internal_revenue_service index number r department of the treasury washington dc person to contact telephone number refer reply to cc dom p si 6-plr-120399-98 nov re legend company parent owner project franchisor investor manager a sw dollar_figurex sy plr-120399-98 dollar_figurez dear pursuant to a power_of_attorney on file in this office this responds to a letter submitted on behalf of company requesting rulings concerning the ability of owner to pass the rehabilitation_credit attributable to the rehabilitation of project to company facts company is a delaware corporation formed for the purpose of entering into a leasing transaction with owner company is a wholly owned subsidiary of parent a corporation actively engaged directly and through subsidiaries in numerous business activities including the ownership and operation of parent is a corporation whose stock ownership meets the requirements of sec_542 of the internal_revenue_code it is represented that parent is not a personal_holding_company as defined in that provision parent files a consolidated_income_tax_return that will include company owner is a limited_liability_company unrelated to company or parent formed to acquire and rehabilitate the project affiliates of owner engage in various business activities including the management and operation of while company entered into an agreement lease with owner dated to lease the project from owner the project has been substantially_rehabilitated by owner and is intended to qualify as a certified_historic_structure within the meaning of sec_47 of the code a request has been made to a for certification of the completed work on the project owner has agreed to make an election to pass any rehabilitation_credit attributable to the rehabilitation of the project to company as lessee a temporary certificate of occupancy was obtained for the project on - company also entered into the management agreement and the performance agreement these agreements will be described infra the lease_term began on commencement_date and continues until that the commencement_date occurred prior to the project being placed_in_service both owner and company have the right to terminate the lease under certain conditions company made a lease deposit with owner that is refundable upon termination of the lease for any reason other than default by company unless there is an early termination it is represented at the same plr-120399-98 time company also made a lease bonus payment to owner to cover pre-opening_expenses of the project and other costs associated with the project previously incurred by owner rent payable under the lease consists of base rent additional rent and percentage rent base rent is dollar_figurew per year from the commencement_date through date and dollar_figurex per year thereafter payable in equal monthly installments base rent was set at an amount equal to of owner's debt service coverage with respect to the financing costs of the project it is represented that the base rents and lease bonus will exceed the expenses that will economically accrue to owner over the lease_term additional rent i sec_4 of the gross revenues as defined in the lease received by company from project operations and is payable quarterly percentage rent is payable when gross revenues for a year exceed lease-specified base gross revenues base gross revenues increase each year through the lease_term percentage rent is computed in tiers above base gross rentals and is payable quarterly except that percentage rent is deferred to the extent that payment would violate company’s balance_sheet covenant to maintain specified levels of current_assets as defined in the lease deferred percentage rent is deemed to be accrued percentage rent and becomes payable for the next quarter along with any percentage rent calculated for that quarter such combined rent being subject_to company’s balance_sheet covenant upon termination of the lease any unpaid percentage rent and accrued percentage rent become payable without regard to the balance_sheet covenant to the extent of monies received and held by company from project operations owner is the franchisee under a franchise agreement with franchisor a corporation unrelated to either owner or company the lease provides that company is responsible for the performance of all obligations imposed on the franchisee under the franchise agreement to the extent the obligations are not owner's responsibility under the lease under the lease company is required to pay all taxes relating to the project and the business operations connected to the project company is also responsible for all maintenance and upkeep of the project any alterations additions and improvements made by company become property of owner without compensation to company the lease requires company to maintain broad form commercial general liability insurance that covers the project in forms and limits as reasonably determined by plr-120399-98 ‘ owner company is also required to maintain all risk property insurance on the project the property insurance must include business interruption coverage maintained in an amount equal to of the estimated gross revenue for the 12-month_period beginning on the date of the business interruption if the project is closed as the result of a casualty or a governmental condemnation under eminent_domain and owner determines the project cannot be reopened within days then either owner or company may terminate the lease company's obligation to pay base rent and additional rent survives the termination and continues as if the casualty or condemnation had not occurred company will be credited with any proceeds from the business interruption insurance maintained by it and paid to owner for its rent obligations company has represented that the lease is a net_lease within the meaning of sec_57 of the code as in effect on the day before enactment of the tax_reform_act_of_1986 company has entered into the management agreement with manager an affiliate of owner owner is a limited_partner in manager and another affiliate of owner is the general_partner the management agreement took effect one day before the commencement_date and continues unti the lease is terminated for any reason or until it is terminated by manager or company under the management agreement company has appointed manager its sole and exclusive agent to operate direct manage and supervise the project company will pay manager a base management fee an incentive management fee and a fixed asset management fee for these services the base management fee is payable monthly and is equal to of gross revenues for the month the incentive management fee is payable yearly and is equal to of gross revenues if gross revenues exceed the amount specified for the particular year the fixed asset management fee is payable monthly and is equal to dollar_figurey adjusted annually for inflation company parent owner and investor a member investor in owner have entered into the performance agreement under which owner has taken on specific obligations and made numerous representations warranties and covenants among these are the following owner has made cost and financial projections that estimate the project will generate positive cash_flow during the period ending years from the date the project is placed_in_service plr-120399-98 owner shall take all necessary steps to pass the rehabilitation_credit attributable to the project to company under the applicable provisions of the code owner has warranted that the amount of credit available to company shall not be reduced by the at_risk_rules under the code and that no debt of owner will be nonqualified_nonrecourse_financing under the code owner and company have agreed that the projected amount of rehabilitation_credit attributable to the project will be dollar_figurez if the actual credit_amount is less than dollar_figurez owner will pay to company of the excess of the projected amount over the actual amount it is represented that an affiliate of company is actively engaged in the business and for the 12-month_period ending date will have of operating at least one full-time_employee substantially_all of whose services were in the active_management of all of whose services were directly related to the deductions attributable to this affiliate's reason of sec_162 and sec_404 exceed sec_15 of the gross revenues from such business and at least three full-time nonowner employees substantially business that are allowable solely by business the amount of law and analysis sec_38 of the code provides a credit against income taxes for certain business credits including the investment_credit determined under sec_46 sec_46 of the code provides that for purposes of sec_38 the amount of the investment_credit includes the rehabilitation_credit sec_47 of the code provides that the rehabilitation_credit for any taxable_year includes an amount equal to of the qualified_rehabilitation_expenditures with respect to any certified_historic_structure - sec_47 of the code provides that qualified_rehabilitation_expenditures with respect to any qualified_rehabilitated_building shall be taken into account for the taxable_year in which the qualified_rehabilitated_building is placed_in_service sec_50 of the code provides that for purposes of subpart e of the code rules similar to the rules of former sec_48 as in effect on the day before the date of enactment of the revenue reconciliation act of 1990_act shall apply following references to sec_48 refer to that section as in effect prior to the enactment of the act the l plr-120399-98 sec_48 of the code provides that a