tax_exempt_and_government_entities_division release number release date org address department of the treasury internal_revenue_service attn mandatory review mc dal commerce st dallas tx 501-dollar_figure date employer_identification_number person to contact id number contact numbers voice fax certified mail - return receipt requested dear ' in a determination_letter dated september 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined that you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter in regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on february 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you have filed taxable returns on form_1120 u s_corporation income_tax return for the year s ended december 20xx and december 20xx with us for future periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return 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 have not 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 fiave any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx legend org - organizationname state motto-motto issue ein-ein xx-date city-city county- county state - co-1 co-2 co-3 - companies whether the org org was operated exclusively for exempt purposes described per internal_revenue_code irc sec_501 a was the org engaged primarily in activities that accomplish an exempt_purpose and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes b was the membership of the org properly limited to the employees of a designated person or persons in a particular municipality c were benefits provided to the members in excess of the benefits permissible per sec_501 facts background of org org’s articles of incorporation the org org was initially incorporated in the state of state on february 19xx the org is currently tax exempt under sec_501 as a local association of employees per the articles of incorporation the purpose of the organization was to e e e do all things necessary to advance the welfare training and effectiveness of the members of the corporation by the establishment and maintenance of training courses classes and schools_for instruction in police science detection psychology public relations and any other subjects considered desirable for motto purchase and acquire books apparatus or equipment for the maintenance of training facilities and a motto’ library for_the_use_of its members and such other persons as may be admitted to the use thereof by the board_of directors to promote organize and encourage target practice both formal and informal with all types of firearms used by motto to hold and encourage organized shooting matches and meets both intra-departmental and inter-departmental with such weapons form 886-a cev page -1- department of the treasury - internal_revenue_service form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx e e e to promote citizenship and high standards of conduct for the youth of the county by supervising financing or assisting individuals rifle clubs traffic patrols and other organizations among minors of the county to fix and collect dies and assessments from its members and to enforce the payment of the same by forfeiture of membership for non-payment under such conditions are specified in the by-laws to provide material for personnel for the giving of educational talks for service clubs and other organizations in the interest of better relations between motto and the citizens the organization performed the aforementioned activities throughout the first twenty years of its existence per the articles of incorporation the association focused on training and increasing the effectiveness of its motto membership who were located in the county in state the organization also promoted the citizenship and high standards of conduct of its youth per social programs administered by the corporation form application_for tax exempt status org submitted form_1024 application_for recognition of exemption under sec_501 of the internal_revenue_code to the internal_revenue_service irs on august 19xx the activities of the corporation as performed in 19xx were detailed on form_1024 per form_1024 the purpose of the org in 19xx was to promote the welfare education training and recreation of its members which is consistent with the exempt_purpose as defined per sec_501 for a local association of employees specifically form_1024 defined the following changes in activities from the initial articles of incorporation filed with the state of state e e the primary fundraising activity is an annual fundraising dance the association operates a small store which sells work-related equipment to its members’ furthermore form_1024 detailed the nature of the activities that were performed in 19xx by the org and were intended to be carried on in the future by the association the activities performed by the association as described via form_1024 and approved for tax exempt status by the irs were as follows ek kek k ' revenue_agent conducted an interview with the org’s executive director during the examination the executive director informed the agent that the small store mentioned on form_1024 used to be located within the facility and was less accessible to the public form 886-a rev department of the treasury - internal_revenue_service page -2- form_8 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org ein ein 20xx conducting motto advanced beginning and refresher-training classes operation of a retail store which sells work-related equipment membership dinner meetings operation of a junior rifle club member life_insurance publication of a monthly newsletter per form_1024 the org stated that its funds would be expended for the following purposes quarterly membership dinner meetings operation of a junior rifle club life_insurance for some members annual association ball publication of a monthly newsletter form_1024 defines the eligibility of membership requirement as anyone employed as a motto within the county in the state of state for the purpose of membership form_1024 defines a motto per section of the penal code of the state of state in september 19xx the internal_revenue_service service issued a determination_letter to org as sec_501 activities performed during the year under examination 20xx subsequent to the irs granting tax exempt status to org in september 19xx its activities evolved over time examination of the org for the 20xx calendar_year agent noted the following changes regarding org’s activities from its aoi and form in september 20xx the service conducted an during the examination the membership policy the agent discovered that org’s membership requirement were materially different according to form_1024 a member of than the requirement set forth in its form_1024 the org must be a motto in the county in the state of state per the interview conducted with the executive director of the org and review of the association's bylaws the agent noted that the organization expanded its membership requirement to include the general_public general_public members enjoy the same benefits as any motto member which includes the discount general_public members do not have the right to vote general store form 886-acrev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx org ein ein activities performed in addition to the change_of membership requirement the agent noted that org performed the following activities in 20xx which were materially different from the activities stated on its form_1024 in 20xx org conducted the following activities operation and management of a larger retail store specializing in the sale of public safety apparel and good sec_2 provide benefits to its members o o o o life_insurance_benefit legal consultation benefit discount on all products sold in the store excluding weapon sales_tax deductible annual dues org has erroneously notified its members on its website that their annual dues are tax deductible charitable donations including cash and equipment to local charities and police organization sec_4 sponsorship of training classes for motto agent noted that org did not sponsor any training classes in 20xx during the time span from 19xx to 20xx the org eliminated the following exempt_activities consistent with a c organization as detailed below membership dinner meetings operation of a junior rifle club annual association ball publication of a monthly newsletter org’s retail store based on interviews conducted a tour of the facility review of the financial statements and review of the meeting minutes the agent discovered that org's management and employees had performed a substantial amount of their time and labor operating the retail store the agent determined that org only spent an insubstantial amount of time eg less than to its charitable functions such as providing charitable_contributions to other organizations it is important to note that the organization did not sponsor any officer training courses during the year under examination form 886-a rev department of the treasury - internal_revenue_service page -4- form_886 a department of the treasury internal_revenue_service name of taxpayer explanation of items org ein ein 20xx schedule no or exhibit year period ended the goods offered for sale by the org were defined as public safety apparel or public safety training materials the agent noted that most goods offered for sale were goods that could be used by motto during their work related duties goods included armor guns pepper spray handcuffs cleaning supplies and other equipment in addition to these goods the store sold items such as books gloves flashlights gear bags briefcases safety glasses tee-shirts mugs hats and knives with the exception of certain weapons eg guns and high intensity pepper spray all goods were available to the public the org store’s sales of goods and apparel were open to the public in addition to their membership based on review of org’s financial statements the agent noticed that org has expanded its retail store to nonmembers per review of the store’s quickbooks point of sale accounting system the agent discovered the nonmember public sales were nearly of its overall store sales member sales consisted of approximately of the total store sales member sales include both law enforcement member sales and general_public member sales according to org’s 20xx financial statements prepared by co-1 its average gross margin on goods and services for sale was subsequent the reduction of the price reduction for members however for public sales the average gross margin was to according to the executive director’s interview from its financial data org received approximately of its total revenues from store sales at the same time org incurred approximately of its total expenses for store related expenses such as cost_of_goods_sold and salaries’ the agent reviewed the board_of director meeting minutes to provide additional detail regarding the operation of the store per the agent’s review of the meeting minutes dated august 20xx the agent noted that the executive director of the org stated that store sales and department orders had decreased due to sales at other similar public safety stores such as co-2 which is a national public safety apparel retailer the agent performed research and determined that co-2 is a subsidiary of the co-3 which is a for-profit entity the agent reviewed co-2 store website and noticed that co-2 sells similar public safety merchandise to law enforcement personnel and the general_public benefits provided to its membership based on annual membership dues of dollar_figure org members receive the following benefits kk kn please see attached income and expense analyses documents for additional details form 886-a cev department of the treasury - internal_revenue_service page -5- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service org ein ein 20xx life_insurance_benefit o dollar_figure total cash benefit legal consultation benefit o each member is allowed a free annual consultation with the association attorney discount on all products sold in the store excluding weapon sales_tax deductible annual dues of dollar_figure the org spent approximately of its total operating budget on member benefits charitable donations org donated cash and equipment to local charities and police organizations in 20xx org donated approximately dollar_figure in cash to various local charities and police organizations which were about of its total expenses org donated approximately dollar_figure worth of gym equipment to the city police department to increase the effectiveness of its police force in 20xx which was about of its total expenses in aggregate the org donated approximately of its total expenses to charitable entities or local police organizations relative to its total expenses of dollar_figure the org s charitable_contributions were de_minimis in addition to the relatively low amount of charitable spending the org did not spend any money to further the recreational activities of its members according to org’s executive director the recreational events such as dinners or dances were phased out subsequent org’s inception motto training classes org owns a firing range and classroom training facility for cadets and seasoned officers according to org’s executive director org typically sponsors one or two training classes for officers per year obtained a copy of the quitclaim_deed 19xx the agreement between org and the county sheriff department was to allow city sheriff department to manage and supervise the firing range and the classroom facilities the agent noted that in 20xx the org did not perform any duties or functions related to the shooting range and did not conduct any training classes at or outside uf the classroom facilities per the quitclaim_deed dated october for the facility owned by org the agent law sec_501 of the internal_revenue_code code states the exemption from taxation of an organization described in subsection c or d or sec_401 shall be form 886-a cev department of the treasury - internal_revenue_service page -6- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org ein ein 20xx exempt from taxation under this subtitle unless such exemption is denied under sec_502 or sec_503 sec_501 of the code states civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes sec_501 of the code states subparagraph a shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual sec_1_501_c_4_-1 of the income_tax regulations states this civic_league_or_organization may be exempt a of i it is not operated for-profit and ii is operated exclusively for the promoting of social welfare b local associations of employees local associations of employees described in sec_501 are expressly entitled to exemption under sec_501 as conditions to exemption it is required that the membership of such an association be limited to the employees of a designated person or persons in a particular municipality and that the net_earnings of the association be devoted exclusively to charitable educational or recreational purposes the word local is defined in paragraph b of sec_1_501_c_12_-1 see paragraph d and of sec_1_501_c_3_-1 with reference to the meaning of charitable and educational as used in this section sec_1_501_c_12_-1 b the phrase of a purely local character applies to benevolent_life_insurance_associations and not to the other organizations specified in sec_501 it also applies to any organization seeking exemption on the ground that it is an organization similar to a benevolent life_insurance association an organization of a purely local character is one whose business activities are confined to a particular community place or district irrespective however of political subdivisions if the activities of an organization are limited only by the borders of a state it cannot be considered to be purely local in character sec_1_501_c_3_-1 organizations organized and operated for religious charitable scientific testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals form 886-arev department of the treasury - internal_revenue_service page -7- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx org ein ein charitable defined -the term charitable is used in sec_501 in its generally accepted legal sense and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions such term includes relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes or i to lessen neighborhood tensions ii to eliminate prejudice and discrimination iii to defend human and civil rights secured_by law or iv to combat community deterioration and juvenile delinquency the fact that an organization which is organized and operated for the relief of indigent persons may receive voluntary contributions from the persons intended to be relieved will not necessarily prevent such organization from being exempt as an organization organized and operated exclusively for charitable purposes the fact that an organization in carrying out its primary purpose advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under sec_501 so long as it is not an action_organization of any one of the types described in paragraph c of this section educational defined i in general -the term educational as used in sec_501 relates to - a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community hearings before house ways_and_means_committee on revenue revision of congress sess pp cong record pt pp held that a c organization may not provide life sick or accident benefits to its members revrul_66_59 1966_1_cb_142 describes an organization of employees whose purpose is to pay lump sum retirement benefits to its eligible members or death_benefit to their survivors does not qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code of as a local association of employees revrul_66_180 1966_1_cb_144 described a local association of employees organized exclusively for recreational purposes operates a gasoline station on property owned by the employer of its members to provide funds in addition to dues income for form 886-a rev department of the treasury - internal_revenue_service page -8- form_886 a name of taxpayer explanation of items schedule no or exhibit yeat period ended department of the treasury - internal_revenue_service 20xx org ein ein its recreational activities sales are limited to its members and to the employer and income is used exclusively for members’ recreation held neither the operation of the gasoline station nor the selling of gasoline and oil to the employer company adversely affects its qualification for exemption since all of its income is used for recreational purposes and income from sales to the employer of its members is considered a form of empivyer support of the association the organization is therefore exempt as a local association of employees described in sec_501 of the internal_revenue_code of advice has been requested whether an employees’ association organized exclusively for recreational purposes which operates a gasoline station to supplement its dues income under the circumstances described below may qualify for exemption from federal_income_tax as an organization described in sec_501 of the internal_revenue_code of the organization was incorporated as a nonprofit corporation for recreational purposes with membership limited to persons who are employees or former employees pensioners of a company in a particular locality recreation through the sponsorship of a basketball league bowling league bridge club golf tournaments square dancing holiday parties etc for its members it also maintains and operates a gasoline station located on property leased from the company its activities consist of providing sales are limited to members and the company the organization’s income is derived from membership dues ticket sales to various recreational functions and gasoline and oil sales expenditures are for recreational activities and for the operation of the gasoline station approximately percent of the income from gasoline and oil sales is derived from sales to the employer company all of the net_earnings of the organization are required to be used for its recreational activities no part is to be distributed to individual members sec_501 of the code exempts from federal_income_tax local associations of employees the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes in determining this organization’s qualification for exemption from tax under the foregoing provision two factors to be considered are whether the organization may engage in a service station type of operation a business ordinarily carried on for profit and whether the realization by the organization of a substantial portion of its income from the sale of oil and gasoline to the employer of its members would adversely affect its qualification for exemption form 886-a rev department of the treasury - internal_revenue_service page -9- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx org ein ein with respect to factor number a local association of employees may qualify for exemption under sec_501 of the code notwithstanding that it engages in a business of a type ordinarily carried on for profit if as in this case such business is with its members and the net_earnings of the business_enterprise are used exclusively for charitable educational or recreational purposes as for factor number an employer may make contributions to an association of its employees to enable the organization to carry on its activities where it is found that as in this case an association of employees derives a substantial portion of its income from doing business with the employer of its members exemption will not be denied since profits derived from doing business with the employer may be regarded as a form of employer support of the organization united_states court_of_appeals second circuit 331_f2d_923 a f t r 2d ustc p people's educational camp society inc petitioner v commissioner of internal revenue respondent proceeding on petition to review a decision of the tax_court 39_tc_756 denying petitioner an exemption from income_tax the court_of_appeals waterman circuit judge held that the ‘destination of income’ test did not afford income_tax exemption to corporation which devoted much of its revenues to improving its ability to compete commercially through accumulation of large surpluses and expansion of its income producing facilities court affirmed the ruling taxpayer’s position org’s position has not been determined government’s position the service contends the org is primarily engaged in activities through its org public safety apparel and goods store that e e e e does not further an exempt_function purpose per sec_501 are organized for profit sales are substantially comprised of public and non-law enforcement officer member sales earnings are not devoted exclusively to charitable educational or recreational purposes sec_501 of the code states organizations that are not organized for profit but operated exclusively for the local associations of employees the membership form 886-acev department of the treasury - internal_revenue_service page -10- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org ein ein 20xx of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are not devoted exclusively to charitable educational or recreational purposes are tax exempt store operated similar to a for-profit entity org’s management and labor focused their efforts on the operation and profitability of the org range store the focus of management and labor on the operation and profitability of the public safety range store illustrated that the association is operating similar to other for-profit range stores such as co-2 which sell similar public safety merchandise furthermore the healthy gross margin of items sold by the org eg greater than subsequent member discounts provide additional evidence that the association is operated like a for profit entity based on the financial statements provided by the org the agent noted that the association did not spend any funds to further the recreational activities of its members the org did expend funds to charitable entities however the total expenditures represented less than of the association’s operating budget org’s major expenditures were on merchandise for the store and salaries for individuals who operate the store on a daily basis in the peoples educational camp society versus the commissioner of internal revenue the court held that the ‘destination of income’ test for a c organization did not afford income_tax exemption to a corporation which devoted much of its revenues to improving its ability to compete commercially based on the analysis performed of the financial records the agent determined that the org’s primary focus was to operate a retail store for its members and general_public use in a for-profit manner based on management's focus operating the org range store ina commercial manner the agent determined the eo does not qualify for exemption under sec_501 rey rul 1966_1_cb_144 stated a local association of employees organized exclusively for recreational purposes was held to be exempt although it operated a gasoline station on property owned by the employer of its members to provide funds in addition to dues income for its recreational activities for the following reasons a local association of employees may qualify for exemption under sec_501 of the code notwithstanding that it engages in a business of a type ordinarily carried on for profit if as in this case such business is with its members and the net_earnings of the business_enterprise are used exclusively for charitable educational or recreational purposes department of the treasury - internal_revenue_service form 886-a crev page -11- form_8 a department of the treasury - internal_revenue_service name of taxpayer explanation of items org ein ein 20xx schedule no or exhibit year period ended an employer may make contributions to an association of its employees to enable the organization to carry on its activities where it is found that as in this case an association of employees derives a substantial portion of its income from doing business with the employer of its members exemption will not be denied since profits derived from doing business with the employer may be regarded as a forrn of employer support of the organization in the case of the org however sales from the public safety store were not limited to its members and a common employer the general_public was also able to purchase a substantial amount of goods from the store furthermore the org’s membership includes non-law enforcement officers based on the evidence provided regarding the operation of the range store the org does not meet the requirements per revrul_66_180 1966_1_cb_144 and does not qualify for exemption under c open membership requirements the service contends that the organization is not properly limiting its membership according to sec_501 requirements sec_501 of the code states that the membership of which is limited to the employees of a designated person or persons in a particular municipality the org initially limited the membership of the local association of employees to law enforcement officers in the county in 19xx per form_1024 information provided during the course of examination org did not limit membership to employees of a designated person or persons in a particular municipality during and subsequent 20xx org also readily admits new members to their association that are not law enforcement officers employed within the county in state based on the improper benefits provided to its membership based on the annual membership dues of dollar_figure org provides life_insurance and legal consultation benefits to its members these benefits are not exempt_activities that are permissible for a sec_501 organizations benefits as provided to members of org were improper as stated in revrul_66_59 1966_1_cb_142 an organization exempt under sec_501’s purpose does not include paying lump sum retirement benefits to its eligible members or death_benefits to their survivors furthermore the hearings before house ways_and_means_committee on revenue revision of congress sess pp cong record pt pp held that a c organization may not provide life sick or accident benefits to its members the service contends that these de_minimis exempt_activities performed form 886-a rev department of the treasury - internal_revenue_service page -12- form_886 a department of the treasury - internal_revenue_service name of taxpayet explanation of items org ein ein 20xx schedule no or exhibit year period ended in aggregate the org donated approximately dollar_figure of its total expenses to charitable entities or local police organizations relative to its total expenses of dollar_figure the org’s charitable_contributions were de_minimis furthermore the org did not facilitate or sponsor any officer training courses in 20xx in addition to the relatively low amount of charitable spending the org did not spend any money to further the recreational activities of its members according to org’s executive director the recreational events such as dinners or dances were phased out subsequent org’s inception conclusion in summary org has not established that it is operated for a tax exempt_purpose under sec_501 since it did not engage primarily in activities that accomplish that purpose based on the examination performed the agent concludes that org did not a engage primarily in activities that accomplish an exempt_purpose and expend the net_earnings exclusively to charitable educational or recreational purposes b properly limit to the employees of a designated person or persons in a particular municipality c provide permissible benefits to members per c accordingly the service has determined that the org is not an organization exempt from federal income taxes described in sec_501 effective january 20xx based on the net_loss incurred by the org for the 20xx and 20xx tax years the total estimated_tax due for these years is dollar_figure the org is required to file form_1120 u s_corporation income_tax return to report the income gains losses deductions credits and to figure the income_tax_liability of a corporation form 886-a cev department of the treasury - internal_revenue_service page -13-


