would incorporate this language in the by-laws as indicated in the response in the december 20xx letter and more specifically the verified statement of michael xxxxx that was attached to the december letter and indicated in the response provided to information_document_request number there were several instances of commingling among xxxxx’s members the response to information_document_request letter listed instances of personal contact during the requested time period some of which involved multiple instances of commingling form 886-a rev department of the treasury - internal_revenue_service page -5- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service year period ended xxxxx 20xx xxxxx's operations are consistent with irs guidance on organizations that are exempt pursuant to code sec_501 for instance revrul_64_118 describes and organization that is organized for the purpose of aiding and assisting in education of students affiliated with a fraternity at college or university in this regard the primary activity of the organization is the operation and maintenance of a fraternity house on a rental basis for the use and benefit of the members of a local chapter of a fraternity the taxpayer believes under proper circumstances be classified as an exempt_organization xxxxx’s operations are consistent with irs guidance on organizations that are exempt pursuant to code sec_501 for instance revrul_64_118 describes and organization that is organized for the purpose of aiding and assisting in education of students affiliated with a fraternity at college or university in this regard the primary activity of the organization is the operation and maintenance of a fraternity house on a rental basis for the use and benefit of the members of a local chapter of a fraternity the taxpayer believes under proper circumstances be classified as an exempt xxxxx believes that it should not be subject_to retroactive revocation because it was operating ina manner it described in its form_1024 application and that it acted in good_faith in relying on its determination jetter specifically exhibit h of xxxxx form_1024 acknowledged that the undergraduate members living in xxxxx fraternity houses were not members of xxxxx but rather were members of xxxxx corporate members in 19xx the internal_revenue_service carefully considered xxxxx’s operations and issued a determination_letter ruling that such operations are exempt_activities described in code sec_501 and now twenty-three years later xxxxx has not deviated in any significant way from activities described in its application_for exemption and therefore xxxxx ’s activities deemed to be in compliance with its 19xx determination and xxxxx should be granted relief under code sec_7805 from retroactive revocation of its exempt status government’s position none of the rents came from the xxxxx or xxxxx xxxxx a result the organization received a of its income from the general_public also in various correspondences provided by xxxxx acknowledged that xxxxx undergraduate members living in the fraternity are not officially members of xxxxx all of the rent income came from individuals that were not members of xxxxx as or the individual members of the organization cannot retroactively amend its by-laws to conform to c status by changing the language to indicate that xxxxx are members of xxxxx and xxxxx form 886-a rev department of the treasury - internal_revenue_service page -6- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items year period ended xxxxx 20xx face to face interaction is important for members of a social_club organizations that do not afford opportunities for personal contact on a recurring basis do not meet the commingling requirements outlined in revrul_55_716 based on a review of the these other educational activities were not identified on the form_990 for tax_year ending july 20xx and july 20xx only after idr number was issued did the organization identify the fact the organization met to discuss civic and educational activities however the organization donated minimal time to these activities and did not record any activities in the minutes after taking income from expenses the organization had net_income of sxxxxx and increased its total net assets to sxxxxx in which none of the income was turned over to another tax-exempt_entity agree that retroactive revocation should not occur based on the fact that the organization’s activities have not materially changed since it was granted exemption however the organization did not qualify for exemption in 19xx and does not qualify in tax years ending july 20xx and july 20xx revocation is being proposed for the first day of the first tax_year under examination therefore revocation will only affect tax years ending july 20xx and july 20xx conclusion xxxxx does not qualify for exemption for the following reasons all of the organization income came from the general_public xxxxx does not meet the commingling aspect of internal_revenue_code sec_501 the organization cannot meet exemption when primary activity a sec_501 is leasing of a fraternity house xxxxx does not turn its income over to another exempt_organization and does not meet sec_501 the organization’s activities are not consistent with c purposes and therefore revocation cannot start the date that the report was issued the effective date of revocation will be august 20xx the first day of the first tax_year under examination alternative issue to revocation unrelated_business_income if revocation is not upheld a 990-t should have been filed for tax_year ending july 20xx form 886-a rev department of the treasury - internal_revenue_service page -7- form_886 a name of taxpayer explanation of items department of the treasury internal_revenue_service year period ended xxxxkx 20xx adjustment number increase in taxable_income unrelated_business_income per return unrelated_business_income per exam adjustment facts 20xx dollar_figure s dollar_figure during the examination the organization filed to report its income from non-member income on form 990-t for tax period ending july 20xx none of this income was considered exempt_function_income and therefore taxable law internal_revenue_code sec_512 defines unrelated_business_income as income derived by an organization from any unrelated_trade_or_business as defined in code sec_513 regularly carried on by it less the allowable deductions directly connected with the carrying on of such trade_or_business internal_revenue_code sec_513 the term unrelated_business_income means in the case of an organization subject_to tax imposed by sec_511 any trade_or_business the conduct which is not substantially related aside for the needs of such organization for the income of funds or the use it makes of the profits derived internal_revenue_code sec_512 discusses