lessor of property may elect with respect to any new sec_38 property to treat the lessee as having acquired the property for an amount equal to the fair_market_value of the property sec_48 of the code provides that in the case of a qualified_rehabilitated_building the portion of the basis attributable to qualified_rehabilitation_expenditures is sec_38 property sec_48 provides that property treated as sec_38 property by reason of sec_48 shall be treated as new sec_38 property sec_48 of the code provides a special rule for certain short-term leases under which a lessee of property described in sec_48 will be treated as having acquired a portion but not all of the leased sec_38 property property described in sec_48 includes real_property that is leased for a period that is less than of its class_life determined under sec_167 under sec_48 sec_48 does not apply to property leased subject_to a net_lease within the meaning of sec_57 as in effect prior to the enactment of the tax_reform_act_of_1986 sec_48 of the code provides that in the case of any lease where the lessee is an at-risk_lessee the property is at-risk_property and the at-risk_percentage is less than the required_percentage any credit allowable under sec_38 to a lessee by reason of an election under sec_48 shall be allowable only as provided in sec_48 sec_48 of the code defines the terms used in sec_48 the term at-risk_lessee means any lessee that is a taxpayer described in sec_465 the term at-risk_property means any property used by an at-risk_lessee in connection with an activity with respect to which any loss is subject_to a limitation under sec_465 sec_465 of the code provides that in the case of a c_corporation with respect to which the stock ownership requirement of sec_542 is met engaged in an activity to which sec_465 applies any loss from such activity for the taxable_year is allowed only to the extent of the aggregate amount with respect to which the corporation is at risk within the meaning of section of b for such activity at the close of the taxable_year sec_465 of the code provides that in the case of a taxpayer that is a qualified_c_corporation each qualifying_business carried on by such taxpayer shall be treated as a separate activity and sec_465 shall not apply to losses from such business sz plr-120399-98 sec_465 of the code provides that a qualified_c_corporation is a corporation otherwise subject_to the limitations of sec_465 that is neither a personal_holding_company defined in sec_542 a foreign_personal_holding_company defined in sec_552 nor a personal_service_corporation defined in sec_269a sec_465 of the code provides that with respect to a qualified_c_corporation a qualified_business is any active business if the corporation had at least one full-time_employee engaged in the active_management of such business the corporation had at least three full-time nonowner employees providing services directly related to such business the amount of the deductions attributable to such business that are allowable solely by reason of sec_162 and sec_404 exceed sec_15 of the gross_income from such business and such business is not an excluded_business sec_465 of the code provides that the term excluded_business means equipment_leasing and any business involving master sound_recordings films videos or tangible or intangible assets associated with literary artistic musical or similar properties sec_465 of the code provides that for purposes of sec_465 the component members of an affiliated_group_of_corporations shall be treated as a single_taxpayer our analysis of the present case assumes that the project qualifies as a certified_historic_structure and the rehabilitation of the project as a certified_rehabilitation within the meaning of the applicable rehabilitation_credit provisions under sec_47 of the - code this letter expresses no opinion with regard to these matters the preceding discussion indicates that the amount of sec_38 credit passed to a lessee by a lessor of new sec_38 property under sec_48 of the code is subject_to limitation under certain circumstances if a lease has a term that is less than of the leased property’s class_life the lease is a short-term_lease for purposes of the sec_48 limitation with respect to the present case the portion of the project’s basis attributable to qualified_rehabilitation_expenditures is new sec_38 property under sec_48 and sec_48 no determination has been made that the lease is a short-term_lease for purposes of sec_48 even if its term is less than of the class_life of the project as determined under sec_167 however assuming that the lease is a short-term_lease under sec_48 if the lease is a net_lease within the meaning of former sec_57 sec_48 would not apply to limit the amount of rehabilitation_credit attributable to the rehabilitation of the project available to company assuming owner makes an election plr-120399-98 under sec_48 to pass the credit to company company has represented that the lease is a net_lease within the meaning of former sec_57 while we make no determination regarding whether the lease is a net_lease under this provision as more fully discussed below for purposes of continuing our analysis of the present case we assume that the representation is accurate the rehabilitation_credit available to company may also be limited under sec_48 of the code if company is an at-risk_lessee of at-risk_property as those terms are defined in sec_48 because parent is a corporation whose stock ownership meets the requirements of sec_542 company is an at-risk_lessee however based upon the representations submitted with the ruling_request we conclude that company is not a lessee of at-risk_property company is a qualified_c_corporation within the meaning of sec_465 under sec_465 the component members of an affiliated_group_of_corporations filing a consolidated tax_return are treated as a single_taxpayer company is a component_member of an affiliated_group_of_corporations filing a consolidated tax_return another member of the group operates sec_465 and the operation of is not an excluded_business under sec_465 therefore the affiliated_group is a taxpayer that carries on a qualifying_business and losses from that business are not subject_to sec_465 accordingly the project is not at-risk_property as defined by sec_48 because it is not used in an activity that is subject_to sec_465 a and the amount of rehabilitation_credit attributable to the rehabilitation of the project available to company is not limited under sec_48 operation meets the employee and expense tests of the conclusions based solely on the facts as presented company's representations and the analysis set forth above we reach the following conclusions if the lease is a net_lease within the meaning of former sec_57 former sec_48 will not apply to limit the amount of rehabititation credit attributable to the rehabilitation of the project available to company the at risk limitations of former sec_48 of the code will not apply to limit the amount of rehabilitation_credit attributable to the rehabilitation of the project available to company company has represented that the transaction denominated lease is a net_lease within the meaning of former sec_57 the service does not issue advance rulings or determinations concerning whether a transaction is in fact a true lease because such rulings or determinations involve issues of true ownership which sec_4 plr-120399-98 are inherently factual accordingly this office has not made any determination about the characterization of the transaction here as a lease a financing_arrangement or a sale consequently this office also has not made any determination as to whether the transaction is a net_lease within the meaning of former sec_57 c b or for any other purpose if the service upon audit subsequently determines that the transaction here is not a true lease for federal_income_tax purposes or is not a net_lease for purpose of former sec_57 then all rulings in this letter are void from the inception of the transaction except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be cited or used as precedent sincerely yours chal fom charles b ramsey branch chief branch office of the assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury significant index no washington dc contact person telephone number in reference to op e eo t date mar o i d i d n e f q w o u o m e x n o t k h i b t l i h dear sir or madam this is in reference to a letter dated date from your legal_representative requesting rulings under sec_4941 of the internal_revenue_code the code with respect to the proposed transactions described below you a bequest provided in the will of the taxpayer are seeking a determination that your b the foundation by the transfer of proposed partial funding of the will to x promissory note the note of an entity which is person under sec_4946 of the code and the holding of the note by the foundation will qualify for the exception to self- dealing provided in sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations the regulations for property of an estate a disqualified a the information provided indicates that x has been a private_foundation within the meaning of sec_509 recognized as exempt from federal_income_tax under sec_501 an organization described in sec_501 and of the code as is died and left a last will and testament the will together with a first codicil to the will admitted to probate in the probate_court having jurisdiction over the estate the co-executrices of b’s estate capacities serve as members of the board_of directors of the foundation c and d duly qualified as independent executrices the will and codicil were in their individual c and d b under the terms of the will b left a bequest to x the the estate of dollar_figurex less the value of any gifts by foundation of b foundation during her life the holder of a promissory note the note principal_amount of and d were the two general partners severally liable under the note reorganization the note has been assumed by n liability company and the note has been personally guaranteed by c and d c and d are the owners managers and officers of a general_partnership in which c b to the the estate in the original c and d are jointly and pursuant to a business dollar_figurey from m a limited is n pursuant to their powers under the will the co-executrices propose funding a portion of the bequest to the foundation by the transfer of the note to the foundation proposed funding a portion of the bequest will be deemed satisfied to the extent of the face_amount of the note which is represented to be the fair_market_value of the note at the time of the upon receipt of a favorable ruling on this request the estate will petition the probate_court for approval of the proposed funding transaction such approval before the termination of the estate under sec_1_641_b_-3 of the income_tax regulations also regulations the estate anticipates obtaining b’s will provides in article i section f as follows x x hereinafter may be referred i give in fee simple to to as the foundation the pecuniary amount of dollars less the value of any gifts valued at the time of gift made by me to the foundation during my life this pecuniary gift may be satisfied in cash or kind at the sole discretion of my executors and any transfers to satisfy this gift shall be valued for the purposes of distribution at the value of the property on the date of distribution then in existence then this gift shall pass to the foundation’s successor organization or successor organization then this gift shall lapse and pass with my residuary_estate if the foundation is not if there is no in article v section d of b’s will provides in part as follows my executors and trustee shall have the power to lease develop partition borrow mortgage sell encumber or hypothecate whole or undivided interests in real or personal_property on behalf of their buy og respective estates both within and beyond the term of their respective estates article v section c of b’s will provides that b’s executors shall have all administrative_powers granted in under state law to a trustee state law provides as follows a trustee may contract to sell sell and convey or grant an option to sell real or personal_property at public auction or private sale for cash or for credit or for part cash and part credit with or without security b’s will provides in article v section e as follows unless specifically directed otherwise in my will my executors may satisfy all gifts in cash or in property or a combination of both and similarly situated beneficiaries need not receive pro_rata distributions of the same asset bequest to x power to choose which assets of my estate will be used to fund such bequest my executors shall have the explicit particularly in regard to the sec_4941 of the code imposes a tax on each act of self- dealing directly or indirectly between a disqualified_person and a private_foundation sec_4946 of the code provides in part that the term disqualified_person means with respect to a private_foundation a person who is - a a substantial_contributor to the foundation b a foundation_manager an owner of twenty percent c combined voting power of profits interest of a partnership or beneficial_interest of enterprise which is foundation of a corporation a_trust or unincorporated a substantial_contributor to the i ii the total the iii the a member_of_the_family of any individual described d in subparagraphs a b c f e trust or estate in which persons described in subparagraphs a a corporation a partnership or a own more than b and and g d c or llof thirty-five percent respectively of the total combined voting power the profits interests or the beneficial interests sec_4946 of the code provides that for purposes of sec_4946 the family of any individual shall include only his spouse ancestors children grandchildren great grandchildren and the spouses of children grandchildren and great grandchildren sec_4941 of the code provides that the term self dealing includes any direct or indirect - b lending of money or other extension of credit between a private_foundation and a disqualified_person sec_53 da - c of the regulations provides that the lending of money between a private_foundation and a disqualified_person shall constitute an act of self-dealing a note pursuant except in the case of the receipt and holding of to a transaction described in sec_53_4941_d_-1 an act of self-dealing occurs where a note disqualified_person is transferred by a third party to foundation which becomes the creditor under the note the obligor of which is a a private sec_53 d - b of the regulations provides the term indirect self-dealing shall not include a transaction with respect to a private foundation’s interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust that has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if - i the administrator or executor of estate or trustee of either- a revocable_trust an a possesses a power of sale with respect to the property or has the power to reallocate the b property to another beneficiary such transaction is approved by the ii probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation lve i such transaction occurs before the iii estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of considered subject_to sec_4947 a revocable_trust before it is iv the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation’s interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transactions occurring after date the transaction either- a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up or b results in the foundation receiving an asset related to the active carrying out of its exempt purposes the co-executrices propose funding a bequest to a provate a disqualified_person as to the under the general_rule of sec_4941 b foundation with a pre-existing prommissory note of liability company that is foundation the code the transaction would constitute self-dealing under sec_4941 of the code provides that a transaction involving property of an estate will not be self-dealing if proposed funding of b’s bequest to the foundation with the note of n meets the five requirements as follows however sec_53_4941_d_-1 requirements it meets five a limited the of power of sale or power to reallocate property the co-executrices possess the power under b’s will to allocate and and hence reallocate estate property among the beneficiaries to fund bequests in regard to the bequest to x section e executrices shall have the explicit power to choose which assets in my estate will be used to fund such bequest of article v specifically provides that the co- approval of the probate_court ho the proposed funding will be approved by the probate_court having jurisdiction over the estate transaction occurs before termination of estate the estate has not heen terminated for federal_income_tax purposes receipt by the estate of fair_market_value of the foundation’s expectancy at all times the estate will remain intact and the fair_market_value of the estate’s assets remains the same partial funding of the bequest by transfer of the note to the foundation will result in the foundation receiving an amount which equals the fair_market_value of the foundation’s expectancy in the property at the time of transfer the estate will receive such benefit by virtue of fulfillment of its obligations under bs will the equal liquidity under the language of b’s will flexibility exists to fund the total bequest to the foundation with any type of property regardless of liquidity so long as requirement of a pecuniary amount of contributions does not result in the foundation giving up any liquidity to which it was othewise entitled thus the funding of the bequest with the note is valued at the bequest less any lifetime dollar_figurex it accordingly we rule as follows the proposed partial funding funding of the pecuniary gift under the will of subsequent payment of the principal and interest due of such note will not constitute acts of self-dealing under sec_4941 of the code provided that the face value of the note equals the fair_market_value of the note b to the foundation with the note and the the holding of the note by the foundation during the term of the note and the foundation’s exercise of any rights granted to under sec_4941 of the code it under the note will nct constitute acts of self-dealing because this letter could help resolve any questions about in your exempt status and foundation status you should keep it your permanent records wt if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely is robert c harper jr chief exempt_organizations technical branch


internal_revenue_service number release date index number ------------------------- ------------------------------------ ------------------------------------------------------- ------------------------------------- --------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc ita b03 plr-102801-18 date date ty ------- legend taxpayer ----------------------------------------------------------------------------------------------------- acquirer ----------------------------------------------------------- adviser ---------------------------------------------------------- accounting firm ----------------------------------------- company a -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ company b -------------------------------------------------------------------------------------------------- ------------------------------------------------ date --------------------- date ------------------- date ------------------- date --------------------------- date -------------------- year ------- year ------- month ------------------- dollar_figurea ----------------- dear ------------------- this is in response to a letter sent on your behalf by your representatives dated date in the letter your representatives requested on your behalf an extension of time to file the forms necessary to make a safe_harbor election under revproc_2011_29 to allocate success-based fees between facilitative and non-facilitative amounts incurred for a covered transaction for taxpayer’s tax_year ending date the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and plr-102801-18 administrative regulations facts taxpayer is a company a acquirer is a company b on date acquirer acquired all of the outstanding_stock of the parent company of taxpayer in a taxable reverse subsidiary merger transaction more specifically a wholly owned merger subsidiary of acquirer merged with and into the common parent company of taxpayer’s former consolidated_return group with taxpayer surviving as a subsidiary of acquirer for federal_income_tax purposes the formation of acquirer’s merger subsidiary and its merger into taxpayer’s former parent company was disregarded instead the transaction was treated for federal tax purposes as a direct taxable purchase of stock of taxpayer by acquirer as a result of the acquisition transaction taxpayer’s former consolidated_return group terminated and taxpayer joined acquirer’s consolidated_return group as of the end of the day on date accordingly taxpayer was required to file a final short-period consolidated form_1120 for the taxable_year ended date the closing date of the acquisition transaction in connection with the acquisition transaction taxpayer engaged adviser to act as exclusive financial advisor to taxpayer regarding the proposed sale of taxpayer to acquirer adviser’s services included transaction advisory services related to general sale strategy assessment of offers received financial and structural advice related to the form of the transaction and various related financial analyses pursuant to the terms of adviser’s engagement letter adviser was entitled to receive a contingent_fee payable on the successful closing of a transaction which was to be calculated as a percentage of transaction value as a result of the successful closing of this transaction adviser became entitled to receive a contingent_fee of dollar_figurea million during the period in question taxpayer’s accounting and finance departments were inundated with various matters related to the acquisition for financial_accounting purposes taxpayer prepared short_period financial statements as a result of the transaction for the short periods of date through date and date through date the date closing date activity including the contingent_fee paid to adviser as a result of the successful closing of a transaction was not included in the first short_period in preparing its short_period tax_return ending on date taxpayer provided the date to date financial information to its predecessor accounting firm which excluded the success-based_fee paid to adviser on date as a result no portion of the dollar_figurea million success-based_fee was included in taxpayer’s final tax_return and taxpayer failed to attach the election statement under revproc_2011_29 for the short_period tax_return ending on date with its originally filed tax_return taxpayer represented that it relied upon its predecessor accounting firm for the correct preparation of its final tax_return plr-102801-18 including the proper tax treatment of transaction costs taxpayer’s former accounting firm mentioned neither the incorrect taxable_year end date nor the treatment of transaction costs incurred on the date closing date to taxpayer this missing election was discovered in connection with the preparation of the consolidated federal tax_return for acquirer and its subsidiaries for tax the year ending date during the preparation of acquirer’s consolidated federal tax_return accounting firm requested additional information relating to the tax treatment of transaction costs on taxpayer’s final tax_return in order to confirm proper treatment of these costs in response to this request accounting firm received among other things a copy of adviser’s invoice dated date showing a dollar_figurea million contingent transaction fee incurred by taxpayer although this information was requested in connection with the preparation of acquirer’s originally filed year consolidated tax_return accounting firm did not receive this information until month when accounting firm reviewed the information it received it discovered that the contingent_fee was inadvertently excluded from taxpayer’s final tax_return and that the safe_harbor election for success-based fees under revproc_2011_29 was inadvertently missed as a result upon discovery of the missed election accounting firm advised that taxpayer request relief under sec_301_9100-1 and sec_301_9100-3 to make a late election taxpayer represented that the extended due_date of taxpayer’s short-period tax_return ending on date was date and thus the period of assessment was still open when taxpayer requested relief law and analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 of the regulations provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 or success- based fee is presumed to facilitate the transaction a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction plr-102801-18 to reduce controversy between the irs and taxpayers over the documentation required to allocate success-based fees between the activities that facilitate the transaction and activities that do not facilitate the transaction the irs issued revproc_2011_29 2011_1_cb_746 the revenue_procedure states that the irs would not challenge a taxpayer's allocation of a success-based_fee between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer -- treats percent of the amount of the success-based_fee as an amount that does not facilitate the transaction capitalizes the remaining percent as an amount that does facilitate the transaction and attaches a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized the revenue_procedure applies to covered transactions described in sec_1 a - e which include -- i a taxable_acquisition by the taxpayer of assets that constitute a trade_or_business ii a taxable_acquisition of an ownership_interest in a business_entity whether the taxpayer is the acquirer in the acquisition or the target of the acquisition if immediately after the acquisition the acquirer and the target are related within the meaning of sec_267 or sec_707 or iii a reorganization described in sec_368 b or c or a reorganization described in sec_368 in which stock_or_securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under sec_354 or sec_356 whether the taxpayer is the acquirer or the target in the reorganization sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin plr-102801-18 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief plr-102801-18 if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer represents that for federal_income_tax purposes the transaction was a direct taxable purchase of stock of taxpayer by acquirer thus immediately after the transaction taxpayer and acquirer were related within the meaning of sec_267 or sec_707 the transaction thus qualifies as a covered transaction described in sec_1_263_a_-5 taxpayer in this case has represented that it requested relief before the failure to make the regulatory election was discovered by the service and that it failed to make the election because after exercising due diligence taxpayer was unaware of the necessity for the election taxpayer has also represented that it reasonably relied on a qualified_tax professional and the tax professional failed to make or advise taxpayer to make the election thus under sec_301_9100-3 iii and v taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore taxpayer has represented that the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer’s election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in revproc_2011_29 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore plr-102801-18 granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time until days following the date of this letter to file an amended_return for the tax_year ending date electing safe_harbor treatment of its success-based fees under revproc_2011_29 except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling including whether taxpayer properly included the correct costs as its success-based fees subject_to the election or whether taxpayer’s transaction was within the scope of revproc_2011_29 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert casey acting branch chief income_tax accounting cc


cca-12150342-15 id uilc number release date from ---------------------- sent tuesday 42pm to --------------- cc --------------------- bcc subject re levy on federal government entities my two cents even though the payments to the attorney may be considered federal payments the irs has only implemented sec_6331 by serving electronic levies on other federal agencies in a program called the federal_payment_levy_program it does not rely on sec_6331 to serve any other type of levies so this is either an a or an e wage levy i suppose the regulation’s definition of wages is broad enough to treat this as a continuous wage levy


le government entities division department of the treasury internal_revenue_service washington d c mar uniform issue list t el ka ty legend taxpayer taxpayer company a ira sponsor p amount r amount s amount t amount x w irs office date date date date page dear this letter is in response to a ruling_request submitted by you dated in which you request approval of the recharacterication of individual_retirement_arrangement ira accounts under sec_408a of the internal_revenue_code ‘code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer and taxpayer the taxpayers are a husband and wife who in direction of their tax advisor with company a transferred their ira accounts with ira sponsor p from traditional iras to roth_ira accounts on date taxpayer transferred amount r and taxpayer transferred amount s for a total of amount x axpayer sold his interest in a partnership as a result of the however during proceeds received from this sale the taxpayers’ adjusted_gross_income for exceeded the dollar_figure limitation imposed on ira recharacterizations thereby disqualifying the taxpayers from undertaking such a recharacterization in was however erroneously overlooked by the taxpayers’ tax advisor company a this at the in the taxpayers switched tax advisors for the year and received conflicting advice as to whether they were eligible to rescind their ira recharacterization to correct the matter as a result the taxpayers missed rescinding their roth_ira recharacterization by the prescribed december taxpayers switched back to their original tax advisor company a and subsequently filed an amended joint recharacterization because of this amendment the taxpayers were subject_to amount t in penalties for income_tax return on date to reflect the improper deadline in the later discussions with internal_revenue_service irs personnel led to the taxpayers submitting a request to the w irs office to dismiss the penalties for because of the circumstances surrounding the matter in a letter dated date the w irs office issued a létter to the taxpayers dismissing the subject penalties for because of reasonable_cause the incomplete advice they received from their tax advisor this letter did not however specifically allow the taxpayers to recharacterize their roth_ira accounts back to traditional_ira accounts with ira sponsor p the taxpayers subsequently requested that ira sponsor p recharacterize their roth_ira accounts back to traditional iras however in a letter dated date irs sponsor p advised the taxpayers that because their recharacterization request was dated after the prescribed december jeadline and the jetter received from the w irs office did not specifically allow the recharacterization they would have to request a private_letter_ruling from the irs permitting the recharacterization page based on the above facts and representations the taxpayers have requested a ruling pursuant to sec_301_9100-3 of the procedure and administration regulations the reulations that because of the circumstances surrounding this ira recharacterization specifically the incomplete advice of their tax advisor the irs permit them to rescind and recharacterize their roth_ira accounts back to traditional_ira accounts with ira sponsor p for the tax_year because of the reasonable_cause involved with respect to the taxpayers’ request for relief under sec_301_9100-3 of the regulations sec_408a of the code and sec_1_408a-5 of the regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira in a recharacterization the ira contribution is treated as having been made to the transferee ira and not the transferor ira under sec_408a of the code and sec_1_408a-5 of the regulations this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax returns for the year of the ira contributions sec_1_408a-5 of the regulations question and answer describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that either has been contributed to a roth_ira or that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer's intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different from the transferor trustee with specified information that is sufficient to effect the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with adjusted_gross_income in excess of dollar_figure for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual_retirement_plan other than a roth_ira during that taxable_year sec_1_408a-4 of the regulations q a provides in summary that an individual with modified_adjusted_gross_income agi in excess of dollar_figure for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year furthermore q a b provides that in the case of a husband and wife who file a joint federal_income_tax return the modified agi is the modified agi derived from the joint_return using the couple’s combined income code sec_408a provides in relevant part that a married individual filing a joint federal_income_tax return may not contribute to a roth_ira for a taxable_year if his her adjusted_gross_income for said year exceeds dollar_figure page sec_1_408a-5 of the regulations q a a provides guidance with respect to the calculation of income attributable to recharacterized amounts see also sec_1 a c ii of the regulations sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the procedure and administration regulations the regulations in general provide guidance concerning requests for relief submitted to the internal_revenue_service on or after date sec_301_9100-1 of the regulations provides that the commissioner of the internal_revenue_service in his discretion may grant a reasonable extension of the time fixed by a regulation a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code section of the regulations lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 of the regulations generally provides guidance with respect to the granting of relief to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 sec_301_9100-3 of the regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if its request for sec_301_9100-1 relief is filed before the failure to make a timely election is discovered by the internal_revenue_service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section announcement 1999_24_irb_50 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional ra to a roth_ira page announcement 1999_44_irb_555 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth_ira the information presented by the taxpayers demonstrates that they received erroneous and confusing information from their tax advisors in their missing the december since the taxpayers timely filed a joint been eligible for relief under either announcement or announcement however because the taxpayers missed the due dates set forth in the announcements it is necessary to determine if they are eligible for relief under the provisions of sec_301_9100-3 of the regulations _ roth_ira recharacterization date provided by law federal_income_tax return they would have which resulted in and the taxpayers were ineligible to convert their traditional ras to roth iras since their adjusted_gross_income for the calendar_year exceeded dollar_figure however at the time of the conversions the taxpayers believed their traditional iras had been properly converted to roth iras because they had been so advised by company a additionally the taxpayers ineligibility to convert their traditional iras and their failure to timely recharacterize their roth iras were not discovered by the service prior to their filing an amended federal_income_tax return for with respect to the taxpayers’ request for relief we believe that based on the information submitted and the representations contained herein the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been met and that the taxpayers have acted reasonably and in good_faith with respect to making the election to recharacterize their roth ras as traditional iras specifically the service has concluded that the taxpayers have met the requirements of clauses i and v of sec_301_9100-3 of the regulations however the service concludes as such only with respect to the taxpayers’ conversion of their traditional iras to roth iras therefore the service concludes with respect to the taxpayers’ ruling_request that pursuant to sec_301_9100-3 of the regulations the service waives the norma roth_ira recharacterization rules and as a result the taxpayers are granted a period of days from the issuance of this ruling letter to recharacterize their roth iras as traditional iras please note that in conjunction with recharacterizing taxpayers’ roth iras the taxpayers must file an amended calendar_year federal_income_tax return consistent therewith if they have not already done so furthermore they must file any additional tax returns necessary to comply with this letter_ruling if any page this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact at sincerely yours donzeli littlejohn manager technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


department of the treasury internal_revenue_service uil tax_exempt_and_government_entities_division release number release date date date taxpayer_identification_number form tax_year s ended august 20xx 20xx 20xx person to contact id number contact numbers phone fax certified mail - return receipt requested dear in a determination_letter dated december 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective september 20xx this is a final letter with regard to your exempt status we previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary on june 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have 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 uil internal_revenue_service office_of_the_taxpayer_advocate lf you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter thank you for your cooperation sincerely barbara l harris acting director eo examinations form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx issue whether an exempt social_club under sec_501 of the internal_revenue_code code failed the gross_receipts_test and whether they will continue to qualify as facts club is exempt from federal_income_tax under sec_501 of the code as an organization described under sec_501 of the code which was effective in december of 19xx the activities as they are stated in the articles of incorporation were difficult to read and were overall illegible however there was language that the club will foster social activities among the members historically the club has mirrored the activities of east coast and west coast gentlemen’s clubs it has since evolved to where it in that they offered in part a place to gather and smoke cigars is now open to women as well the membership is limited to individuals who hold a bachelor’s degree from a four-year college or university generally the club offers several event-type rooms that are made available for rent in addition the facility offers dining facilities for members that are used for the day-to-day activities there are two squash courts that are provided for use as well nonmember use throughout the minutes there is a recurring theme of the financial challenges the club has been encountering for the past several years there are recorded in the minutes issues regarding the marketing efforts by the event coordinator to increase outside nonmember participation such as partnering with shows etc also recorded in the minutes is good profile on the club's reliance on the function business or outside business to support a substantial portion of the general operating costs of the restaurant and clubhouse ‘ talking to the convention center maintaining a website visiting the club’s website contains solicitation of public patronage such as the following example the club is known to the general_public as an option to host a private event featured the club on its featured in the publication top as one of in addition the club has been has form 886-a rev department of the treasury - internal_revenue_service page -1- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx as it was stated by the event coordinator nonmembers are welcome to reserve event rooms nonmember events are provided a member-sponsor when needed but typically the nonmember knows a member who will be willing to sponsor the event all nonmembers are issued an account number for their particular event overall the club did not comply with the record keeping requirements as they are outlined in in computing the gross_income tests it was determined that the revproc_71_17 club had nonmember income for the years ending august 20xx 20xx and 20xx with percentages of and respectively income percentages are without consideration of a complete analysis of the day-to-day sales which does in fact contain non-member income in addition for the 20xx and 20xx years these percentages do not consider the nonmember events sponsored by members that include weddings and numerous other nonmember events nor does it include the cash sales these revenue items were not pursued at this time due to time constraints and the fact that the club had exceeded the limitation without their consideration it should be emphasized that the nonmember law organizations exempt from federal taxes as described in sec_501 of the code include clubs organized for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the income_tax regulations relating to the requirements of exemption of such clubs under sec_501 reads in part as follows a the exemption provided by sec_501 for organizations described in sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption form 886-a rev department of the treasury - internal_revenue_service page -2- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx sec_512 of the code states that in the case of an organization described in paragraph the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income both computed with the modifications provided in paragraphs and of subsection b for purposes of the preceding sentence the deductions provided by sec_243 sec_244 and sec_245 relating to dividends received by corporations shall be treated as not directly connected with the production of gross_income sec_512 of the code states that for purposes of subparagraph a the term exempt_function_income means the gross_income from dues fees charges or similar amounts paid_by members of the organization as consideration for providing such members or their dependents or guests goods facilities or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid such term also means all income other than an amount equal to the gross_income derived from any unrelated_trade_or_business regularly carried on by such organization computed as if the organization were subject_to paragraph which is set_aside revenue_ruling states that a country club that issues corporate membership is dealing with the general_public in the form of the corporations’ employees gross_receipts from such members will be a factor in determining whether the club qualifies as a social_club under sec_501 of the code it also provides that while the regulations indicate that a club may it makes its facilities available to the general_public this does not mean that revrul_58_589 sets forth the criteria for exemption under sec_501 of the code and provides that a club must have an established membership of individuals personal contacts and fellowship lose its exemption if any dealings with nonmembers will automatically cause a club to lose its exemption a club may receive some income from the general_public that is persons other than members and their bona_fide guests or permit the general_public to participate in its affairs provided that such participation is incidental to and in furtherance of the club’s exempt purposes such dealings with the general_public and the receipt of income therefrom does not indicate the existence of a club purpose to make a profit and the income does not inure to club members revrul_60_324 provides that a social_club that made its social facilities available to the general_public through its member-sponsorship arrangement can not be treated as being operated exclusively for pleasure recreation or other nonprofitable purposes and the club no longer qualified for exemption under c of the code revproc_71_17 sets forth guidelines for determining the effect of gross_receipts derived from nonmember use of a social club’s facilities on exemption under internal_revenue_code sec_501 and recordkeeping requirements failure to maintain such records or make them available to the service for examination will preclude use of the minimum gross_receipts standard and audit assumptions set forth in this revenue_procedure form 886-a rev department of the treasury - internal_revenue_service page -3- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx if a club exceeds the test then it will maintain its exempt status only if through facts and circumstances that substantially_all of its activities are for pleasure recreation and other nonprofitable purposes it can show the following are important facts and circumstances to take into account to determine whether a club may maintain its exemption under sec_501 e e e e e the actual percentage of nonmember receipts and or investment_income frequency of use of the club facilities or services by nonmembers an unusual or single event that is nonrecurring on a year to year basis that generates all the nonmember income is viewed more favorably than nonmember income arising from frequent use by nonmembers record of nonmember use over a period of years a high percentage in one year by nonmembers with the other years being within permitted levels is viewed more favorably than a consistent pattern of exceeding the limits even by relatively small amounts see s rept 2d sess c b big_number purposes for which the club’s facilities were made available to nonmembers whether the nonmember income generates net profits for the organization profits derived from nonmembers unless set_aside subsidize the club’s activities for members and result in inurement within the meaning of sec_501 prior to its amendment in sec_501 required that social clubs be operated exclusively for pleasure recreation and other non-profitable purposes public law amended the exclusive provision to read substantially in order to allow a sec_501 organization to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status the committee reports for public law further state a within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of a social club’s facilities or services by the general_public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non-members so long as the latter does not represent more than percent of total receipts these percentages supersede those provided in revrul_71_17 1971_1_cb_683 b thus a social_club may receive investment_income up to the full percent of its gross_receipts if no income is received from non-members’ use of club facilities c in addition the committee reports state that where a club receives unusual amounts of income such as from the sale of its clubhouse or similar facilities that income is not to be included in the percent formula form 886-a rev department of the treasury - internal_revenue_service page -4- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx d the senate report also indicates that even though gross_receipts from the general_public exceed this standard it does not necessarily establish that there is a nonexempt purpose a conclusion that there is a nonexempt purpose will be based on all the facts and circumstances including but not limited to the gross_receipts factor taxpayer's position the club has not provided its position at this time government's position an organization exempt from federal income taxes as described in sec_501 of the code must meet the gross_receipts_test in order to maintain its exemption in order to meet the gross_receipts_test an organization can receive up to thirty-five percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status within thi sec_35 amount not more than fifteen percent of the gross_receipts should be derived from the use of a social club’s facilities or services by non-members the club did not satisfy the facts_and_circumstances_test in that the club allowed for consistent and regular nonmember use of the club's facilities through numerous outside nonmember events has exceeded the gross_receipts standard for non-member income on a continuous basis for at least three years the non-member receipts are earned throughout the year there was no one single or unusual event that caused the club to exceed the threshold based on the percentages of gross non-member income to total gross_receipts of the club eg and as noted in the above table which exceeds the limitation of as set forth by sec_501 of the code for each of these years it is the government's position that the club is no longer operated exclusively for the pleasure and recreation of its members and is not exempt under sec_501 of the code search there were various form 886-a rev - overall the minutes speak of the decline in membership and that more are needed in addition to the day-to-day member usage to sustain the club there is also the overarching discussion of the function activity as being one the primary revenue makers as such the event coordinator actively seeks outside events such as to be held at the club has posted photos taken at the club to advertise that the club is available for from reviewing the club’s website it is apparent that there is a significant amount of marketing devoted to attracting non-member business use particularly also ina vendors who mention the club as an ideal venue department of the treasury - internal_revenue_service page -5- form 886-a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service august 20xx 20xx and 20xx the event coordinator also purchased software to increase sales it is evident that the event coordinator as directed by the club actively markets for public patronage sec_1_501_c_7_-1 of the income_tax regulations states in relevant part that a club which engages in business such as making its social and recreational facilities available to the general_public is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 of the code solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes based on the marketing activities of the club it is clearly prima facie evidence of the club's intent to open its facilities to the general_public which is inconsistent with an organization described is sec_501 of the code for this reason it is the government's position that the club is no longer operated exclusively for the pleasure and recreation of its members and is not exempt under sec_501 of the code conclusion the tax exemption of under sec_501 of the code should be revoked since the non-member income received by the club exceeded of the club's total gross_receipts for the years under examination further it advertises the use of its facilities to the general_public reflecting evidence that the club is engaged in a business and is not being operated exclusively for pleasure recreation or social purposes no longer meets the requirements to qualify as exempt from federal_income_tax under sec_501 as described in sec_501 of the code therefore the exempt status under c of the code will be revoked effective september 20xx as a taxable entity the organization would be required to file form_1120 u s_corporation income_tax return for the periods open under statute under g of the code these periods include the years ending august 20xx 20xx and 20xx additionally the organization is reminded of the provisions of sec_277 of the code concerning membership organizations which are not exempt_organizations taxpayer’s options if you agree please provide the following documents original signed copy of the enclosed form 6018-a form 886-a rev department of the treasury - internal_revenue_service page -6- form 886-a name of taxpayer department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended august 20xx 20xx and 20xx original signed copies of the forms for the tax years ending august 20xx 20xx and 20xx if you do not agree please provide the following documents a detailed explanation of your current position provide documents and legal authority that will support your position as an alternative you have the option of presenting your case to an appeals officer in a fast track settlement setting te_ge fast track settlement fts offers taxpayers an alternative to resolving unagreed issues during the examination process working with the tax exempt government entities division te_ge and appeals taxpayers can use the settlement authority and mediation skills of appeals while shortening their overall experience with the internal_revenue_service fts can reduce a taxpayer’s combined te_ge and appeals audit process time by as much as one year if any issues remain unresolved at the conclusion of the fts process taxpayers retain their traditional appeal rights as explained in publication your appeal rights and how to prepare a protest if you don't agree enclosed is publication fast track settlement that briefly explains the process also enclosed is a partially completed application form should you decide to consider this offer department of the treasury - internal_revenue_service page -7- form 886-a rev


t c memo united_states tax_court james l and eva j downs petitioners v commissioner of internal revenue respondent docket no filed date james l downs pro_se rodney j bartlett for respondent memorandum opinion nameroff special_trial_judge respondent issued a notice_of_deficiency to petitioners for the taxable years and in the notice respondent determined that petitioners were liable for additions to tax for negligence pursuant to sec_6653 of dollar_figure and dollar_figure for and respectively and under sec_6653 for percent of the interest due on unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue - - dollar_figure and dollar_figure respectively respondent also determined an addition_to_tax for a substantial_understatement of tax under sec_6661 of dollar_figure for the issues for decision are whether petitioners are liable for the additions to tax for negligence or intentional disregard of rules or regulations pursuant to sec_6653 and for both years and whether petitioners are liable for the addition_to_tax for a substantial_understatement of tax under sec_6661 for background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in dana point california at the time they filed their petition during the years at issue james l downs petitioner was a corporate officer and major shareholder of carburetor sales and services inc and eva j downs was employed as a teacher petitioner received a degree in business education in the 1970's petitioners had been active in the stock market for a number of years and they also invested in several real_estate limited_partnerships through a broker in petitioner attended a lecture given by consolidated financial services inc cfs at the university of southern california usc petitioners’ son was a student at usc and he told them about the lecture cfs offered financial planning and petitioner spoke with keith maynes mr maynes cfs’s financial planner on several occasions mr maynes proposed an investment in a limited_partnership called utah jojoba i research utah jojoba i which would engage in the farming of jojoba plants petitioner read articles on prospective business for jojoba oil and its many uses petitioners received a private_placement memorandum the prospectus to review according to the prospectus dated date the cost to invest was dollar_figure per unit with a minimum of four units per investor for each unit the investor was to pay cash of dollar_figure and execute a promissory note for the remainder payable annually for years on the front page of the prospectus it is stated that the offering involved a high degree of risk the prospectus also contained the following statements investors are urged to consult their own counsel as to all matters concerning this investment and bach purchaser of units herein should and is expected to consult with his own tax advisor as to the tax aspects the prospectus also cautioned about agricultural risks and warned that there was no structured market for jojoba oil and there were limited processing facilities petitioner scanned the prospectus but did not read it carefully he did not seek any outside professional advice because he has always made his own judgments on these things q4e- petitioner knew it was a high-risk investment and he considered the cautions in the prospectus about the risks to be standard language on date petitioners signed a subscription agreement a promissory note and a limited guarantee agreement in the subscription agreement petitioners purchased four units in the partnership and agreed to pay dollar_figure in the promissory note petitioners promised to make yearly payments over the next years to the partnership for a total of dollar_figure about months after investing in the partnership petitioner drove out to desert center california where the jojoba plantation was located to him it looked like the plantation was flourishing a few months after the visit to the plantation petitioner visited the offices of cfs in salt lake city utah which looked reputable to him during the years at issue petitioner did not have much contact with the partnership in pursuant to the promissory note petitioners made a payment to the partnership of dollar_figure on their federal_income_tax return petitioners reported income of dollar_figure and claimed a partnership loss of dollar_figure from utah jojoba i on their federal_income_tax return petitioners reported income of dollar_figure and claimed a there also were other losses claimed in this year from other investments - - partnership loss of dollar_figure from utah jojoba i in a partnership proceeding utah jojoba i research v commissioner tcmemo_1998_6 the court determined that the partnership’s claimed loss deductions for and were not allowable the resultant adjustments to petitioners’ and federal income taxes resulted in deficiencies of dollar_figure and dollar_figure respectively see sec_6225 validity of notice_of_deficiency petitioners contend that they were unaware that the utah jojoba i partnership was being audited and that there was litigation in the tax_court petitioners claim that they received no correspondence from the commissioner or from the tax_matters_partner until they were notified of the computational adjustment resulting from the partnership level proceeding while it is not clear it appears that petitioners are claiming that the notice_of_deficiency for the affected items is invalid petitioners contend that if they had been notified about the audit and litigation they would have taken care of the matter at an earlier date instead of having to deal currently with the additions to tax and accrued interest petitioners rely on a letter found in respondent’s file the letter was prepared by the internal_revenue_service irs and addressed to walnut street whittier ca the walnut street address a copy of an envelope attached to the letter bears a -- - stamp reflecting that it was returned because the forwarding order had expired for the walnut street address petitioners had moved from walnut street in to jeremiah drive dana point california jeremiah drive address the letter states that the irs was beginning an examination of the utah jojoba i partnership for tax_year there is no clear date on the letter but it is stamped as received by the tefra tax_shelter section of the irs on date presumably the date it was returned as undeliverable sec_6223 requires the commissioner to send the notice of beginning administrative_proceeding nbap and the notice of final_partnership_administrative_adjustment fpaa to each partner whose name is furnished to the commissioner under subsection c of that section unless additional information is provided by the tax_matters_partner the commissioner is required to use the address shown on the partnership return in mailing the nbap and the fpaa the walnut street address is shown on petitioners’ and federal_income_tax returns as well as on the schedules k-1 for utah jojoba i for and there is no indication that respondent was advised of any different address for petitioners in accordance with sec_6223 therefore there was no error on behalf of respondent regarding the nbap - j- in a letter dated date from james elliott chief_of_appeals to congressman packard mr elliott states our records show that petitioners were mailed a certified notice of the partnership audit on date x x petitioners were also mailed certified notices of final partnership adjustments on date these notices were mailed to them pincite2 jeremian drive dana point california we realize that the address on the and letters varies slightly from petitioners’ address pincite2 jeremiah he furthers states that the other partners were also issued notices that the tax_matters_partner filed a petition with the tax_court and that on date our office also sent a letter to the taxpayers offering a settlement of the government conceding the penalties if the taxpayer conceded the tax in tefra cases the tax_matters_partner has the responsibility to keep all partners informed of the progress of the case the record does not reflect when respondent was advised of petitioners’ jeremiah drive address nor except for petitioner’s self-serving testimony whether the fpaa was returned to respondent as undeliverable once partnership level proceedings are completed the commissioner is permitted to assess a computational adjustment against a partner without issuing a deficiency_notice see sec a n c f energy partners v commissio89_tc_741 this must have occurred sometime between the date the opinion for utah jojoba i research v commissioner supra was filed date and the date the instant notice of --- - deficiency was sent to petitioners the notice_of_deficiency dated date was mailed to petitioners at the misspelled jeremian drive address and subsequently petitioners timely petitioned this court we assume that petitioners also received notice of the computational adjustment at the misspelled jeremian drive address in 102_tc_683 the court held that a taxpayer may contest the validity of a notice_of_deficiency for affected items on the ground that the taxpayer’s partnership items converted to nonpartnership_items by virtue of the commissioner’s alleged failure to properly notify the taxpayer of partnership level proceedings as stated earlier we do not find that respondent erred in failing to notify petitioners about the beginning of the partnership audit furthermore although the address on the fpaa was slightly misspelled petitioners have received mail addressed to jeremian sic drive insignificant typographical errors in an address will not prevent a letter or notice from being valid see mcmullen v commissioner tcmemo_1989_455 riley v commissioner tcmemo_1985_231 therefore we hold that respondent notified petitioners of the partnership proceeding as required by sec_6223 and the notice_of_deficiency herein is valid negligence sec_6653 and imposes additions to tax if any part of the underpayment of the tax is due to negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under the circumstances see 85_tc_934 when considering the negligence addition we evaluate the particular facts of each case judging the relative sophistication of the taxpayers as well as the manner in which the taxpayers approached their investment turner v commissioner tcmemo_1995_363 petitioner contends that although he is not a professional he thought that he reasonably investigated the investment and he was seeking a long-term investment not merely a tax-sheltered one petitioners have not demonstrated that they reasonably investigated their investment in the utah jojoba i partnership petitioner discussed the investment with mr maynes knowing that cfs was receiving a commission for the sale of the limited_partner interests therefore the only person he discussed the investment with was someone who had an economic_interest in the investment petitioners did not seek professional advice from outside sources which was recommended in the prospectus -- - petitioner did not read the prospectus carefully and he thought the cautionary language therein was standard petitioners did not have any expertise in or knowledge of jojoba farming and they did not seek the advice of an expert in this area petitioners did not investigate the bona fides of the investment it was only after the investment that petitioner visited the plantation and the offices but it seems he was merely looking at the appearance of the locations to determine whether they were reputable we do not find that petitioners are naive investors they invested in the stock market for a number of years and they also participated in limited_partnerships several times petitioners had total wages in excess of dollar_figure for each year and they have not established that tax savings was not a motivating factor we conclude that if petitioners were looking to make a long-term profit they would have investigated the jojoba investment more thoroughly because of the high risk and lack of a market for the oil on the record before us we find that petitioners were negligent and we sustain respondent’s determination substantial_understatement of tax respondent determined that petitioners were liable under sec_6661 for a substantial_understatement of tax for sec_6661 provides for an addition_to_tax equal to percent of the amount of any underpayment attributable toa substantial_understatement an understatement is substantial when the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return or dollar_figure the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position or has substantial_authority for the tax treatment of an item see sec_6661 sec_1 a income_tax regs petitioners made no argument that there was adequate_disclosure nor have they produced substantial_authority for their position the deficiency upon which the addition_to_tax was imposed was dollar_figure the understatement is substantial because it exceeds the greater or dollar_figure or percent of the amount required to be shown on the return accordingly we sustain respondent’s determination to reflect the foregoing decision will be entered for respondent