internal_revenue_service number release date index number ------------------- -------------- ------------------------------------------------ --------------------------------------- - legend legend 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 b01 plr-113782-06 date date x a b state countrym date1 date2 date3 date4 date5 date6 date7 -------------- ----------------------- ------------------- ------------------------- ------------------------------- ---------- ----------- ------------------- ---------------------- ------------------- ------------------- ------------------- ---------------------- --------------------- plr-113782-06 dear---- ------- this letter responds to your letter dated date together with subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date1 under the laws of state and elected to be an s_corporation effective date1 on date1 a was the sole shareholder of x on date2 shares of x were issued to b a resident_alien employed by x b entered into a shareholders agreement under which a had the right to purchase b’s shares in the event that b’s employment with x was terminated the shareholders agreement provides that during the term of the agreement no shareholder shall take any_action or transfer any shares in any manner that would cause the revocation or termination of x’s s election under sec_1362 on date3 b’s employment with x was terminated on date4 a exercised the right under the shareholders agreement to buy b’s shares with a proposed closing date of date5 however b failed to properly tender the stock to perfect a transfer on or about date6 b returned to countrym a filed a civil lawsuit against b to perfect the transfer of the shares as of date5 on date7 a and b entered into a settlement agreement that the transfer of the shares occurred on date5 x represents that the circumstances resulting in the potential termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the service law and analysis sec_1361 provides that the term s_corporation means for any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in subsection c or an organization described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock plr-113782-06 sec_1362 provides that an election under sec_1362 terminates whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period of inadvertent termination of the s_corporation_election agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and representations made we conclude that x’s s_corporation_election may have terminated because x may have had an ineligible shareholder however we conclude that if x’s s_corporation_election was terminated such termination was inadvertent within the meaning of sec_1362 consequently we rule that x will be treated as continuing to be an s_corporation from date6 and thereafter provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 additionally from date5 and thereafter a will be treated as the owner of the shares of x stock previously held by b if x and its shareholders fail to treat x as described above this ruling shall be null and void except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express no opinion on whether x is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer requesting it under sec_6110 it may not be used or cited as precedent plr-113782-06 in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purpose


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep tt err a u ll xxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxkxxxxx legend taxpayer a xxxxxxxxxxxxxxxxxxxx ira x kkkkxooxairni amount a xxxxxxxxxxxxxxxxxxxx amount b xxxxxxxxxxxxxxxxxxxx amount cc xxxxxxxxxxxxxxxxxxxx bank b bank c xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx dear xxxxxxxx this letter is in response to your letter dated xxxxxxxxx as supplemented by correspondence dated xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxx xxxxxxxxkaxxxxxkx xxxxxxxxxxxx and xxxxxxxxxxx suubmitted on your behalf by your authorized representative in which you request a waiver of the day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of your request taxpayer a represents that he received a distribution on xxxxxxxxxxxx from ira x totaling amount a taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to an error committed by bank c combined with his mental condition which impaired his ability to recognize that a rollover was not correctly performed by bank c taxpayer a represents that amount a has not been used for any other purpose on xxxxxxxxxxxxx taxpayer a withdrew amount a from ira x with the intention to rollover amount a into a rollover ira with bank c taxpayer a represents that he specifically instructed bank c’s personnel that the funds be deposited into a rollover ira account however contrary to taxpayer a’s instructions bank c’s representative deposited the funds into three certificates of deposit cds totaling amount b and a checking account in the amount of amount c documentation submitted shows that taxpayer a was suffering from a mental condition in xxxxxxxxxxxxx which caused him to not understand that amount a was deposited into non- ira accounts by bank c taxpayer a was not aware that the accounts held by bank c were not an ira account until he received an underreporting notice from the internal_revenue_service the service in xxxxxxxxx based upon the foregoing facts and representations taxpayer a requests that the service waive the day rollover requirement with respect to amount a sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred by bank c the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a rollover of amount a was due to an error committed by bank c combined with his mental condition which impaired his ability to recognize that a rollover was not correctly performed ‘ therefore pursuant to sec_408 i of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount a into a rollover ira provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such contribution amount a will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions concerning this ruling please contact idf se t ep ra t3 at sincerely yours ge ad ae perey laura b warshawsky manager employee_plans technical group enclosures deleted copy of letter_ruling notice ce


t c memo united_states tax_court stephen j dunn and geri l dunn petitioners v commissioner of internal revenue respondent docket no filed date stephen j dunn and christina r mcneal for petitioners charles v dumas iii for respondent memorandum findings_of_fact and opinion lauber judge the internal_revenue_service irs or respondent deter- mined a deficiency in petitioners’ federal_income_tax of dollar_figure and an ac- all statutory references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest dollar curacy-related penalty of dollar_figure after concessions the issues for decision are whether petitioners for are entitled to a deduction in excess of the amount respondent allowed for contributions made to an individual retirement ac- count ira for stephen dunn petitioner or mr dunn and whether peti- tioners are liable for an accuracy-related_penalty pursuant to sec_6662 we resolve both issues in respondent’s favor findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference petitioners re- sided in michigan when they filed their petition mr dunn is an attorney licensed to practice in michigan and missouri and admitted to practice before the tax_court mr dunn has specialized in tax law foreign accounts compliance civil asset forfeitures tax collection litigation and estate_planning for a number of years including mr dunn had reached age by the end of petitioners conceded that they received dollar_figure of taxable interest_income from jp morgan chase bank in respondent conceded that dollar_figure petitioners allegedly received from calumet specialty production partners lp and linn energy llc did not constitute taxable_income to them for during the first part of mr dunn was employed by a private law firm he was an active_participant during in that firm’s qualified_retirement_plan mr dunn became self-employed in late and remained self-employed through the end of mr dunn maintains an ira with vanguard brokerage services vanguard during he made the following contributions on the following dates to his vanguard ira date amount designated for year dollar_figure big_number big_number vanguard furnished the irs with forms ira contribution informa- tion reporting these contributions these forms as well as the financial state- ments that vanguard furnished to petitioner show that he designated the first two contributions listed above totaling dollar_figure for the tax_year that he designated the second two contributions listed above totaling dollar_figure for the tax_year and that he designated the final contribution of dollar_figure for the tax_year petitioner made no other contributions to his vanguard ira for none of these contributions has been returned to petitioner all amounts that petitioner contributed remain invested at vanguard petitioners filed joint federal_income_tax returns for and for each year they claimed a dollar_figure deduction for the contributions that petitioner had made to his vanguard ira and designated for tax years and respectively the irs examined the return and disallowed the claimed dollar_figure deduction because mr dunn was an active_participant in a qualified_retirement_plan during petitioners do not dispute that the deduction was properly disallowed the irs allowed the deduction because mr dunn was no longer an active_participant in his former employer’s retirement_plan petitioners filed a joint_return for the tax_year in issue on which they again claimed a dollar_figure ira contribution deduction petitioners based this claim on the theory that the contribution was an excess_contribution that could be carried forward or alternatively that the contribution should be deemed to have been made for with the supposed result that the contribution if an individual is an active_participant in a qualified_plan sec_219 phases out the deduction allowed by sec_219 according to certain income thresholds taking into account petitioners’ adjusted_gross_income and the phase- out threshold respondent determined that petitioners for were entitled to no deduction for ira contributions would be bumped to petitioner did not notify vanguard of any desire to change the tax years for which he had designated his contributions upon examination of petitioners’ return the irs reduced the allow- able ira contribution deduction to dollar_figure this was the amount that petitioner had contributed on date and designated as an ira contribution for petitioners timely petitioned this court in response to the notice_of_deficiency that followed i burden_of_proof opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving those determina- tions erroneous rule a 290_us_111 deductions are a matter of legislative grace and the burden is on the taxpayer to prove entitlement to the deductions claimed 503_us_79 because we decide this case on a preponderance_of_the_evidence we need not decide which party has the burden_of_proof see sec_7491 138_tc_306 ii analysis subject_to various limitations a deduction is allowed for contributions to an ira for the taxable_year sec_219 the amount allowable as a deduction may not exceed the lesser_of the deductible amount or the amount of compensation includible in the individual’s gross_income for that year sec_219 for taxpayers who had attained the age of before the close of the taxable_year as petitioner had done before the end of the deductible amount was capped at dollar_figure see sec_219 petitioner contributed dollar_figure to his vanguard ira on date and designated that contribution toward respondent allowed that amount as a deduction for petitioners advance various theories to support their assertion that they are entitled to an additional dollar_figure deduction for the gist of each theory is that the dollar_figure deduction that respondent properly disallowed for should be allowed for instead none of these theories is persuasive first petitioners contend that the contribution was an excess contri- bution described in sec_4973 which supposedly became deductible in under sec_219 sec_4973 imposes a excise_tax on excess_contributions to an ira as relevant here sec_4973 defines excess_contributions to mean contributions in excess of the amount allowable as a deduction under sec_219 a for such contributions for purposes of calculating excess_contributions the amount allowable as a deduction under sec_219 shall be computed without regard to sec_219 sec_4973 last sentence respondent determined that petitioners’ allowable ira contribution deduc- tion for was zero after application of sec_219 since mr dunn was an active_participant during in a qualified_retirement_plan but sec_4973 provides that for purposes of determining the existence of an excess_contribution the amount allowable as a deduction under sec_219 shall be computed without regard to sec_219 without regard to sec_219 the amount allowable to petitioners as a deduction under sec_219 was dollar_figure which equals the amount petitioner contributed to his vanguard ira for his excess_contribution for was thus zero and he accordingly had no excess_contribution that could be allowed as a deduction for a future year under sec_219 alternatively petitioners contend that once the irs disallowed the contribution each set of contributions should be rolled forward by one year petitioners contend in other words that the contributions mr dunn made in january and date though designated for should be deemed to have been made toward that the contributions he made on date and date though designated for should be deemed to have been made toward and that the dollar_figure contribution he made on date should be deemed to have been made toward this argument rests on two premises neither of which is tenable petitioner provides no support for his assertion that he could have made in date an ira contribution that would be deductible against hi sec_2010 income in an act of legislative largesse congress has permitted taxpayers to make ira contributions for a particular year until april of the following year but there is no provision that allows a cash_basis taxpayer in violation of the annual accounting principle of sec_461 to claim a deduction for an ira contribution made before january of the year for which the deduction is claimed see sec_1_219-1 income_tax regs providing that a deduction shall be allowed of amounts paid for the taxable_year to an ira account cf sec_1_219-1 proposed income_tax petitioners assert that they deducted the dollar_figure contribution on their tax_return even though they had paid this amount in date see sec_219 providing that a contribution shall be deemed to have been made on the last day of the preceding_taxable_year if the contribution is made on account of such taxable_year and is made not later than the time pre- scribed by law for filing the return for such taxable_year not including extensions thereof regs fed reg date proposing that for years before the effective date of sec_219 now sec_219 a taxpayer must make a contribution to an ira during a taxable_year in order to receive a deduction for such taxable_year moreover the forms that vanguard sent to the irs as well as the fi- nancial statements that vanguard furnished to petitioner show that he designated both his date contribution and his date contribution as being made toward petitioner provides no support for his assertion that these contributions could now be redesignated as having been made toward proposed_regulations issued years ago still in proposed form specify a procedure for designating ira contributions see sec_1_219-1 proposed income_tax regs supra contribution shall be treated as made on account of a taxable_year if it is irrevocably specified in writing to the trustee insurance_company or custodian that the amounts contributed are for such taxable_year the proposed_regulations include no suggestion that a contribution once so desig- nated can be redesignated after the close of that tax_year for a different tax_year in any event because petitioner provided no evidence that he had ever submitted a redesignation request to vanguard we need not decide whether that action would have been effective if it had been attempted finally petitioners advance a variety of equitable arguments urging that congress’ policy of encouraging retirement savings supports the deduction they seek these arguments are addressed to the wrong forum whether and to what extent deductions shall be allowed depends upon legislative grace and only as there is clear provision therefor can any particular deduction be allowed 292_us_435 petitioners are asking that a deduction for an ira contribution petitioner made for which the irs properly disallowed for should be allowed instead for there is no legal basis for this claim a taxpayer is free to organize his affairs as he chooses but once having done so he must accept the tax consequences of his choice whether contemplated or not see 417_us_134 in sum petitioners are entitled for to an ira contribution deduction of dollar_figure the amount that petitioner contributed to his vanguard ira during and designated as a contribution for we sustain respondent’s disallowance of the balance of the dollar_figure deduction claimed iii accuracy-related_penalty sec_6662 and b imposes a accuracy-related_penalty upon the portion of any underpayment_of_tax that is attributable to negligence or disregard of rules or regulations negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code and disregard means any careless reckless or intentional disregard sec_6662 the commissioner bears the burden of production with respect to a sec_6662 penalty sec_7491 respondent met his burden of production by showing that petitioners were not entitled to dollar_figure of the dollar_figure deduction claimed on their return the burden thus shifts to petitioners to prove that the penalty does not apply see 116_tc_438 the sec_6662 penalty does not apply to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the tax- payer acted in good_faith with respect to it sec_6664 the decision whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances that may signal reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer ibid mr dunn is an experienced tax attorney after respondent properly dis- allowed the dollar_figure deduction petitioners had claimed for they sought to deduct that amount for even though their total contribution for did not exceed dollar_figure the theory on which mr dunn chiefly relied at trial--that the disallowed contributions could be carried forward as excess_contributions for 2008--is contradicted by the plain language of sec_4973 petitioners’ other arguments have no support in the code the regulations relevant caselaw or basic tax principles in the light of mr dunn’s experience knowledge and education we find that petitioners’ deduction of amounts not contributed in the relevant year which was based on amounts for which a deduction had been previously disallowed did not reflect a good-faith misunderstanding of the law nor was this deduction otherwise supported by reasonable_cause we accordingly sustain the accuracy-related_penalty to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number r ---------------------------- ------------- ------------------------------------------------------- ---------------------------------------------- ---------------------------- in re ---------------------------------------------------- ------------------------------------------------------------- ------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ----------------- telephone number --------------------- refer reply to cc ita b05 plr-142401-11 date april legend taxpayer ----------------------------------------------------------- ------------------------------------------------------- taxpayer ----------------------------------------------------------- ------------------------------------------------------- llc ----------------------------------------------------------- ------------------------------------------------------- state county city building building building district site corp1 ------------- ----------------------------------------- ----------------------------------------- --------------- --------------- --------------- ------------------------------------------------------ ------------------------------------ ----------------------------------------- plr-142401-11 corp corp corp corp date date date date date date date date date year b ------------------------------------------------- ------------------- -------------------------------------------------- ------------------------------------------------------ ------------------ -------------------- -------------------------- ------------------- ---------------------- -------------- ------------------ -------------- ---------------------- ------- -------------- dear -------------- this is in response to your ruling_request dated on date and subsequent correspondence requesting a ruling under sec_47 and sec_168 of the internal_revenue_code on behalf of taxpayer regarding the rehabilitation of historic buildings facts taxpayer taxpayer and llc are multi-member state limited_liability companies which have not elected under sec_301_7701-3 to be taxed as corporations and therefore will be taxed as partnerships for federal_income_tax purposes taxpayer was formed for the purpose of acquiring rehabilitating constructing developing leasing and selling building taxpayer intends to rehabilitate building in a manner that plr-142401-11 would qualify its expenditures_for the federal historic tax_credit taxpayer was formed for the purpose of acquiring rehabilitating constructing developing leasing and selling building taxpayer intends to rehabilitate building in a manner that would qualify its expenditures_for the federal historic tax_credit llc was formed for the purpose of acquiring rehabilitating constructing developing leasing and selling building llc will rehabilitate building in a manner that would qualify its expenditures_for the federal historic tax_credit each of building building and building collectively the buildings has been determined by the national park service nps top be a contributing building and therefore a certified_historic_structure within the district which is a historic_district listed on the national register of historic places the buildings together with other related land are collectively referred to as the site according to the submission the site is part of a larger real_estate development controlled by corp beginning in year representatives of corp related to taxpayer met with representatives of corp to discuss rehabilitation of the buildings the buildings were to be developed in an integrated manner and be used for research corp wanted to develop the buildings because of their proximity to each other their common history and architectural or physical design and the common marketing plan of using those structures corp and corp anticipated that the buildings would be developed simultaneously however the recession made it impractical to finance such a large developmental project all at once instead corp began developing building first with plans to develop building sec_1 and as soon as practicable the design phases of building began in date and rehabilitation began in date it is projected that the rehabilitation of building will be substantially completed around date and tenants will begin moving in on or about date the design of building began in date and the design of building began in date prior to completing the construction of building it is anticipated that the rehabilitation of building sec_2 and will be performed along the same time line with demolition for each building beginning in date and new_construction beginning in date corp will be the architect for each of the buildings corp will be the general contractor for each of the buildings the buildings are separated by public streets but there are a number of architectural features which physically tie the buildings together on the ------ side of building sec_1 and is a -------------------------------------------------------- the ---------- will be retained which will create an outdoor concourse connecting the two buildings there is a ground level walk way physically connecting building sec_1 and a one-story bridge between both buildings will be reactivated and refurbished there is a two-story bridge between building sec_1 and which tenants in those buildings can use to go from one building to the other without the necessity of exiting in the open air once the buildings have been rehabilitated they will be interconnected by the refurbished pedestrian plr-142401-11 bridges for the benefit of tenants in addition a new connection stair will be built to allow easy external access between building sec_2 and building will contain retail stores and restaurants accessible to tenants in the buildings building will have a fitness center retail and services that will be open to tenants in all of the buildings in addition building will have a conference center which may be used by certain tenants in all of the buildings tenants of the buildings also will share usage of surface parking lots and the park adjacent to building county and city entered into an agreement dated date with corp and llc to fund up to dollar_figureb for costs incurred in connection with the infrastructure improvements and or site preparations for rehabilitating the site in order to create an interconnected and integrated project taxpayer requests a ruling that for purposes of the rehabilitation tax_credit and applications of sec_47 and sec_168 h b to taxpayer 1’s rehabilitation and leasing of building the property will include all of the net rentable floor space in the buildings law and analysis sec_47 as amended by section a of the housing assistance tax act of provides that the term qualified_rehabilitation_expenditure does not include any expenditure in connection with the rehabilitation of a building which is allocable to the portion of the property which is or may reasonably be expected to be tax-exempt_use_property within the meaning of sec_168 except that percent shall be substituted for percent in sec_168 section b of the act provides that the amendment made by section shall apply to expenditures properly taken into account for periods after date sec_168 states that in the case of non-residential real_property the term tax-exempt_use_property means that portion of the property leased to a tax- exempt entity in a disqualified_lease under sec_168 the term disqualified_lease means any lease of the property to a tax-exempt_entity but only if i part or all of the property was financed directly or indirectly by an obligation the interest on which is exempt from tax under sec_103 and such entity or a related_entity participated in such financing ii under such lease there is a fixed or determinable price purchase or sale option which involves such entity or a related_entity or there is the equivalent of such an option iii such lease has a lease_term in excess of years or iv such lease occurs after a sale or other transfer of the property by or lease of the property from such entity or a related_entity and such property has been used by such entity or a related_entity before such sale or other transfer or lease plr-142401-11 under sec_168 property will be considered tax-exempt_use_property only if the portion of the property leased to tax-exempt entities in disqualified leases is more_than_35_percent_of_the_property the 35-percent exception sec_168 provides that improvements to a property other than land will not be treated as a separate_property sec_1_168_j_-1t q a-6 of the temporary income_tax regulations provides that the phrase more_than_35_percent_of_the_property means more than percent of the net rentable floor space of the property the net rentable floor space in a building does not include the common areas of the building regardless of the terms of the lease for purposes of the more_than_35_percent_of_the_property rule two or more buildings will be treated as separate properties unless they are part of the same project in which case they will be treated as one property two or more buildings will be treated as part of the same project if the buildings are constructed under a common plan within a reasonable_time of each other on the same site and will be used in an integrated manner sec_168 provides that property will not be treated as tax-exempt_use_property if the portion of the property leased to tax-exempt entities in disqualified leases is no more_than_35_percent_of_the_property under sec_47 the test is no more than percent for purposes of the rehabilitation_credit taxpayer posits that even if building is leased to tax-exempt entities in disqualified_lease the determination of whether the 50-percent threshold is crossed should be made by reference to the total net rentable floor space in the buildings combined because the buildings are part of the same project under q a-6 of the temporary regulations and thus the buildings together constitute the property for purposes of sec_168 therefore according to the submission if this 50-percent threshold is not crossed with respect to the total net rentable floor space in the buildings no portion of the property will be tax-exempt_use_property within the meaning of sec_168 as modified for purposes of the rehabilitation_credit by sec_47 for purposes of determining if the buildings in this case should be considered part of a single project for purposes of q a-6 of the temporary regulations and sec_168 taxpayer represents that the buildings are constructed under a common plan within a reasonable_time of each other located on the same site and will be used in an integrated manner taxpayer represents that there is a common plan for the construction rehabilitation of the buildings first county and city entered into an -------- -----------------------------------------------------------------------------------agreement with corp and llc pursuant to which county and city agreed to fund up to dollar_figureb for costs incurred in connection with the infrastructure improvements and or site preparations for the rehabilitation of the site where the buildings are located the purpose of agreement is to create an interconnected and integrated --------------------------- center second corp will contract to design the rehabilitation of each of the buildings in a manner consistent plr-142401-11 with their historic nature thus there will be a consistent architectural theme and landscape design throughout this area in addition the nps letter notes that nps views the rehabilitation work as a single overall project and rehabilitation certification will be issued on the merits of the overall project rather than for each structure moreover it has been represented that the buildings have been designed and are being constructed under a common plan that calls for shared facilities and amenities including restaurants and shops that are intended to allow the tenants of the buildings easy access to dining and retail establishments corp will perform the rehabilitation of all of the buildings we have no facts or reason to doubt or challenge these representations the design of the buildings improvements are to be constructed on the site the use of a single architect corp the use of a single general contractor corp the county- city financing the nps letter and the existence of shared elements all support the conclusion that the renovation of the buildings is part of a single common plan for the improvement of the site the submission also indicates that the construction and renovation of the buildings will all be completed within a reasonable_time of each other according to the submission corp began developing building first with plans to develop building sec_1 and as soon as practicable the design phases of building began in date and rehabilitation began in date it is projected that the rehabilitation of building will be substantially completed around date and tenants will begin moving in on or about date design work on building began in date and the design work on building began in date prior to completion of construction on building it is anticipated that the rehabilitation of building sec_1 and will be performed along the same time line with demolition for each building beginning in date and new_construction beginning in date in our view the construction and renovation of the buildings will be performed and completed within a reasonable_time of each other the facts show that the buildings will be constructed on the same site ie the site separated only by public streets however the buildings will be interconnected through skywalks several parking lots will be shared among the tenants of the buildings building sec_1 and will be connected by an outdoor concourse building and will be connected by newly constructed steps accordingly there is little doubt that based on the descriptions and exhibits in the submission the buildings are located on the same site lastly the facts in the submission indicate that the buildings will operate in an integrated manner for instance the buildings will be marketed to tenants which will do research consistent with the ------------------------------------------------------------------------------- -------------agreement entered into between county city corp and llc which funded up to dollar_figureb for costs incurred in connection with the infrastructure improvements and or site preparations for the rehabilitation of the site in order to create an interconnected plr-142401-11 and integrated ----------------------------center in addition an employee has been hired to market the buildings to prospective tenants corp will market and manage the site as a single project seeking economies of scale and the benefits of a significant amount of diverse space available for lease corp will utilize a single maintenance operation to work on the site corp should also benefit from the economic synergies associated with development of a core of high quality commercial properties on one site the buildings will share and their tenants will use many amenities facilities including a fitness center a central conference center convenient retail and restaurant options parking and a park for recreation the buildings are adjacent to each other finally a single corp employee will be responsible for arranging events and lecture programs for the common benefit of the tenants in the buildings consequently the buildings will be operated in an integrated manner conclusion based on the facts submitted and representations made the buildings constitute one project for purposes of sec_1_168_j_-1t q a-6 of the temporary regulations accordingly we conclude that for purposes of the rehabilitation tax_credit and the application of sec_47 and sec_168 h b to taxpayer 1’s rehabilitation and leasing of building the property will include all of the net rentable floor space in the buildings no opinion is expressed or implied regarding the application of any other provision in the code or regulations specifically no opinion is expressed or implied regarding whether the rehabilitation of historic building is a substantial rehabilitation or certified_rehabilitation or whether expenditures incurred to rehabilitate historic building are qualified_rehabilitation_expenditures under sec_47 this ruling is directed only to the taxpayer that requested it under sec_6110 it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of this letter is being sent to your authorized representatives we are sending a copy of this letter to the appropriate sbse office sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc pa cbs br2 gl-114537-01 uilc memorandum for associate area_counsel sb_se area long island from joseph w clark senior technician reviewer branch collection bankruptcy summonses subject delegation_order no this chief_counsel_advice responds to your request dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issues can the compliance area director accept an offer_in_compromise notwithstanding an opinion by the associate area_counsel sb_se opposing acceptance of the offer can the compliance area director accept an offer_in_compromise if no grounds for compromise under sec_301_7122-1t of the treasury regulations have been established conclusions yes although sec_7122 of the internal_revenue_code requires that an opinion of counsel be placed on file whenever a compromise is made counsel’s opinion need not favor compromise in order for the service to accept an offer no although sec_7122 grants the secretary broad authority to compromise treasury regulations issued pursuant to that section establish that compromise can only be made on specific grounds no compromise may be made unless one of the bases for compromise recognized by the regulations has been established gl-114537-01 background on date temporary regulations were issued which expanded the secretary’s authority to compromise tax_liabilities under sec_7122 of the code see t d compromises fed reg date in additional to the traditional compromise grounds of doubt as to liability and doubt as to collectibility the temporary regulations authorize the secretary to compromise when compromise will promote effective tax_administration specifically where there is no doubt as to either liability or collectibility the service may now compromise on the basis that collection of the full tax_liability would create economic hardship or regardless of the taxpayer’s financial condition exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers see sec_301 1t b you have asked our advice regarding several issues revolving around this expanded compromise authority specifically you have asked whether and under what circumstances the area director can compromise a case notwithstanding an opinion by counsel which opposes acceptance of a taxpayer’s offer when the offer is based on a purported finding that collection in full would cause the taxpayer economic hardship first you have asked that we address a situation in which the offer group has established that collection in full would result in economic hardship but counsel issues an opinion stating that the amount proposed for acceptance is nevertheless too low under the circumstances of the case second you have asked our opinion of a case in which it has not been established that collection in full would result in economic hardship discussion sec_7122 of the internal_revenue_code grants the secretary the authority to compromise civil or criminal liabilities arising under the internal revenue laws ever since that authority was granted in the code has also required that an opinion of counsel be placed on file in certain cases the current statement of this requirement provides record -whenever a compromise is made by the secretary in any case there shall be placed on file in the office of the secretary the opinion of the general counsel for the department of the treasury or_his_delegate with his reasons therefor with a statement of- the amount of tax assessed the general counsel for the treasury has delegated the functions relative to the review of offers in compromise to the chief_counsel of the internal_revenue_service see general counsel order no rev date gl-114537-01 the amount of interest additional_amount addition to the tax or assessable penalty imposed by law on the person against whom the tax is assessed and the amount actually paid in accordance with the terms of the compromise notwithstanding the foregoing provisions of this subsection no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed including any interest additional_amount addition to the tax or assessable penalty is less than dollar_figure however such compromise shall be subject_to continuing quality review by the secretary sec_7122 the system for obtaining review of offers recommended for acceptance is contained in the service’s irm handbook offers in compromise chapter and in the chief_counsel directives manual part chapter ccdm the opinion of counsel is sought after a recommendation of acceptance has been made but prior to formal acceptance of the offer by the official with delegated authority to accept irm the offer itself form along with the form_7249 offer acceptance report and supporting documentation are sent to the appropriate associate area_counsel sb_se office for review the service expects that counsel’s opinion will assess both whether the legal requirements for compromise are met and whether the offer conforms to the service’s policies and procedures irm the ccdm states that the primary role of counsel is to determine whether there is a bonafide doubt as to liability or doubt as to collectibility ccdm a at the time this manual section was promulgated doubt as to collectibility and doubt as to liability were the only authorized bases for compromise under then governing treasury regulations see sec_301_7122-1 although the permissible bases for compromise have since been expanded in the regulations to include the promotion of effective tax_administration counsel’s role has not changed and verifying that a basis for compromise is present continues to be the most important part of counsel’s role in reviewing proposed acceptances although verifying that there is a legal basis for compromise is the principal role of counsel most of the manual is dedicated to counsel’s examination of the adequacy of the amount proposed for acceptance a matter which is undoubtedly a question of policy see t d fed reg pincite3 t he amount to be paid future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the discretion of the secretary thus both the offer_in_compromise handbook and the ccdm recognize that the role of counsel is to review both legal and policy issues gl-114537-01 asking that counsel review policy matters does not grant a veto power or establish that counsel has final say over whether an offer will be accepted the procedures explicitly recognize that counsel’s concurrence in the decision to compromise is not required see irm ccdm a thus if counsel issues an opinion that the compromise of the case is not in keeping with the service’s acceptance policy either because the amount offered is too low or for any other reason the service may nevertheless compromise the case because the counsel opinion is sought prior to the issuance of an acceptance letter the official with final authority to accept will have an opportunity to consider counsel’s concerns before the decision to accept is made final your question assumes that the basis for compromise is the promotion of effective tax_administration specifically economic hardship the internal_revenue_manual gives the following guidance with respect to determining an acceptable offer based on considerations of economic hardship in offers based on economic hardship an acceptable offer amount should be determined based on the facts and circumstances of the taxpayer’s situation and the financial information analysis for example the taxpayer has dollar_figure liability and assets and income of dollar_figure to avoid economic hardship it is determined that the taxpayer will need dollar_figure the remaining dollar_figure should be considered in determining an acceptable offer amount irm the standard articulated in this manual provision appears very similar to the reasonable collection potential standard used for doubt as to collectibility offers see policy statement p-5-100 in that the service expects a taxpayer to offer an amount equal to that which could be collected after the economic hardship has been accounted for counsel’s disagreement with the amount determined to be acceptable pursuant to the foregoing guidance will not barr compromise of the case as with all advice issued by counsel it is appropriate and proper for you to render your opinion as to whether a proposed action is in keeping with the service’s stated policies the ultimate decision however remains with the area director or other delegated official a more serious issue is presented if counsel concludes that no basis for compromise is present treasury regulations enacted by the secretary in accordance with required procedures have the force and effect of law they are mandatory not directory and must be followed see 810_f2d_209 d c cir specifically discussing compromise regulations under sec_7122 in fact the in boulez the court was considering the requirement contained in the regulations but not in the statute that all compromises be in writing we find the court’s analysis even more persuasive when the issue is one of substantive authority as opposed to mere procedural safeguards in the words of the court indeed when a compromise of tax_liability is at issue the need for rigorous compliance with pertinent gl-114537-01 supreme court has recognized that it must defer to treasury regulations that implement the congressional mandate in some reasonable manner 450_us_156 citations and internal quotation marks omitted the commissioner’s delegation of authority to compromise necessarily carries with it the implicit assumption that it will be exercised in accordance with applicable law and regulations see boulez f 2d pincite stating that it defies common sense to infer that secretary’s delegates may waive requirements stated in regulations thus no service official may compromise a case unless it has been established that a basis for compromise as established by temp sec_301_7122-1t is present in the case confusion on this point may in part stem from language in prior versions of delegation_order no which grants certain officials the authority to compromise prior to revision in date the delegation of authority vested in certain officials the authority to compromise in the event counsel renders a negative legal opinion delegation_order no rev date in spite of internal guidance to the contrary many within the service mistakenly believed that this language authorized compromise even where there was no doubt as to either liability or collectibility in reality this delegation was intended to authorize certain officials to accept less than reasonable collection potential once doubt as to collectibility had been established see delegation_order no rev date stating that authority to accept notwithstanding negative counsel opinion applies only to offers in compromise - doubt as to collectibility the more recent delegation of compromise authority partially in an effort to alleviate any confusion has removed language making reference to the opinion of counsel in favor of positive grants of authority to certain officials the authority to accept less than could otherwise be collected in a doubt as to collectibility case now referred to as compromise based on special circumstances is specifically delegated to certain officials see delegation_order no rev date delegating authority to accept offers based on special circumstance criteria as well as authority to accept offers based on the promotion of effective tax_administration irm explaining special circumstances criteria and acceptance authority regulations may be at its greatest for not only the integrity of the public fisc but also public faith in the equitable enforcement of the tax laws hangs in the balance f 2d pincite see also revproc_80_6 1980_1_cb_586 in explaining the various delegations of compromise authority the revenue_procedure stated the above delegations are ‘limited’ to the extent that the delegated authority must be exercised in accordance with the limitations prescribed by sec_301_7122-1 of the regulations on procedure and administration and with procedures established by the national_office gl-114537-01 in reviewing proposed acceptances counsel should defer to the offer group on factual determinations such as valuation of assets allowable expenses and the existence of circumstances which warrant acceptance of less than could otherwise be collected if having done so counsel is unable to verify that a basis for compromise as authorized under the regulations is present that determination is more than a policy disagreement under such circumstances the seriousness of the decision to compromise warrants opening up a dialogue with the area director to attempt to reach consensus if no consensus can be reached it is appropriate to elevate the question to higher levels of management just as would be done in any other type of case nevertheless because both compliance and counsel are working toward the same goals disputes of this nature should be rare if you have any questions please contact the attorney assigned to this matter pincite- at the outset the ccdm states clearly that the factual determinations of the service are not to be reexamined unless patently erroneous and that asset valuations in particular are largely matters of administrative discretion and judgment and should rarely be questioned by counsel ccdm a