special rules applicable to organizations described in paragraph and of section s01 c the term unrelated_business_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter exempt_function_income for purposes of this sub-section means the gross_income from dues fees charged or similar amounts paid_by members of the organization or consideration for providing goods and services in furtherance of the purposes constituting exemption taxpayer's position form 886-a rev department of the treasury - internal_revenue_service page -8- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items year period ended xxxxx 20xx the organization believes the income from rents it considered exempt_function_income and thus is excludable as taxable_income government's position income from rents is not considered exempt_function_income and is thus taxable conclusion all the income received by the organization is considered taxable_income adjustment number increase in expenses line facts all of the expenses associated with the activities conducted by the organization are considered rental expenses with the exception of the sxxxxx for travel related expenses for conferences as well as to meet with the students of the fraternity therefore sxxxxx can be used to offset unrelated_business_income law internal_revenue_code sec_512 allows for deductions that are directly connected to the income generating activities conclusion expenses that are directly related to the rental expenses can be used to offset unrelated_business_income adjustment number increase in specific deduction allowance facts if the organization generates any unrelated_business_income the organization is entitled to a specific deduction allowance s law form 886-a rev department of the treasury - internal_revenue_service page -9- department of the treasury - internal_revenue_service form_886 a name of taxpayer year period ended explanation of items 20xx xxxxx internal_revenue_code sec_512 allows a specific deduction of dollar_figure unrelated_business_income to be offset against conclusion the organization is allowed a specific deduction allowance of dollar_figure form 886-a rev page -10- department of the treasury - internal_revenue_service


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date cc ita b04-------------- conex-132657-05 office_of_chief_counsel number info release date uil the honorable arlen specter united_states senator walnut street p o box harrisburg pa attention mr doug rice dear senator specter thank you for your letter dated date on behalf of your constituent ---------------- ---------------------- on mutual_fund transactions ----------- requested information pertaining to the requirements of specific identification in the sale of mutual_fund shares mr doug rice of your office asked us to respond directly to ----------- we spoke with - ----------- and explained to his satisfaction that his inquiry was answered in sec_1_1012-1 of the income_tax regulations we have forwarded a copy of sec_1_1012-1 as well as publication mutual_fund distributions to ----------- we have enclosed a copy of our response and the materials provided to ----------- for your records i hope this information is helpful if you have any questions please call me at ------------- ---------------------or ------------------------- identification_number ------------- at ------------- ------------------ sincerely edward s cohen deputy associate chief_counsel income_tax accounting enclosures


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-119756-00 date date legend x d1 this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 x intended to be treated as an s_corporation for federal_income_tax purposes effective on d1 but the s election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year plr-119756-00 x did not file a timely election to be treated as an s_corporation under sec_1362 effective on d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer s dianna k miosi sincerely chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------ --------------------------- ------------------------------------------- ------------------------------------------------------------ ------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc ita plr-115083-18 date date ty ------- legend taxpayer parent related_party ------------------------- related_party ---------------------------------------- x -------------------------- --------------------------------------------- ----- dear ----------------------- this ruling refers to a request for a private_letter_ruling dated date concerning whether payments to taxpayer by related_party and related_party as reimbursement of a branded_prescription_drug_fee paid_by taxpayer are includible in taxpayer’s gross_income facts related_party is a foreign_corporation and the common parent of related_party a foreign_corporation and parent a u s_corporation parent is the common parent of an affiliated_group_of_corporations which includes parent’s united_states subsidiary taxpayer related_party related_party parent and taxpayer are collectively referred to as the group the group develops manufactures and distributes prescription drugs and other medical_care products related_party and related_party are the intellectual_property holders of the prescription drugs which they manufacture related_party and related_party contract with taxpayer to distribute the prescription drugs in the united_states taxpayer is a limited risk distributor whose operating_profit margin approximates x percent of sales of the prescription drugs all remaining profits accrue to related_party and related_party plr-115083-18 the patient protection and affordable_care_act public law stat as amended by section of the health care and education reconciliation act of public law stat collectively the aca imposes a branded prescription drug bpd fee on entities that manufacture or import branded prescription drugs for sale to specified government programs aca sec_9008 and sec_51_2 generally require controlled groups to be treated as a single entity for purposes of the bpd fee sec_51_2 requires controlled groups to select a designated entity to act for the controlled_group by filing reports relating to the bpd fee and paying the bpd fee to the u s treasury aca sec_9008 and sec_51_8 provide that all members of a controlled_group are jointly and severally liable for the bpd fee taxpayer represents that taxpayer parent related_party and related_party are jointly and severally liable for the bpd fee on sales of branded prescription drugs that are manufactured by related_party and related_party and distributed by taxpayer because they are part of a controlled_group within the meaning of aca sec_9008 and sec_51_2 although parent is the named designated entity for the payment of the bpd fee the labeler code of the national drug code identifies taxpayer as the manufacturer or importer of the branded prescription drugs taxpayer remits the payment of the fee to the u s treasury on behalf of the group related_party and related_party reimburse taxpayer for this fee according to their contracts with taxpayer taxpayer has requested a ruling that the payments to taxpayer from related_party and related_party as reimbursement of the bpd fee are not includible in taxpayer’s gross_income law and analysis sec_61 generally provides that gross_income means all income from whatever source derived the term income is broadly defined as instances of undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 it is well-established that the payment of the expenses of a taxpayer by another is includible in the taxpayer’s gross_income see eg 279_us_716 in contrast a taxpayer does not have gross_income when it pays the expenses of another person and the person reimburses the taxpayer for the payments expenditures of this nature are analogous to loans in which the taxpayer is the lender and the party for whom the expense is paid and who reimburses the taxpayer for paying the expense is a borrower see eg revrul_67_407 1967_2_cb_59 a corollary to these principles is that when a taxpayer pays the expenses of another person primarily to advance the business interests of the other person the reimbursements are not includible in the gross_income of the taxpayer notwithstanding plr-115083-18 any incidental or indirect economic benefit to the taxpayer see eg 401_f2d_118 5th cir expenses paid for auto dealer by european manufacturer for trip to germany to tour facilities as required by manufacturer held not includible in auto dealer’s gross_income because the costs for the taxpayer-dealer’s trip were incurred primarily for the payor-manufacturer’s benefit covered entities must pay a branded_prescription_drug_fee under sec_9008 of the aca sec_9008 defines a covered_entity as any manufacturer or importer with gross_receipts from branded prescription drug sales sec_9008 defines branded prescription drug sales as sales of branded prescription drugs to any specified government program or pursuant to coverage under such program these programs are the medicare part b program the medicare part d program the medicaid program any program under which branded prescription drugs are procured by the department of veterans affairs any program under which branded prescription drugs are procured by the department of defense and the tricare retail pharmacy program sec_51_2 of the branded_prescription_drug_fee regulations defines a covered_entity in general as any manufacturer or importer with gross_receipts from branded prescription drug sales including a single-person covered_entity or a controlled_group sec_51_2 defines a manufacturer or importer as the person identified in the labeler code of the national drug code for the branded prescription drug sec_51_2 defines a controlled_group as a group of two or more persons including at least one person that is a covered_entity that is treated as a single employer under sec_52 sec_52 sec_414 or sec_414 sec_51_8 states in the case of a controlled_group that is liable for the fee all members of the controlled_group are jointly and severally liable for the fee accordingly if a controlled group's fee is not paid the irs will separately assess each member of the group for the full amount of the controlled group's fee sec_51_2 provides that a foreign_entity subject_to tax under sec_881 is included within a group under sec_52 or sec_52 sec_51_2 provides that a person is treated as being a member of a controlled_group if it is a member of the group at the end of the day on december 31st of the sales year the branded_prescription_drug_fee is treated as a nondeductible tax under sec_275 of the code see aca sec_9008 and sec_51_9 plr-115083-18 joint_and_several_liability it is clear from the law cited above and taxpayer’s representations that taxpayer parent related_party and related_party are jointly and severally liable for the branded_prescription_drug_fee that taxpayer remits on behalf of the group gross_income although taxpayer arguably receives an accession to wealth when related_party and related_party reimburse it for paying the bpd fee all three parties are jointly and severally liable for of the fee the irs has the right to assess and collect the full amount of the fee against any member or combination of members of the group however it does not have the right to assess and collect more than of the fee here the parties have agreed according to their distribution contracts that related_party and related_party will bear the economic burden of of the bpd fee because they are the ip holders of the branded prescription drugs and they are the primary economic beneficiaries of the sales of these drugs taxpayer receives of the bpd fee from them and pays it directly to the u s treasury in a pass-through transaction taxpayer does not have complete dominion over these funds nor does it receive a tax_benefit in the form of a deduction from making this payment because sec_275 blocks such a deduction when viewed in the context of the group members’ respective businesses and contractual relationships with each other taxpayer’s actions in remitting the bpd fee most closely resemble the actions of a conduit that is merely receiving and paying the liability on behalf of other members of the group who are the primary economic beneficiaries of the profits from the branded prescription drug sales see eg 14_tc_965 payments received from franchisee bottling companies for a national advertising campaign not includible in franchisor’s gross_income because franchisor was obliged to spend the funds on the advertising campaign revrul_84_128 1984_2_cb_123 subsidiary’s pro_rata payment of shared administrative expenses to parent not includible in parent’s gross_income this situation is distinguishable from that in revrul_2013_27 2013_51_irb_676 in which an insurance_company collected extra amounts from its policy holders to pay a fee imposed on health insurers under the aca in that situation the fee was imposed on the insurer not jointly on the insurer and its policyholders the revenue_ruling concludes that the fee whether or not separately_stated on the insurer’s invoices to its policyholders was not distinguishable from other costs of doing business that are traditionally passed on to a business’s customers accordingly the insurer was not entitled to exclude from gross_income the amounts collected from its policyholders for the fee plr-115083-18 conclusion based on the information submitted and representations made we conclude that the payments to taxpayer by related_party and related_party as reimbursement of the branded_prescription_drug_fee are not includible in taxpayer’s gross_income under sec_61 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 requesting it sec_6110 of the code 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 two of your authorized representatives a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely angella l warren chief branch office of associate chief_counsel income_tax accounting enclosure ---------------- we express no opinion as to whether our conclusion might be different if taxpayer or another u s taxpayer-member of the controlled_group were entitled to a deduction for paying the bpd fee whether the payment was made by direct remittance or by reimbursing a related_party for remitting the payment because sec_275 prohibits such a deduction for u s taxpayers we need not consider the effect of such a deduction on our analysis


internal_revenue_service number release date index number ---------------------- ------------------------- ------------------------------------- attn --------------------- -------------------- ------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number -------------------- refer reply to cc ita b02 plr-130426-17 date february ty date legend taxpayer date date date date date a b c d dear ------------------ ------------------------------------- --------------------------- --------------------------- --------------------- ------------------ ------------------- ---- -------------- --------------------- ---------------------------------------------- this is in response to your letter dated date requesting permission to file a copy of the request to use the alternative_cost_method with the a director for the region of your principal_place_of_business for your taxable_year ending date the copy of the request to use the alternative_cost_method was not timely filed with the a director for the region of your principal_place_of_business although it was required in order for taxpayer to use the alternative_cost_method of accounting in conformity with the requirements of revproc_92_29 1992_1_cb_748 the request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts taxpayer represents the following plr-130426-17 taxpayer is a b real_estate builder and developer taxpayer files a consolidated federal_income_tax return taxpayer sold the initial home in one or more communities under development in the taxable_year beginning date and ending date taxpayer used the alternative_cost_method described in sec_4 of revproc_92_29 to compute the gain_or_loss on the homes sold in those communities during the year on its federal_income_tax return for the taxable_year ending date taxpayer filed its original federal_income_tax return for the taxable_year ending date on date taxpayer intended to determine the estimated cost of common improvements with regard to the ten-taxable year horizon as defined in section dollar_figure of revproc_92_29 taxpayer attached the following to its return for the taxable_year ending date i a request to use the alternative_cost_method on a project-by-project basis and ii a form_921 consent to extend the time to assess income_tax extending the period of limitation on the assessment of tax with respect to the use of the alternative_cost_method on a project-by-project basis taxpayer failed to file a duplicate of the request to use the alternative_cost_method with the a director for the region of its principal_place_of_business on or before the due_date of the return including extensions for the taxable_year ending date taxpayer’s c completed the duplicate request but failed to timely mail it taxpayer was in the process of d at the time the request was due and inadvertently misplaced the request taxpayer’s c discovered this oversight on date taxpayer represents that other than timely filing a duplicate copy of the request with the a director it qualifies to use the alternative_cost_method law revproc_92_29 1992_1_cb_748 provides rules for the treatment of common improvement costs and an automatic procedure for developers to follow to use the alternative_cost_method generally consent to use that method is conditioned on the following the developer must be contractually obligated or required_by_law to provide the common improvements and the cost of the common improvements must not be properly recoverable through depreciation by the developer the developer must file a request to use the alternative_cost_method on a project- by-project basis in accordance with the procedures set forth in section of revproc_92_29 these procedures include a requirement to file the request with the district_director for the internal_revenue_district in which is located the principal_place_of_business of the person required to make the return on or before the due_date of the developer’s original federal_income_tax return determined with regard to extensions of time for the taxable_year in which the first benefitted property in the project is sold plr-130426-17 the developer must sign a consent extending the period of limitation on the assessment of income_tax with respect to the use of the alternative_cost_method on a project-by-project basis as described in section of revproc_92_29 the developer must file an annual_statement for each project for which the developer has received permission to use the alternative_cost_method in accordance with section of revproc_92_29 the developer must file a supplemental request for each project if required pursuant to section of rev_proc taxpayer requests permission with this ruling_request to file a copy of the request to use the alternative_cost_method with the a director for the region of its principal_place_of_business sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through 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 sec_301_9100-3 provides that requests for extensions of time for regulatory elections other than automatic changes covered under sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the internal_revenue_service irs ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the irs or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election plr-130426-17 sec_301_9100-3 provides that a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the irs will not ordinarily grant relief sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or in any other setting and the change would provide a more favorable method or more favorable terms and conditions than if the change were made as part of an examination or provides a more favorable method_of_accounting or more favorable terms and conditions if the election is made by a certain date or taxable_year ruling based upon our analysis of the facts and representations provided taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file the copy of the request to use the alternative_cost_method with the a director for the region of its principal_place_of_business for its taxable_year ending date plr-130426-17 caveats 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 no opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the internal_revenue_code and the treasury regulations that may be applicable or under any other general principles of federal income_taxation this letter_ruling is only applicable to matters under our jurisdiction see revproc_2018_1 2018_1_irb_1 sec_3 no opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling in particular no opinion is expressed as to whether taxpayer qualifies to use the alternative_cost_method this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosed is a copy of this letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 we are sending a copy of this letter to the appropriate operating division director sincerely ______________________________ bridget e tombul branch chief branch office of the associate chief_counsel income_tax accounting enc copy for sec_6110 purposes


internal_revenue_service uniform issue list department of the treasury washington dc person to contact telephone number refer reply to t ep ra t3 date mar - legend corporation a entity b companyc entity d entity e entity f entity g corporation h corporation plan x dear this is in response to your request for a ruling dated date supplemented by letters dated date date and date and facsimile dated date submitted by your authorized representative concerning distributions from a plan described page in sec_401 k of the internal_revenue_code code your authorized representative submitted the following facts and representations in support of the requested ruling corporation a maintains plan x a profit-sharing_plan which includes a cash_or_deferred_arrangement coda as described in sec_401 of the code plan x is a prototype document to which the internal_revenue_service service has issued a favorable opinion letter corporation a has received a favorable determination_letter from the service with respect to its adoption of such prototype_plan prior to the transactions described herein corporation a owned eighty-eight percent of the outstanding equity interests in entity b which in turn owned one hundred percent of the outstanding equity interests in entity e corporation a also owned one hundred percent of corporation h which owned one hundred percent of entity f which in turn owned one hundred percent of the outstanding equity interests in two subsidiaries entity b entity e and entity f are adopting employers of plan x in a complex and interrelated series of transactions between corporation a and corporation h and their related entities three types of transactions occurred that affected the employees who participated in plan x first substantially_all of the assets and liabilities of entity b were transferred to company c company c for tax purposes one hundred percent of the ownership_interest of company c d which is taxed as a partnership is a limited_liability_company that is a disregarded_entity is held by entity second entity e was merged into company c third corporation h contributed all of its equity_interest in entity f to entity b entity b then merged entity f into its wholly-owned subsidiary entity g a newly-formed limited_liability_company and then entity b contributed the stock of entity g to company c so that entity g became a wholly-owned subsidiary of company c_corporation a continues to have a substantial indirect ownership_interest in entity d it retains the right to elect two of the minimum of seven board members of entity d and its subsidiaries including company c and to submit its preferences on major corporate issues as a result of the foregoing transactions the employees of company c and its subsidiaries no longer participate in plan x plan x will make lump sum distributions as soon as possible to employees who have been hired by company c affected employees plan x will make no distributions to the employees who have continued employment with corporation a corporation a will continue to maintain plan x for the benefit of its employees plan x provides generally for the distribution of a participant's vested account balance under the plan in the type of transactions described above but only with respect to a participant who continues employment with the acquiring_corporation plan x also provides that such distributions shall be made in the form of a lump sum to the affected participants no later than the end of the second calendar_year after the calendar_year in which the sale occurred a bet ry arseoras mine oc sie page based on the foregoing facts and representations you have requested the following rulings that the transfer of assets and liabilities of entity b to company c by corporation a constitutes a disposition by a corporation of substantially_all of the assets used by corporation a in a trade_or_business of such corporation within the meaning of sec_401 k a ii of the code that the merger of entity e into company c and the transfer of entity g to company c as a subsidiary is a disposition by entity b of its interest in subsidiaries within the meaning of sec_409 and sec_401 of the code that the distribution as soon as administratively possible after this ruling is granted and within one tax_year to each affected employee of the entire balance in his or her account in plan x on account of the above-described transactions will constitute an eligible_rollover_distribution within the meaning of sec_402 of the code that each affected employee who rolls over his or her distribution from plan x in accordance with sec_402 of the code or who elects to have his or her distribution paid directly to another eligible_retirement_plan in accordance with sec_402 of the code will not be required to include the proceeds representing his or her interests in plan x in his or her income in the year of distribution sec_401 k b of the code provides in relevant part that distributions from a qualified_cash_or_deferred_arrangement may not be made earlier than the occurrence of certain stated events sec_401 provides that two of these stated events are ii the disposition by a corporation of substantially_all its assets within the meaning of sec_409 used by such corporation in a trade_or_business of such corporation to an unrelated corporation but only with respect to an employee who continues employment with the corporation acquiring such assets and iii the disposition by a corporation of such corporation’s interest in a subsidiary within the meaning of sec_409 but only with respect to an employee who continues employment with such subsidiary in regard to ruling_request one corporation a disposed of the entity b assets by transferring them to company c a limited_liability_company which is a disregarded_entity for tax purposes being owned by entity d which is taxed as a partnership since the disposition was not to a corporation we conclude that the above-described disposition of assets was not a disposition within the meaning of sec_401 of the code in regard to ruling_request two corporation a has retained a substantial indirect ownership_interest in entity d and a continuing role in its governance subsequent to corporation a’s disposition of company c accordingly we conclude that the above-described merger of entity e and transfer of entity g into company c are not dispositions within the meaning of sec_401 viva page because of our conclusions in the first and second ruling requests the issues presented in the third and fourth ruling requests are moot this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent this ruling is based on the assumption that plan x continues to be qualified under sec_401 a of the code at all relevant times a copy of this ruling has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter notice of intention to disclose ce es


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-156558-02 date date legend corporation shareholder date state dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_1362 of the internal_revenue_code facts corporation was incorporated under the laws of state on date corporation intended to be taxed as an s_corporation but failed to file timely a form_2553 election by a small_business_corporation applicable law sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation for federal tax purposes sec_1362 governs the timeliness of such an election as well as its effective date generally if an election to be treated as an s_corporation is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation beginning in the year in which the election was made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as having made an effective election to be treated as an s_corporation for federal tax purposes until the following taxable_year sec_1362 provides that if an election to be treated as an s_corporation plr-156558-02 for federal tax purposes is either made untimely or not made at all and the secretary determines that there was reasonable_cause for the failure to make a timely election then the secretary may treat the corporation as having made a timely election conclusion based on the facts submitted and representations made we conclude that corporation has established reasonable_cause for failing to make a timely election to be an s_corporation accordingly provided corporation files a completed form_2553 effective date with the appropriate service_center within days from the date of this letter such election will be treated as timely made a copy of this letter should be attached to the form_2553 and is enclosed for that purpose except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code specifically we express or imply no opinion concerning whether corporation otherwise qualifies as an s_corporation for federal tax purposes 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 a power_of_attorney on file with this office a copy of this letter is being forwarded to your authorized representative sincerely yours jeanne m sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court john edward rapp and cammie a rapp petitioners v commissioner of internal revenue respondent docket no 12411-14s filed date john edward rapp and cammie a rapp pro_se mistala m cullen and clint t hale for respondent summary opinion leyden special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure and dollar_figure for and respectively after concessions the sole issue for decision is whether petitioners are entitled to deduct rental real_estate losses for and the resolution of that issue depends on whether for and petitioner john edward rapp3 was a real_estate_professional or in the alternative petitioners’ modified_adjusted_gross_income was less than dollar_figure the court concludes mr 1all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 2petitioners conceded that they received dollar_figure of interest_income in the other adjustments in the notice_of_deficiency to itemized_deductions the sec_36a making_work_pay_credit and the child_tax_credit for and are computational the adjustments will be resolved by the court’s resolution of the sole issue for and and will not be discussed further 3during and petitioner cammie a rapp was president and chief_executive_officer of a nonprofit organization she was not a licensed real_estate salesperson or broker during or mrs rapp did not participate in the rental_real_estate_activities for the rental properties she and her husband owned mrs rapp appeared at trial but she did not testify rapp was not a real_estate_professional for either or and petitioners’ modified_adjusted_gross_income exceeded dollar_figure for both and background some of the facts are stipulated and are so found the first stipulation of facts the first supplemental stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in california when they timely filed their petition i mr rapp’s employment during and during and mr rapp was a full-time_employee of two companies from and until mid-date mr rapp was employed by kz devco llc kz devco a development service company that developed retail commercial real_estate according to the testimony of one of its members kz devco provided a platform for other real_estate people to be involved in developing commercial real_estate 4the parties stipulated that mr rapp was licensed as a real_estate salesperson by the state of florida during and the parties also stipulated that mr rapp is licensed as a salesperson by the state of california bureau of real_estate the present tense verb indicates that at the time of trial mr rapp was licensed as a salesperson in the state of california and does not indicate whether he was licensed during and the years at issue as a full-time_employee of kz devco mr rapp earned wages of dollar_figure and dollar_figure in and respectively while at kz devco mr rapp worked to cultivate the development of retail commercial real_estate for kz devco’s clients mostly for one of its major clients a retail pharmacy company during the years at issue mr rapp did not own any membership interests in kz devco nor did he own or more of kz devco’s capital or profits instead the owners of kz devco offered mr rapp the opportunity to own equity interests in projects he developed according to the testimony of one of the owners of kz devco the company agreed that if mr rapp developed a project kz devco would create a special-purpose entity in which he would receive an equity_interest however during and mr rapp did not develop any projects and he did not own any interest in any special-purpose entity created by kz devco mr rapp was also employed as a retail sales manager by united el segundo then doing business as united oil co united from date to date as an employee of united mr rapp earned wages of dollar_figure in of that amount dollar_figure was an employee bonus for his efforts in selling a business owned by united and negotiating a ground lease during mr rapp did not own ownership interests in united nor did he own or more of united’s capital or profits ii petitioners’ and tax returns petitioners timely filed their joint federal individual income_tax returns for tax_return and tax_return petitioners’ and tax returns were prepared by an enrolled_agent petitioners filed schedules e supplemental income and loss with their and tax returns reporting gross rental income and expenses for the following six rental real_estate properties address on return city san francisco cordova buena park cajon avondale s 114th jamestown rd phoenix w forest grove tolleson buckeye so 220th ln state cal cal ariz ariz ariz ariz for and petitioners reported net profits for the buena park california rental property and reported net losses for the five other rental properties petitioners did not report any other income from rental real_estate or property management for or petitioners claimed rental real_estate loss deductions of dollar_figure and dollar_figure for and respectively after examining petitioners’ tax return5 and tax_return respondent issued petitioners a notice_of_deficiency on date for both years disallowing their claimed schedule e rental real_estate loss deductions and making several computational adjustments see supra note i burden_of_proof discussion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect see rule a 290_us_111 morever deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed 503_us_79 292_us_435 under sec_7491 the burden_of_proof may shift to the commissioner if the taxpayer produces credible_evidence with respect to any relevant factual issue and meets other requirements petitioners have not argued that sec_7491 applie sec_5petitioners signed two form sec_872 consent to extend the time to assess tax for the first form signed on date extended the time to assess tax to date the second form signed on date further extended the time to assess tax to date nor established that its requirements are met the burden_of_proof remains with petitioners ii whether mr rapp’s rental_real_estate_activities were passive activities sec_162 and sec_212 generally permit a taxpayer to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business or for the production_of_income in the case of an individual sec_469 generally disallows any current deduction for a passive_activity_loss sec_469 a a passive_activity_loss is equal to the aggregate losses from all passive activities for a taxable_year over the aggregate income from all passive activities for that year sec_469 generally a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 rental_activity is generally treated as per se passive regardless of whether the taxpayer materially participates see sec_469 however a taxpayer may deduct rental real_estate losses if the 6the effect of the passive_activity_loss disallowance rule is that deductions related to passive activities are allowed against income from passive activities and the excess ie the amount by which the deductions related to the passive activities exceed the income from passive activities cannot be deducted from income from activities other than passive activities see 279_f3d_547 7th cir aff’g 114_tc_366 taxpayer meets the requirements for the exceptions provided under sec_469 or i the court addresses each exception below a mr rapp did not meet the definition of a real_estate_professional under sec_469 whether the rental real_estate loss deductions petitioners claimed for and are deductible without limitation under the passive_activity_loss rules depends on whether mr rapp met the definition of a real_estate_professional under sec_469 for the years at issue the court concludes mr rapp did not meet the definition of a real_estate_professional under that section for or rental real_estate activity is per se passive unless the taxpayer is a real_estate_professional as defined in sec_469 sec_469 if a taxpayer meets that definition the sec_469 disallowance does not apply and the taxpayer’s rental real_estate activity if conducted as a trade_or_business or for the production_of_income is not treated as a passive_activity if the taxpayer materially participates in the activity sec_469 a fowler v commissioner tcmemo_2002_223 tax ct memo lexis at sec_1_469-9 income_tax regs the court concludes mr rapp was not a real_estate_professional for either or because he did not meet the time requirements of sec_469 therefore the court does not need to address the definition of material_participation set forth in sec_469 to qualify as a real_estate_professional a taxpayer must own at least one interest7 in rental real_estate and meet both tests under sec_469 the first test requires that more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates sec_469 the second test requires that the taxpayer perform more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 failure to satisfy either test means that mr rapp was not a real_estate_professional and that the losses from petitioners’ rental_real_estate_activities are not deductible under the sec_469 exception to the passive_activity_loss limitations 7respondent contends that petitioners did not make an election to treat all of their rental real_estate interests as one activity see sec_469 flush language the court does not address this contention having found as discussed infra pp that petitioners failed to show that mr rapp spent more than hours on any or all of the rental_real_estate_activities on the basis of the record the court concludes mr rapp’s rental_real_estate_activities constituted real_property trades_or_businesses for and see sec_469 however petitioners have failed to prove how much time mr rapp spent on his rental_real_estate_activities a taxpayer may use any reasonable means to establish his hours of participation sec_1_469-5t temporary income_tax regs fed reg date contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means id reasonable means may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries id the court has held that the regulations concerning the records to be maintained by taxpayers by no means allow a postevent ‘ballpark guesstimate’ carlstedt v commissioner tcmemo_1997_331 tax ct memo lexis at citing speer v commissioner t c memo a taxpayer’s uncorroborated testimony need not be relied upon bailey v commissioner tcmemo_2001_296 tax ct memo lexi sec_332 at the court is not required to accept unverified testimony of taxpayers in the absence of adequate documentation see eg lum v commissioner tcmemo_2012_103 tax ct memo lexi sec_102 at estate of stangeland v commissioner tcmemo_2010_185 tax ct memo lexi sec_221 at in the petition petitioners assert mr rapp dedicated an excess of hours per year to real_estate activities mr rapp testified that he was the property manager for five of petitioners’ rental real_estate properties other than petitioners’ assertion and mr rapp’s testimony petitioners did not provide any evidence showing how much time mr rapp spent on the rental_real_estate_activities during the years at issue mr rapp testified that he was unaware of the tax laws in and that required him to document the time spent on his real_estate activities ignorance of his responsibility to keep records of his real_estate activities does not relieve mr rapp of the requirement to do so see 142_tc_151 furthermore although mr rapp asserts that he did possess some employment in and the record shows that he was a full-time_employee during both and in fact one of mr rapp’s employers testified that mr rapp worked long nights and weekends as an employee during the years at issue the court concludes mr rapp did not spend anywhere near hours with respect to petitioners’ rental_real_estate_activities during or mr rapp also argues that the revenue generated from the rental_real_estate_activities was higher than his wages for both of the years at issue thereby qualifying him as a real_estate_professional the real_estate_professional test under sec_469 is measured by hours not revenue even so mr rapp’s argument is contrary to the evidence in the record for mr rapp reported wages of dollar_figure and petitioners reported gross rents from their rental real_estate of dollar_figure for mr rapp reported wages of dollar_figure and petitioners reported gross rents from their rental real_estate of dollar_figure petitioners assert that mr rapp’s time spent as an employee of kz devco should be considered in calculating the 750-hour requirement in computing the number of hours a taxpayer performs services in real_property trades or business generally personal services performed by an employee shall not be treated as performed in real_estate trades_or_businesses sec_469 however if the employee is a owner of the employer as defined in sec_416 then the employee’s personal services may be treated as performed in the real_estate trade_or_business of the employer id if the employer is a corporation then the employee is a owner if he owns more than percent of the outstanding_stock of the corporation or stock possessing more than percent of the total combined voting power of all stock of the corporation sec_416 if the employer is not a corporation then the employee is a owner if he owns more than percent of the capital or profits interest in the employer sec_416 during and mr rapp was employed by kz devco and united kz devco was a limited_liability_company for and the record does not indicate whether united was a corporation regardless mr rapp did not own any stock or capital or profits in either employer therefore the personal services mr rapp performed as an employee for either employer are not considered for purposes of the 750-hour requirement petitioners have not met their burden of proving that in or mr rapp spent more than hours performing services connected with petitioners’ rental_real_estate_activities accordingly petitioners may not deduct the rental real_estate losses claimed on their and tax returns under the real_estate_professional exception provided under sec_469 b petitioners’ rental real_estate business does not qualify them for the relief provided under sec_469 sec_469 provides a second exception to the general_rule that losses from rental_real_estate_activities are limited under the passive_activity rules of sec_469 under sec_469 a taxpayer who actively participates in rental_real_estate_activities may deduct up to dollar_figure per year for related passive_activity_losses sec_469 and a taxpayer may satisfy the active_participation requirement by participating in management decisions such as approving new tenants deciding rental terms and arranging for services and repairs madler v commissioner tcmemo_1998_112 tax ct memo lexi sec_111 at the court concludes petitioners do not qualify for the exception provided under sec_469 for either or the dollar_figure deduction amount begins to phase out when the taxpayer’s adjusted_gross_income agi determined without regard to any passive_activity_loss modified agi exceeds dollar_figure and is phased out entirely when the taxpayer’s agi reaches dollar_figure sec_469 the court does not need to determine whether mr rapp actively participated in petitioners’ rental_real_estate_activities because petitioners’ modified agi exceeded the dollar_figure ceiling under sec_469 for both of the years at issue for petitioners’ reported agi was dollar_figure the amount of disallowed passive_activity_loss for that year is dollar_figure therefore petitioners’ modified agi for for purposes of the exception under sec_469 was dollar_figure for petitioners’ reported agi was dollar_figure the amount of disallowed passive_activity_loss for that year is dollar_figure therefore petitioners’ modified agi for for purposes of the exception under sec_469 was dollar_figure for both and petitioners’ modified agi exceeded the ceiling for the phaseout under sec_469 the court concludes petitioners do not qualify for the exception under sec_469 for or the court has considered the parties’ arguments and to the extent not discussed herein the court concludes the arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index numbers ----------------------------- --------------------------------------------------- ------------------------------------------------------------ ----------------------- ------------------------ ------------------------------------------------------------ ------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-112165-09 date date legend x --------------------------------------------------------------------------------------------- --------------------------------------------------- ---------------------------------------------------- d country ------------------------- ---------------- dear --------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d plr-112165-09 law and analysis sec_301_7701-3 provides 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 a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 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 internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-112165-09 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 the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 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 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 your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes