internal_revenue_service number release date index number ---------------------------- --------------------------------- -------------------------------------- ------------------------- ----------------------------------- -------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b05 plr-111861-05 date date legend community -------------------------------------- reservation --------------------------------------- x ----------- y --------- z --------- locality ----------- state ---------- tribe a -------------------------------- tribe b ---------------------------- dear ---------------- this is in response to your authorized representative’s request for a private_letter_ruling on behalf of community and its members specifically you have asked whether certain payments made to community members will be exempt from federal taxation under the general welfare doctrine and whether community will have any information reporting or withholding requirements with respect to such payments plr-111861-05 facts community is a federally-recognized indian_tribal_government organized and operated under a constitution and bylaws approved by the secretary of the interior secretary in pursuant to the indian reorganization act of and later amended and approved by the secretary in the community exercises self-governance and sovereign jurisdiction over the reservation the reservation consists of x acres located within and adjacent to locality in state the community is divided into seven districts and is composed of members of two tribes tribe a and tribe b there are approximately y enrolled members of the community and approximately z members reside within reservation the income assets educational levels and housing conditions of community members and their families residing on reservation are substantially lower than elsewhere in the greater locality metropolitan area or within state the community is governed by the community council which is composed of enrolled members of the community who are at least years old the community council members are elected by the qualified voters of their respective districts for three-year terms each district elects at least one member of the community council more populous districts elect additional members each district may elect a district council composed of representatives of the villages or settlements within the district the district councils serve as advisory boards and perform other administrative duties as assigned by the community council the community council is vested with all of the sovereign legislative powers of the community the community’s constitution empowers the community council to promote and protect the health peace morals and general welfare of the community and its members the community raises revenue to fund its operations through taxation commercial leases and gaming activities conducted pursuant to the indian gaming regulatory act u s c and u s c - the community also raises revenue through its involvement in farming industrial parks recreational facilities and other economic development activities the areas in which the community administers tribal government programs include housing education health care social services public safety and economic development the community also administers a variety of federally funded programs although federal programs provide some housing assistance to community members plr-111861-05 federal assistance has not provided all community members with safe and affordable housing on the reservation much of the housing continues to be substandard overcrowded or lacking indoor plumbing electricity roofs or floors community members face a number of obstacles in attempting to obtain adequate housing such obstacles include below average employment and savings rates and below average educational levels and income community members are also adversely affected by various health problems in addition construction costs are higher on the reservation because of the relatively remote location of many home sites and the lack of existing infrastructure finally community members encounter difficulties in obtaining conventional home financing because of these problems and because of the restricted status of real_property on the reservation imposed by federal_law accordingly the community council established a housing assistance program program to provide housing assistance to qualified community members based on a needs-based priority system the community previously operated a similar housing assistance program that was replaced by the program in the purpose of the program is to expand the supply of safe decent and affordable housing within the reservation for eligible community members and their families each year the community council will decide whether and to what extent to fund the program under the program administered by the community housing department community members may apply for grants to finance new home construction on the reservation or for the rehabilitation of existing homes on the reservation other grants are available for home improvements designed to bring homes into compliance with the community building code or to perform minor repairs the program also provides for rental assistance for families awaiting more permanent housing to ensure that grant funds are used for their intended purpose funds are not paid directly to community members instead the funds are paid to the contractor building a new home or performing repairs on an existing home or to a landlord providing temporary housing in order for a community member to qualify for any benefit under the program the member’s family gross_income must be less than the locality metropolitan statistical median gross_income for a household of the same size the maximum grant that any community member may receive under the program for new home construction is based on united_states department of housing and urban development hud guidelines for total development costs for affordable housing built on indian reservations throughout the united_states hud guidelines incorporate the higher than average cost of housing development on the reservation as compared with other reservations each year each of the districts on the reservation will prepare for submission to the housing department a prioritized list of community member applications that the plr-111861-05 district has approved for program grants the list will be divided between applications that have not been approved by the housing department and applications that have been approved by the housing department but were not funded in the previous year the list will also be prioritized according to seven categories previously approved applications that were not funded in the prior year elderly and disabled families with very low income elderly and disabled families with low income other eligible elderly and disabled families other families with very low income other families with low income and other eligible families category families will be prioritized in the same order that they were in the prior year families in the other categories will be prioritized according to the severity of the family’s housing conditions and need as determined by the district the program requires that if within years a community member conveys a home with respect to which they received a program grant to any person other than a community member who would qualify for program benefits the member must pay a penalty the penalty is the amount of the grant multiplied by a fraction the numerator of which is minus the number of years since the grant and the denominator of which is in addition for years a community member who has received a program grant will also be liable for the same penalty if they establish their principal_residence outside the reservation without conveying the home with respect to which they received a program grant law sec_61 of the internal_revenue_code_of_1986 code provides that except as otherwise provided by law gross_income means all income from whatever source derived under sec_61 congress intends to tax all gains or undeniable accessions to wealth clearly realized over which taxpayers have complete dominion 348_us_426 individual community members are citizens of the united_states and are subject_to federal_income_tax unless specifically exempted by treaty or statute see revrul_67_284 1967_2_cb_55 modified on another issue by revrul_74_13 1974_1_cb_14 amplified by revrul_94_16 1994_1_cb_19 amplified by revrul_94_65 1994_2_cb_14 the internal_revenue_service irs has consistently held that payments to individuals by governmental units under legislatively provided social benefit programs for promotion of the general welfare are excludable from the recipient's gross_income general welfare exclusion sec_7701 defines indian tribal governments as the governing bodies of indian tribes bands communities villages or groups of indians and recognizes that these bodies exercise governmental functions in general where indian tribal governments act in such capacity to provide general welfare-type benefits of a kind traditionally provided by federal state or local governmental bodies as in the instant circumstances plr-111861-05 the federal_income_tax treatment of such benefits is analogous the general welfare exclusion applies only to governmental payments out of a welfare fund based upon the recipients' identified need which need not necessarily be financial and not where made as compensation_for services see eg revrul_57_102 1957_1_cb_26 payments to the blind revrul_74_74 1974_1_cb_18 awards to crime victims or their dependents revrul_74_205 1974_1_cb_20 hud replacement housing payments to aid displaced individuals and families revrul_75_271 1975_2_cb_23 assistance payments for lower income families to acquire homes revrul_76_395 1976_2_cb_16 home rehabilitation grants to low-income recipients revrul_77_77 1077_1_cb_11 payments to indians to stimulate and expand indian owned economic enterprises and revrul_98_19 1998_1_cb_840 relocation payments made to flood victims in revrul_75_271 supra the irs held that mortgage assistance payments to lower income individuals provided under a governmental housing program designed to assist lower income families in acquiring home ownership and that were based on a consideration of financial need determined under hud guidelines were in the nature of general welfare_payments and were excludable from recipient's gross incomes under the general welfare exclusion in revrul_77_77 supra the irs concluded that grants made under a governmental program designed to meet a legislatively identified need of indians of various tribes in the united_states were payments in the nature of general welfare and excludable from recipients' gross incomes in the instant circumstances based on the information submitted and representations made we conclude that the grants made by the community under the program are similar to those benefits previously considered by the irs in the authorities addressed above are similarly within the scope of the general welfare exclusion and are thus excludable from the gross incomes of recipients for federal_income_tax purposes the subject benefits are made by a governmental body from a governmental welfare fund pursuant to a legislative enactment for the promotion of the general welfare and do not represent either compensation_for services or per capita distributions of net_revenues from class ii or iii gaming activities reporting and withholding obligations sec_6041 of the code provides with exceptions not applicable here that any person engaged in a trade_or_business must file an information_return with respect to certain payments made in the course of that trade_or_business to another person aggregating dollar_figure or more in the calendar_year this filing requirement applies to payments whether made in cash or property of salaries wages commissions fees other forms of compensation_for services and other fixed or determinable gains profit or income plr-111861-05 sec_6041 of the code requires persons who are required to make returns under sec_6041 to furnish to the recipient of the payment a written_statement showing the name address and identification_number of the person making the return and the aggregate amount_paid to the recipient that is required to be shown on the return sec_1_6041-1 of the regulations defines fixed or determinable income income is fixed when it is to be paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_6041 of the code requires the reporting of all compensations or other fixed or determinable gains profits and income the word income as used in sec_6041 is not defined by statute or regulation however its appearance in the phrase fixed or determinable gains profits and income indicates that what is referred to is gross_income thus the payments of compensation and other_amounts required to be reported under sec_6041 are those includible in gross_income under sec_1_6041-1 information returns required by sec_1_6041-1 must be made on forms and because income under sec_6041 of the code is interpreted to mean only income includible in gross_income under sec_61 the payments made by the community under the terms of the program are not required to be reported under sec_6041 sec_3402 extends the withholding provisions to certain taxable payments of indian casino profits the grants made by the community are not taxable payments of casino profits accordingly the community does not have a withholding requirement under sec_3402 with respect to the grant amounts accordingly based on the information submitted and representations made we conclude that payments to individuals pursuant to the program as described above are in the nature of general welfare and therefore are not includible in the members’ gross_income accordingly the community is not required to report such payments under sec_6041 or to withhold any amounts with respect to such grants except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by plr-111861-05 the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_04_1 2004_1_irb_7 however when the criteria in section dollar_figure of revproc_04_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant 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 sincerely william a jackson branch chief branch income_tax accounting cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division ' uniform issue list dec tep ra t3 legend company a amount d amount e date m date n account w ira x dear this is in response to your request dated date as supplemented by correspondence dated date and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ page the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you are years old and maintain ira x with company a you assert that your failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to mental and physical incapacities which impaired your ability to handle your financial affairs including the rollover of amount d on date m you withdrew amount d from ira x you also received the required_minimum_distribution of amount e you intended to roll amount d back into an ira within the days medical documentation submitted with your request indicates the severity of your chronic medical problems and the extent of your treatment for these conditions at all times during the 60-day period you had sufficient funds to complete the rollover based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to amount d contained in sec_408 of the code in this instance sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt page 2u0845uu48 such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information you presented and the documentation submitted on your behalf demonstrate that you were effectively disabled and incapable of handling your financial affairs in an appropriate manner therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x you are granted a period of days from the issuance of this ruling letter to contribute amount d into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount d will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent page 2u064 if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t id ewen at sincerely yours kromet tomhden ff employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ----------------- --------------------------------------- ----------------------------------------- --------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-150123-03 date date ----------------- ----------------------------------- -------------------------------------- this responds to your letter dated date and subsequent legend x ------------------------------------------ a -------------------------------------------- d1 dear -------------- correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 a the sole shareholder of x intended for x to be an s_corporation effective for the taxable_year beginning d1 but form_2553 election by a small_business_corporation was not filed timely this intent is evidenced by the minutes of a board_of directors meeting on d1 which states x’s intent to make the election to be taxed under subchapter_s accordingly x requests a ruling that it will be treated as an s_corporation effective d1 any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year sec_1362 provides that if -- a an election under sec_1362 is made for except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer who requested it sec_6110 based solely on the facts and the representations submitted we conclude that x plr-150123-03 has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 provides that it may not be used or cited as precedent being forwarded to x enclosures j thomas hines chief branch associate chief_counsel passthroughs and special industries pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes sincerely yours


t c memo united_states tax_court richard j and carol c spera petitioners v commissioner of internal revenue respondent docket no filed date c the wholly owned corporation of h constructed a building on land owned by h and w ps r determined and argues that the expenditures_for this building are constructive dividends to ps ps argue that the land was leased to c and that the expenditures were not constructive dividends to them held because the expenditures were made with the primary intention and result of conferring a benefit on ps c's expenditures are constructive dividends to ps to the extent of c's earnings_and_profits held further ps are liable for the accuracy- related penalties determined by r under sec_6662 i r c to the extent described herein james j mahon for petitioners monica e koch and andrew mandell for respondent memorandum findings_of_fact and opinion laro judge respondent determined deficiencies in the respective amounts of dollar_figure dollar_figure dollar_figure and dollar_figure in petitioners' through federal_income_tax an addition_to_tax under sec_6651 for and accuracy-related_penalties under sec_6662 for through following concessions by both parties we must decide whether petitioners received constructive dividends in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure in through respectively as a result of expenditures made by general refining and smelting corp grc richard j spera's mr spera wholly owned corporation and whether petitioners are liable for accuracy-related_penalties under sec_6662 for through unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference when the petition was filed petitioners resided in northport new york for the years in issue petitioners filed form sec_1040 u s individual_income_tax_return using the filing_status of married filing joint_return in petitioners acquired title to approximately acres of real_property the ashland property the property is located in ashland new york in the catskill mountains and within minutes of a ski area called ski windham at the time of purchase a small farmhouse and garage were located on the property petitioners have since used the house as a vacation home mr spera a metallurgical chemist by trade was the sole shareholder of grc during the years in issue grc's operations were located in a building in hempstead new york the hempstead building grc incorporated on date was in the business of assaying and melting precious metals grc's assaying business consists of ascertaining the weight and the purity of gold and silver the melting business consists of liquefying metal grc also conducts a sweeps operation out of the hempstead building the sweeps operation services customers in the manufacturing jewelry and electronics fields these businesses use precious metals and create a byproduct of waste materials grc burns crushes sieves assays and sends these waste materials to a smelter grc filed its through forms u s_corporation income_tax return based on a taxable_year ended on july in or around mr spera and grc entered into a lease agreement in petitioners ascertained that they had lost their copy of the original lease and that larry gardner mr gardner the attorney who prepared the original lease had also lost his copy petitioners asked mr gardner to prepare a replacement lease that embodied the terms of the original lease and he did under the replacement lease dated date petitioners leased approximately dollar_figure acres of the ashland property to grc from date to august for an annual rent of dollar_figure payable in equal monthly installments grc is obligated to pay as additional rent all sums required for town taxes school taxes land scaping sic building maintenance and snow removal under the terms of the lease grc is given an option to renew the lease upon the same terms as set forth therein for an additional term of years and an option to purchase the property at a price to be agreed upon the replacement lease also provided that grc shall be allowed to construct a two story building with basement upon the subject premises the building's purpose is not identified in the replacement lease petitioners signed the agreement as the lessors and lori romandi ms romandi an employee of grc signed in an unidentified capacity for grc the lessee neither the original lease nor the replacement lease was recorded on date an application signed by mr spera was made to the building department town of ashland for the issuance of a building permit the application identifies the address of the proposed building as mile north - mail route road - west side the application identifies the intended use of the building as farm and storage the total cost of construction at dollar_figure and huntersfield as the contractor the town of ashland approved the building permit application and issued a building permit on date sometime thereafter huntersfield ltd d b a lewis creek group huntersfield incorporated on date started construction on the ashland building for through grc paid dollar_figure dollar_figure dollar_figure and dollar_figure respectively for construction-related expenses on the ashland building all construction including electrical work was completed on the ashland building as of date and a certificate of occupancy was issued by the town of ashland on date the certificate of occupancy identifies the type of property as commercial and residential year round the ashland building consists of three floors each floor is approximately big_number from to mr spera and timothy abresch mr abresch were each 50-percent owners of huntersfield square feet the first floor is primarily of concrete construction the second floor is of timber construction and the third floor is of timber construction on the outside with cedar interior wood from date to date petitioners have resided in the ashland building's third floor living quarters and as of date the first floor of the ashland building is being used as an operational precious metals melting facility petitioners did not report any rental income on their through tax returns from through and through petitioners paid all property_tax bills on the ashland property as follows dollar_figure in dollar_figure in dollar_figure in dollar_figure in dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in for the period date through date petitioners paid dollar_figure dollar_figure and dollar_figure respectively for school taxes on the ashland property for its taxable years ended date through grc's forms report other assets relating to construction in progress in the respective amounts of dollar_figure dollar_figure and dollar_figure for the taxable_year ended date grc reported only dollar_figure in other assets relating to construction in progress its buildings and other depreciable assets were increased from dollar_figure to dollar_figure under its depreciation summary grc showed a building placed_in_service on date with a basis of dollar_figure for the taxable_year ended date grc reported an increase in its buildings and other depreciable assets to dollar_figure of which dollar_figure was attributable to a building improvement placed_in_service on date for the taxable_year ended date grc reported an increase in its buildings and other depreciable assets to dollar_figure of which dollar_figure was attributed to building improvements placed_in_service on date for the taxable_year ended date grc reported a decrease in its buildings and other depreciable assets to dollar_figure however dollar_figure was shown expended for building improvements placed_in_service on date on its returns for the taxable years ended date through grc deducted the following amounts for real_estate_taxes paid dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure during the years in issue grc made the following payments to mr spera in dollar_figure for taxes on the barn in dollar_figure for reimbursement of taxes paid on the barn in dollar_figure for taxes on ashland from through grc maintained insurance coverage with hartford fire insurance co on various applications for insurance insurance policies amendments and riders the hempstead building was identified as a refining operation and or a precious metals refinery and the ashland building was identified as an office building and or other eligible professional offices the parties failed to stipulate to grc's earnings_and_profits during the years in issue grc's retained earnings for the taxable years ended date through were dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively the retained earnings do not account for constructive dividends in the respective amounts of dollar_figure and dollar_figure imputed to petitioners in their and tax years or for petitioners' concession that they received constructive dividends in and in the respective amounts of dollar_figure dollar_figure and dollar_figure other than the constructive dividends imputed to petitioners in and and petitioners' concession grc did not pay any dividends from through in the notice_of_deficiency dated date respondent determined among other things that petitioners received constructive dividends based on building additions in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively for through the expenditures emanating from the building additions which remain in dispute for through are dollar_figure dollar_figure dollar_figure and dollar_figure respectively opinion the primary issue we must decide is whether construction expenditures made by grc constituted constructive dividends to petitioners respondent argues that the purported lease agreement between petitioners and grc was not negotiated at arm's length that the lease should be disregarded and that the money grc expended on the ashland building should be treated as constructive dividends to petitioners petitioners argue that sec_109 specifically removes the expenditures at issue from the definition of gross_income and that grc's expenditures are thereby not income to petitioners petitioners bear the burden of proving respondent's determination wrong rule a 290_us_111 i economic reality and the lease agreement as a general_rule improvements made by a lessee to a leasehold estate do not result in the realization of income by the lessor in the year of the improvement or upon termination of the lease sec_109 305_us_267 37_tc_1134 weigel v commissioner tcmemo_1996_485 however this rule and the case law developed thereon do not apply where the lease agreement is determined to be a subterfuge or a sham 324_us_331 jaeger motor car co v commissioner tcmemo_1958_223 affd 284_f2d_127 7th cir therefore as an initial matter we must ascertain whether the lease arrangement between grc and petitioners has any economic reality and should be respected for tax purposes because transactions between shareholders and their closely held corporations are easily manipulated we examine such a transaction with special scrutiny see 56_tc_1324 affd without published opinion 496_f2d_876 5th cir we evaluate the realities or substance of the transaction and are not bound by the form the transaction may take commissioner v court holding co supra 308_us_473 specifically when evaluating a lease arrangement between a taxpayer and his wholly owned corporation we consider not only the lease itself but also the testimony of witnesses and the surrounding circumstances see weigel v commissioner supra based on our detailed review of the record we conclude that there was no economic reality behind petitioners' and grc's lease agreement and that sec_109 and m e blatt co v united_states supra are inapposite first we find that the terms of the lease are not commercially reasonable we do not believe that a lessee dealing at arm's length would agree to rent property worth approximately dollar_figure for years of equal payments totaling dollar_figure indeed such a stream of payments would constitute a 30-percent annual return to the lessor over the years exclusive of any appreciation on the underlying land and without consideration of any improvements made thereon further the option to rent the land for an additional years contains no provision for a corresponding increase in rent or reference to establishing the rent in accordance with a then- current fair rental value and the option to purchase the land contains no terms or objective measurement by which to do so we also find that mr spera and grc did not take adequate steps to determine the fair rental value of the dollar_figure acres of land among other things mr spera made no effort to determine what the prevailing rental rate was for similar parcels of property in the same locale see weigel v commissioner supra second we find that grc and petitioners did not intend to honor the terms of the lease grc did not pay and petitioners did not receive any rent during the years in issue we also note that contrary to the lease petitioners paid all town taxes school taxes and other expenses for through we have calculated this 30-percent return using basic present_value formulae petitioners argue that the parties to the lease never intended for rental payments to commence prior to the issuance of the certificate of occupancy further petitioners claim that grc began making rent payments in after the certificate of occupancy was issued on date given the fact that no rental receipts were reported on petitioners' federal_income_tax return we are not persuaded by petitioners' argument although the record shows that grc did make a series of payments to mr spera during through for the stated purpose of paying taxes on a barn and ashland we are unable continued and third we reject petitioners' argument that numerous business reasons and corporate meetings demonstrate that there was a valid lease between grc and petitioners for example mr spera cited numerous business reasons for the relocation of grc's refinery operations to include rental and utility costs incurred by grc for the business_premises located in hempstead new york were extremely high relative to rental and utility costs in other areas in new york outside of the new york metropolitan area and grc could operate much more efficiently and profitably by moving to an upstate new york location however for the years at issue and thereafter grc continued to pay rent for the hempstead building mr spera testified that this fact is not inconsistent with the stated business_purpose but instead naturally arises from the fact that the completion of the ashland building was delayed due to a severe economic downturn in grc's business we do not assign any weight to petitioners' argument although grc's gross_receipts declined from the taxable_year ended date to taxable_year ended date grc's gross_profits and taxable_income increased significantly mr spera's proffered business reasons are continued to find that these payments were indeed payment of taxes under the terms of the lease grc's federal_income_tax returns do not reflect a corresponding deduction for real_estate_taxes paid and petitioners have not demonstrated that grc's deductions for rent paid include payment of taxes on the ashland building nothing more than after the fact self-serving espousals designed to make the lease seem bona_fide ii constructive dividends as a result of our finding that there was no economic reality behind grc's and petitioners' lease agreement we now turn to the question of whether grc's construction expenditures constitute constructive dividends to petitioners sec_61 includes dividends in a taxpayer's gross_income sec_316 defines dividends as any distribution_of_property made by a corporation to its shareholders out of its earnings_and_profits sec_1_317-1 income_tax regs provides that the term 'property' means any property including money securities and indebtedness to the corporation other than stock or rights to acquire stock in the corporation making the distribution where a corporation confers an economic benefit on a shareholder without the expectation of repayment that benefit may be a constructive_dividend taxable to the shareholder see sec_61 fields v commissioner tcmemo_1996_425 construction services performed by a corporation which improve property owned by its shareholder may constitute a constructive_dividend 73_tc_980 likewise transfers between related corporations can result in constructive dividends to their common shareholder if they were made primarily for his or her benefit and if he or she received a direct or tangible benefit therefrom 74_tc_60 69_tc_877 the amount of the constructive_dividend reflects the benefit conferred on the shareholder 56_tc_1225 the crucial test of the existence of a constructive_dividend is whether the distribution was primarily for shareholder benefit 577_f2d_1206 5th cir 472_f2d_449 5th cir affg in part revg in part and remanding tcmemo_1971_145 89_tc_1280 magnon v commissioner supra pincite to make this determination we look at all the facts and circumstances surrounding the expenditures including the nature of the building improvements and evidence that the shareholder benefited from the corporate expenditures based on the record at hand we conclude that petitioners received a direct economic benefit from grc's construction expenditures first as to the nature of the improvements each party presented an expert to opine on whether the ashland building was constructed for use as a metals refinery we were unimpressed with both experts and do not accept either expert's characterization of the nature of the improvements as dispositive see 304_us_282 estate of cloutier v commissioner tcmemo_1996_49 they both based their opinions on personal observations which were made at least years after the last year in issue and subsequent modifications may have altered the building's features both experts also made key concessions on cross-examination certain features of the ashland building indicate that the building was not constructed for the benefit of grc but was instead constructed for purposes that are personal to petitioners the first floor has no bathrooms and one must exit the building to use the restroom facilities on the third floor petitioners have failed to show how this design adequately accommodates industrial workers who must have ready access to wash basins and restroom facilities the third floor contains a balcony a wine storage_facility and four bedrooms with four bathrooms each equipped with its own bathtub among other things we conclude that there was no business_purpose to be served from the installation of a wine storage_facility mr spera also conceded at trial that petitioners have resided in grc's current use of the ashland building for its melting operation does show that the building was indeed adaptable for use as a refinery it does not demonstrate that the parties intended to use it as such our inquiry focuses on petitioners' intent and use during the years in issue and later modifications which adapt the building's use are not persuasive the ashland building's third floor living quarters from date to date this fact is relevant to the extent it sheds light on petitioners' intent to use the ashland building as a personal_residence during the years in issue therefore we find that the nature of the improvements indicates that the ashland building was built in part for petitioners' personal benefit cf weigel v commissioner tcmemo_1996_485 improvements made to obtain necessary rezoning for business second the record is replete with evidence that corporations other than grc utilized the ashland building as their principal_place_of_business during the years in issue and petitioners have failed to show that they were not benefited directly from this use documents generated by huntersfield show its principal_place_of_business as the ashland building for example huntersfield issued invoices to hi-tek chemical corp hi-tek in late and early showing accounts receivables of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for work done on the farm the invoices identify both huntersfield's and hi-tek's address as rd box prattsville ny the ashland we recognize that part of the ashland building is suitable for industrial usage however we have no basis for apportioning the construction expenditures hi-tek incorporated on date is the manufacturer of an antifouling coating system used in conjunction with marine and fresh water fouling problems mr spera was originally its sole shareholder since he and joseph m wentzell are each 50-percent shareholders in hi-tek building's address in addition mr spera made representations to third parties that the ashland building was huntersfield's primary place of business on a date application package to new york state electric gas for electric service to the ashland building signed by mr spera the business and customer name identified for billing purposes is huntersfield in a petition for the judicial dissolution of huntersfield mr spera stated that the principal_place_of_business of huntersfield was the ashland building an admission by mr spera also supports respondent's argument that other entities used the ashland building peter toporowski a revenue_agent testified that in date he inspected a three-story building on the ashland property and that on the first floor he observed leftover construction equipment a bulldozer a workbench and tools in response to mr toporowski's inquiry as to who owned the aforementioned equipment mr spera stated that the equipment belonged to a couple of dissolved corporations at trial mr spera claimed among other things that grc charged huntersfield rent for the storage of construction materials and that huntersfield's offices were located elsewhere however other than mr spera's unsubstantiated testimony petitioners presented no supporting documentation or testimony moreover while grc's depreciation of the ashland building is seemingly consistent with its ownership and use of the ashland building the timing of the depreciation_deductions raises questions regarding grc's intended use of the ashland building and who was actually using the building during the years in issue depreciation_deductions may not be claimed until an asset is placed_in_service 91_tc_524 sec_1_167_a_-10 income_tax regs an asset is first placed_in_service when it is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 income_tax regs see also 542_f2d_599 2d cir affg per curiam tcmemo_1975_320 84_tc_739 affd on another issue 803_f2d_1572 11th cir the ashland building was apparently placed_in_service substantially complete and available for occupancy on date with later related building improvements placed_in_service on date date and date however petitioners claim that grc has utilized the ashland building as its corporate headquarters and for record storage since and that grc has used the building as an operational precious metals melting facility since date given these facts we conclude that an entity other than grc utilized the ashland building during the years in issue and third we find numerous inconsistencies between grc's stated intent to use the ashland building as a refinery and other evidence in the record first the building permit application identifies the intended use of the ashland building for farm and storage second the date certificate of occupancy identifies the type of property as commercial and residential year round third the insurance records for the ashland building do not reflect an intent to use the structure as a melting facility nancy weingartner an employee of the hartford insurance co and underwriter for the hempstead and ashland properties testified that the business listed for the hempstead property is that of general refining and smelting and the business listed for the ashland property was that of an office petitioners attempt to explain these inconsistencies as to the building permit application mr spera stated in a sworn affidavit that in obtaining the building permit the builder misidentified the intended use of the ashland building as farm and storage he further testified that he did not complete the building permit application nor did he enter the total cost of the building or its intended use instead it was mr abresch the builder and co-owner of huntersfield who completed the application after mr spera affixed his signature as to the certificate of occupancy mr spera testified that the reference to residential referred only to the occasional use of an apartment and as to the intended use of the ashland building as identified in insurance records petitioners claim that the records presented at trial do not reflect a change in classification resulting from the ashland building's use as an operational metals refinery as of date taken individually many of petitioners' explanations appear reasonable however there are just too many inconsistencies and we do not find mr spera's testimony persuasive under current law the burden is on petitioners to show that grc and not petitioners was the primary beneficiary of grc's expenditures_for the aforementioned reasons petitioners have failed to carry that burden and we therefore conclude that the payments for the costs associated with the construction of the ashland building were made by grc with the primary intention and result of conferring a benefit on petitioners accordingly we find that grc's expenditures in constructing the ashland building were sec_301 distributions to petitioners these distributions are taxable dividends to the extent of grc's earnings_and_profits see sec_301 the amounts received in excess of earnings_and_profits are a nontaxable return_of_capital to the extent of mr spera's basis in his stock with any excess treated as a gain from the sale_or_exchange of property see sec_301 and and the parties shall apply this tripartite classification in arriving at their computation under rule iii sec_6662 respondent determined that petitioners are liable for sec_6662's accuracy-related_penalty for through because there was a substantial_understatement_of_income_tax liability see sec_6662 and d in the alternative respondent determined that petitioners are liable for the negligence_penalty under sec_6662 b and c sec_6662 imposes an accuracy-related_penalty equal to percent of the portion of an underpayment that is due to a substantial_understatement of tax or negligence a substantial_understatement means an understatement which exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 the understatement is reduced by that portion of the understatement for which the taxpayer had substantial_authority or for which the taxpayer adequately disclosed the relevant facts in the return sec_6662 in order to avoid the negligence_penalty petitioners must show that they made a reasonable attempt to comply with the provisions of the internal_revenue_code and that they were not careless reckless or in intentional disregard of rules or regulations in brief respondent argues only for the imposition of the accuracy-related_penalty under sec_6662 and b for negligence or disregard of rules or regulations we do not interpret this to be a concession by respondent as to the penalty for any substantial_understatement_of_income_tax and proceed accordingly sec_6662 see also 925_f2d_348 9th cir affg 92_tc_1 negligence defined as a lack of due care or a failure to do what a reasonable and prudent person would do under similar circumstances as to both accuracy-related_penalties no penalty is imposed with respect to any portion of an understatement as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 petitioners must prove that respondent erred in determining that the accuracy-related_penalty applied to the years in issue rule a 109_tc_235 58_tc_757 we primarily address respondent's determination of the accuracy-related_penalty for negligence because our decision on that issue is dispositive because petitioners presented no evidence or argument to support a finding that they exercised due care and did what a reasonable and ordinarily prudent person would have done under the circumstances we find that they are liable for negligence under sec_6662 we also note that petitioners presented no evidence or argument to support a finding that they relied on substantial_authority adequately disclosed relevant facts or acted with reasonable_cause and in good_faith therefore to the extent that petitioners had not been liable for the accuracy-related_penalty for negligence they would have been liable for sec_6662's penalty for a substantial_understatement of tax to the extent that the rule computation indicated that petitioners' understatement_of_tax exceeded the greater of percent of the amount of tax required to be shown on the return or dollar_figure we have considered all other arguments made by petitioners and found them to be either irrelevant or without merit to reflect the foregoing and concessions decision will be entered under rule


department of the treasury internal_revenue_service washington d c inf o se tf ck ti date uniform issue list no krhkk krenek akk rrkkkekererkerkek hrkekrererekrrerererereeek dear mr am responding to your letter of date regarding non-profit hospitals described in sec_501 of the internal_revenue_code you are concerned because you feel that hospitals are giving preferential treatment or discounts to private interest you indicate that you believe that is a private interest sec_501 of the code provides in part for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not organized exclusively for any of the purposes specified in sec_501 of the code unless it serves public rather than private interests thus an organization applying for tax exemption under sec_501 must establish that it is not organized or operated for the benefit of private interests for purposes of sec_501 of the code the term private interests has a specific meaning private interests include the creator of an organization or members of his family shareholders of an organization or persons controlled directly or indirectly by such private interests based on this definition is not a private interest eeeeeee and the hospitals are at arm’s length and fair_market_value the relationship between the hospitals and will not jeopardize the tax-exempt status of the hospitals unless you have information substantiating the negotiations between the hospitals and were not at arm’s length and the reimbursement received by the hospitals from was below fair_market_value we have no creditable basis to consider revoking exemption to show the reimbursement received by the hospitals is below fair_market_value you would as an example have to provide comprehensive if the contracts between page of written expert opinion from a qualified expert showing the amounts received for each type of reimbursement is less than fair_market_value if you feel that sec_501 of the code as written allows impermissible preferential treatment you may want to take the action recommended by the u s department of justice in their letter of date and contact the oversight subcommittee of the committee on ways and means whose jurisdiction includes review of tax-exempt organization’s compliance with the internal revenue hope this information is helpful to you if you need further assistance please contact kekkkrekk at hrakerrere ee her identification_number is rrr ere sincerely michael seto manager exempt_organizations technical group


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date xxxxxxxxxxxxxxxxxxxxxxxxkxxxxxxxx xxx xxxxxxxxxxxxxxx xxxxxxxxxxxxx xxxxxxxxxxxxxxxxkxxxxxx uil code se t eo ra t employer_identification_number xxxxxxxxxx contact person xxxxxxxxxx identification_number xxxxxxx telephone number xxxxxxxxxxxxxx dear this is in response to your request for a ruling that certain proposed contractual relationships will not generate unrelated_business_taxable_income under sec_512 of the internal_revenue_code the code’ you are exempt under sec_501 of the code as an organization described in sec_501 and have been classified as a publicly_supported_organization described in sec_509 and sec_170 you were formed to receive hold invest and administer property and to make expenditures to or for the benefit of a university an organization described in sec_501 and classified as a publicly_supported_organization described in sec_509 and sec_170 you solicit and receive donations on the university’s behalf although some donors make unrestricted donations for the general benefit of the university most donors request that their contributions benefit a particular program department school or campus of the university you categorize these restricted gifts in accounts that you track according to the university program department school or campus to be benefited the accounts the funds in the accounts are pooled for investment purposes in a general long term fund the pooled fund’ the pooled_fund is invested in a diverse manner including but not necessarily limited to substantial investments in domestic and international public and private equities domestic and international bonds and other fixed income assets and real_estate much of the income earned consists of passive dividends interest and there may also be long and short-term_capital_gains some income may be debt-financed or otherwise treated as unrelated_business_taxable_income xxxxxxxxxxxxxxxkxkxx xxx xxx xxx xxx xxx you use a unit concept internally to administer the accounts within your pooled_fund each account is allocated a certain number of units of the pooled_fund the value of which is based on a proportionate value of the underlying pooled_fund investments you determine a payout rate on units each year based in part on the pooled fund’s investment performance distributions are determined by a spending policy the algorithm of which is established by the investment policy approved and periodically reviewed by your board_of directors each account is entitled to distribution based on the number of units it holds and the applicable payout rate you calculate the value of the pooled_fund units on a monthly basis and united may be redeemed for that value raising investing managing and tracking the accounts in the overall pooled_fund you assess an administrative fee on the market_value of each account within the pooled_fund assessed on a monthly basis the pooled_fund also incurs expenses in connection with fund management services provided by third-party managers you pay those expenses to third-party managers directly from the pooled_fund in order to offset direct administrative and other costs incurred in in addition to holding and managing the accounts you are the trustee of a number of charitable_remainder trusts the trusts that were established for the benefit of you and or the university as trustee you are the legal owner of the trusts’ assets each trust has you and or the university as its sole remainder beneficiary or beneficiaries as a result of its relationship with the trusts as both trustee and beneficiary or in some cases the fundraising vehicle for the sole beneficiary the university you have a substantial interest in the value of the trusts moreover the donors to the trusts in each case intended that you and the university benefit substantially from the assets of the trusts and that the assets would be managed to achieve the greatest possible return on investment accordingly you seek to enable the trusts to participate albeit indirectly in the return on your pooled_fund as described below unlike your practice with respect to the accounts within your pooled_fund you will not assess the administrative fee described above against trust assets held in the pooled_fund you will continue to assess fees as trustee with respect to the administering the trusts you seek to enable the trusts to invest in the pooled_fund in a manner similar to the accounts and thereby to receive an investment return roughly equal to that of the pooled_fund specifically you will issue a contract right for units in the pooled_fund to each of the trusts the value of the contract units would be based on the value of all the underlying investment_assets held by the pooled_fund and would have the same unit value that you use for internal accounting purposes with respect to the accounts the contracts between you and the trusts would provide that the price of the units would equal their value at the time of acquisition the contracts further would provide that each trust would receive payments on the units held by it based on the payout rate you establish for the pooled_fund and the number of units held with payouts made at least annually or more frequently as appropriate a_trust could choose either to reinvest part of the payout or redeem additional units depending on its cash requirements the trusts would treat payouts as ordinary_income regardless of the character of the underlying income of the pooled_fund whether capital_gain ordinary_income or return_of_capital the trusts would treat redemptions of the units over and above receipt of the spending rate as generating long or short-term_capital_gain or loss depending on the holding_period of the redeemed contract units under each contract a_trust would not have any ownership_interest in the underlying assets of the pooled_fund or any contract rights with respect to the other trusts the trusts would have xxxxxxxxxxxxxkxxxxxxxx xx xxxkkkkkx xx no power or right of any kind to control direct supervise recommend or review your business activities operation or decisions with respect to the pooled_fund except the right to review the payout computations the trusts would not have the right to veto or opt_out of any of the underlying pooled_fund investments each contract would provide that with respect to the issuance of contract units you are neither a partner nor an agent of the trusts that the trusts would never be or become liable for any cost expense or payment incurred or due by you or for which you are liable or responsible relating to the pooled_fund or the underlying pooled_fund assets and consistent with your status as a fiduciary you will not allow the trusts to suffer any liability arising out of any_action or inaction by you with respect to the pooled_fund or the underlying pooled_fund assets you have requested the following ruling the issuance of units by you to the trusts the making or receipt of payments with respect to the units and the holding or redemption of units will not generate unrelated_business_taxable_income to you law sec_501 of the code in part provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific and certain other purposes sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_512 of the code sets forth so-called modifications which are excluded from the computation of unrelated_business_taxable_income these modifications include dividends interest royalties rent from real_property and gain from the sale of property sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the income_tax regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business xxxxxxxxxxxxxxxxxxxxxxxkxxxkkxxxkkx such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that for purposes of sec_513 of the code the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued for example specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of non-exempt organizations sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code it receives funds from the participating exempt_organizations invests in common stocks reinvests income and realized appreciation and upon request liquidates a participant's interest and distributes the proceeds to the participant the rev_rul states that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit if the services were regularly provided by one tax-exempt_organization for other xxxxxxxxaxxxxxxxxxxxkkxxxxkkkxxxx kkk tax-exempt organizations such activity would constitute unrelated_trade_or_business the rev_rul holds that the organization is not exempt under sec_501 as noted previously organizations described in sec_501 of the code are subject_to tax on their unrelated_business_income under sec_511 income to be subject_to the unrelated_business_income_tax three requirements must be met the income must be from a trade_or_business the trade_or_business must be regularly carried on and the conduct of the trade_or_business must not be substantially related to the organization's exempt_purpose or function see sec_1_513-1 of the regulations in order for such an organization's analysis you propose to enter into a contractual relationship with certain trusts that are charitable_remainder trusts in which you have an interest as a beneficiary and serve as trustee such a contractual relationship each trust would receive payments on the units held by it equal to the payout rate you establish for your pooled_fund with payouts made as determined by you under each trust would acquire units from your pooled_fund which would give the trusts a contractual right against you but no interest whatsoever in the underlying investment_assets of the pooled_fund the contract between you and the trusts would provide that the price of the units would equal their value at the time of acquisition the units would have the same value that you use for internal accounting purposes consequently a_trust could choose either to reinvest part of the payout or redeem a portion of the units depending on its cash requirements thus under the contractual relationship with you the trusts would have a right to the payout declared by you plus the right to redeem the units at the value that you use for internal accounting purposes generally an organization that otherwise qualifies for recognition of exemption under sec_501 of the code and provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated_trade_or_business under sec_513 see revrul_69_528 supra such an activity would constitute a trade_or_business under sec_513 and sec_1_513-1 of the regulations and would be regularly carried on under sec_512 and sec_1_513-1 thus if you charged a fee for investment management services provided to organizations unrelated to you or generated income from the management of the funds invested by such organizations these activities could result in unrelated_business_taxable_income under sec_512 here however you are not charging a fee for services and not otherwise receiving income from the services provided to the trusts thus under these circumstances you will not receive unrelated_business_taxable_income under sec_512 the fact that you will engage in the investment activity for the benefit of individuals who are co- beneficiaries of the trusts at the same time that you engage in investment activity for your own benefit as the remainder beneficiary limits the scope of the service provided to others and distinguishes it from a commercial venture in view of the foregoing we rule as follows xxxxxxxxxxxxkxkxxkxkxkkaxkx kkk kkk kx kkk kkk the issuance of units from you to the trusts the making or receipt of payments with respect to the units and the holding or redemption of the units will not generate unrelated_business_taxable_income to you this ruling is based on the following two assumptions you will not charge any fee for managing the investment of the trusts in your endowment other third party management firms charge a fee and receive reimbursement of expenses for management services provided to your endowment these fees and expenses are charged against the aggregate return of the endowment and will be reflected indirectly in the payout to the trusts and others participating in the endowment you will continue to be entitled to the fees any trustee may receive with respect to the administering the trusts you are the sole charitable_beneficiary of each charitable_remainder_trust this ruling is based on the understanding that there will be no material changes in the facts upon which it is based we express no opinion as to the tax consequences of the proposed transaction under any other section of the code pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives a copy of this letter should be kept in your permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely manager exempt_organizations technical group enclosure notice


cid office of the chief_counsel department of the treasury internal_revenue_service washington d c number info release date genin-143081-09 uil cid --------------------------------------------------------------------------------------------------------------- --------------------------------------- ------------------------------------------------------------------------------------------ -------------------------- -------------------------------------------------------------------------------------------------------------- date dear ------------- this is in response to your letter of date concerning qualified tuition reductions described in sec_117 of the internal_revenue_code code specifically you asked about the term education below the graduate level we are pleased to address your concerns generally amounts paid to or for the benefit of employees are presumptively compensatory in nature and ordinarily includible in gross_income as wages however sec_117 of the code provides a special rule in the case of a qualified_tuition_reduction sec_117 of the code provides that gross_income shall not include any qualified_tuition_reduction sec_117 defines a qualified_tuition_reduction as the amount of any reduction in tuition provided to an employee of a sec_170 educational_organization a school for the education below the graduate level at such an educational_organization of a such employee or b any person treated as an employee or whose use is treated as an employee_use under the rules of sec_132 of the code sec_132 refers generally to spouses and dependent_children of employees for purposes of this tax exclusion education below the graduate level generally refers to any course which is not part of a course of study conducted at an cid genin-143081-09 cid educational_organization requiring a bachelor of arts degree or bachelor of science degree or the equivalent for admission into the program and which leads to a graduating degree a course which is part of a course of study leading to a graduate level degree is not considered 'education below the graduate level ' even if the course is not taken in order to fulfill requirements for a graduate level degree unless it is taken for credit toward a degree below the graduate level in the case of educational organizations conducting joint ba jd ba md or similar joint-degree programs the individual courses of study must be analyzed to determine the permissibly excludable education those courses taken in satisfaction of the ba or bs degree requirements are considered 'education below the graduate level ' even if for example they are taken in a fifth or sixth year of study similarly a graduate level course taken in the freshman year solely in satisfaction of the jd or md degree requirement would not constitute 'education below the graduate level ' these remarks refer solely to the federal_income_tax treatment of certain tuition reductions under sec_117 of the code as you may know the internal_revenue_service issues both private letter rulings and general information letters to assist taxpayers in the preparation of their returns the procedures for requesting private letter rulings are set forth in revproc_2009_1 2009_1_irb_1 this is a general information_letter we thank you for your interest and concern in this matter and hope that the general information provided is helpful sincerely yours associate chief_counsel income_tax accounting s william a jackson by william a jackson chief branch enclosure copy of this letter cid


tcmemo_2009_174 united_states tax_court robert powell petitioner v commissioner of internal revenue respondent docket no 18134-06l filed date robert powell pro_se martha j weber for respondent memorandum opinion cohen judge this case was filed in response to a notice_of_determination concerning collection action it is before the court on respondent’s motion for summary_judgment and to impose a penalty under sec_6673 against petitioner and the court’s order to show cause directed at petitioner’s counsel requiring him to explain why counsel should not be required under sec_6673 to pay personally any excess costs expenses and attorneys’ fees reasonably incurred because of his conduct in this case unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure background petitioner resided in tennessee at the time his petition was filed he received compensation_for services and other forms of taxable_income during and petitioner failed to file valid federal_income_tax returns for those years and he claims that he is not required to file returns or pay taxes on money earned from his labor or services he also makes other frivolous arguments about whether he is a taxpayer or an individual under the internal_revenue_code the internal_revenue_service irs sent statutory notices of deficiency to petitioner although he received the notices of deficiency petitioner did not file petitions in this court and the amounts determined in the notices were assessed the irs also determined a frivolous_return penalty for under sec_6702 although the petition included reference to the sec_6702 penalty that part of the case was dismissed for lack of jurisdiction because the determination appealed by the petition was made before the effective date of the amendment of sec_6330 by the pension_protection_act of publaw_109_ sec_855 120_stat_1019 on date the irs sent to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing in order to enforce collection of the unpaid liabilities for through the notice showed then-outstanding liabilities totaling dollar_figure by letter dated date petitioner requested a hearing and made various spurious demands he claimed to have researched the constitution the internal_revenue_code caselaw and other publications and asserted my research has lead sic me to the conclusion that i am not required by any law to file an individual tax_return or pay income_tax on the money i earn from my labor or services on date a settlement officer responded to petitioner’s request for a hearing and advised petitioner that the items mentioned in his request are items that courts have determined are frivolous or groundless the letter advised petitioner that appeals does not provide a face-to-face conference if the only items you wish to discuss are those mentioned indicated the alternatives available to petitioner and scheduled a telephone conference petitioner responded with a letter dated date repeating his demands and making threats petitioner acknowledged that he had reviewed the irs publication entitled the truth about frivolous tax arguments but he denied that the publication addressed the issues he had raised on date a notice_of_determination concerning collection action s under sec_6320 and or was sent to petitioner the notice sustained the proposed levy noting that petitioner had raised only frivolous issues and had been warned that if he persisted in raising frivolous arguments the court may impose sanctions under sec_6673 in his petition filed date petitioner sought relief on all non-frivolous issues but did not specify errors in the notice_of_determination on date respondent’s motion for summary_judgment first motion for summary_judgment was filed respondent set out the history of petitioner’s frivolous arguments and requested a penalty under sec_6673 at the hearing on the motion for summary_judgment respondent’s counsel disclosed to the court that certain additions to tax reflected in the transcripts of petitioner’s account had been improperly assessed and would be abated the first motion for summary_judgment was denied and the court stated that satisfaction of the requirements of sec_6330 should be demonstrated at trial rather than in a summary adjudication the court was also concerned with unjustified delay in resolving this action because of the infrequency of trial sessions in memphis tennessee the place of trial requested by petitioner on date respondent’s motion for summary_judgment and to impose a penalty under sec_6673 second motion for summary_judgment which is now pending and respondent’s motion to permit levy were filed the pending order to show cause dated date recounted additional history and included the following by notice served date this case was set for trial in memphis on date on date petitioner moved for a continuance which was not opposed by respondent on the ground that he had employed counsel jerold barringer so that mr barringer and petitioner can eliminate issues petitioner sought to raise but which would be foreclosed at trial the court reluctantly granted the continuance by notice served date this case was set for trial in memphis on date respondent’s pending motions apparently crossed in the mail with the notice of trial respondent’s motions recount the history of frivolous arguments made by petitioner establish that petitioner is precluded from disputing the underlying liabilities in this case because of his receipt of statutory notices of deficiency explain that the invalid assessments of certain penalties have been abated and assert that respondent has shown good cause for the removal of the suspension of the levy that results during the pendency of this action petitioner’s response does not raise a bona_fide material issue of fact but merely seeks more time to pursue discovery petitioner’s argument that respondent’s motions should be denied because they are premature until petitioner secures responses to his various inquiries is patently for the purpose of delay petitioner’s interrogatories indirectly assert stale tax defiance arguments about terms such as taxpayer person non-resident alien income and other non-meritorious arguments about delegated authority these arguments are directed to the underlying liabilities that will not be considered in this case we agree with respondent and conclude that petitioner’s pursuit of frivolous and groundless arguments throughout the collection review process is intended to delay collection under such circumstances levy action should not be suspended section e see 124_tc_189 the discovery of the invalid assessment of certain penalties that led to the court’s denial of respondent’s prior motion for summary_judgment was made and disclosed by respondent and was not revealed by petitioner’s frivolous and dilatory tactics that concession by respondent does not preclude an otherwise appropriate penalty under sec_6673 petitioner’s counsel rather than resolving issues as represented in the petitioner’s motion for continuance filed date has continued the frivolous and dilatory course of conduct and seeks to multiply these proceedings unreasonably and vexatiously see sec_6673 petitioner’s counsel is fully aware of the consequences of pursuing frivolous arguments see 507_f3d_1092 7th cir upon due consideration and for cause it is hereby ordered that respondent’s motion to permit levy filed date is granted pursuant to section e and the levy action that is the basis of this proceeding is not suspended it is further ordered that respondent’s motion for summary_judgment and to impose a penalty under sec_6673 is set for hearing on date at the trial session of the court theretofore scheduled to commence pincite a m in room federal building north main street memphis tn trial may proceed immediately if the motion for summary_judgment is denied and this case will not be further continued it is further ordered that at the hearing on date petitioner’s counsel jerold w barringer shall show cause if any he has why he should not be required under sec_6673 to pay personally any excess costs expenses and attorneys’ fees reasonably incurred because of his conduct in this case it is further ordered that at the hearing on date respondent shall present evidence of costs expenses and attorneys’ fees if any that respondent would claim under sec_6673 on date the court received a letter from petitioner in which he claimed that his counsel jerold w barringer barringer had failed to communicate with him the letter stated in part i am in the process of preparing motions the purpose of which is to obtain postponement of the scheduled trial date so i can retain another lawyer complete discovery and otherwise prepare for trial when the case was called on date petitioner’s letter was filed as a motion to withdraw counsel barringer stated we’ve had a breakdown of communication i have in fact sent emails to mr powell as well as left phone messages for him but we have different theories about where this case is going or what this case could do and for some time now i’ve not been able to pursue the issues he wants to pursue so i don’t know how i can represent what he wants to do i have a different theory of where the case could conceivably go but i don’t know whether he wants to go that route respondent’s counsel did not oppose withdrawal of petitioner’s counsel but did oppose a continuance respondent’s counsel filed a declaration describing respondent’s attorneys’ time and claiming dollar_figure as the amount to be awarded under sec_6673 barringer was allowed days to respond to the claimed costs and the motion to withdraw counsel was granted petitioner proceeded pro_se and persisted in his demands for discovery and a continuance he submitted an offer of proof in which he set forth his frivolous arguments that he is not an individual required to file income_tax returns or pay taxes and complained of the denial of a face-to-face hearing and denial of discovery he did not raise any issue of material fact precluding summary_judgment barringer’s response and objection to motion for sanctions and response to request for attorneys fees was filed date he challenges the validity of the assessment and other documents on the alleged absence of appropriate signatures by irs personnel he claims that respondent was obligated to produce a form 23c assessment certificate--summary record of assessments and copies of the notices of deficiency petitioner requested as a pro_se even though barringer has acknowledged to respondent’s counsel that petitioner received the notices of deficiency he insists that the discovery was appropriate because petitioner has sought to know exactly how all the provisions of the i r c apply to him but he asserts that petitioner would not have agreed to any issue ever as demonstrated in open court on date the latter statement is made in support of barringer’s argument that counsel’s involvement was not the cause of the time expended by respondent’s counsel that is the basis of the claim under sec_6673 discussion petitioner has not been deterred by the multiple warnings that his arguments are frivolous and his former counsel argues persuasively that petitioner would never give up his arguments despite repeated warnings by respondent and the court petitioner continues to maintain the same frivolous positions and to impose extra burdens on respondent in pursuing matters where there is no reasonable dispute arguments that compensation_for services is not taxable have been repeatedly and thoroughly rejected in cases too numerous to mention arguments such as those pursued by petitioner have resulted in criminal convictions eg 939_f2d_499 7th cir 920_f2d_619 10th cir civil_fraud penalties eg 80_tc_1111 chase v commissioner tcmemo_2004_142 sec_6673 penalties eg sawukaytis v commissioner tcmemo_2002_156 affd 102_fedappx_29 6th cir and sanctions for frivolous appeals eg 756_f2d_38 6th cir affg tcmemo_1983_473 746_f2d_1187 6th cir affg tcmemo_1983_474 in any event arguments about his underlying liability for the taxes were precluded by sec_6330 because petitioner received notices of deficiency for the years in dispute in the context of cases brought under sec_6330 procedural arguments such as those made by petitioner and now by barringer have been refuted repeatedly see eg 118_tc_365 and cases cited thereat sec_6673 penalty imposed on the taxpayer who had been counsel in prior cases affd 329_f3d_1224 11th cir see also 119_tc_252 115_tc_576 115_tc_35 the arguments made and the cases rejecting them are cited in the irs publication the truth about frivolous tax arguments sec ii date available on the irs web site at www irs gov which petitioner acknowledges reviewing under the circumstances petitioner did not have a right to a face-to-face hearing see 117_tc_183 because of the demonstrated abuses of the sec_6330 procedures in the tax relief and health care act of publaw_109_432 div a sec_407 120_stat_2960 congress has added a penalty for frivolous submissions including submissions under sec_6330 sec_6702 see notice_2008_14 2008_1_cb_310 neither petitioner nor barringer acknowledges the authorities showing that their arguments are totally lacking in merit and have no likelihood of success in similar circumstances in 507_f3d_1092 7th cir the court_of_appeals described barringer’s inability to distinguish between plausible and preposterous arguments and characterized him as a recidivist for ignoring that court’s decision reminding him that taxpayers cannot use a request for a collection hearing to contest their substantive liability in the absence of any acknowledgment of current law there is no indication of a good-faith attempt to change it see rule a model rules of profl conduct r we conclude that barringer was adequately warned yet persisted thus his conduct was reckless and in bad faith see 119_tc_285 davis v commissioner tcmemo_2007_201 affd 301_fedappx_398 6th cir gillespie v commissioner tcmemo_2007_202 affd 292_fedappx_517 7th cir edwards v commissioner tcmemo_2003_149 affd 119_fedappx_293 d c cir according to barringer all of his conduct in this case was consistent with demands of petitioner petitioner’s conduct while acting pro_se was totally groundless and patently for the purpose of delay on the entire record a penalty will be awarded against petitioner in the amount of dollar_figure respondent’s itemization claims dollar_figure hours as excess hours attributable to the involvement of petitioner’s counsel and includes time for preparation of the second motion for summary_judgment time spent as a result of the frivolous discovery requests sent by barringer after he entered his appearance in the case and time spent in response to the court’s order to show cause respondent sets out the time and experience of various attorneys and proposes rates previously adopted by the court see takaba v commissioner supra pincite 99_tc_533 barringer claims that the time spent in relation to the second motion for summary_judgment would have been necessary even without his involvement he attempts to excuse his submission of the interrogatories on the basis that they were demanded by his client he does not dispute the reasonableness of the hourly rates suggested for the various attorneys based on their experience in denying the first motion for summary_judgment the court expressly stated that satisfaction of the requirements of sec_6330 should be demonstrated at trial rather than in a summary adjudication the case was submitted on the second motion for summary_judgment at the time of trial because petitioner offered only the same stale frivolous arguments he had pursued from the beginning of the administrative proceedings and did not demonstrate any remaining material issues of fact the same result would have been achieved without the second motion for summary_judgment we do not accept barringer’s argument that the second motion for summary_judgment would have been necessary without his involvement we believe that it was unnecessary with or without his involvement it was a choice by respondent to disregard the advice of the court and we decline to require barringer to compensate respondent for that choice effecting delay and unnecessary responses through abuse of the discovery process is an appropriate basis for an award under sec_6673 see 116_tc_111 affd 289_f3d_452 7th cir the motion to permit levy was an appropriate response to the continuance and delays caused by the false representation that barringer’s entry of appearance would lead to reasoned resolution of this case costs of supervising counsel are recoverable see takaba v commissioner supra pincite barringer complains about time spent in consultations among and between respondent’s counsel but that time was appropriate because of respondent’s cautious approach to seeking sanctions by reason of counsel’s conduct and because the motion to permit levy is not a frequently employed option excluding time spent in preparation of the second motion for summary_judgment we conclude that the recoverable amount reasonably incurred as a result of barringer’s unreasonable and vexatious conduct is hours at dollar_figure per hour and hours at dollar_figure per hour for a total award of dollar_figure under sec_6673 an appropriate order and decision will be entered