department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil number 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 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 at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations 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 uil number date3 u q o o identification_number contact number fax number employer_identification_number t t h t h w m t n m t w w m t u w w d u m o w dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were incorporated as a nonprofit corporation in state on datei you filed a form_1023 seeking exemption from taxation under sec_501 according to your articles of incorporation you were formed to promote meaningful access to our system of justice educational institutions and medical_care to educate and enrich the quality of life within our multicultural community by helping individuals and groups recognize their similarities appreciate their differences and understand that they share a common destiny in promoting multicultural community by helping individuals and groups recognize their similarities appreciate their differences and understand that they share a common destiny in promoting a just and fair society and to advocate for civil rights and employment rights and to develop leadership skills in young people who show an interest in promoting civil rights and employment rights your narrative statement provides that your dominant purpose access to our system of justice educational institutions and medical_care you list three activities that will further your purposes first you intend to work with adolescents who exhibit an interest in civil and employment rights second you are working with a neighborhood organization project in order to raise money to pay the medical bills of two children and third you are raising funds to pay for the out-of-pocket travel_expenses of attorneys in state who will provide pro bono legal services to individuals is to help provide meaningful you state that you intend to work with adolescents who exhibit an interest in civil and employment rights you may conduct this activity with the cooperation of other organizations that already work with young people you will raise money in furtherance of this purpose which will be used to pay individuals and organizations that provide leadership training date2 letter you explain that leadership training will be provided by local labor leaders civil rights leaders community leaders and teachers you state that no fees will be charged and if there are fees they would be minimal and limited to helping cover the expense of materials and educational trips you did not submit any additional information regarding this activity including the types of students that you will provide with training how you will identify those students the types of training they will be provided with and the curriculum for the training currently you do not spend any of your time on this activity and did not estimate the percentage of your time that will be spent on this activity in the future in your in your date2 letter you also state that ten percent of your activities consist of supporting fundraising activities for project which according to your date3 letter is raising funds for the medical_expenses of two neighborhood children initially your involvement with project was focused on raising funds to pay the medical bills of one child you state that you intend to make some distributions of your funds to individuals but such distributions will not be limited to one family or a pre-determined or selected group of individuals a local committee of neighbors made the decision about assisting with the medical bills initial application the beneficiary of the support was limited to one predetermined individual you did not have guidelines for determining the recipients of these distributions letter you provided that you will maintain records that will demonstrate how recipients were selected and that you would expand the class of individuals your date3 letter states that two individuals have received assistance with medical bills however you did not provide any information on how the second individual was selected how much assistance the individual received the time frame during which the individual received assistance and whether you were still providing assistance to the individual furthermore you did not provide any guidelines for in your date2 in your determining future recipients of these distributions or state whether you intended to increase the number of recipients beyond these two as of date3 you have raised dollar_figure x1 for project you state that your third activity of raising funds to pay for the out-of-pocket expenses of attorneys who are providing pro bono legal services to individuals constitutes about ninety percent of your time an attachment to your letter of date2 provides a breakdown of expenses including air travel hotel and meals however you did not provide any guidelines demonstrating which fees would be reimbursable to the attorneys in your letter of date3 you provide that these activities will continue through the end of year and possibly for another year after that currently you are aiding four attorneys of these four attorneys two are on your board_of directors you plan on reimbursing firm which is partially comprised of all of your directors for expenditures associated with the pro bono representation of individuals while you have audit procedures for such distributions those procedures can be waived by two-thirds of your board who are all partners at firm for example you state that project has started new vegetable gardens is coordinating in addition to your listed activities you described additional activities that will be conducted by project with another organization exempt from federal taxation under sec_501 on a 5k run and is considering creating a nature trail however you do not fully describe your involvement with these other activities of project in your date3 letter you provided some information regarding your fundraising you state that you have raised dollar_figure x2 of that dollar_figure x1 one-fifth of dollar_figure x2 was spent on project and dollar_figure x3 less than two percent of dollar_figure x2 was spent on your pro bono activities to individuals the remaining dollar_figure x4 has not been used you did not submit any details on how you anticipate using the remaining funds while your bylaws provide for up to seven members on your board_of directors you currently have only three directors these three members are lifetime members of the board_of directors according to your bylaws these three individuals are also business partners in firm law sec_501 of the code provides an exemption for corporations organized and operated exclusively for religious charitable scientific literacy or educational_purposes no part of the net_earnings of which inures to the benefit of any shareholder or individual sec_1_501_c_3_-1 of the income_tax regulations regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section not exempt if an organization fails to meet either the organizational_test or the operational_test it is sec_1_501_c_3_-1 of the regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if which accomplish one or more of such exempt purposes specified in sec_501 of the it engages primarily in activities 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 states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations states 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 who created it it must not be operated for the benefit of designated individuals or the persons revproc_2011_9 r b provides in part that exempt status will be recognized in advance of operations if proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed a mere statement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement the organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned and the nature of the contemplated expenditures where the organization cannot demonstrate to the satisfaction of the service that its proposed activities will be exempt a record of actual operations may be required before a ruling or determination_letter will be issued revrul_69_545 1969_2_cb_117 holds that operating under the control of one person or a small related group suggests that an organization operates primarily for non-exempt private purposes rather than exclusively for public purposes revrul_67_367 1967_2_cb_188 holds that a nonprofit organization whose sole activity is the operation of a scholarship plan for making payments to pre-selected specifically named individuals does not qualify for exemption from federal_income_tax under sec_501 of the code in 326_us_279 the supreme court held that the presence of a single destroy the exemption regardless of the number or importance of truly exempt purposes nonexempt purpose if substantial in nature will in 412_f2d_1197 cert_denied 397_us_1009 the supreme court examined whether an organization's net_earnings may inure to the benefit of private individuals in ways other than by the actual distribution of dividends or payment of excessive_salaries in 70_fedclaims_782 the court in denying an organization tax exempt status under sec_501 found that the organization was operated for personal rather than public benefits after reviewing the organization’s promotional materials actions finances and records of activities the court in reviewing whether the taxpayer had modified its activities noted that gaps in the record may be resolved against the taxpayer since the burden is on the taxpayer