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 fip b02 plr-105307-10 date july legend taxpayer ----------------------- ------------------------------------------------------------------------------ employer --------------------------------------------------------------------------- --------------------------------------------------------------- parent company a company b company c law firm state year year year year year year -------------------------------------------------- ------------------------------- ----------------------------- ---------------------------------- ---------------------------- ----------- ------- ------- ------- ------- ------- ------- plr-105307-10 year year dear ------------- ------- ------- this is in reply to a letter dated date and supplemental correspondence dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file a written representation under sec_1_7872-15 of the income_tax regulations if this written representation under sec_1_7872-15 is considered timely filed and the other requirements under sec_1_7872-15 are satisfied then an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 facts employer and parent employer’s parent_corporation are state non-profit corporations exempt from taxation under sec_501 of the internal_revenue_code as organizations described in sec_501 and are classified as public_charities under sec_509 since year parent has had a split-dollar_life_insurance program for certain of its executive level employees and employees of its subsidiary corporations including employer in year parent hired company a to consult on matters relating to the split- dollar program and to administer the program company a recommended revising the split-dollar plan and in year parent implemented a new split-dollar_life_insurance program company b subsequently acquired company a and became parent’s consultant and administrator of the split-dollar program in year parent implemented a new split-dollar_life_insurance program current sdp upon the recommendation of company b the current sdp was entered into after the treasury department’s issuance of final regulations under sec_1_61-22 and sec_1_7872-15 pertaining to split-dollar_life_insurance arrangements the split-dollar regulations under the current sdp employer pays the premiums on a life_insurance_policy owned by taxpayer the premium payments made by employer are treated as loans pursuant to the split-dollar regulations whereby employer is the lender and the taxpayer is the borrower the parties to the loan taxpayer represents that the loans were to each have a stated_interest rate equal to the applicable_federal_rate so as not to be below-market split-dollar loans under the split-dollar regulations employer made the first loan under the current sdp to taxpayer in year taxpayer represents that a plr-105307-10 reasonable person would expect that all payments under the loans will be made as described in sec_1_7872-15 company b was instrumental in implementing the current sdp for parent employer and employee participants including taxpayer collectively plan participants company b was responsible for advising plan participants regarding the set-up of the current sdp determining the type of life_insurance policies associated with the current sdp and administering the current sdp taxpayer represents that taxpayer lacked knowledge and experience with regards to split-dollar_life_insurance arrangements and the split-dollar regulations and therefore relied on employer’s guidance representations conclusions and information regarding the current sdp employer in turn relied on company b’s guidance in developing implementing and administering the current sdp company b provided employer’s tax_return_preparer with a governing document pertaining to the current sdp but did not provide the preparer with a copy of the plan’s participation_agreement due to some confusing language in the governing document the tax_return_preparer erroneously concluded that the loans involved in the current sdp were recourse loans the tax_return_preparer has provided an affidavit stating that discussions with company b representatives regarding the current sdp confirmed his conclusion that the loans were recourse in nature therefore employer did not execute or file the written representations for nonrecourse split-dollar loans pursuant to sec_1_7872-15 and neither did taxpayer in year company b ceased administering the current sdp and employer hired company c to administer the current sdp due to the decline in the value of common stocks and many bonds from year to early year the cash surrender values of the life_insurance policies under the current sdp declined employer employed counsel from law firm to review the current sdp and advise employer on options to revise or terminate the plan counsel from law firm determined that under applicable state law the loans under the current sdp were not recourse loans but rather nonrecourse loans secured_by the life_insurance policies subsequently employer informed taxpayer that the loans were nonrecourse loans and that a written representation should have been filed by both taxpayer and employer to ensure that payments on the loans were not treated as contingent payments employer further explained that the written representation should have been made in year when the first loan was made to taxpayer under the plan and asked that taxpayer file a request for an extension of time to make the written representations under sec_1 d i and ii taxpayer makes the following representations the granting of relief under sec_301_9100-3 would not result in taxpayer having a lower tax_liability in the aggregate for all years to which the election applies than it would have had if the election had been plr-105307-10 timely made taking into account the time_value_of_money taxpayer did not knowingly choose not to file the election taxpayer did not use hindsight in requesting relief finally taxpayer represents that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 in support of its ruling_request taxpayer has submitted the affidavits of taxpayer employer’s chief_executive_officer employer’s tax_return_preparer and employer’s counsel from law firm regarding the events that led to taxpayer’s failure to make the regulatory election pursuant to sec_1_7872-15 and ii law and analysis sec_1_7872-15 of the regulations provides that except as provided in sec_1_7872-15 if a payment on a split-dollar loan is nonrecourse to the borrower the payment is a contingent payment for purposes of sec_1_7872-15 sec_1_7872-15 provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 if the parties to the split-dollar_life_insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made sec_1_7872-15 describes the time and manner requirements for providing the written representation required by sec_1_7872-15 sec_1 d ii provides in part that the written representation be signed by both the borrower and lender not later than the last day including extensions for filing the federal_income_tax return of the borrower or lender whichever is earlier for the taxable_year in which the lender makes the first split-dollar loan under the split-dollar_life_insurance arrangement sec_301_9100-1 defines election to include an application_for relief in respect of tax a request to adopt change or retain an accounting_method or accounting_period the term does not include an application_for an extension of time for filing a return under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulation or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the plr-105307-10 requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and taxpayer’s representations we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to file the written representation as required under sec_1 d i and ii taxpayer is therefore granted a period of time not to exceed days from the date of this letter to prepare and have both parties to the loan sign the written representation provided that the written representation is timely signed by both parties to the loan as required by this letter and filed with the taxpayer’s tax_return for year plr-105307-10 the written representation will be deemed effective for all years in which the arrangement has been in effect in accordance with sec_1_7872-15 a copy of the written representation should be attached to taxpayer’s tax_return for any subsequent taxable_year in which employer makes a split-dollar loan to taxpayer to which the representation applies except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code this ruling is limited to the timeliness of the filing requirement of the written representation under sec_1_7872-15 and ii no opinion is expressed with regard to whether taxpayer satisfied the other requirements under sec_1_7872-15 and ii the loan treatment requirements under sec_1_7872-15 or whether payments under the loan are otherwise noncontingent payments for purposes of sec_1_7872-15 no opinion is expressed with regard to whether the tax_liability of taxpayer is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions and products


internal_revenue_service number release date index number ---------------------------------------------- ---------------------------------------------- ---------------- ------------------------------------------ ------------------------------ legend legend x department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-137956-06 date february ------------------------------------------------ ----------------------- --------------------- -------------------------- country d dear ------------ correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to file an entity classification election this letter responds to the letter dated date and related facts the information submitted states that x is a_trust formed under the laws of country on d x represents x is a foreign_entity eligible to elect to be treated as a partnership for federal tax purposes x intended to elect to be treated as a partnership for federal tax purposes effective d the election however was not timely filed law and analysis sec_301_7701-4 provides that in general the term trust as used in the internal_revenue_code code refers to an arrangement created either by will or by an inter_vivos declaration whereby trustees take title to property for the purpose of sec_301_7701-4 addresses business trusts and provides that there are plr-137956-06 protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts other arrangements which are known as trusts because the legal_title to property is conveyed to trustees for the benefit of beneficiaries but which are not classified as trusts for purposes of the code because they are not simply arrangements to protect and conserve the property for the beneficiaries the fact that any organization is technically cast in the trust form by conveying title to property to trustees for the benefit of persons designated as beneficiaries will not change the real character of the organization if the organization is more properly classified as a business_entity under sec_301_7701-2 federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301_7701-3 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code a business_entity with two or more members is classified for federal tax purposes as either a corporation or a partnership sec_301_7701-2 provides that a business_entity is any entity recognized for sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months plr-137956-06 except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a partnership for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court leslie and linda himes petitioners v commissioner of internal revenue respondent docket no filed date leslie and linda himes pro_se lisa k hunter for respondent memorandum findings_of_fact and opinion paris judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for after concessions the issue for decision is whether petitioners are entitled to 1the notice_of_deficiency disallowed exemptions and credits related to a third dependent at petitioners’ minor grandchild the parties filed a stipulation of settled issues on date resolving all issues related to at in favor of petitioners dependency_exemption deductions and child tax_credits under sections and respectively for leslie himes’ petitioner’s sons mh3 and gh from a former marriage 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 petitioners resided in nebraska at the time the petition was filed before his marriage to linda himes petitioner was married to ms barbara wyke ms wyke formerly barbara himes petitioner and ms wyke have two children mh who was born in and gh who was born in on date petitioner and ms wyke divorced the district_court of saline county nebraska issued a decree of dissolution of marriage divorce decree awarding custody of the two children to ms wyke petitioner was awarded liberal visitation rights and ordered to make child_support payments to ms wyke that court granted petitioner the right to claim a dependency_exemption deduction for gh on federal and state tax returns for and all subsequent years the district_court 2section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 3this court refers to minor children by their initials see rule a judge and petitioner’s attorney signed and executed the divorce decree on date the district_court of saline county nebraska issued an order modified decree modifying the divorce decree the modified decree maintained custody of the children with ms wyke and continued petitioner’s visitation privileges the modified decree still required the petitioner to make child_support payments to ms wyke however the modified decree significantly changed petitioner’s right to claim dependency_exemption deductions the modified decree provided that petitioner was entitled to claim the dependency_exemption deduction for both children if he was current on his child_support payments at the conclusion of the tax_year the decree provided the following process for transferring the exemption first ms wyke would deliver a release to the exemption to the county clerk second the clerk upon verification that all child_support payments were made would deliver the release to petitioner the modified decree was signed only by the district_court judge in ms wyke without permission of the state court left nebraska with the two children she did not provide a forwarding address to petitioner and he subsequently lost all contact with his children despite this petitioner continued to make regular child_support payments additionally every year petitioner claimed dependency_exemption deductions for the two children on his tax_return ms wyke never executed a form_8332 release of claim to exemption for child of divorced or separated payments even though the modified decree specifically required her to do so for tax_year petitioners timely filed form 1040a u s individual_income_tax_return attached to their return a copy of the modified decree and claimed dependency_exemption deductions and child tax_credits for both mh and gh ms wyke also claimed dependency_exemption deductions and child tax_credits for both mh and gh ms wyke was the custodial_parent of mh and gh for i dependency_exemption deduction opinion sec_151 allows taxpayers to deduct an exemption for each individual who qualifies as a dependent as defined in sec_152 sec_152 provides several definitions for a dependent including sec_152 which specifies how to determine the dependent status of children of divorced parents the exceptions of sec_152 apply if a child receives more than half of her support from her parents the parents are divorced and the parents have custody of the child for more than half of the tax_year if the requirements of sec_152 are met the custodial_parent may claim the exemption unless all of the criteria for one of the sec_152 exceptions have been met the only relevant exception is sec_152 which provides that the noncustodial_parent may claim the dependent_exemption for a calendar_year only if a the custodial_parent signs a written declaration in such manner and form as the secretary may by regulations prescribe that such custodial_parent will not claim such child as a dependent for any taxable_year beginning in such calendar_year and b the noncustodial_parent attaches such written declaration to the noncustodial parent’s return for the taxable_year beginning during such calendar_year the regulations in effect in specify that the declaration required under sec_152 must be made either on a completed form_8332 or on a statement conforming to the substance of form_8332 see sec_1_152-4t a q a-3 temporary income_tax regs fed reg date form_8332 requires a taxpayer to furnish the names of the children for whom exemption claims were released the years for which the claims were released the signature of the custodial_parent the date of the custodial parent’s signature the name of the noncustodial_parent claiming the exemption and the social_security numbers for the custodial and noncustodial parents 4the court notes that temporary regulations have binding effect and are entitled to the same weight as final regulations see peterson marital trust v commission102_tc_790 affd 78_f3d_795 2d cir ms wyke’s failure to sign either a form_8332 or a substantially equivalent document is the controlling factor in this case the signature of the custodial_parent releasing the claim to the dependent_exemption is a statutory requirement that cannot be waived see sec_152 providing that the custodial_parent signs a written declaration 114_tc_184 affd on other grounds sub nom 293_f3d_1208 10th cir although this court has allowed the use of a divorce decree to serve as a substantially equivalent document to a form_8332 in appropriate cases a decree that was not signed by the custodial_parent is not sufficient compare boltinghouse v commissioner tcmemo_2003_134 with miller v commissioner supra petitioners have provided no evidence that ms wyke has ever signed a form_8332 or equivalent document nor was any signed document attached to their tax_return therefore petitioners have not met the statutory requirements necessary to claim the dependency_exemption deductions although this court is sympathetic to petitioner’s difficulties in acquiring a signed form_8332 especially during those years when the children’s whereabouts were unknown the statutory language clearly controls this case absent a signed release by the custodial_parent petitioner is unable to claim dependency_exemption deductions for his sons neither petitioner’s faithful payments of child_support nor ms wyke’s failure to comply with her divorce decree and state law is sufficient to release the deduction to petitioner without a completed form_8332 or a substantially equivalent document petitioner as the noncustodial_parent does not qualify for the deductions under sec_151 ii child_tax_credit sec_24 provides that a taxpayer may claim a credit for each qualifying_child a taxpayer may satisfy the qualifying_child requirement if a taxpayer establishes entitlement to the dependency_exemption deduction under the exception of sec_152 walker v commissioner tcmemo_2008_194 because petitioners have failed to satisfy the requirements under sec_152 as discussed above they are ineligible for the child_tax_credit provided by sec_24 for mh and gh in tax_year to reflect the foregoing and the concessions of the parties decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely holly o paz director exempt_organizations rulings and agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number legend b founder owner director c founder owner director m area of operation o name of league q state r date t date u date uil dollar_figure dear issues we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the internal_revenue_code the basis for our conclusion is set forth below do you fail the organizational_test yes for the reasons explained below do your earnings inure to the benefit of insiders yes for the reasons explained letter cg catalog number 47630w below do your activities result in more than insubstantial private benefit yes for the reasons explained below facts b c husband and wife owned and operated a for-profit amateur minor league football team less than years later after starting the team they voluntarily dissolved the for- profit in order to apply for a not for profit referencing the same ownership in order to keep the name the same in addition the same ein number of the dissolved for-profit continued to be used for the not for profit entity the program re formed as a not for profit so that if we the team had to pay for items merchandise services etc they would at least be tax deductible becoming a non-profit will help open a lot of doors for the organization on different levels b and c incorporated you in q on date r your purpose in pertinent part is to form an amateur minor league football team to regulate standardize and promote the highest possible level of football competition amongst its your members in the community your dissolution clause states upon dissolution the remaining assets will be used exclusively for exempt purposes’ b and c are your only board members and they are described throughout your application as the founders and owners of the team the application also shows b is a player on your team information provided along with your primary activity is the operation of a minor league football team the brochure you provided advertises you as a professional minor league at its best you advertise times for interested individuals to try out for the team the players must be or older or age with a parents or guardians permission and pay a small fee to try out players admitted to the team must buy their own equipment as well as pay a fee of about dollar_figure players receive no compensation your football season typically includes practice two days a week and season play consisting of ten games against other minor league teams you also encourage your players to be involved in community and charitable activities and require a minimum of ten hours commitment from each player to such activities get together off the field for interaction you have weekly players’ night out where players you offer players another chance at playing football you film all games and provide copies to players who are looking to advance their careers through recruitment college or the nfl a news article quotes one of your coaches describing your players as some are out here trying to move to a different level like arena football some are just out here to play some are trying to hold on to the past other articles and promotional letter cg catalog number 47630w materials suggest players may receive opportunities to play college or professional football a flyer states the sky’s the limit with respect to possible opportunities for career advancement your staff includes a head coach assistant coaches offensive and defensive coordinators video and media coordinators grounds keeper etc all staff positions are volunteer and no one is compensated your sources of income include gross_receipts from admission to your games sponsorship and advertising financial statements provided for the for-profit team indicated it operated initially at a profit prior to your formation the for-profit team realized a loss your financial statements continue to show financial losses expenses include advertising league fees rental of game and practice fields and payments for officials and team transportation auto costs to around dollar_figure your balance_sheet reflects a loan from an officer this amount ranged from around dollar_figure no explanation was provided for the varying amounts you explained that b and c mortgaged their home to finance the team you submitted documentation from prior to your formation indicating a loan amount of over by fy ended from a bank to b and c law sec_501 of the internal_revenue_code code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order for an organization to be exempt under sec_501 of the code it must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes if by the terms of its articles the purposes for which such organization is created are broader than the purposes specified in sec_501 sec_1_501_c_3_-1 of the regulations provides that an organizations assets would be considered dedicated for an exempt_purpose for example if upon dissolution letter cg catalog number 47630w such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes or to the federal government or the state_or_local_government for a public purpose regulations sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one of more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 of the regulations defines the words private_shareholder_or_individual in sec_501 to refer to persons having a personal and private interests in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_64_275 1964_2_cb_142 held an organization formed for the purpose of providing advanced training to suitable candidates in the techniques of racing small sailboats in national and international competition and thereby improving the caliber of candidates representing the united_states in olympic and pan american games qualifies for exemption as an educational_organization described in sec_501 revrul_65_2 1965_1_cb_227 held a foundation which is organized and operated exclusively for the purpose of teaching a particular sport to the children of a community by providing free instruction free equipment and facilities for playing the game qualifies for exemption from federal_income_tax under sec_501 of the code revrul_76_441 1976_2_cb_147 presents two situations concerning school operations in the first scenario a nonprofit school succeeded to the assets of a for- profit school while the former owners were employed in the new school the board_of directors was completely different the ruling concludes that the transfer did not serve letter cg catalog number 47630w private interests part of that conclusion was based on the independence of the board in the second scenario the for-profit school converted to a nonprofit school the former owners became the new school's directors the former owners new directors benefited financially from the conversion the ruling concludes that private interests were served revrul_77_365 1977_2_cb_192 held an otherwise qualifying nonprofit organization that conducts clinics workshops lessons and seminars at municipal parks and recreational areas to instruct and educate individuals in a particular sport is operated exclusively for educational_purposes and qualifies for exemption in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number of or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university american science foundation v commissioner tcmemo_1986_556 indicates that an organization must establish through the administrative record that it operates as a sec_501 organization the 86_tc_916 describes an organization in which the court wrote that private_inurement is strongly suggested where an individual or small_group of individuals are the principle contributors to an organization and that individual or small_group of individuals have exclusive control_over the management of the organization’s funds in wayne baseball inc v c i r tcmemo_1999_304 wl it was determined that a highly competitive amateur baseball league did not qualify for exemption under c team members were recruited from a series of spring tryouts were comprised of players who each possessed a high degree of baseball skills the team did not have a formal instructional program players relied on informal interaction to seek advice self-teaching and hands-on experience during games no admission was charged to spectators who watched the games although spectators were allowed to watch the baseball games for free the organization’s activities did not promote the game of baseball in the surrounding community instead the court found that organization’s purpose was to provide a team for the enjoyment recreation and social interaction of its players letter cg catalog number 47630w application of law organizational_test your articles of incorporation do not contain the requisite purpose and dissolution provisions your purposes are broader than the purposes specified in sec_501 and sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations the dissolution clause does not meet the requirements of sec_1_501_c_3_-1 of the regulations since it simply indicates the remaining assets will be used exclusively for exempt purposes this statement does not dedicate assets exclusively for exempt purposes inurement private benefit you are not as described in sec_501 and you do not meet operational_test as described in sec_1_501_c_3_-1 of the regulations you provide football players of all ages another opportunity to play football you operate an adult minor league team owned by your directors and comprised of members of the community selected through tryouts to compete in a league against other teams you operate to provide your players an opportunity to advance their careers through recruitment college or the nfl you are not as described in sec_1_501_c_3_-1 of the code because your net_earnings inure to the benefit of band c band c who are your founders and officers are also described as owners of your team they paid a franchise fee and financed your activities with personal loans obtained by mortgaging of their residence the amount is shown as your liability on your balance_sheet b c owned stock and were paid dividends prior to your conversion to a non-profit therefore you serve the private interests of b and c and do not meet this requirement of the regulations you are not as described in sec_1_501_c_3_-1 of the regulations because you are operated for the benefit of your founders owners and officers b and c you also serve the private interests of your players by assisting eligible players get opportunities to play at the college or professional levels you are not like the organizations described in revrul_65_2 and revrul_64_275 you are organized and operated to recruit adult football players to play in a minor league with the hope that they can move on to the professional level you are similar to the second organization described in revrul_76_441 the catalog number 47630w letter cg officers of the for-profit continued as officers of the non-profit the personal loan from the officer continued to be a liability of the non-profit and there was no indication that any of the assets were transferred to the non-profit there have been no changes in your activities and you continue to operate in the same fashion as when you were a for- profit entity furthermore you have indicated that expenses while operating as a for- profit were cost-prohibitive at a minimum you would be able to reduce expenses by not having to pay sales_taxes for purchases as a sec_501 organization you are unlike the organization described in revrul_77_365 your purpose is to provide a venue for men in m to engage in the sport of football and potentially enter the collegiate or professional arena you require potential players to pay registration fees to tryout out for your team player fees are required of those who make the team the players must possess certain skills to play on your team similar to better business bureau of washington d c inc v united_states you operate for the substantial non-exempt purpose of managing and operating a minor league football team that is owned by your founders officers as in american science foundation v commissioner you have failed to establish through the administrative record that you operate as a sec_501 organization you have not established that you are educational and that your earnings do not inure to the benefit of b and c your founders officers like the organization in the church of eternal life and liberty inurement is strongly suggested because you too have a small_group of individuals namely your founders b and c who have used funds from the mortgage of their home for your operations and have exclusive control_over the management of your funds you are similar to the organization described in wayne baseball inc you recruit players through tryouts and promote by advertising in the media many of your players play for the love of the sport and community benefit if any is incidental to the main purpose of playing on a team in the minor league in addition you also charge spectators for attending the games applicant’s position you indicate that young men to be better on and off the field and another give back community service of your time is devoted to playing football is spent teaching is spent participating in you formed as a non-profit so that if you had to pay for items merchandise services etc letter cg catalog number 47630w they would at least be tax deductible as a for-profit the program does not and cannot generate enough funds to run properly without having to cut corners becoming a non profit will help open a lot of doors for you on different levels service’s response to applicant’s position - of your time is devoted to football the facts show although you indicate only otherwise you spend time on the sport for summer conditioning team tryouts preseason weekend practices two preseason games official season practices held twice weekly ten official season games and playoff games over a period of nine to ten months during the year is substantial besides playing together on the football field weekly players night out events enable players to bond together off field team building is the purpose for the weekly events which encourages and facilitates positive interaction amongst your team’s players and helps create a stronger team your players’ community service and outreach activities are incidental compared to the time spent for training for and playing the game your players’ appearances at various community events accomplish the following raise the public’s awareness of the events and or fundraisers serve as a public relations campaign for the team and increase the team’s exposure within the community your reason for applying for non-profit status is to obtain merchandise or services tax free and to enable the opening of a lot of doors at different levels you will also help alleviate b and c’s financial burden of owning the team conclusion organizational based on the above we find that you are not organized for exempt purposes within the meaniiig of sec_501 of the code specifically you do not meet the organizational_test for exemption because the language in your organizing document does not meet the organizational_test requirements under sec_501 of the code inurement private benefit you fail the operational_test because you are not operated exclusively for sec_501 purposes specifically you are operated to own and manage a minor league team providing opportunities for your players to move on to the professional level and for the private benefit of your founders and officers b and c letter cg catalog number 47630w accordingly we conclude you do not qualify for exemption under sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal the statement of facts item must be accompanied by the following declaration under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code section letter cg catalog number 47630w b provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action determination_letter that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service internal_revenue_service you may fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter enclosure publication sincerely holly o paz director exempt_organizations ruling and agreements letter cg catalog number 47630w


internal_revenue_service number release date uilc date cc psi 1-cor-104026-01 we are responding to correspondence submitted on your behalf by cpa requesting relief in order to establish as the effective year for your s_corporation_election the information submitted explains that a form_2553 for filed under revproc_98_55 was rejected because it was received after the window period had closed it appears that your corporation is also ineligible for automatic late s_corporation relief under revproc_97_48 as the form_1120s return for the taxable_year was filed in date without an extension although we are unable to respond to to your request as submitted this letter provides useful information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2001_1 copy enclosed in addition revproc_2001_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible to use the reduced fee provision you must include the statement described in b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address attn cc p a p o box ben franklin station washington dc direct to cc psi room please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2001_1


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp 2-plr-164359-01 date date legend distributing controlled controlled controlled estate a b c d business x business y business z date plr-164359-01 date a b c d e state a dear this is in response to a letter dated date submitted on behalf of distributing requesting rulings under sec_355 and sec_368 of the internal_revenue_code the code with respect to a proposed transaction additional information was received in letters dated date date date and date 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 the material information submitted is summarized below distributing is an s_corporation that files federal_income_tax returns on a calendar-year basis and uses the cash_method distributing is engaged in business x business y and business z distributing first became engaged in business z on date since date distributing has expanded business z by acquiring other business z assets the stock of distributing is owned by estate individuals a b c revocable trusts for the benefit of d and a member of d’s immediate_family and members of the immediate families of each of a b and d a b c and d have managed the business with varying degrees of involvement of a b c and d only a and a’s family wish to continue in business x a and a’s family have no interest in pursuing business z although b c and d all wish to continue in business z the level of animosity distrust and lack of communication among a b c and d has reached the point that they can no longer successfully operate a business together the following series of transactions collectively the distribution is therefore proposed plr-164359-01 distributing will form three corporations controlled controlled and controlled collectively the controlled corporations distributing will contribute to controlled the business x operation controlled will also assume or refinance in the amount of dollar_figurea a debt now secured_by certain business z assets that will be contributed to controlled distributing will contribute to controlled certain business z assets cash or notes in the amount dollar_figureb and certain equipment controlled will receive cash or notes in the amount dollar_figurec from controlled distributing will contribute to controlled the business y assets certain business z assets cash or notes in the amount dollar_figured a note in the amount dollar_figuree owed to distributing by c and certain equipment distributing will retain certain business z assets distributing will then distribute all of the stock of controlled to a the members of the a family holding distributing stock and to estate in exchange for the shares of distributing held by such shareholders shares of controlled owned by estate will be settled solely to a distributing will distribute all of the stock of controlled to b the members of the b family holding distributing stock and estate in exchange for the shares of distributing held by such shareholders shares of controlled held by estate will be settled solely to b distributing will distribute all of the stock of controlled to c and to estate in exchange for the shares of distributing held by such shareholders shares of controlled held by estate will be settled solely to c following the distribution distributing will retain certain business z assets the stock of distributing will be owned by revocable trusts for the benefit of d and a member of d’s immediate_family and members of d’s immediate_family the distribution will not be carried out prior to date ie the day following the fifth anniversary of date each of the controlled corporations will elect to be an s_corporation on the first available date after the distribution financial information has been received indicating that business x has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years and that business z has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for the period beginning date distributing has made the following representations with respect to the distribution a b the fair_market_value of the stock of each of the controlled corporations to be received by each shareholder of distributing will be approximately equal to the fair_market_value of the stock of distributing surrendered in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing plr-164359-01 c d e f g h the five years of financial information submitted on behalf of distributing is representative of distributing’s present operation with respect to its business x activities and there have been no substantial operational changes since the date of the last financial statements submitted for such operations the financial information submitted on behalf of distributing is representative of distributing’s present operation with respect to its business z activities since date and there have been no substantial operational changes since the date of the last financial statements submitted for such operations following the distribution distributing and each of the controlled corporations will continue independently the active_conduct of its share of all of the integrated activities of its business independently and with its separate employees except that the services of one employee will be shared by controlled and distributing the distribution is being carried out for the following corporate business_purpose to eliminate disputes among a b c and d regarding important business decisions including decisions with respect to the types of business for the corporation to acquire management styles disclosure and sharing of information regarding management of assets and the focus of the business distributing is an s_corporation within the meaning of sec_1361 of the code each of the controlled corporations will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution there is no plan or intention to revoke or otherwise terminate the s_corporation_election of distributing or of any of the controlled corporations once made there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or any of the controlled corporations after the transaction except for gifts by shareholders of distributing or the controlled corporations to the immediate_family of such shareholders there is no plan or intention by any of the distributing or any of the controlled corporations directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through purchases meeting the requirements of sec_4 b of revproc_96_30 plr-164359-01 i j k l m n there is no plan or intention to liquidate any of the controlled corporations to merge any of the controlled corporations with any other corporation or to sell or otherwise dispose_of the assets of any of the controlled corporations after the distribution except in the ordinary course of business the distribution is not part of a plan or series of related transactions within the meaning of code sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the total combined voting power of all classes of stock of either distributing or any of the controlled corporations entitled to vote or stock possessing or more of the total value of all classes of stock of either distributing or any of the controlled corporations the total adjusted_basis and the fair_market_value of the assets transferred to each of the controlled corporations by distributing each equals or exceeds the sum of the liabilities assumed by each of the controlled corporations plus any liabilities to which the transferred assets are subject the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred except that as noted above in order to equalize values a debt now secured_by an asset to be transferred to controlled will be assumed by controlled or refinanced and the security_interest will be assets of controlled distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the distribution no intercorporate debt will exist between distributing and any of the controlled corporations at the time of or subsequent to the distribution except for the following made to equalize the values in the distribution a note in favor of controlled obligating distributing in an amount not to exceed dollar_figureb and a note in favor of controlled obligating distributing in the amount not to exceed dollar_figured payments made in connection with all continuing transactions if any between distributing and any of the controlled_corporation will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length o no two parties to the distribution are investment companies as defined in code sec_368 and iv plr-164359-01 based solely on the information submitted and the representations made we have concluded that the transfer by distributing to each of the controlled corporations of property in exchange for all of the stock of each of the controlled corporations as described above followed by the distribution by distributing of all of the shares of the common_stock of each of the controlled corporations to certain of the shareholders as described above will in each case constitute a reorganization within the meaning of code sec_368 distributing and each of the controlled corporations will each be a_party_to_a_reorganization within the meaning of code sec_368 distributing will not recognize any gain_or_loss upon the transfer of its assets to the controlled corporations in exchange for shares of of the common_stock of the controlled corporations and the assumption of certain liabilities by the controlled corporations code sec_361 and sec_357 no gain_or_loss will be recognized to the controlled corporations upon the receipt of distributing’s assets in exchange for of the stock of the controlled corporations and the assumption of the liabilities of distributing by the controlled corporations code sec_1032 the basis of the assets received by the controlled corporations from distributing will be the same as the basis of such assets in the hands of distributing immediately prior to the transfer code sec_362 the holding_period of each asset received by the controlled corporations from distributing will include the period during which distributing held such asset code sec_1223 no gain_or_loss will be recognized to distributing upon the distribution to the shareholders of of the shares of the common_stock of the controlled corporations pursuant to the distribution code sec_361 no gain_or_loss will be recognized to and no amount will be included in the income of the shareholders upon the exchange of their shares of distributing common_stock for shares of the common_stock of the controlled corporations pursuant to the distribution code sec_355 the basis of the shares of the common_stock of each of the controlled corporations will be the same as the basis of the distributing common_stock surrendered in exchange therefor code sec_358 plr-164359-01 the holding_period of the shares of the stock of the each of the controlled corporations to be received by the shareholders will include the period during which the shareholders held the distributing stock surrendered in exchange therefore provided that such shareholder held the distributing stock as a capital_asset on the date of the distribution code sec_1223 as provided in code sec_312 the earnings_and_profits of distributing will be allocated among the controlled corporations under sec_1_312-10 no opinion is expressed as to the tax treatment of the transactions under other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling specifically no opinion was requested and none is expressed as to the validity or effect of distributing’s s_corporation_election or the proposed s_corporation_election of any of the controlled corporations this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent cc sincerely yours gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court jose martignon petitioner v commissioner of internal revenue respondent docket no 7249-10s filed date jose martignon pro_se melanie e senick for respondent summary opinion vasquez judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 the issues for decision are whether petitioner’s distributive_share of income from café savannah llc2 café savannah is includible in his gross_income for and whether petitioner is liable for the sec_6662 accuracy-related_penalty background 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 petitioner resided in anchorage alaska when the petition was filed in petitioner and alejandro vargas opened café savannah a restaurant petitioner held a interest in café savannah and mr vargas held a unless otherwise indicated all section references are to the code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure petitioner and his business partner organized café savannah as a limited_liability_company for federal tax purposes a limited_liability_company with more than one member generally is treated as a partnership unless the limited_liability_company elects to be treated as a corporation see sec_301_7701-3 proced admin regs interest mr vargas controlled the restaurant’s finances and petitioner focused on the operation of the restaurant helping with everything from waiting tables to cooking before opening café savannah petitioner worked as the general manager of sacks restaurant and he continued working at sacks restaurant full time while also working at café savannah the partnership between petitioner and mr vargas deteriorated shortly after they opened café savannah in date mr vargas shut petitioner out of the business mr vargas changed the locks refused to communicate with petitioner and ignored petitioner’s request for the restaurant’s records after mr vargas shut him out of the business petitioner contacted an attorney to resolve the dispute and gain access to the partnership’s records but was unsuccessful carla bassler a certified_public_accountant prepared café savannah’s form_1065 u s return of partnership income and schedules k-1 partner’s share of petitioner cites mr vargas’ alleged drinking problem failure to invest in the restaurant as promised and aggressive manner with employees and petitioner as the causes of the restaurant’s problems petitioner eventually gained access to the partnership’s records in around date petitioner filed a complaint in the district_court for the state of alaska against mr vargas alleging breach of contract violation of alaska stat sec inspection of records provision of alaska’s limited_liability_company act and breach of fiduciary duty and claim for accounting_income deductions credits etc for ms bassler prepared the form_1065 on the basis of the information and records mr vargas provided café savannah reported dollar_figure of income on its form_1065 for in spring petitioner received a schedule_k-1 reporting dollar_figure as his distributive_share of café savannah’s income petitioner was surprised to learn café savannah had earned a profit for because the restaurant had reported a loss every prior year and he had not received any distributions from the partnership petitioner had his tax_return prepared by an accountant petitioner’s accountant listed café savannah as a partnership in which petitioner held an interest on the schedule e supplemental income and loss attached to petitioner’s form_1040 u s individual_income_tax_return but did not report on the schedule e any of the dollar_figure reported on petitioner’s schedule_k-1 ms bassler had been the accountant for café savannah since it opened the records included bank statements credit card statements loan statements and cash receipts discussion i burden_of_proof generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer has the burden of proving it wrong rule a 290_us_111 in an unreported income case appealable to the court_of_appeals for the ninth circuit such as this one the presumption of correctness does not attach unless the commissioner first establishes some evidentiary foundation linking the taxpayer with the alleged income-producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 rodriguez v commissioner tcmemo_2009_92 if respondent meets his burden of connecting petitioner with the unreported income determined in the statutory_notice_of_deficiency the burden then shifts to petitioner to prove that respondent’s determination is erroneous see george v commissioner tcmemo_2002_163 respondent has established a sufficient evidentiary foundation linking petitioner with the income-producing activity by showing that petitioner held a interest in petitioner has neither claimed nor shown that he satisfied the requirements of sec_7491 to shift the burden_of_proof to respondent with regard to any factual issue affecting the deficiency in his tax café savannah in thus respondent’s determination of unreported income is entitled to the presumption of correctness ii distributive_share of partnership income sec_701 provides a partnership as such shall not be subject_to the income_tax imposed by this chapter persons carrying on business as partners shall be liable for income_tax only in their separate or individual capacities in determining his income_tax each partner must separately include his distributive_share of the partnership’s taxable_income or loss sec_702 as a general_rule a partner’s distributive_share of income gain loss deduction or credit is determined by the partnership_agreement sec_704 sec_1_702-1 income_tax regs provides each partner is required to take into account separately in his return his distributive_share whether or not distributed of each class or item of partnership income emphasis added few principles of partnership_taxation are more firmly established than that no matter the reason for nondistribution each partner must pay taxes on his distributive_share 410_us_441 the tax is thus imposed upon the partner’s proportionate share of the net_income of the partnership and the fact that it may not be currently distributable whether by agreement of the parties or operation of law is not material 304_us_271 see also chama v commissioner tcmemo_2001_253 holding that a partner was taxable on his share of partnership gain even though not distributed to him but instead reinvested by the partnership johnston v commissioner tcmemo_1984_374 holding that each partner is taxed on his distributive_share of partnership income without regard to whether the amount is actually distributed to him the fact that petitioner did not receive any distribution from the partnership because of mr vargas’ alleged wrongdoing does not change the general_rule that a partner is taxed on his distributive_share whether or not received see 208_f2d_903 3d cir holding that the taxpayer’s distributive_share of partnership income was taxable to him in the year of realization by the partnership despite the fact that his partner had embezzled funds which did not appear in the partnership books and the taxpayer was unaware of the existence of the funds and never received any of them aff’g a memorandum opinion of this court dated date thus petitioner must include his distributive_share of café savannah’s income in his gross_income iii accuracy-related_penalty respondent determined that petitioner is liable for a sec_6662 accuracy-related_penalty for pursuant to sec_6662 and b a taxpayer may be liable for a penalty of of the portion of an underpayment_of_tax attributable to a substantial_understatement_of_income_tax an understatement is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return sec_6662 a substantial_understatement_of_income_tax exists if the understatement exceeds the greater of of the tax required to be shown on the return for a taxable_year or dollar_figure see sec_6662 the burden of production is on respondent to produce evidence that it is appropriate to impose the relevant penalty see sec_7491 116_tc_438 because we have sustained respondent’s adjustment the amount of tax required to be shown on petitioner’s return is dollar_figure petitioner reported total_tax of dollar_figure for accordingly petitioner understated his tax_liability by dollar_figure petitioner’s understatement constitutes a substantial_understatement_of_income_tax because it exceeded the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure respondent has therefore met his burden of production the accuracy-related_penalty does not apply with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 higbee v commissioner t c pincite the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s efforts to assess his or her proper tax_liability see id after receiving the schedule_k-1 that he believed was incorrect petitioner made several attempts to contact mr vargas and to access the partnership’s records petitioner even sought counsel in an attempt to resolve the dispute with mr vargas and gain access to the partnership’s records additionally petitioner had his tax_return prepared by an accountant in a good-faith attempt to properly assess his proper tax_liability we find that petitioner made a significant effort to assess his proper tax_liability see id on the facts and circumstances we find that petitioner had reasonable_cause and acted in good_faith to reflect the foregoing decision will be entered for respondent with respect to the deficiency in income_tax and for petitioner with respect to the accuracy-related_penalty under sec_6662