department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely rob choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date legend b president rabbi c secretary d treasurer e name of individual g h property location rabbi residence v name of congregation w school x m name of county facility of congregation date of incorporation contact person identification_number contact number fax number employer_identification_number uil numbers dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below issue sec_1 does your lack of adequate and detailed responses to our inquiries preclude you from qualifying for exemption under sec_501 of the code yes for the reasons described below do your inadequate responses cause you to fail the operational_test therefore disqualifying you from exemption under sec_501 of the code yes for the reasons described below does the transfer of a personal liability by one of your officers for the benefit of that officer constitute prohibited inurement of income under sec_501 of the code yes for the reasons described below alternative issue if upon appeal exemption is granted would you qualify as a synagogue under sec_501 of the code as an organization described in sec_509 and sec_170 i no for the reasons described below facts you were formed by articles of incorporation filed with m’s office on the date x by individuals b c and d who are also your president secretary and treasurer respectively these articles stated that your services will be held at address h the purposes of your corporation in part were listed as follows a b to promote the principles of the jewish religion and judaism to establish and maintain a synagogue and place of jewish worship as well as a place of study of the laws and books of the jewish faith to raise funds in order to distribute charity to the poor and needy to strengthen the religious moral and intellectual welfare of your members and their families to buy sell hold own rent lease mortgage convey exchange alter improve and develop real_property and other_property necessary to carry out the purposes and object of this corporation as permitted by the religious corporations law your bylaws were very brief they stated your name and that your purpose is to provide a place of worship and a study hall for torah studies the entire remainder of the document states according to the orthodox jewish religion one is forbidden to ride in a motor_vehicle on the sabbath therefore it is customary to have small synagogues in the orthodox neighborhoods for those who cannot walk the distance to the large community synagogues our synagogue is a small congregation established for the benefit of the immediate neighborhood our congregation has one class of membership which consists of attending services on a regular basis members are allowed to vote for officers at the annual meeting meetings are held the last day of august of each year at this meeting officers are elected by the vote of members of the congregation the duties of the officers are administrative they solicit the contributions and disburse them according to the needs of the congregation the rabbi of the synagogues exercises his rabbinical authority to insure that all administrative decisions adhere to the orthodox jewish law and tradition if necessary officers will amend the certificate of incorporation these bylaws were signed by individuals b and c the initial proposed budgets that you submitted included all of your expenses as follows meeting and lectures cleaning maintenance supplies supplies organization fee year dollar_figure year dollar_figure dollar_figure dollar_figure year dollar_figure dollar_figure dollar_figure you have requested classification as a synagogue under sec_509 and sec_170 accordingly you submitted a form_1023 with a schedule a for churches as a part of this schedule you indicated that you had an average of attendees at your services and members you responded no to the following inquiries on schedule a m t a - a s t t a d do you have a formal code of doctrine and discipline do you own the property where you have an established place of worship do you have a process by which an individual becomes a member may your members be associated with another denomination or church are all of your members a part of the same family do you conduct baptisms weddings funerals etc do you have a school for the religious instruction of the young do you have schools_for the preparation of your ordained ministers or religious leaders is your minister or religious leader also one of your officers directors or trustees do you ordain commission or license ministers or religious leaders are you part of a group of churches with similar beliefs and structures do you issue church charters do you pay a fee for a church charter do you have other information you believe should be considered regarding your status as a church the narrative description of your activities as included with your original form_1023 in its entirety states that your purposes are to provide a house of worship for prayer services and torah study to residents of the community your application includes the following governing body members individual b - president individual c - secretary individual d - treasurer we asked for additional information regarding your activities and facility you indicated that you had relocated to facility g congregation v which you stated is the owner of the facility has the same surname as individual c w’s address is also the same as v’s the statement in its entirety is as follows you provided a statement signed by individual e on behalf of it is noteworthy that individual e we have the honor to accept you and your kollel members to participate in all prayers and studies at facility g later in the development of your application we asked about the implication of the statement made by congregation v that you do not conduct your own activities but that you join with them for worship you responded that at present we do not conduct our own worship activities however it is customary in the religious orthodox community to have individuals who study religious studies all day to participate in worship activities we asked for you to identify your rabbi or other religious leader you said that individual b is your rabbi we asked for a copy of b's ordination certificate rather than submitting a certificate you submitted a statement from organization w the statement said that this is to confirm that b attended organization w an institute for advanced study of jewish law from date through date he obtained the ordination of rabbi organization w’s letterhead indicated that they were located at facility g approximately one year after you were established we asked if your congregation had increased and you responded no you said that you attract new members through word of mouth you indicated that you do not at this time have any women members the photographs of the facility that you use show a very large building there was no signage that we could see in the photographs to indicate that you were conducting services in that building we asked for you to either provide a congregational directory or a listing of your members including name and address you responded no we asked why you did not provide this information and you responded enclosed please find a list of members again this information was omitted from your response we then asked for you to comment on this omission and you finally submitted a listing of names with no addresses this listing included three pairs of individuals with the same surname we had previously asked if any of your members were related by family or business relations and you responded no was notably absent from this listing also rabbi b we asked if b was otherwise employed and you replied no we asked how you differentiate between synagogue expenses and personal expenses of the officers directors trustees and members you responded that you do not pay personal expenses for these individuals we asked if the living_expenses of the rabbi are paid_by the synagogue how the amounts were determined and by whom you said that only expenses that are paid_by the synagogue for the benefit of the rabbi are for parsonage housing_expenses these amounts would be determined based on the amounts listed on the mortgage bill real_estate tax bill etc there are no benefits paid for members trustees directors or officers we asked why you assumed the mortgage how this transfer came public record showed that not only did b transfer his home to you but that transfer was subject_to existing mortgage on the property the liabilities transferred to you totaled the principal_amount of dollar_figure about and for board meeting minutes to document this decision to these questions you responded simply that the agreement to transfer the property was based on assuming the existing mortgage we asked for you to explain the purpose of holding the property and you said that the main use is to provide a residence for our rabbi and his family there is also a study at this location for the study use of our rabbi and for consultations with members of our organizations we asked for photographs of the facility you own you indicated that the photographs were enclosed but they were omitted we asked for you to provide the minutes for all of your board meetings and you said that you do not have any we requested resumes for each of the board members and for you to describe the activities conducted by each of the individuals on your behalf you said that there are no formal resumes for members of our board however