to provide evidence that it meets the requirements of sec_501 in 74_tc_531 aff'd 670_f2d_104 9th cir the court denied exemption to an organization controlled by a small number of individuals in part because those individuals were in a position to perpetuate control of taxpayer’s operations and activities indefinitely in 82_tc_215 an organization that merely made statements as to its intended purposes without supplying any concrete information as to how it proposed to carry out those purposes did not qualify for exemption under sec_501 in 92_tc_1053 the court determined that an organization providing training for individuals specifically to work on republican campaigns was providing prohibited private benefit the court stated that the presence of earnings inuring to the benefit of a private shareholder were not necessary prohibited private benefit can be gained by an unrelated third party that a determination of private benefit must examine the charitable nature of the class and that size alone will not convert an noncharitable class into a charitable one in making this determination in carrie a maxwell trust pasadena methodist foundation v commissioner 2_tcm_905 a_trust established for the benefit of an aged clergyman and his wife was a private trust and not an exempt activity despite the fact that the two individuals served were needy in wendy parker rehabilitation foundation inc v commissioner 52_tcm_51 the organization was created by the parker family to aid an open-ended class of victims of coma however the organization stated that it anticipated spending _- percent of its income for the benefit of wendy parker significant contributions were made to the organization by the parker family and the parker family controlled the organization wendy's selection as a substantial recipient of funds substantially benefited the parker family by assisting with the economic burden of caring for her the benefit did not flow primarily to the general_public as required under sec_1_501_c_3_-1 therefore the foundation was not exempt from federal_income_tax under sec_501 in share network foundation v commissioner 78_tcm_6 the court provided that an organization has the burden of providing sufficient documentation or other substantive information regarding its activities and operations which would establish entitlement to tax exempt status analysis to qualify for exemption under sec_501 a taxpayer must demonstrate that it is organized and operated exclusively for exempt purposes sec_1_501_c_3_-1 even though some of your activities may have a charitable purpose within the meaning of sec_501 your assets and income might inure to the benefit of your founders see better business bureau u s pincite additionally you have not fully described your activities in sufficient detail to demonstrate that you meet the requirements of sec_501 the burden is on the taxpayer to demonstrate that it is organized and operated for exempt purposes which includes demonstrating that its net_earnings do not inure to private shareholders or individuals and that it does not benefit private interests such as designated individuals the creator or his family the shareholders of the organizations or persons controlled directly or indirectly by such private interests see eg founding church of scientology f 2d pincite bubbling well church of universal love t c pincite share network foundation t c m cch pincite the internal_revenue_service has previously determined that control of an organization by a single_person or by even a small related group of individuals suggests that an organization is operated primarily for non-exempt private purposes see eg revrul_69_545 supra see also bubbling well church of universal love t c pincite revrul_69_545 supra you are under the control of a small_group of individuals like the organization described in currently your board_of directors is controlled by three related individuals who have been given a lifetime appointment to your board these three directors are also the named partners of firm currently two of your three directors are performing legal services for individuals and you will reimburse them and eirm for their out-of-pocket expenditures however you do not have guidelines for determining or limiting the amount of funds received by these directors additionally you do not have guidelines as to what expenses will or will not be reimbursed as such you have not demonstrated that you are not operated for the benefit of your directors in addition to the activities listed above you are also organized and operated in substantial part to conduct fundraising activities for the benefit of pre-selected recipients your fundraising on behalf of two designated individuals is like the activities described in carrie a maxwell trust 2_tcm_905 which held that a_trust established to benefit a needy clergyman and his wife was not exempt the trust benefited private individuals rather than the general_public a similar result was reached in revrul_67_367 supra where an organization paid scholarships to pre- selected individuals payments to pre-determined specific individuals you have selected two individuals to receive medical payments from you without providing information as to the guidelines of selecting those individuals and without providing information on payments to other individuals meeting those guidelines such that you would be providing a public rather than a private benefit in both situations an organization was found to not be exempt due to in your medical expense activity is also analogous to those in wendy parker 52_tcm_51 that case an organization formed to aid coma victims including a family_member of the founders was not entitled to recognition of exemption approximately thirty percent of the organization's net_income was expected to be distributed to aid the family of a specific coma victim the organization provided funds for the support of an unspecified number of other coma patients of which there was no shortage and to organizations that also supported coma patients generally the tax_court found that the family of the coma victim was a substantial beneficiary of the foundation’s funds the court noted that the family’s control_over petitioner is not in itself fatal to petitioner’s cause however petitioner’s selection of wendy parker as a substantial beneficiary of its disbursements is the determinative factor in this case wendy parker t c m pincite those receiving a private benefit do not have to be related to the organization in order for there to be a prohibited private benefit see american campaign academy t c pincite while none of the family members of the individuals receiving benefits sit on your board_of directors you are providing monetary support for medical_care to a pre-determined select class of two individuals you represent that one fifth of your total current funds and ten percent of your time have been provided for the support of these pre-determined individuals furthermore while the court looked favorably on the petitioner’s provision of information on guidelines used for determining who received funds as well as information regarding other beneficiaries of its funds you have not provided any information as to either category as such you are operated for their private interests even if you were not operated for private interests you have not provided sufficient detail to conclude that you are operated for an exempt_purpose under revproc_2011_9 2011_2_irb_283 exempt status will be recognized in advance of operations if the proposed operations can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed an organization must fully describe the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned and the nature of the contemplated expenditures the organization has the burden of providing sufficient documentation or other substantive information regarding its activities and operations which would establish entitlement to tax exempt status information that is vague or nonspecific is not sufficient to meet the requirements under sec_501 see share network foundation v commissioner 78_tcm_6 exempt status may be denied based solely upon the applicant's failure to describe in adequate detail how it will satisfy the operational_test see 82_tc_215 finding that an organization that merely made statements as to its intended purposes without supplying any concrete information as to how it proposed to carry out those purposes did not qualify for exemption an application_for tax-exempt status calls for open and candid disclosure of all facts bearing upon an applicant’s organization operations and finances to assure that there is not abuse of the revenue laws the facts if disclosed would show that the applicant fails to meet the requirements of sec_501 bubbling well church of universal love t c pincite see also founding church of scientology ct_cl pincite any gaps contained in the administrative record are resolved in favor of the service new dynamics foundation fed cl pincite it is well- accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant’ if such disclosure is not made the logical inference is that you have failed to provide information regarding several of your activities you state that you will provide leadership training to youths but do not describe any program to such end and you state that no amount of your time is going toward such goal you have stated that the individuals receiving medical benefits will be a broader class and that you will have standards for determining who is eligible to receive funds but you have not provided any guidelines for determining the recipients of the funds and ensuring the charitable nature of the grants you have also not provided any information as to additional recipients that may qualify or where you will seek out or solicit applications from such recipients you provided a list of activities that project an organization that is separate from you will engage in but do not describe your specific involvement in these activities you state that you will reimburse out-of-pocket expenses for attorneys providing pro-bono work for individuals in place but you do not provide guidelines for ensuring the charitable nature of these reimbursements such as what expenses qualify or how an applicant seeks reimbursement the logical inference from these gaps is that if revealed they would indicate a failure to satisfy the operational_test see 74_tc_531 as such you are not operated exclusively for exempt purposes conclusion accordingly you do not qualify for exemption as an organization described in sec_501 and you must file federal_income_tax returns contributions to you are not deductible under sec_170 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 your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you 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 protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service te_ge se t eo ra t constitution ave n w washington dc you may also 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 sincerely lois lerner director exempt_organizations


t c memo united_states tax_court robert l boebrhm and winona j mowrey petitioners v commissioner of internal revenue respondent crestmark mortgage services inc petitioner v commissioner of internal revenue respondent docket nos filed date allen r weed for petitioners alvin a ohm for respondent memorandum opinion thornton judge these cases were consolidated for trial briefing and opinion pursuant to separate notices of deficiency respondent determined the following deficiencies penalties and additions to tax robert l boehm and winona j mowrey docket no penalty taxable_year ended deficiency sec_6662 date dollar_figure dollar_figure crestmark mortgage services inc docket no addition_to_tax taxable_year ended deficiency sec_6651 date dollar_figure dollar_figure after concessions the issues for decision are whether petitioners robert l boehm and winona j mowrey the individual petitioners are entitled to a deduction of dollar_figure for a real_estate mortgage rate market fee claimed on their schedule a for taxable_year whether the individual petitioners are liable for section a accuracy-related_penalties and whether petitioner crestmark mortgage services inc crestmark is entitled to a deduction for business_expenses claimed on its corporate_income_tax return for the year ended date ' respondent determined that crestmark should have included in taxable_income interest imputed under sec_7872 on the unpaid balance of certain loans that crestmark made to petitioners respondent also asserted an addition_to_tax against crestmark for failure_to_file a timely return petitioners failed to present any evidence with regard to these issues at trial on opening brief petitioners listed both issues but failed to argue them respondent dealt with both issues in his brief in answer petitioners did not address either issue in their brief in reply we treat petitioners’ failure to argue as in effect a concession of these issues see rule 15l e and 96_tc_226 continued unless otherwise indicated all section references are to the internal_revenue_code as in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background the parties have stipulated some of the facts which are so found the stipulated facts and the accompanying exhibits are incorporated herein by this reference when they filed their petition the individual petitioners were married and resided in dallas texas crestmark is a corporation formed under the state laws of texas when it filed its petition crestmark’s principal office was located in dallas texas since winona mowrey mowrey has been employed in the mortgage banking business as a loan officer during the year in issue mowrey was employed as loan officer and manager of a branch office of fort worth mortgage corp and colonial savings f a fort worth mortgage and reported wage income of continued 89_tc_46 grossman v commissioner tcmemo_1996_452 supplemented by tcmemo_1997_451 affd _ f 3d _ 4th cir date on brief respondent indicates that because of a miscalculation the amount of imputed_interest income was overstated in the notice_of_deficiency we expect respondent to give crestmark the benefit of the revised computation in the rule computation and in accordance with representations in respondent’s trial memorandum and opening statements at trial to make appropriate adjustments to crestmark’s taxable_income with respect to the income reassigned from crestmark to the individual petitioners dollar_figure she supervised more than employees in addition to her managerial duties she originated loans made accounting for income produced by the loans and prepared budget projections for the branch office the income she received from fort worth mortgage was determined at least in part by the profitability of her branch office to increase the profitability of her branch office and thereby increase her income mowrey would arbitrage loans originated in her branch office to take advantage of interest rate fluctuations in the secondary mortgage market robert boehm boehm was also employed in the mortgage banking business as a loan officer during the year in issue he was employed by nationsbank of texas and reported wage income of dollar_figure in addition boehm assisted mowrey in her employment rach month he helped her audit loan files to determine how much income was being produced and to compare it against the projected budget for the branch office occasionally boehm picked up packages for mowrey and took photographs for_the_use_of appraisers he also kept up with daily mortgage interest rates and would advise mowrey on whether or not to sell loans in the secondary mortgage market during the year in issue boehm was president and sole officer shareholder director and employee of crestmark crestmark came into existence on date as the result of a name change_of a predecessor_corporation identified in the record only as jawin boehm testified that jawin was previously owned though it never did any business by mowrey’s father crestmark has never had any office outside the individual petitioners’ personal_residence nor a telephone number other than the individual petitioners’ on date boehm deposited dollar_figure into an account established in the name of crestmark at nationsbank of texas prior to this deposit the account had a balance of dollar_figure this was the only account in the name of crestmark during the date deposit was the only money received by crestmark during its fiscal_year ended date petitioners allege that the dollar_figure deposited into crestmark’s account represented payment for services performed for mowrey by boehm in his capacity as sole employee of crestmark no written contract existed between crestmark and mowrey neither boehm nor crestmark at any time provided mowrey with any documents or records stating what services were performed the date or time any services were performed or who performed any services on their schedule a attached to their joint federal_income_tax return petitioners claimed a deduction of dollar_figure the record contains no explanation of the apparent discrepancy between the dollar_figure date deposit and the dollar_figure that petitioners have claimed as a deduction for a real_estate mortgage rate market fee paid to crestmark respondent disallowed the deduction in its entirety on date crestmark untimely filed its short--form income_tax return for its fiscal_year ending date on its late-filed return crestmark reported the date deposit of dollar_figure as its sole gross_receipts for the year it reported no compensation of officers no salaries and no wages on its return crestmark deducted dollar_figure in business_expenses for the year the claimed expenses consisted of dollar_figure for taxes and licenses dollar_figure for interest dollar_figure for depreciation and dollar_figure for other deductions that included sums paid for meals petitioners’ country club_dues and improvements to petitioners’ residence at lake kiowa texas such as a room addition garage and landscaping respondent disallowed the claimed business deductions in their entirety discussion petitioners’ deduction for amounts paid to crestmark sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered the test of deductibility for compensation payments is whether they are reasonable and are in fact payments purely for services sec_1_162-7 income_tax regs deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any deductions claimed see rule a 503_us_79 292_us_435 respondent disallowed petitioners’ claimed deduction for the dollar_figure deposited by boehm to crestmark’s account on grounds that petitioners have failed to establish that services were ever performed by crestmark respondent argues that the arrangement with crestmark was a sham intended to divert wage income to their wholly owned corporation petitioners counter that the record has ample evidence to support the finding that the services were in fact performed by mr boehm in his capacity as an officer of crestmark petitioners have failed to establish that the amounts ostensibly paid to crestmark were reasonable or purely for services that boehm provided apart from petitioners’ self- serving testimony the only evidence that petitioners have produced to support the claimed deduction is a single unsigned and undated document captioned invoice that states in its respondent has not raised and therefore we do not consider any issue as to whether the amounts paid to crestmark represented ordinary and necessary expenses of carrying on mowrey’s business as a commission-basis employee for forth worth mortgage entirety winona j mowrey for services rendered for year ended dollar_figure the document bears no letterhead and contains no reference to crestmark this purported invoice sheds little light on what services the dollar_figure deposit compensated the record is devoid of any evidence to suggest that the fees purportedly paid to crestmark were the result of arm’s- length bargaining there was no contract between the individual petitioners or between mowrey and crestmark spelling out the nature and terms of services to be provided by boehm the individual petitioners’ testimony on the method of compensation was vague and inconsistent mowrey testified that fees paid to crestmark were based on a percentage of less than percent of total income and that the amount varied on budget preparation time and that type of thing boehm testified i charge whatever i want to even assuming arguendo that the claimed deduction represented a reasonable allowance for services performed by boehm petitioners have not established that boehm performed these services in his capacity as an employee of crestmark rather than in his own capacity this consideration implicates the first principle of income_taxation that income must be taxed to him who earns it 337_us_733 citing 281_us_111 generally a corporation constitutes a separate taxable entity and will not be ignored for federal_income_tax purposes if it is created for business purposes or actually conducts business after incorporation see 319_us_436 where a corporation relies upon personal services of an employee to produce income the question arises whether it is the employee or the corporation that is actually conducting the business the relevant test is who controls the earning of the income see 88_tc_604 affd without published opinion 855_f2d_855 8th cir 78_tc_882 affd without published opinion 734_f2d_20 9th cir 73_tc_1246 in johnson v commissioner supra this court articulated two requirements that must be met before a corporation rather than its service-performer employee will be considered the controller of income and therefore taxable on it first the service-performer employee must be just that---an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense second there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation’s controlling position johnson v commissioner supra pincite citations omitted in cases involving members of religious orders obligated to turn over outside income to the order some courts have rejected the two-part test used in 78_tc_882 in favor of a flexible facts and circumstances approach see 872_f2d_1014 fed cir 800_f2d_672 7th cir continued petitioners fail both requirements of this test first there is no evidence that crestmark directed or controlled boehm in any meaningful sense to the contrary it is obvious that crestmark was boehm’s alter ego with no employees other than boehm and no office other than petitioners’ personal_residence there is no evidence that during the year at issue crestmark had any activity apart from receiving funds from and disbursing funds on behalf of the individual petitioners second there is no evidence of the existence between mowrey and crestmark of any contract or similar indicium recognizing crestmark’s controlling position with regard to boehm accordingly we conclude that boehm rather than crestmark actually controlled the earning of the amounts allegedly paid to crestmark with respect to boehm’s services because petitioners have filed a joint income_tax return their tax 1s computed on their aggregate income see sec continued 780_f2d_1005 fed cir we need not reconcile any differences in the legal tests as we would reach the same result under either test see haeri v commissioner tcmemo_1989_20 in the context of determining the identity of a taxpayer’s employer this court has also held that it is necessary to examine all the facts and circumstances distinguishing cases such as johnson that--like the instant case--involve the issue of whether compensation paid_by the recipient of personal services is income to the individual workers or their personal_service_corporations see 104_tc_140 d both allowable deductions and taxable_income are determined on an aggregate basis see sec_1_6013-4 income_tax regs where a joint income_tax return is filed it is treated as the return of a taxable unit and the net_income disclosed by the return is subject_to tax as though the return were that of a single individual 311_us_189 quoting sol op c b the amounts paid_by mowrey to boehm have not left petitioners’ taxable unit and accordingly no deduction is allowable mowrey testified that petitioners had a prenuptial agreement that says that all of our income would be sole and separate using this testimony as their springboard petitioners argue on brief that respondent’s sham theory is therefore inapplicable petitioners have introduced no prenuptial agreement into evidence whether or not there is a prenuptial agreement however is immaterial having filed a joint income_tax return petitioners must aggregate their income prenuptial agreement or no we sustain respondent's determination on this issue sec_6662 penalty sec_6662 imposes a penalty equal to percent of the portion of an underpayment of taxes attributable to negligence or disregard of rules or regulations negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under like circumstances see eg 925_f2d_348 9th cir affg 92_tc_1 85_tc_934 no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith see sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances of each particular case see sec_1_6664-4 income_tax regs the burden_of_proof is upon the taxpayer see rule a the individual petitioners have not established that their underpayment was due to reasonable_cause or that they acted in good_faith to the contrary the record is clear that petitioners engaged in a scheme to divert substantial sums of their wage income to crestmark which then claimed business_expenses for their personal living_expenses such as home improvements country club_dues and meals on brief the individual petitioners argue that they should not be liable for the negligence_penalty because the commissioner at least impliedly approved a similar deduction on their individual_income_tax_return the record does not establish that respondent either implicitly or expressly approved a similar deduction in the only pertinent evidence apart from mowrey’s vague and self-serving testimony’ is respondent’s no-change letter from and a revenue agent’s report which indicates that the only items questioned in the audit were a charitable_contribution_deduction and a deduction for investment_expenses there is no evidence that the revenue_agent was even aware of much less approved petitioners’ diversion of income to crestmark in support of their position the individual petitioners cite 92_tc_351 affd f 2d on direct examination mowrey testified as follows q did you pay crestmark that year for the same type of services that you later paid them in a yes sir q in the audit do you know what the outcome of the audit was a well i don’t know all these fancy words that he was talking about but the bottom line is to me was the irs said you know this is not a problem this is fine you know d c cir and brown v commissioner tcmemo_1989_89 affd without published opinion 916_f2d_710 4th cir these cases are distinguishable unlike the taxpayers in matthews petitioners have taken a position that is untenable and have failed to establish that they made full disclosure of their position to respondent unlike brown this is not a case where respondent failed to act over a period of years when fully informed of the facts we sustain respondent’s determination on this issue crestmark’s claimed business deductions respondent disallowed crestmark’s claimed business_expenses on the grounds that it had failed to establish that these were ordinary and necessary business_expenses and that they were expended for the purpose designated with respect to the meals and entertainment_expenses respondent also determined that crestmark failed to meet the substantiation reguirements of sec_274 on brief crestmark concedes that the meals and entertainment deductions have not been substantiated we conclude that crestmark has also failed to establish the validity of its other claimed deductions sec_162 generally allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the -- - requirements of sec_162 is a question of fact see 320_us_467 because petitioners have failed to establish that crestmark carried on any trade_or_business during the year at issue a fortiori the amounts claimed as deductions do not constitute ordinary and necessary costs of carrying_on_a_trade_or_business and thus are not deductible under sec_162 even if we were to assume arguendo that crestmark was carrying_on_a_trade_or_business it has not met its burden_of_proof with respect to these deductions it presented no canceled checks receipts or other evidence establishing that any claimed business_expenses were ever paid the amount of the payments or any other evidence that any part of the claimed expenses were paid for the purposes designated the only witness to testify about the claimed deductions was boehm his testimony was vague conclusory and self-serving and we are not required to accept it see 99_tc_202 consequently we uphold respondent's disallowance of crestmark’s deductions to reflect the foregoing and concessions by the parties decisions will be entered under rule


internal_revenue_service number release date index number ---------------------------------------- ------------------------------------- ---------------------- --------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-112852-15 date october x ----------------------------------------------------- ---------------------------------------- a ------------------------------------------------------ ----------------------- b ------------------------------------------------------ ----------------------- c ----------------------------------------------------- ----------------------------- d ----------------------------------------------------- --------------------------------------------------- e ----------------------------------------------------- ---------------------------------- dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree date -------------- ---------- ---------- ------------ ------------ --------------------------- plr-112852-15 date year a year b state dear -------------- ---------------------- ------------------------------------------------------------- ------------------------------------------------------------- ----------------- this responds to a letter dated date and subsequent correspondence submitted on x’s behalf by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under the laws of state on date and elected to be treated as an s_corporation effective date a b and c were shareholders and officers of x in year a b is the sole owner of d c is a shareholder of e during year a x transferred dollar_figurea dollar_figureb dollar_figurec dollar_figured and dollar_figuree to a b c d and e respectively x’s advisor determined that those amounts may be disproportionate distributions to a b and c in violation of the one class of stock requirement under sec_1361 to correct the possible terminating event x will make corrective distributions to the shareholders in year b x and its shareholders will make consistent adjustments to their returns for year a for the treatment of dollar_figurea dollar_figureb dollar_figurec dollar_figured and dollar_figuree x represents that under x’s governing provisions all of x’s shares of stock have possessed identical rights to distributions and liquidation proceeds from date x represents that the form of the transfers of dollar_figurea dollar_figureb dollar_figurec dollar_figured and dollar_figuree did not have as a principal purpose the circumvention of the one class of stock requirement applicable to s_corporations x represents that the circumstances resulting in the possible termination were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x further represents that x and its shareholders consistently treated x as an s_corporation since the time of its election lastly x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the service plr-112852-15 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1_1361-1 of the income_tax regulations provides in part that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable plr-112852-15 period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to this period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion we conclude that if x's s_corporation_election terminated any such termination was inadvertent within the meaning of sec_1362 consequently x will continue to be treated as an s_corporation from date and thereafter provided x's s election is not otherwise terminated under sec_1362 accordingly x’s shareholders in determining their respective income_tax liabilities must include their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account distributions made by x as provided by sec_1368 as an additional condition to this letter x and its shareholders must take the steps as indicated above to correct the possible terminating event 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 specifically no opinion is expressed or implied on whether x was or is otherwise eligible to be treated as an s_corporation or the correct treatment for federal tax purposes of x’s transfers of dollar_figurea dollar_figureb dollar_figurec dollar_figured and dollar_figuree the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-112852-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp - plr-151867-03 date date legend taxpayer llc company a company b company c parent sub sub merger co state r m n plr-151867-03 date date date year a year b dollar_figurea dollar_figureb dollar_figurec y z cla sec_1 common_stock cla sec_2 common_stock cla sec_3 common_stock cla sec_4 common_stock dear this letter responds to your authorized representative’s letter dated date requesting rulings concerning the proper charge to earnings_and_profits resulting from a redemption distribution under sec_302 of the internal_revenue_code the material information submitted for consideration is summarized below summary of facts taxpayer is a state r corporation that has elected to be treated as a real_estate_investment_trust reit within the meaning of sec_856 taxpayer elected reit status for its first taxable_year beginning on date of year a taxpayer operates on a calendar-year basis and uses the accrual_method of accounting taxpayer is engaged indirectly in the business of rental commercial real_estate its various properties located nationwide are owned and managed directly and indirectly by lower-tier partnerships plr-151867-03 taxpayer is owned by llc a state r limited_liability_company taxable as a partnership and by m other individuals member interests in llc are owned by affiliates of company a company b and company c company a company b and company c are collectively referred to as the purchasers it is anticipated that company c will purchase directly or indirectly the member interests in llc held by the affiliates of purchasers previously taxpayer was owned by sub sub and n other individuals collectively the former shareholders sub and sub are owned by parent a publicly-traded corporation in connection with a larger transaction in which parent sold all of its other assets to the purchasers taxpayer originally intended to sell all of its assets subject_to liabilities for cash and to distribute the proceeds to the former shareholders in one liquidating_distribution certain assets consisting of partnership interests the retained assets could not be sold as of the proposed closing date due to third-party transfer restrictions because the purchasers were unable to resolve these third-party transfer restrictions prior to closing the acquisition with respect to taxpayer was structured as follows i ii iii iv llc formed merger co and on date of year b paid dollar_figurea as a subscription for all of merger co ’s common shares on date of year b the board_of directors of taxpayer adopted a month plan_of_liquidation following the adoption of the plan_of_liquidation taxpayer in year b sold approximately y of its assets subject_to liabilities to affiliates of the purchasers for cash with each such asset being transferred by deed or assignment to a designated affiliate of one of the purchasers the asset sale a portion of the proceeds received from the asset sale was used to repay corporate debt effective date of year b merger co merged into taxpayer pursuant to the laws of state r with taxpayer surviving the merger immediately prior to the merger the former shareholders held all of the outstanding_stock of taxpayer which consisted of three classes cla sec_1 common_stock cla sec_2 common_stock and cla sec_3 common_stock at this time taxpayer held in addition to the retained assets dollar_figurec of cash as a result of operations through date of year b and the asset sale pursuant to the merger merger co ’s shares were automatically converted into one share of taxpayer’s newly issued cla sec_4 common_stock taxpayer’s former shareholders received the right to dollar_figureb which is equal to dollar_figurea plus dollar_figurec in exchange for their taxpayer stock and the shares of each class of stock held by the former shareholders were cancelled taxpayer will plr-151867-03 report the transaction for federal_income_tax purposes as a complete termination of the interests of the former shareholders under sec_302 see revrul_79_273 c b accordingly of the total dollar_figureb transferred to the former shareholders in exchange for their taxpayer stock dollar_figurec will be treated as a distribution in payment in exchange for some of the former shareholders’ taxpayer stock under sec_302 the redemption and dollar_figurea will be treated as a purchase by purchasers of the remaining taxpayer stock from the former shareholders the stock purchase subsequent to date of year b taxpayer determined that it may not be able to resolve the third-party transfer restrictions on the retained assets prior to the lapse of the 24-month liquidation_period taxpayer thus proposes to abandon its plan_of_liquidation and requests a ruling concerning its proposed methodology for computing the amount of earnings_and_profits for purposes of the dividends_paid deduction under sec_857 attributable to a non-liquidating redemption of all the former shareholders under sec_302 representations the following representations have been made in connection with the proposed transaction a b c d e f the redemption together with the stock purchase was consummated pursuant to an integrated_plan that completely terminated the interests of the former shareholders within the meaning of sec_302 the redemption is an isolated transaction no prior distributions have been treated as redemptions since taxpayer’s inception taxpayer is able to calculate its current_earnings_and_profits to the date of the redemption distribution with reasonable certainty taxpayer will have positive earnings_and_profits for taxable_year b following the redemption taxpayer paid no ordinary dividend distributions during its year b taxable_year and will pay no throwback dividend distributions under sec_858 that are treated as paid with respect to taxpayer’s year b taxable_year upon abandonment of the plan_of_liquidation taxpayer intends to retain substantial assets in order to continue operating a trade_or_business as a reit and taxpayer has no plan or intention to liquidate completely for a plr-151867-03 period of three years from date rulings based solely on the information submitted and the representations as set forth above we hold as follows taxpayer will be permitted to discontinue its plan_of_liquidation in computing its year b dividends_paid deduction under sec_857 as defined in sec_561 and sec_562 for purposes of sec_857 and b upon abandonment of the plan_of_liquidation taxpayer will be permitted to determine the proper charge to its earnings_and_profits resulting from the sec_302 redemption based on actual earnings_and_profits as of the date of the redemption distribution such proper charge being determined in an amount which is not in excess of the ratable share within the meaning of sec_312 of such earnings_and_profits attributable to the former shareholders’ redeemed stock for this purpose the ratable share is the ratio of the value of the shares treated as redeemed over the total value of all the taxpayer’s shares outstanding immediately prior to the transactions in step iv described above in this case dollar_figurec over dollar_figureb or approximately z earnings_and_profits are thus reduced by an amount equal to z of the actual earnings_and_profits as of the date of the sec_302 redemption except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provision of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction we specifically express no opinion regarding whether taxpayer qualifies as a reit the rulings contained in this letter are predicated on the facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the factual information representations and other data may be required as part of the audit process this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling plr-151867-03 letter is consummated pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely ____________________________ michael j wilder senior technician reviewer branch associate chief_counsel corporate cc


department of the treasury i n t e r n al r e v e n u e s e r v i c e washington d c date chief_counsel number info release date uil conex-132501-04 cc ita b4 the honorable bob goodlatte member u s house of representatives franklin road s e suite roanoke va dear congressman goodlatte i am writing in response to your inquiry dated date on behalf of your constituent mr charles dennis mr dennis a tax preparer believes that his clients’ net gambling winnings of dollar_figure resulted in additional income_tax of dollar_figure mostly attributed to the alternative_minimum_tax amt mr dennis asked for a change to the law under sec_61 of the internal_revenue_code gross_income means all income from whatever source derived as mr dennis correctly pointed out a taxpayer must include gambling winnings in gross_income under sec_165 a taxpayer can deduct gambling_losses up to the amount of gambling winnings generally this is an itemized_deduction in determining the amount of the alternative_minimum_taxable_income amti of any taxpayer other than a corporation sec_56 disallows certain deductions however gambling_losses under sec_165 are not subject_to the amt disallowance rules therefore a taxpayer can deduct gambling_losses for purposes of determining amti i have enclosed form_6251 alternative_minimum_tax - individuals its instructions and an extract from publication your federal_income_tax the detailed information about the amt in these materials may help mr dennis determine whether he correctly computed his clients’ tax_liability i hope this information is helpful please call shareen s pflanz identification_number at if you have any questions sincerely robert a berkovsky branch chief branch income_tax accounting enclosures


tax_exempt_and_government_entities_division reiease number release date ull code department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas date date t axpayer identification identification_number number person to contact employee identification_number employee telephone number certified mail - return receipt dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code our favorable determination_letter to you dated may 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s organizations described in sec_501 and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to produce documents to establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inures to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by sec_6001 and sec_6033 of the code and revrul_59_95 1959_1_cb_627 contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file income_tax returns on form_1120 this return was filed with the appropriate service_center for the tax_year ending december 20xx these returns should be filed for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a i petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address united_states tax_court second street nw washington dc you also have the right to contact the office_of_the_taxpayer_advocate the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit taxpayeradvocate irs gov or call if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely margaret von lienen director eo examinations enclosures publication irs department of the treasury internal_revenue_service tax_exempt_and_government_entities_division 25th st rm mail stop ogden ut date march taxpayer_identification_number form_990 tax_year s ended december 20xx person to contact id number contact numbers phone number toll free long distance fax number manager's name id number manager's contact number response due_date april 20xx certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren’t an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don’t hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies letter catalog number 34809f effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you may also file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can’t reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely paul a marmolejo acting director exempt_organizations examinations enclosures report of examination form_6018 publication publication letter catalog number 34809f form_886 a name of taxpayer explanation of items department of the ‘i'reasury - internal_revenue_service schedule no or exhibit year period ended december 20xx date of notice date issues whether the organization continues to qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code facts the organization filed form_1023 for exemption on august 20xx and was granted exemption as a c on may 20xx with an effective date of exemption of june 20xx an organization exempt under c needs to be organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and to foster national and amatuer sports competition the organization was selected for audit to ensure that the examined organization's activities and operations align with its approved exempt status the organization failed to respond to the internal_revenue_service attempts to obtain information to perform an audit of form_990 for the above mentioned tax period e correspondence for the audit was as follows o o letter rev with attachments was mailed to the organization on august 20xx with a response date of september 20xx a letter was sent to the organization on september 20xx letting the organization know the tax compliance officer tco mailing address and phone number had changed o eoca letter eo exam follow up for no response with attachments was mailed certified to the organization on october 20xx with a response date of october 20xx article number per the united_states postal service usps tracking this was delivered on october 20xx at pm o eoca letter eo exam follow up for no response with attachments was mailed certified to the president per form_1023 application on december 20xx with a respond date of december 20xx article number per usps tracking this was unclaimed and returned to the internal_revenue_service irs on january 20xx form 886-a crev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer explanation of items department of the ‘l'reasury - internal_revenue_service schedule no or exhibit year period ended december 20xx o eoca letter eo exam follow up for no response with attachments was mailed certified to the treasurer secretary per form_1023 application on december 20xx with a respond date of december 20xx article number per usps tracking this was unclaimed and returned to the irs on january 20xx e telephone contact for the audit was as follows o august 20xx tax compliance officer tco was not able to locate a phone number for an officer of the organization to notify the organization they were under audit the phone number listed on the form_1023 application was for the power_of_attorney for the application o november 20xx tco received a phone call from - president dated october 20xx in the mail president said he just looking at it yesterday and realized it had a due_date of october 20xx he just sent the letter over to the accountant yesterday president said he had received the certified letter tco reviewed the individual document request idr with the president as well as publication tco asked if the organization is terminating and the president said no they want to be a 501_c_3_organization tco also let the organization know they should be filing a form_990 each year the organization said for the 20xx year the gross_receipts were over xx xxx xx let him know a form_990 should have been filed by may 20xx as part of the audit the president will need to submit a form_990 and a letter of reasonable_cause for late filing if applicable the tco granted an extension to november 20xx o december 20xx tco had not received a response from the organization tco called and received a voice mail system vms tco left a message for the president to return the phone call - president o december 20xx tco received a return phone call from president said he was still waiting to get - president information back from the accountant tco let the president know certified letters had been mailed to all the officers tco told the president the certified letter has a response date of december 20xx tco let the president know if a response is not received by december 20xx then form 886-a crev department of the treasury - internal_revenue_service page -2- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year period ended december 20xx tco would be starting the paper work for a no response and proposing revocation the president said tco would have the information by december 20xx law internal_revenue_code irc sec_1_61-1 of the regulations provides that gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services income may be realized therefore in the form of services meals accommodations stock or other_property as well as in cash sec_501 of the code provides that an organization organized and operated exclusively for charitable or educational_purposes is exempt from federal_income_tax provided no part of its-net earnings inures to the benefit of any private_shareholder_or_individual sec_511 of the internal_revenue_code imposes a tax at corporate rates under sec_11 on the unrelated_business_taxable_income of certain tax-exempt organizations sec_6001 of the code provides that every person liable for any_tax imposed by this title or for the collection thereof shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe whenever in the judgment of the secretary it is necessary he may require any person by notice served upon such person or by regulations to make such returns render such statements or keep such records as the secretary deems sufficient to show whether or not such person is liable for tax under this title sec_1_6001-1 of the code provides that such permanent books_and_records as are required by paragraph a of this section with respect to the tax imposed by sec_511 on unrelated_business_income of certain exempt_organizations every organization exempt from tax under sec_501 shall keep such permanent books of account or records including inventories as are sufficient to show specifically the items of gross_income receipts and disbursements such organizations shall also keep such books_and_records as are required to substantiate the information required by sec_6033 see sec_6033 and sec_1_6033-1 through sec_1_6001-1 of the code provides that the books_or_records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such form 886-a crev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended december 20xx statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe federal tax regulations ftr sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 sec_1_501_c_3_-1 in order to be exempt under sec_501 the organization must be both organized and operated exclusively for one or more of the purposes specified in the section religious charitable scientific testing for public safety literary or educational ftr sec_1_501_c_3_-1 of the regulations states that in order to be exempt as an organization described in sec_501 an organization 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_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will not be regarded as operated exclusively for one or more exempt purposes described in sec_501 of the code if more than an insubstantial part of its activities is not in furtherance of a c purpose accordingly the organization does not qualify for exemption under sec_501 of the code revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status the organization has failed to respond to all attempts to contact them organizations position governments position based on the above facts the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in sec_501 if an organization fails to meet either the organizational_test or the operational_test it is not exempt department of the treasury - internal_revenue_service page -4- form 886-a cev form_886 name of taxpayer schedule no or exhibit year period ended december 20xx department of the treasury - internal_revenue_service explanation of items in accordance with the above-cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax sec_1_6033-1 of the regulations specifically state that exempt_organizations shall submit additional information for the purpose on enabling the internal_revenue_service to inquire further into its exempt status using the rationale that was developed in revrul_59_95 the organization's failure to provide requested information should result in the termination of exempt status conclusion based on the foregoing reasons the organization does not qualify for exemption under sec_501 and its tax exempt status should be revoked it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code accordingly the organization's exempt status is revoked effective january 20xx form_1120 returns should be filed for the tax periods after january 20xx form 886-acrev department of the treasury - internal_revenue_service page -5-


t c memo united_states tax_court a-z optics inc petitioner v commissioner of internal revenue respondent docket no 18932-05l filed date kenneth d perkins for petitioner russell f kurdys for respondent memorandum opinion thornton judge pursuant to sec_6330 petitioner seeks review of a proposed levy respondent has moved for summary unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code as amended judgment pursuant to rule for the reasons discussed herein we shall grant respondent’s motion background petitioner is a corporation with principal_place_of_business in masontown pennsylvania on date david p alan alan in his capacity as petitioner’s ceo executed form_870 waiver_of_restrictions_on_assessment_and_collection of deficiency in tax and acceptance of overassessment agreeing to the immediate_assessment and collection of a dollar_figure deficiency in petitioner’s corporate_income_tax for the period ending date a handwritten note at the top of the form_870 states partial agreed issues on date respondent assessed the dollar_figure tax and accrued interest thereon subsequently on date respondent mailed petitioner a notice_of_deficiency determining that for this same period ending date petitioner had a deficiency in corporate_income_tax of dollar_figure and was liable for an dollar_figure accuracy-related_penalty pursuant to sec_6662 the notice_of_deficiency was predicated in large part on the disallowance of a claimed net_operating_loss carryforward from petitioner’s prior tax_year on date on petitioner’s behalf alan executed form 4089-b notice_of_deficiency - waiver consenting to the immediate_assessment and collection of this dollar_figure deficiency and dollar_figure penalty petitioner did not petition this court to redetermine the deficiency or penalty petitioner paid only a portion of the agreed-upon tax and penalty on date respondent sent petitioner a final notice_of_intent_to_levy the levy notice for collection of petitioner’s unpaid balance on date alan submitted on petitioner’s behalf form request for a collection_due_process_hearing notwithstanding that alan had previously executed form_870 agreeing to the immediate_assessment of the dollar_figure tax that was in fact assessed on date on the form alan complained that he had never been given an explanation for the date assessment the settlement officer sent petitioner materials explaining the basis for the disputed assessment she directed petitioner to submit certain information if petitioner wished her to consider a collection alternative and she scheduled a telephone conference for date by letter dated date alan requested that the telephone conference be rescheduled stating that he wished to present new evidence in a face-to-face conference petitioner’s case was reassigned to an appeals officer by letter dated date the appeals officer advised that petitioner was not entitled to dispute the underlying liability having previously agreed to it she offered to schedule a face- to-face hearing to consider payment options by letter dated date alan again contested petitioner’s underlying tax_liability he stated that he had recently discovered documentary_evidence that would substantiate certain claimed business_expenses that respondent had previously disallowed alan asked to be allowed to show this new evidence by letter dated date the appeals officer reiterated that she could not consider petitioner’s underlying tax_liability she stated that if petitioner did not present a collection alternative plan by date she would issue a determination_letter on the basis of information available to her in a letter dated date alan stated that he believed petitioner was entitled to audit_reconsideration on the basis of his newly discovered evidence but that all his tax records relating to the appeal had been taken in an irs raid of his home on date he requested a face-to-face hearing and audit_reconsideration but only after his tax records were returned by the irs petitioner never proposed any collection alternative to the proposed levy and never submitted requested financial information necessary for appeals_office consideration of a collection alternative by notice_of_determination concerning collection action s under sec_6320 and or the notice dated date the appeals_office sustained the proposed levy an attachment to the notice explained that the appeals_office was unable to consider petitioner’s challenge to its underlying tax_liability in this collection proceeding the notice verified that all procedural and legal requirements had been met and that the proposed levy was no more intrusive than necessary under the circumstances the notice stated that no face-to-face meeting could be granted since petitioner had no collection alternative to present in its petition petitioner sets forth the following reasons why it believes it is entitled to relief a incorrect determination of net_income net_operating_loss resulting in assessment and b incorrect application of procedures set forth in sec_6320 and sec_6330 and c new documentation now in hands of internal_revenue_service supporting correct determination of net_income net_operating_loss and d incorrect application of net_operating_loss for carryforward carryback reproduced literally discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law rule a and b see 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 when a motion for summary_judgment is made and properly supported the adverse_party may not rest upon mere allegations or denials of the pleadings but must set forth specific facts showing that there is a genuine issue for trial rule d insofar as petitioner seeks to have this court redetermine a deficiency we lack jurisdiction over petitioner’s claim the jurisdiction of this court depends on the timely filing of a petition rule c the notice_of_deficiency was mailed to petitioner on date petitioner did not file his petition within the 90-day period prescribed by sec_6213 similarly because petitioner signed form_870 consenting to the immediate_assessment of the original dollar_figure deficiency and received a notice_of_deficiency with respect to an additional deficiency and penalty petitioner may not challenge the existence or amount of its underlying liability as part of its challenge to respondent’s proposed collection action see sec_6330 117_tc_324 114_tc_604 114_tc_176 in its petition petitioner broadly assigns as error incorrect application of procedures set forth in sec_6320 and sec_6330 petitioner has not however complied with rule which requires the petition to contain among other things clear statements of the facts on which the petitioner bases the assignment of error similarly in its response to respondent’s motion for summary_judgment petitioner has not set forth specific facts as required by rule d showing that there is a genuine issue for trial with respect to this generalized allegation that respondent committed procedural error petitioner’s failure to allege facts in support of this assignment of error justifies summary_judgment see 122_tc_280 moreover in the administrative_proceeding petitioner did not ask for a collection alternative or raise any procedural issues in its form or otherwise bring any such issues to the attention of the appeals_office other than attempting improperly to contest its underlying tax_liability such issues generally are not properly raised for the first time before this court 118_tc_488 in any event we see no error in the appeals_office determination in conclusion we are satisfied that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law to reflect the foregoing an appropriate order and decision will be entered for respondent


department of the treasury internal_revenue_service washington d c office_of_chief_counsel date number release date uilc cc pa apjp b1 scaf-154007-02 memorandum for m k mortensen associate area_counsel salt lake city small_business_self-employed_division cc sb slc attn mark h howard from john j mcgreevy senior advisor administrative provisions judicial practice cc pa apjp subject the application of sec_6611 and sec_6513 of the internal_revenue_code this advice responds to your memorandum dated date in accordance with sec_6110 this advice should not be cited as precedent legend taxpayer state you have asked for a strategic advice memorandum evaluating taxpayer’s legal argument concerning the application of sec_6611 and sec_6513 of the internal_revenue_code code the facts of the case are not in dispute taxpayer is a domestic mutual_insurance_company created by the state legislature taxpayer made estimated income_tax payments and filed income_tax returns based on its view that it was a taxable entity however taxpayer subsequently requested and received a determination_letter from the service stating that it was exempt from federal taxation following the receipt of its notice of exemption taxpayer filed refund claims for the years that were open the service approved taxpayer’s claims for refund the only issue remaining is the date that overpayment interest begins to accrue on taxpayer’s refunds the complex interest unit at the ogden service_center campus has requested advice on the question of whether the service should pay overpayment interest to taxpayer using the actual dates of each estimated_tax payment or whether the service should calculate the refund interest using the due_date of the return per the standard rule_of sec_6611 referring to b the taxpayer cites state of 141_f3d_662 6th cir in support of its theory that because it was never required to file income_tax returns the deemed dates of payments stated in sec_6513 and sec_6611 don’t apply because they are tied to an event -- the filing of an income_tax return -- that does not apply to the taxpayer hazards and other consideration sec_4 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions


office_of_chief_counsel department of the treasury i n t e r n al r e v e n u e s e r v i c e washington d c september number info release date conex-147956-04 uil no the honorable max baucus united_states senator west 14th st suite helena mt dear --------------------- i am responding to your letter dated -------------------------------------------------------------------- ------------- he wrote about the tax treatment of federal appropriations he asked if a business must include federal appropriations that it receives in its taxable_income or if those funds receive a different tax treatment the tax treatment of federal appropriations depends on all the facts and circumstances surrounding the appropriation the law defines gross_income as all income from whatever source derived sec_61 of the internal_revenue_code code the united_states supreme court has held that under sec_61 of the code the congress intended to tax all gains or undeniable accessions to wealth clearly realized over which taxpayers have complete dominion 348_us_426 c b moreover the supreme court has consistently held that taxpayers must include advance_payments of income in gross_income in the year they receive the advance_payment 372_us_128 367_us_687 353_us_180 consequently unless a business is tax-exempt under the code generally it must include federal appropriations in gross_income especially if the payments were in exchange for the purchase of goods or services by the federal or a state government however certain statutory or common_law exclusions from gross_income may apply one example of a common_law exclusion_from_gross_income is for an amount an individual or a business receives as a loan whether an amount received is a loan depends on all the facts and circumstances including whether or not the taxpayer has an obligation to repay the amount borrowed and whether or not the lender charged interest the supreme court recognized that the proceeds of a loan are not income to the borrower 493_us_203 an example of a statutory exception to the usual rule_of inclusion in gross_income is for amounts received as gifts a taxpayer can exclude the value of property acquired as a gift from gross_income sec_102 of the code the supreme court has held that a gift must result from a 'detached and disinterested generosity ' 'out of affection respect admiration charity or like impulses' 363_us_278 c b however payments that result from a moral or legal duty or from an anticipated economic benefit are not gifts duberstein pincite therefore a taxpayer cannot exclude amounts received for goods or services from gross_income in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 of the code the term contribution_to_the_capital_of_the_taxpayer does not include any contribution_in_aid_of_construction or a contribution as a customer or potential customer sec_118 of the code special rules apply for water and sewage disposal utilities sec_118 of the code i hope this information is helpful if you need further information please contact me at or ----------------------------- identification_number ------------- at sincerely robert m brown associate chief_counsel income_tax and accounting macro form rev department of the treasury - internal_revenue_service