they are all graduates of rabbinical college and are respected members of the community further we asked for you to describe the monetary and non-monetary contributions the members directors trustees and officers make to you you responded n a we requested copies of all of your bank and investment statements since your inception you said that at present we do not have any bank or investment statements however you attached bank statements with your response we asked about this discrepancy and you responded that there was an error when we erroneously stated that we have no bank statements the bank statements included payments to a credit card you indicated that the purpose of these disbursements were to pay for the travel_expenses of the rabbi these expenses are necessary since he is a kosher rabbinical supervisor we asked for documentation of these expenses and you were not able to provide same we asked for a listing of individuals that are authorized to sign checks from your bank account you responded that rabbi b is the only individual with this authority there were also numerous payments made to individuals from your bank account we asked about a few of these and you responded that one of these was a loan no further information provided and two of them were for repairs done to facility h we asked for a list of disbursements you had made to other organizations since your inception including the employer_identification_number ein and the purpose you provided a listing of disbursements including numerous distributions to congregations v and w you omitted the ein numbers the stated purpose that you provided for of these distributions was for religious ed and the other were for charity law sec_501 exempts organizations described in sec_501 of the code from federal income_taxation sec_501 of the code describes corporations organized and operated exclusively for charitable purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section organization fails to meet either the organizational_test or the operational_test it is not exempt if an sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals as defined in sec_1_501_a_-1 sec_1_501_a_-1 of the regulations provides that the terms private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities in not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an exempt_organization must serve a public rather than a private interest the organization must demonstrate that it is not organized or operated to benefit private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests it must not be operated for the benefit of designated individuals or the person who created it in revrul_78_232 1978_1_cb_69 the taxpayer claiming to be a duly ordained minister formed a church the original members of the church consisted of the taxpayer the taxpayer's spouse and two minor children and a few family friends the taxpayer was employed full-time by a state government and continued in this employment after the church was formed the taxpayer's salary checks were received by the taxpayer and deposited into the church's bank account the funds from the church bank account however were primarily used to furnish the taxpayer with lodging food clothing and other living_expenses in a manner comparable to that which the taxpayer previously enjoyed revrul_81_94 1981_1_cb_330 held that a church that was formed by a professional nurse who is also the church's minister director and principal officer and that was used primarily as a vehicle for handling the nurse's personal financial transactions was not exempt from tax under sec_501 c of the code pursuant to a vow of poverty the nurse transferred all of the nurse's assets including the nurse's house and automobile to the corporation all salary payments received from the third-party employer were deposited in a bank account maintained in the name of the corporation in return all of the nurse's existing liabilities such as a home mortgage and all outstanding credit card balances were assumed by the corporation the nurse was also provided with a full living allowance sufficient to maintain or improve the nurse's previous standard of living the corporation permitted the nurse to use the house and automobile for personal purposes revproc_2010_10 superseding revproc_90_27 1990_1_cb_514 sec_4 provides that the internal_revenue_service will recognize the tax-exempt status of an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed section dollar_figure provides that exempt status may be recognized in advance of the organization's operations if its proposed operations are described in sufficient detail to permit a conclusion that it will clearly meet the particular requirements for exemption pursuant to the section of the code under which exemption is claimed sec_4 states that the organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures in 490_fsupp_304 d d c the court said that at a minimum a church must include a body of believers that assemble regularly in order to worship it must also be reasonably available to the public in the conduct of worship in its educational instruction and in its promulgation of doctrine an organization of a few family members who attend worship services at a relative's apartment was held not to be a church under sec_509 and sec_170 because it did not meet these requirements in addition it was held that when the assets of an organization are used to pay for the living_expenses of an individual s denial of exemption is appropriate generally there are fourteen criteria used in determining whether or not an organization qualifies as a church these criteria are as follows d a e a t t t a c s a distinct legal existence a recognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history a membership not associated with any other church or denomination ordained ministers ministering to its congregation ordained ministers selected after completing prescribed studies literature of its own established place of worship regular congregation regular religious services sunday schools_for religious instruction of the young schools_for the preparation of ministers the court stated in cases where church status has been litigated certain criteria have been more heavily weighted it considered the following factors to be especially important e a membership not associated with any other church or denomination e an established place of worship e regular religious services the court case states that although no one characteristic is controlling with some being considered relatively minor the existence of an established congregation served by an organized ministry the provision of regular religious services and religious education for the young and the dissemination of a doctrinal code are deemed to be of central importance unless the organization is reasonably available to the public in its conduct of worship its educational instruction and its promulgation of doctrine it cannot fulfill the necessary associational role in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 74_tc_531 the tax_court considered an adverse_ruling by the irs on an application_for exempt status as a church the applicant had declined to furnish some information and made answers to other inquiries that were vague and uninformative on the basis of the record the court held that the applicant had not shown that no part of its net_earnings inure to the benefit of the family or that petitioner was not operated for private benefit in 485_us_351 108_sct_1179 99_led_368 the supreme court held that an organization must prove unambiguously that it qualifies for a tax exemption in 505_f2d_1068 the court held that an organization seeking a ruling as to recognition of its tax exempt status has the burden of proving that it satisfies the requirements of the particular exemption statute whether an organization has satisfied the operational_test is a question of fact in 74_tc_846 the sixth circuit_court found that although the organization did serve religious and charitable purposes it existed to serve the private benefit of its founders and thus failed the operational_test of sec_501 control_over financial affairs by the founder created an opportunity for abuse and thus the need to be open and candid which the applicant failed to do in 511_fsupp_166 affd 670_f2d_1210 the tax_court upheld irs's denial of exempt status as a religious_organization in a declaratory_judgment action the court held that in factual situations where there is evident potential for abuse of the exemption provision a petitioner must openly disclose all facts bearing on the operation and finances of its organization here plaintiff did not proffer sufficiently detailed evidence of its charitable disbursements or the extent of its support of its members rather plaintiff continually responded that it had already provided the data or could not furnish anything further therefore the court found that the applicant did not meet its burden to positively demonstrate that it qualifies for the exemption the court_of_appeals for the district of columbia circuit in affirming that the organization had not met its burden of establishing that no part of its net_earnings inured to any private individual observed taxpayer confuses a criminal prosecution in which the government carries the burden of establishing the defendant's guilt with a suit seeking a declaratory_judgment that plaintiff is entitled to tax-exempt status in which the taxpayer whether a church or an enterprise of another character bears the burden of establishing that it qualifies for exemption in peoples prize v commissioner t c memo the tax_court upheld the service's determination that an organization failed to establish exemption when the organization failed to provide requested information the court stated applicant has for the most part provided only generalizations in response to repeated requests by the service for more detail on prospective activities such generalizations do not satisfy us that applicant qualifies for the exemption christian echoes nat ministry inc v u s f 2d stated that that tax exemption is a privilege a matter of grace rather than right in 30_tc_1151 the court stated that the applicant for tax exempt status under sec_501 has the burden of showing it comes squarely within the terms of the law conferring the benefit sought in kj's fund raisers v commissioner t c memo affd 166_f3d_1200 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the court_of_appeals in 365_f2d_792 8th cir held inter alia the findings of tax_court that foundation was pursuing a substantially nonexempt purpose in the publication and commercial exploitation of the writings of the director and prime functionary of foundation and that foundation was not entitled to a tax exemption as a religious_organization were clearly supported by evidence in 82_tc_18 the tax_court denied a petition for declaratory_judgment that the organization qualified for exempt status as a church in addition to evidence of a pattern of tax-avoidance in its operations the court noted that the organization had failed to respond completely and candidly to irs during administrative processing of its application_for exemption an organization may not declare what information or questions are relevant in a determination process it cited a number of declaratory relief actions that upheld adverse rulings by the service because of the failure of the applicants to provide full and complete information on which the service could make an informed decision in 73_tc_196 the tax_court held that although separate requirements the private_inurement test and the operated exclusively for exempt purposes test often overlap substantially in 74_tc_507 it was held that the prohibition against inurement or private benefit is absolute the amount or extent not being determinative petitioner's financial decisions are controlled by x one of petitioner's ministers and his wife x received widely fluctuating parsonage allowances over a 3-year period as compensation_for leading services and for being available for pastoral counseling there is no evidence in the administrative record of any differing duties that he performed over these years there is also insufficient evidence in the record regarding some of the travel_expenses paid to x and his wife and regarding two loans made to x's secular employer parsonage allowances of fluctuating amounts were also paid in some years to petitioner's other two ministers yet there is no evidence in the record about any services they performed for petitioner the tax_court concluded that petitioner is not entitled to exemption because a part of its net_earnings inures to the benefit of private shareholders or individuals in new dynamics foundation v united_states supra the court explains that the burden is on the applicant to establish that it meets the statutory requirement under sec_501 of the code application of law you are not described in sec_501 of the code and c -1 a of the regulations because you fail the operational_test you are not as described in sec_1_501_c_3_-1 of the regulations because you were set up to pay the mortgage and related expenses associated with expenses of your own worship activities b such as credit card and travel_expenses you indicated that you do not conduct b’s home and to pay the you are not as described in sec_1_501_c_3_-1 of the regulations because your earnings inure to b and his family you are not as described in sec_1_501_c_3_-1 because you are operated for the benefit of designated individuals specifically b and his family further you are similar to the organizations described in revrul_81_94 and much like the organizations described in these rulings b transferred his home and associated debt to you b also has sole financial control he continues to live as he did prior to the transfer of his property but his mortgage is now paid_by you private interests of b and his family are being served to qualify for exempt status an organization must make a convincing case that they qualify for tax exempt status under sec_501 of the code sec_501 of the code provides for the exemption from federal_income_tax for organizations if they are organized and operated exclusively for religious charitable and educational_purposes as was the case in new dynamics foundation v united_states you have not demonstrated that your operations exclusively further exempt purposes as required by revproc_2010_10 you have not established that you are organized and operated exclusively for exempt purposes and not for the private benefit of its creators designated individuals or organizations controlled by such private interests you are like the organization in american guidance foundation supra you have indicated that you do not conduct worship activities your members are a part of congregation v and worship is conducted at their facilities your responses to schedule a of the application also indicate that you do not meet several of the criteria established in this case for an organization that is a church you do not seem to conduct any religious services of your own you are also like the organizations in better business bureau of washington dc and basic bible church and parker vs commissioner and kj’s fundraisers since your operations include substantial non-exempt purposes specifically your non-exempt purposes include inurement to b and his family members similarly you are also like the organizations’ in basic unit ministry of alma karl schurig peoples prize v commissioner christian echoes nat ministry inc and nelson_v commissioner because you did not respond openly and candidly to our questions questions multiple times and continually received little or no details regarding your operations in fact we asked the same an applicant for exempt status must provide sufficient information for the service to make an informed decision as indicated in national association of american churches supra and bubbling well church of universal love inc v commissioner you must respond to questions completely and candidly your responses did not include details and documentation you have given answers to our inquiries that were vague as in harding hospital inc v united_states supra you have not proven that you satisfy the requirements of the code you have failed to provide enough information to prove to us that you are operating in a manner that would allow you to qualify for exemption under sec_501 of the code applicant’s position you originally stated that your purpose is to have a house of worship for prayer services and torah study for residents of the community you also stated that your established place of worship is located at h you then responded to our queries stating that you have relocated the place where you hold services to g you also provided a letter stating that your members would be joining v at g you stated that your administrative offices were located at h you also stated that the only expenses paid_by you would be parsonage housing_expenses such as the amounts listed on the mortgage bill real_estate tax bill etc upon being asked about the property at g you responded that it was shared with w and that w holds the legal_title to g you stated earlier that v was the owner of the facility g you also stated that you do not have any definitive plans to construct or acquire your own facility you also stated that you made payments for real_estate_taxes on h and also mortgage payments and travel_expenses for b for his duties as a kosher rabbinical supervisor later you contradicted this by stating that the credit card payment was for the mortgage payment for h you further stated that the main use of h was to provide a residence for b and his family and that b uses the facility as a study for consultations with members of our organizations you also stated that the agreement to transfer the property h was based on assuming the existing mortgage further you also stated that you do not at present conduct your own worship activities you provided a list of payments showing the purpose of distribution as religious education service’s response to applicant’s position b is the exclusive signatory of your checking account there appears to be no oversight regarding the checks written you have no board meeting minutes to document your decisions made since your inception rabbi b has written checks to cash to individuals and to pay his personal credit cards these payments were made with no supporting documentation available to allow us to conclude that these payments were in furtherance of c purposes while it may be reasonable for an organization to pay for the parsonage and related expenses of their rabbi it is not clear what b’s duties include with respect to you you recently admitted that you do not conduct worship activities you also do not conduct weddings funerals etc you only have congregants none of which attend your services but rather they attend the services of congregation v the parsonage and related expenses assume the majority of your monthly revenue as the mortgage amount is substantial rabbi b’s donation of his home appears to be a vehicle by which he eliminated his own personal debt but continued to reside in his home besides the fact that in your most recent correspondence you said that you are not currently conducting worship activities which was contradictory to everything you had provided us to that point you do not have an established place of worship your members are a part of congregation v and have been accepted to participate in all prayers and studies at g which is v's facility your activities are not separate or distinct from those of congregation v you do not meet several of the criteria for a church as outlined in american guidance foundation supra you have no flyers or brochures the transfer of the liabilities to you from b who is also your president causes him to receive private_inurement which is fatal to your exemption b continues to live in the home with his family which you now own as per deed executed by b dated january subject_to the existing mortgage and your funds are being used to pay for the mortgage and all related expenses therefore you are not entitled to exemption because your net_earnings inure to the benefit of b your president the application_for tax-exempt status calls for open and candid disclosure of all facts bearing upon an applicant’s organization operations and finances to assure that there is not abuse of the revenue laws disclosed would show that the applicant fails to meet the requirements of sec_501 your responses for clarifications were vague inconsistent and contradictory if such disclosure is not made the logical inference is that the facts if the use by insiders of the organization's property for which the organization does not receive adequate_consideration is a form of inurement and unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement furthermore the courts have repeatedly upheld the service’s determination that an organization has failed to establish exemption where the organization fails to provide requested information an organization will be denied exemption if any of its net_earnings inure to the benefit of private individuals per sec_1_501_c_3_-1 of the regulations even a small amount of inurement will prevent exemption to be granted b is one of the incorporators of your organization as well as the president he is the sole signatory on your checking account he has control_over the operations of your organization and has a personal_interest in your activities thus bis a private individual within the meaning of sec_1_501_a_-1 of the regulations based upon the facts presented you have not demonstrated that this form of compensation paid to b is reasonable therefore you have not established that no part of the net_earnings of your organization inure to the benefit of private individuals as a result you do not meet the requirements for tax exemption conclusion based on the above facts and law we conclude that you are not organized and operated for purposes descried in sec_501 of the code specifically you fail the operational_test because your earnings inure to the benefit of your president your responses to our inquiries for additional information were vague uninformative and contradictory therefore you have failed to meet your burden of demonstrating that you qualify for exemption under sec_501 of the code based on of the inconsistent and contradictory information you have submitted over the course of the development of your application we are unable to conclude that you are operating exclusively for c exempt purposes therefore you fail the operational_test and are disqualified from exemption under sec_501 of the code the transfer of a personal liability as well as sole financial control by one of your officers for the benefit of that officer constitutes prohibited inurement of income under sec_501 of the code and causes you to be disqualified for exemption there under conclusion regarding alternative issue the information you have provided about your operation of a house of worship is vague and contradictory in addition you have stated that you do not conduct worship services your members are part of another congregation and you do not have a place of worship if upon appeal you were found to qualify for exemption you do not meet the requirements to be classified as a church under sec_509 and sec_170 as described above further the information submitted shows you lack the public support to pass the support_test for classification as a public charity therefore we conclude that you are a private_foundation you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations group room p o box cincinnati oh internal_revenue_service eo determinations group main street room cincinnati oh you may fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements


t c memo united_states tax_court douglas d schumann petitioner v commissioner of internal revenue respondent docket no filed date tyler b korn for petitioner joel d mcmahan for respondent memorandum findings_of_fact and opinion kerrigan judge respondent determined deficiencies and a penalty with respect to petitioner’s federal_income_tax returns as follows deficiency dollar_figure big_number penalty sec_6662 --- dollar_figure year the deficiency amount for is the amount in the notice_of_deficiency respondent filed a first amendment to answer which asserts additional schedule e income of dollar_figure dollar_figure increase to petitioner’s nonpassive_income and an erroneous offset of dollar_figure a rule computation will be required to determine the correct deficiency amount for unless otherwise indicated all section references are to the internal_revenue_code code in effect for the tax years in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the issues for consideration are whether petitioner qualifies as a real_estate_professional who materially participated in a real_estate trade_or_business for either tax_year or whether the rental income petitioner received for use of his properties in maine and connecticut is nonpassive_income under the self-rental rules of sec_469 whether petitioner’s rental real_estate losses for are limited by sec_280a and whether petitioner is liable for the accuracy-related_penalty under sec_6662 for tax_year findings_of_fact some of the facts are stipulated and are so found petitioner resided in florida when he filed the petition petitioner graduated from college with a degree in mechanical engineering petitioner’s businesses petitioner has incorporated four companies p-q controls inc p-q controls p-q controls maine inc p-q controls maine n r s associates inc n r s associates and exec-jet inc d b a dds proprietary inc exec-jet p-q controls is an s_corporation with a principal_place_of_business in connecticut p-q controls manufactures electronic controls for construction and mobile equipment in and petitioner was the president and majority shareholder of p-q controls in petitioner was one of four directors of p-q controls and his three adult children were the remaining directors in petitioner was the sole director of p-q controls p-q controls maine is an s_corporation with a principal_place_of_business in maine p-q controls maine provides manufacturing services to p-q controls petitioner was the president majority shareholder and sole director of p-q controls maine in and n r s associates is a florida corporation n r s associates licensed technology to p-q controls during n r s associates did not have any operations in petitioner was the sole shareholder of n r s associates in and exec-jet is an s_corporation during and petitioner was a licensed pilot and in he owned an aircraft petitioner originally formed exec-jet to hold ownership of his aircraft during and exec-jet had no employees exec-jet does not own an interest in p-q controls in p-q controls paid petitioner approximately dollar_figure million on behalf of exec-jet petitioner’s real_estate holdings during and petitioner owned two commercial rental properties one in connecticut connecticut property and one in maine maine property in and petitioner rented the connecticut property to p-q controls and the maine property to p-q controls maine in and petitioner also owned an airplane hangar in florida during and petitioner owned residential properties in florida gordon gordon cutlass gin cutlass kings town gin treasure fort charles green dolphin green dolphin and green dolphin collectively florida properties all residential properties are within a mile of petitioner’s home in florida petitioner purchased six of the properties in and two of the properties in petitioner did not rent out any of the properties in and he was able to rent out only the green dolphin property in petitioner did not sell any of the properties during and petitioner permitted his friends to use the properties occasionally while they were on vacation petitioner owns two apartments on a cruise_ship known as the world the world is a privately owned luxury yacht that travels around the world he purchased the first apartment in and the second apartment in he used one of his two apartments as his residence while aboard the world petitioner spent at least days in and days in aboard the world petitioner deducted the annual maintenance_costs associated with these apartments on schedules e supplemental income and loss of his income_tax returns petitioner reported no rental income from these apartments on his or income_tax return petitioner did not keep a contemporaneous log detailing his real_estate activities during or third-party assistance with the florida properties during and petitioner hired a number of individuals and companies to assist him with the maintenance of his florida properties petitioner hired the forrest co realty of naples inc forrest co downing frye prudential realty and aadvisors realty to market the florida properties the forrest co placed signs on some of petitioner’s properties and helped him attempt to lease his properties petitioner employed thomas frei and michael nichols to manage the renovation and repair of the florida properties mr frei worked for petitioner from date to date he repaired and painted petitioner’s properties solicited contractors for work estimates hired contractors to perform work and paid contractors for their services mr nichols replaced mr frei in date and assumed similar duties and responsibilities mr nichols received a weekly salary petitioner also hired landscapers interior decorators pest control companies air conditioning companies and alarm companies to perform work on the florida properties petitioner’s tax returns petitioner filed a form_1040 u s individual_income_tax_return for tax_year he reported dollar_figure of wages from p-q controls and dollar_figure of wages from p-q controls maine petitioner also reported dollar_figure in management fees from a subcontracting business on a schedule c profit or loss from business petitioner attached a schedule e to his form_1040 on his schedule e petitioner reported dollar_figure and dollar_figure of nonpassive_income from p-q controls maine and p-q controls respectively he also reported dollar_figure of rental income from p-q controls for the connecticut property and dollar_figure of rental income from p-q controls maine for the maine property petitioner also reported dollar_figure of royalties from n r s associates a certified_public_accountant prepared petitioner’s tax_return petitioner submitted a form 1040x amended u s individual_income_tax_return for tax_year on the amended_return petitioner reported the same wages and business income but made changes to his schedule e petitioner added eight of the florida properties cutlass green dolphin fort charles gin gin kings town treasure and cutlass and his apartment aboard the world to his schedule e petitioner reported zero rental income with respect to the eight florida properties and his apartment aboard the world but he reported expenses with respect to those properties petitioner reported dollar_figure of expenses for the florida properties which included insurance mortgage interest taxes utilities management fees ground care pest control pool care and depreciation petitioner’s reported expenses for his apartment aboard the world included dollar_figure of maintenance fees and dollar_figure of depreciation petitioner also attached a document entitled rental real_estate_professional election in which he stated that he was a qualified_real_estate_professional under code sec_469 and wished to elect under code sec_469 to treat all interests in real_estate as a single rental real_estate activity his amended tax_return was prepared by a tax_return_preparer different from the one who had prepared his original return petitioner filed a form_1040 for tax_year petitioner reported dollar_figure of wages from p-q controls and dollar_figure of wages from p-q controls maine petitioner also reported dollar_figure in management fees from exec-jet on a schedule c petitioner attached a schedule e to his form_1040 on his schedule e petitioner reported dollar_figure and dollar_figure of nonpassive_income from p-q controls maine and exec-jet respectively and dollar_figure of nonpassive loss from p-q controls he also reported dollar_figure of rental income from p-q controls for the connecticut property and dollar_figure of rental income from p-q controls maine for the maine property petitioner listed all of his residential properties in florida his apartments aboard the world and his airplane hangar on his schedule e petitioner reported only dollar_figure of rental income from the green dolphin property and dollar_figure of rental income from his airplane hangar petitioner reported dollar_figure of expenses for the florida properties which included cleaning and maintenance commissions legal fees insurance mortgage interest repairs supplies utilities ground care pest control pool care security permits inspections and depreciation petitioner’s reported expenses for his apartments aboard the world included dollar_figure of legal fees dollar_figure of maintenance fees and dollar_figure of depreciation petitioner also attached a document entitled rental real_estate_professional election which is identical to the one he attached to his amended tax_return his tax_return was prepared by the tax_return_preparer who had prepared his amended tax_return notice_of_deficiency on date respondent issued petitioner a notice_of_deficiency for tax_year respondent determined that petitioner was not entitled to the refund that he claimed on his amended tax_return because he did not qualify as a real_estate_professional for tax_year respondent disallowed a deduction for dollar_figure of reported rental real_estate losses because of sec_469 passive loss limitations respondent also determined that petitioner is liable for an accuracy-related_penalty under sec_6662 for tax_year pleadings on date petitioner filed timely the petition on date respondent filed an answer on date respondent filed an amended answer which asserts that petitioner improperly reported the rental payments that he received from p-q controls and p-q controls maine in both and as passive rental income respondent asserts that the rental income is nonpassive_income under the self-rental rules of sec_469 and that petitioner cannot offset this income with his passive losses on date respondent filed a second amended answer in the second amended answer respondent asserts that petitioner’s rental real_estate losses for are limited by sec_280a respondent did not accept petitioner’s amended tax_return and based his adjustments on petitioner’s form_1040 the petition states only that petitioner disagrees with respondent’s determination that he does not meet the requirements to be a real_estate_professional the petition does not specify whether petitioner’s disagreement pertains to both and opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving those determinations erroneous rule a 290_us_111 the taxpayer likewise bears the burden of proving his or her entitlement to deductions allowed by the code and of substantiating the amounts of claimed deductions 503_us_79 sec_1_6001-1 income_tax regs petitioner bears the burden of proving that he is entitled to deduct the passive_activity_losses that he reported for and petitioner does not contend and the evidence does not establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact the commissioner bears the burden_of_proof for any new matters or increases in deficiency asserted in the answer rule a 68_tc_48 respondent did not raise the sec_280a limitation until the second amendment to answer respondent did not raise the self-rental rules of sec_469 until the first amendment to answer therefore respondent bears the burden_of_proof for both issues however we decide these issues by the preponderance_of_the_evidence rather than by reference to the placement of the burden_of_proof i sec_469 taxpayers are allowed deductions for certain business and investment_expenses under sec_162 and sec_212 however if the taxpayer is an individual sec_469 generally disallows any passive_activity_loss for the taxable_year and treats it as a deduction or credit for the next taxable_year sec_469 and b a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the taxable_year over the aggregate income from all passive activities for that year sec_469 a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 a taxpayer is treated as materially participating in an activity only if his or her involvement in the operations of the activity is regular continuous and substantial sec_469 rental_activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 a real_estate_professional sec_469 provides an exception to the rule that a rental_activity is per se passive the rental activities of a taxpayer in a real_property_trade_or_business a real_estate_professional are not subject_to the per se rule_of sec_469 sec_469 see kosonen v commissioner tcmemo_2000_ slip op pincite sec_1_469-9 c income_tax regs rather the rental activities of a real_estate_professional are subject_to the material_participation requirements of sec_469 see sec_1_469-9 income_tax regs a taxpayer qualifies as a real_estate_professional if more than one-half of the personal services performed in trades and businesses by the taxpayer during the taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and the taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 and ii election for the purposes of determining whether a taxpayer is a real_estate_professional a taxpayer’s material_participation is considered separately with respect to each rental property unless the taxpayer makes an election to treat all interests in rental real_estate as a single rental real_estate activity sec_469 sec_1_469-9 income_tax regs a taxpayer makes the election by filing a statement with the taxpayer’s original income_tax return for the taxable_year sec_1_469-9 income_tax regs the statement must contain a declaration that the taxpayer is a qualifying taxpayer for the taxable_year and is making the election pursuant to sec_469 id a - - petitioner did not file a statement with his original tax_return electing to treat all of his interests in rental real_estate as a single rental real_estate activity although petitioner did include a statement making the election with his amended tax_return the election is ineffective because the statement must accompany the original return see shiekh v commissioner tcmemo_2010_126 slip op pincite trask v commissioner tcmemo_2010_78 slip op pincite see also sec_1_469-9 income_tax regs the notice_of_deficiency is based upon the original return accordingly for tax_year we will treat each of petitioner’s properties separately in order to determine whether he materially participated in the particular rental_activity b petitioner filed a statement with his tax_return electing to treat all of his interests in rental real_estate as a single rental real_estate activity the statement stated that petitioner was a qualified_real_estate_professional under code sec_469 and wished to elect under code sec_469 to treat all interests in real_estate as a single rental real_estate activity for tax_year we will treat petitioner’s properties as a single rental real_estate activity material_participation tests a taxpayer is considered to have materially participated in an activity if one of the seven tests listed in the regulations is satisfied sec_1_469-5t temporary income_tax regs fed reg date four tests set forth in paragraph a and are most relevant here the individual participates in the activity for more than hours during such year the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year based on all of the facts and circumstances the individual participates in the activity on a regular continuous and substantial basis during such year a taxpayer may establish hours of participation by any reasonable means sec_1_469-5t temporary income_tax regs fed reg date contemporaneous daily reports are not required if the taxpayer can establish participation by other reasonable means id reasonable means includes appointment books calendars or narrative summaries that identify the services performed and the approximate number of hours spent performing such services id we have noted previously that we are not required to accept a postevent ballpark guesstimate or the unverified undocumented testimony of taxpayers see eg 135_tc_365 lum v commissioner tcmemo_2012_103 estate of stangeland v commissioner tcmemo_2010_185 petitioner testified that he spent over big_number hours in both and doing various tasks connected with his properties he further testified that he worked five to six hours per day six days a week when he was in florida and worked remotely exchanged messages with mr nichols two hours per day when aboard the world mr nichols testified that he witnessed petitioner working on the properties approximately three to four hours per day three to four days per week when petitioner was in town and that he exchanged emails with petitioner however petitioner did not produce any of the emails that he exchanged with mr nichols we decline to accept petitioner’s and mr nichols’ testimony without adequate documentary support petitioner did not keep a contemporaneous log or an appointment calendar tracking his real_estate activities but he prepared a narrative summary of his activities the summary however provides a broad description of the work performed at each property rather than a detailed description of the work that petitioner performed personally the summary does not differentiate between hours that petitioner worked in and hours that he worked in the summary also seems to include hours worked in petitioner contends that the narrative summary is based on the documents that he introduced into evidence petitioner introduced a document labeled daily log for each tax_year that provides the number of hours that he worked during each day in and these documents were prepared during examination the daily log contains contradictions for instance petitioner indicates in the log that on certain dates november and date january to date and june october to and november to date he was in florida inspecting his properties but at trial he testified that he was aboard the world on those dates in the log petitioner indicates that mr frei carried out daily inspections and participated in a daily telecommunications meeting with petitioner in date and march and date mr frei however testified that he worked for petitioner from date to date we believe that the methods that petitioner used to approximate the time that he spent performing services during and are not reasonable within the meaning of sec_1_469-5t temporary income_tax regs supra petitioner’s estimates are uncorroborated and do not reliably reflect the hours that he spent on his rental_real_estate_activities see bailey v commissioner tcmemo_2001_296 slip op pincite petitioner also introduced bank records copies of checks and receipts these bank statements checks and receipts provide no information regarding how many hours petitioner spent working on a given day on his properties furthermore petitioner admitted at trial that he did not personally make all of the purchases represented by the receipts and did not personally write all of the checks petitioner testified that he gave his credit card to mr nichols so mr nichols could make most of the purchases from home depot petitioner testified that deborah houseman an employee of p-q controls retained possession of his p-q controls checkbook and a signature stamp with his name he testified that ms houseman paid many bills on his behalf mr frei testified that he typically received checks from ms houseman to pay expenses relating to petitioner’s properties mr nichols testified that he often paid expenses relating to petitioner’s real_estate properties out of pocket he further testified that he sent an invoice for the expenses to ms houseman and that ms houseman would send him a check with petitioner’s signature added by stamp to reimburse him for the expenses to the extent that petitioner based his narrative summary on the bank records copies of checks and receipts the narrative summary would be a postevent ballpark guesstimate and we are not bound to accept his summary as proof that he materially participated in his rental activities petitioner does not satisfy the first material_participation test for tax_year because he did not prove that he spent more than hours working on any of his properties in he likewise did not satisfy the first material_participation test for tax_year because he did not prove that he spent more than hours working on all of his properties combined in we find that petitioner did not meet his burden of showing that he participated in any of his rental activities for more than hours for either or petitioner does not satisfy the second material_participation test because various employees and independent contractors worked on each of his properties for unknown amounts of time without quantification of the work performed by these third parties we cannot determine whether petitioner’s participation constitutes substantially_all of the participation with respect to any particular property see shiekh v commissioner slip op pincite stating that the taxpayer did not satisfy substantially_all test where tenants were responsible for the maintenance of that property petitioner does not satisfy the third material_participation test because he did not show that his participation in each rental_activity was not less than the participation of any other individual once again petitioner did not provide us with any quantification of the work performed by the many third parties that worked on his properties the evidence suggests that mr frei and mr nichols worked more hours than petitioner mr frei testified that he typically worked as a property manager for hours per week on petitioner’s properties in mr nichols testified that he typically worked or even hours per week on petitioner’s properties in mr nichols testified that he witnessed petitioner working on the properties approximately three to four hours per day three to four days per week when petitioner was in town and that he exchanged emails with petitioner if we were to accept mr nichols’ testimony petitioner would have worked at most hours per week on his properties even if we assume that petitioner worked hours per day six days per week when he was in florida as he contends hi sec_36 hours per week would be fewer than mr frei’s hours in and mr nichols’ hours in finally we cannot conclude that petitioner participated in his rental activities on a regular continuous and substantial basis see sec_1 5t a temporary income_tax regs supra petitioner spent time on his rental activities but we cannot overemphasize the importance of keeping thorough contemporaneous time records rather than making estimates after the fact in addition petitioner’s use of several rental agencies to help find prospective tenants show his properties and market his properties suggests that he did not materially participate in the rental of his properties see bailey v commissioner slip op pincite barniskis v commissioner tcmemo_1999_258 chapin v commissioner tcmemo_1996_56 we conclude that petitioner has not met his burden of proving that he materially participated in any real_estate activity during and since petitioner did not materially participate in any real_estate activity during and he does not satisfy either requirement of sec_469 petitioner does not qualify as a real_estate_professional for either or petitioner’s loss deductions with respect to the florida properties are disallowed for tax years and pursuant to sec_469 b self-rental rules respondent contends that petitioner’s net rental income from the connecticut property and the maine property is nonpassive_income under the self- rental rules of sec_1_469-2 income_tax regs income from rental_activity is generally treated as per se passive_income see sec_469 under the self-rental rules net rental income is reclassified as nonpassive_income if the taxpayer receives the rental income for use of an item of his or her property in a business in which he or she materially participates sec_1_469-2 income_tax regs see also 139_tc_45 rental income that is reclassified as nonpassive cannot be offset by passive losses see 123_tc_275 petitioner owned the connecticut property and the maine property in and he rented the connecticut property and the maine property to p-q controls and p-q controls maine for use in their respective businesses he reported net rental income from both properties for and the self-rental rules apply to this net rental income if petitioner materially participated in the businesses of p-q controls and p-q controls maine during and material_participation in a business is tested in the same way as material_participation in a rental_activity sec_1_469-5t temporary income_tax regs supra we focus on whether on the basis of all the facts and circumstances petitioner participated in the businesses of p-q controls and p-q controls maine on a regular continuous and substantial basis during and see sec_1_469-5t temporary income_tax regs supra petitioner’s tax reporting suggests that he was an active_participant in both businesses in and for petitioner reported dollar_figure of wages from p-q controls and dollar_figure of wages from p-q controls maine on his schedule e he reported dollar_figure and dollar_figure of nonpassive_income from p-q controls maine and p-q controls respectively for petitioner reported dollar_figure of wages from p-q controls and dollar_figure of wages from p-q controls maine on his schedule e he reported dollar_figure of nonpassive_income from p-q controls maine and dollar_figure of nonpassive loss from p-q controls petitioner testified that his income_tax reporting for both years was tax provisioning and that he did not actively provide services to either company in exchange for the wages and payments reported on his tax returns however petitioner testified that he reviewed the monthly financial statements of his companies with bart guthrie he further testified that he would communicate with mr guthrie weekly or biweekly about his companies petitioner acknowledged that he was the majority shareholder president and a director of both p-q controls and p-q controls maine during the years in issue and he testified that he was financially responsible for his companies on date petitioner’s three adult children all minority shareholders of p-q controls commenced a shareholder’s derivative lawsuit against petitioner in the u s district_court for the district of connecticut among other things petitioner’s children alleged that petitioner did minimal work for p-q controls during petitioner denied that he did minimal work for p-q controls during on date petitioner was deposed in connection with the shareholder’s derivative lawsuit petitioner admitted that he was responsible for ensuring that p-q controls had enough resources to invest capital in new projects petitioner also admitted that he was involved actively in sales calls during and petitioner also stated that as of the date of the deposition he was still with p-q controls creating and inventing and continued to be a participant in the overall strategy and growth of the business we conclude that petitioner participated in the businesses of p-q controls and p-q controls maine on a regular continuous and substantial basis as a consequence petitioner’s net rental income is nonpassive and cannot be offset by any passive_activity_losses that he incurred with respect to any other properties see 139_tc_396 ii sec_280a respondent contends that the deductions that petitioner claimed for tax_year with respect to his apartments aboard the world are limited by sec_280a sec_280a provides that no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence see also langley v commissioner tcmemo_2013_22 at a dwelling_unit is a residence if the taxpayer uses the dwelling for personal purposes for a number of days equal to the greater of days or of the number of days during the year for which the unit is rented at a fair rental value sec_280a see also langley v commissioner at personal purposes include personal_use by the taxpayer and personal_use by any other individual unless that individual is renting the dwelling for fair rental value sec_280a petitioner owns two apartments aboard the world he used one of his two apartments as his residence while aboard the world he spent at least days in aboard the world petitioner testified that he offered his second apartment aboard the world as a live auction item to help raise money for charities he further testified that his donations led to auction bidders’ using his second apartment aboard the world for to weeks petitioner did not provide any evidence that either apartment was rented at fair rental value in because both of petitioner’s apartments were used for personal purposes for at least days in both apartments are treated as residences for we find that the deductions that petitioner claimed for with respect to his apartments aboard the world are limited by sec_280a iii accuracy-related_penalty respondent contends that petitioner is liable for an accuracy-related_penalty under sec_6662 for tax_year sec_6662 provides a penalty for an underpayment attributable to negligence or disregard of rules or regulations within the meaning of sec_6662 the commissioner bears the burden of production regarding the taxpayer’s liability for any penalty sec_7491 see also 116_tc_438 once the commissioner has met this burden the taxpayer must provide persuasive evidence that the commissioner’s determination was incorrect see rule a higbee v commissioner t c pincite negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws to exercise due care or to do what a reasonable and prudent person would do under the circumstances sec_6662 85_tc_934 sec_1_6662-3 income_tax regs negligence also includes any failure by a taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs respondent has demonstrated that petitioner failed to keep accurate records with respect to his participation in his rental activities the participation of third parties in his rental activities and his participation in the businesses of his companies respondent has shown that petitioner acted negligently with respect to the accuracy-related_penalty does not apply with respect to any portion of an underpayment for which it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 for purposes of sec_6664 a taxpayer may be able to establish reasonable_cause and good_faith by showing reliance on professional advice sec_1_6664-4 income_tax regs to establish good_faith and reasonable_cause through reliance on professional advice the taxpayer must show that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir petitioner’s original tax_return was prepared by a certified_public_accountant he testified that after his tax_return was filed he decided to have a second tax_return_preparer reassess the tax_return because he had concerns about the tax_return he testified that the second preparer informed him that the original tax_return had many omissions petitioner hired the second tax preparer to draft an amended tax_return after reviewing the amended_return petitioner decided to file the amended tax_return this preparer also prepared petitioner’s tax_return petitioner did not call either of his tax_return_preparers to testify petitioner did not keep books_and_records adequate to substantiate his status as a real_estate_professional we think petitioner acted without reasonable_cause and did not act in good_faith we hold that petitioner is liable for a sec_6662 penalty for negligence for any contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------- --------------------- -------------------------------------- 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 psi b04 plr-116821-14 date october legend -------------------------------- -------------------------------------------------------- --------------------- --------------------------------------------------------- ------------------------------------ ---------------------------------------------------------------------- grantor spouse grantor trust trust trust ---------------------------------------------------------------- date date date date date date date date child taxpayers 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------------------------------------------------------------------------------------------ court ----------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --- ----------------------------------------------------------------------------------- plr-116821-14 -------------------------------------------- ---------------------- ----------------------------------------------------------------------------- county farm agreement of sale -------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- -------------------------------------------------- a v w x y z limited_partnership trustee trustee year -------------------- ---------- ---------- ----------------- ------------ ------------ ------------ ------------------------- -------------------------------- ------- dear ----------------------- this letter responds to your authorized representative’s letter of date requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of a proposed transaction the facts and representations submitted are summarized as follows on date grantor established an irrevocable_trust trust for the benefit of himself spouse and his lineal_descendants grantor died on date and spouse died on date the corporate trustee of trust is trustee on date grantor established a revocable_trust trust for the benefit of himself on date grantor amended trust so that income was paid in equal shares to his daughter grantor 1’s spouse spouse and his son child for life in addition on date grantor released his right to further amend or revoke trust on date by court order trust as amended was divided into two irrevocable equal trusts one for the benefit of spouse and her descendants trust and one for the benefit of child and his descendants grantor died on date the corporate trustee of trust is trustee trust and trust and the trust beneficiaries of those trusts taxpayers are the parties requesting this ruling currently the beneficiaries of trust and trust are essentially the same trust provides that the trustees are to pay the net_income for the benefit of grantor 1’s issue share and share alike per stirpes trust terminates twenty-one years after the death of the survivor of grantor 1’s three children trust provides that the trustees are to pay the net_income to spouse’s issue per stirpes trust terminates twenty-one plr-116821-14 years after the death of the last surviving lineal descendant of grantor living at the time of grantor 2’s death trust and trust together own farm in county trust owns y acres and trust owns z acres the acreage in farm owned by trust and trust is generally contiguous however the acreage owned by each trust was acquired at different times so that some of the parcels owned by each trust are land-locked and access to these parcels from a public road is only possible via easements over acreage owned by the other trust the trustees of both trusts have decided it is in the best interest of trust and trust to sell the property in a coordinated sale the real_estate owned by each trust is subject_to various zoning and land use restrictions and is not currently serviced by public water and sewer the property is currently zoned for agricultural and residential use and for public land use farm has been on the market for several years since year the purchaser is limited_partnership which is owned by a who is a lineal descendant of both grantor and grantor and is the trustee of a_trust that is a current beneficiary of trust and a contingent beneficiary of trust a is a licensed real_estate broker and is a developer of residential real_estate in the area where farm is located the agreement of sale was negotiated by trustee of trust and trustee of trust with some input from the beneficiaries the trusts and a the purchaser were represented by separate counsel it is represented that the sale price is dollar_figurex which is consistent with two independent appraisals and recent land sales in the area upon completion of all closings trust will receive w percent of the purchase_price and trust will receive v percent of the purchase_price the sellers’ obligations are conditioned on trust and trust receiving approval of the sale from court the beneficiaries of trust and trust performing certain conditions in the event trust terminates prior to the closing of the sale the beneficiaries of trust and trust approving and ratifying the agreement of sale and the taxpayers receiving a favorable private_letter_ruling trust will terminate on date and trust will terminate at a much later date yet to be determined trust and trust were irrevocable prior to date it is represented that no additions have been made to trust or trust after date you have requested the following rulings the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy hereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under plr-116821-14 sec_26_2601-1 of the generation-skipping_transfer_tax regulations and distributions from trust and trust will not be subject_to gst tax under sec_2601 of the internal_revenue_code provided that no additions actual or constructive are otherwise made to trust or trust the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death ruling sec_2601 imposes a tax on each generation skipping transfer under a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the plr-116821-14 time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust trustees will seek court approval of the sale of farm trustees will join with all living beneficiaries of trust and trust in the proposed court proceeding the agreement of sale will only be binding on trust and trust if the trusts receive approval from court as part of the proceedings the trustees will petition the court to appoint a guardian and trustee ad litem to represent the interests of minor unborn and unascertained descendants of grantor and grantor in addition the agreement of sale is binding only if trust and trust receive from all beneficiaries of trust and trust ratification and approval of the agreement of sale as part of the court approval process court must determine that the agreement of sale is fair and reasonable which determination includes the determination that the price reflects a fair_market_value and that the other terms of the sale are reasonable in this case trust and trust were irrevocable prior to date therefore trust and trust are currently exempt from gst tax the agreement of sale and sale of farm is binding on trust and trust only if court approves the sale the execution and or the carrying out of the terms of the agreement of sale and the sale of farm are administrative in nature and will not shift a beneficial_interest in trust or trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to entering into the agreement of sale or the sale of farm further execution of the agreement of sale and the sale of farm does not extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for in the original trusts plr-116821-14 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy thereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under sec_26_2601-1 and distributions from trust and trust will not be subject_to gst tax under sec_2601 provided that no additions actual or constructive are otherwise made to trust or trust ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift and shall be included in computing the amount of the gifts made during the calendar_year sec_25_2512-8 of the gift_tax regulations provides that transfers reached by the gift_tax are not confined to those only which being without a valuable consideration accord with the common_law concept of gifts but embrace as well sales exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money_or_money's_worth of the consideration given therefor however a sale exchange or other transfer of property made in the ordinary course of business a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_consideration in money_or_money's_worth trust and propose to sell acreage in farm it is represented that the trustees have obtained two independent appraisals on the value of farm and that the sales_price is consistent with the appraisals and other sales of land in the area the agreement of sale has been negotiated at arm’s length by the corporate trustees of trust and trust the beneficiaries of both trusts must consent to the sale the trusts and a the purchaser were represented by separate counsel to secure approval of court the trustees will have to demonstrate that the agreement of sale is fair reasonable and plr-116821-14 that the terms are arm’s length the trustees have a fiduciary duty to act in the best interests of all of the beneficiaries based on the facts submitted and the representations made and provided court approves the agreement of sale and finds the agreement of sale is fair reasonable and that the terms are arm’s length we conclude that the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a ruling sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2035 provides that if the decedent transferred by trust or otherwise an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the transferred interest or relinquished power had been retained by the decedent on the date of death the value of the gross_estate shall include the value of any property or interest therein that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_consideration in money_or_money's_worth by trust or otherwise under which the decedent has retained for his life or for any period not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent's death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if the possession or enjoyment thereof can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of the reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of the property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at plr-116821-14 any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent's death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death in order for sec_2035 through to apply a decedent must have made a transfer of property or any interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in this case the corporate trustees of trust and trust propose to sell farm to limited_partnership owned by a in exchange for dollar_figurex the acreage in farm is an asset of each trust the beneficiaries are not transferring assets to trust trust or any other trust accordingly the beneficiaries are not transferors for purposes of sec_2036 sec_2037 or sec_2038 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-116821-14 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes