s wvise coo-oee department of the treasury internal_revenue_service washington d c date feb coan person identification_number telephone number jt b employer_identification_number dear sir or madam this is in response to your letter dated date in which you requested certain rulings with respect to a proposed transfer of all of the assets of b to c b and c are exempt under sec_501 of the internal_revenue_code and are classified as private_foundations under sec_509 b was originally organized and funded by e it has always operated exclusively for charitable literary educational and scientific purposes by f it has always operated exciusively for educational and scientific purposes c was originally organized and funded e and f recently merged resulting in the creation of d b and c are both funded exclusively by grants from d b and c now share the same officers and directors because b and c now receive all of their funds for charitable giving from d the officers and directors of b and c believe that the merger of b and c will eliminate duplicative administrative costs and allow more effective management of their charitable giving programs thus the combined organization will be better able to meet their charitable goals provide a more rational means of efficiently administering the charitable giving program of d therefore b and c propose to merge c will be the surviving entity a single foundation would b has not notified the service that it intends to terminate its private_foundation_status nor has b ever received notification that its status as a private_foundation has been terminated furthermore b has stated that it has not committed willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter e sec_507 of the code provides for the voluntary and involuntary termination of private it states in part that except for transfers described in sec_507 an foundation status organization's private_foundation_status will be terminated only if the organization notifies the service of its intent to terminate or there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_507 of the code provides that when a private_foundation transfers assets to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a new organization sec_507 of the code provides that for purposes of sec_507 of the code the value of the net assets of the private_foundation shall be determined at whichever time the value is higher the first day on which action is taken by the organization which culminates in its ceasing to be a private_foundation or the date on which it ceases to be a private_foundation sec_1_507-3 of the income_tax regulations provides that a transferor private_foundation is required to meet its charitable distribution_requirements under sec_4942 of the code even for any taxable_year in which it makes a transfer of its assets to another private_foundation such transfer shall itself be counted toward satisfaction of such requirements to the extent the amount transferred meets the requirements of sec_4942 of the code however where the transferor has disposed of all of its assets the record-keeping requirements of sec_4942 of the code shall not apply during any period in which it has no assets - sec_1_507-1 of the regulations provides that neither a transfer of all of the assets of a private_foundation nor a significant disposition of assets as defined in sec_1 c by a private_foundation whether or not any portion of such disposition of assets is made to another private_foundation shall be deemed to result in a termination of the transferor private_foundation under sec_507 of the code unless the transferor private_foundation elects to terminate pursuant to sec_507 or sec_507 is applicable sec_1_507-1 of the regulations provides that a private_foundation which transfers all of its assets is not required to file annual information returns required by sec_6033 of the code for its tax years after the tax_year of its transfer when it has no assets or activities sec_1_507-3of the regulations provides that in the case of a significant disposition of assets to one or more private_foundations within the meaning of paragraph c of this subsection the transferor organization shall not be treated as a newly created organization sec_1_507-3 of the regulations provides that a transferee organization in the case of a transfer described in sec_507 of the code shall succeed to the aggregate tax_benefit of the transferor organization in an amount equal to the amount of such aggregate tax_benefit of the transferor organization multiplied by a fraction the numerator of which is the fair market_value of the assets less encumbrances transferred to such transferee and the denominator of which is the fair_market_value of the assets of the transferor less encumbrances immediately before the transfer fair_market_value is determined at the time of transfer sec_1_507-3 of the regulations provides that in a sec_507 transfer the provisions enumerated in subparagraphs a through g thereof apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in sec_507 been effected sec_1_507-3 of the regulations provides that if a transferor private_foundation transfers assets to a private_foundation effectively controlled directly or indirectly by the same person or persons who effectively control the transferor private_foundation the transferee foundation will be treated as if it were the transferor foundation for purposes of sec_4940 through and sec_507 through of the code the transferee is treated as the transferor in the proportion which the fair_market_value of the transferor’s assets that were transferred bears to the fair_market_value of all of the assets of the transferor immediately before the transfer sec_1_507-3 of the regulations provides that in order for a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization not to be a taxable_expenditure it must be to an organization described in sec_501 other than an organization described in sec_509 or treated as described in sec_501 under sec_4947 sec_1_507-4 of the regulations provides that the tax on termination of private foundation-status under sec_507 of the code does not apply to a transfer of assets pursuant to sec_507 of the code sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4942 of the code requires a private_foundation to make specified distributions of income for each taxable_year including the year in which it transfers substantial assets to another private_foundation under sec_507 sec_4942 of the code defines a qualifying_distribution as any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to i an organization controlled by the foundation or one or more disqualified persons or ii a private_foundation which is not an operating_foundation except as otherwise provided or b any amount_paid to acquire an asset used directly in carrying out one or more purposes described in sec_170 sec_4942 of the code requires that a grantor private_foundation in order to have a qualifying_distribution for its grant to another private_foundation which is not an operating_foundation under sec_4942 of the code must have adequate_records as required by sec_4942 of the code to show that the grantee private_foundation in fact subsequently made qualifying distributions that were equal to the amount of the grant and that were paid out of the grantee’s own corpus within the meaning of sec_4942 of the code such grantee foundation’s qualifying distributions out of corpus must be expended before the close of the grantee’s first tax_year after its tax_year in which it received the grant sec_4944 of the code imposes tax upon a private_foundation which invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_4945 of the code imposes tax upon a private foundation’s making of any taxable_expenditure under sec_4945 sec_4945 of the code defines the term taxable_expenditure to include any amount_paid or incurred by a private_foundation as a grant to an organization unless a the organization is described in subparagraphs or of sec_509 of the code or is an exempt_operating_foundation as defined in sec_4940 of the code or b the private_foundation exercises expenditure_responsibility with to such grant in accordance with sec_4945 of the code the exercise of expenditure_responsibility requires the foundation that makes the transfer to keep detailed records of the way the payment is spent by the recipient foundation sec_4945 of the code provides that expenditure_responsibility referred to in subsection d means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and detailed reports with respect to such expenditures and to make full and detailed reports to the secretary sec_53_4945-5 of the foundation and similar excise_taxes regulations refers to the rules relating to the extent to which the expenditure_responsibility_rules contained in sec_4945 and h and this section apply to transfers of assets described in sec_507 sec_53_4945-6 of the regulations allows a private_foundation to make transfers of its assets pursuant to sec_507 of the code to organizations exempt from federal_income_tax under sec_501 of the code including private_foundations without the transfers being taxable_expenditures under sec_4945 of the code b has not notified the service that it intends to terminate its private_foundation_status nor has b ever received notification that its status as a private_foundation has been terminated furthermore b has represented that it has not committed willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to a termination pursuant to sec_507 of the code because b is not terminating its existence and assuming there has been no willful repeated or flagrant act giving rise to liability under chapter no tax will be imposed on b under sec_507 as a result of the transfer of assets from b to c because a transfer of assets as described in sec_507 will not cause a termination of an organization's private_foundation_status the transfer from b to c will not terminate b's status as a private_foundation under sec_507 under sec_507 of the code the value of b’s assets after it has transferred all of its assets to c willbe zero thus b’s voluntary notice of termination of its private_foundation_status pursuant to sec_507 will not result in tax under sec_507 of the code under sec_1_507-3 of the regulations the transfer of b’s assets to c pursuant to sec_507 of the code will not result in c being considered a newly-created organization moreover c will succeed to all of b’s aggregate tax benefits because b and c are controlled by d for purposes of chapter of the code and sec_507 through of the code c will be treated subsequent to the transfer of all of b’s assets as if it were b in the proportion which the fair_market_value of the assets less encumbrances transferred bears to the fair_market_value of b’s assets less encumbrances immediately before the transfer thus c can succeed to b’s excess qualifying distributions carryover for purposes of sec_4942 of the code including the election under section a -3 c iv of the regulations under sec_1_507-3 of the regulations the provisions enumerated in subparagraphs a through g thereof apply to c with respect to the assets transferred to the same extent and in the same manner that they would have applied to b had the transfer described in sec_507 of the code not been effected - because b will dispose_of all of its assets the recordkeeping requirements of sec_4942 will not apply during any period in which it has no assets therefore b’s recordkeeping under sec_4942 will not apply after the merger since b will have disposed of all of its assets because b and c are both exempt under sec_501 they are not considered disqualified persons for purposes of self-dealing therefore the transfer of assets from b toc would not be considered an act of self-dealing because c is exempt under sec_501 and is organized for purposes described in sec_170 and the reason for the transfer is to carry out more efficiently such exempt purposes the transfer would not be a jeopardizing investment under sec_4944 under sec_1_507-3 of the regulations c will be treated the same as b so that b’s undistributed_income under sec_4942 if not already distributed by b must be taken into account by c as the successor to b under sec_4942 for failure to distribute income b’s transfer of assets to c will not subject b to tax because b is transferring all of its assets to c pursuant to a merger and b and c are controlled by the same persons c will be treated as b the transfer will be treated as not having -6- taken place for expenditure_responsibility purposes under sec_4945 of the code - thus the transfer will not be a taxable_expenditure under sec_4945 therefore b need not exercise expenditure_responsibility with regard to the transfer accordingly based on the information furnished we rule as follows the transfer of the assets of b to c will not result in the termination of b’s private_foundation_status within the meaning of sec_507 of the code or the imposition of any termination_tax under sec_507 c as the transferee of b’s assets will not be treated as a new foundation c will succeed to all of b’s aggregate tax benefits c will succeed to b’s excess qualifying distributions carryover for purposes of sec_4942 of the code including the election under section a -3 c iv of the regulations the provisions of sec_1_507-3 through g will apply to c with respect to assets transferred from b b will not be required to comply with the recordkeeping requirements of sec_5 g b of the code with respect to and following the transfer of assets to c the transfer of assets from b to c will not constitute an act of self-dealing under sec_4941 of the code and will not constitute a jeopardy investment under sec_4944 the transfer of assets from b to c will not subject b to any_tax under sec_4942 of the code for a failure to distribute income b will not be subject_to tax under sec_507 of the code if b informs the service of its intention to terminate its private_foundation_status following the transfer of assets to c the transfer of assets from b to c will not constitute a taxable_expenditure under sec_4945 of the code and b will not be required to exercise expenditure_responsibility under sec_4945 or h as a result of the transfer we are informing the ohio te_ge office of this action please keep a copy of this ruling in your organization’s permanent records this ruling is directed only to the organization that requested it sec_61 k of the code provides that it may not be used or cited as precedent oo 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 bevathl v daok gerald v sack manager exempt_organizations technical group


internal_revenue_service number release date index number ----------------------------------------------------------- ------------------------------------------------- ----------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ----------------- telephone number -------------------- refer reply to cc ita plr-100164-10 date may re -------------------------------------------------------------------------------------------------------------- re -------------------------------------------------------------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------- taxpayer ------------------------------------------ a -------------------------- b -------------------------- date1 date2 ---------------------- lmsb official ---------------------- dear -------------- this letter responds to a letter dated date and supplemental correspondence submitted by taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election to use the alternative_depreciation_system ads under sec_168 of the internal_revenue_code for 5-year_property 15-year_property and residential_rental_property placed_in_service in the taxable_year ended date1 facts taxpayer represents that the facts are as follows taxpayer owns and operates an apartment community known as a located in b hereinafter referred to as the property the property which is a residential_rental_property and related 5-year_property and 15-year_property were placed_in_service on date2 these were the only depreciable properties placed_in_service by taxpayer in the taxable_year ended date1 for the taxable_year ended date1 taxpayer determined its depreciation_deductions attributable to the properties using the general depreciation system of sec_168 instead of the ads taxpayer however had intended to elect to use the ads plr-100164-10 to depreciate costs attributable to the properties due to cost overruns related to the construction of the property taxpayer relied on a qualified_tax professional to prepare its federal_income_tax return for the taxable_year ended date1 when this return was filed neither taxpayer nor the tax_return_preparer realized that taxpayer did not elect to use the ads to determine depreciation for the classes of properties placed_in_service during the taxable_year ended date1 taxpayer discovered the error when the income_tax return for the following year was being prepared ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election to use the ads under sec_168 for 5-year_property 15-year_property and residential_rental_property placed_in_service in the taxable_year ended date1 law and analysis sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in the taxpayer’s trade_or_business the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 sec_168 prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the ads in sec_168 in the case of any property to which an election under sec_168 applies sec_168 provides that the depreciation deduction provided by sec_167 is determined under the ads pursuant to sec_168 the ads is depreciation determined by using the straight_line method without regard to salvage_value the applicable convention determined under sec_168 and a recovery_period determined under the table prescribed in sec_168 for most personal_property the recovery_period is the property’s class_life sec_168 provides special rules for determining class_life sec_168 permits a taxpayer to elect for any class of property for any taxable_year to use the ads for determining depreciation for all property in that class placed_in_service during that taxable_year however in the case of nonresidential_real_property the election is made separately with respect to each property once made an election to use ads is irrevocable sec_301_9100-7t provides that the election under sec_168 must be made for the taxable_year in which the property is placed_in_service sec_301 plr-100164-10 7t a i further provides that this election must be made by the due_date including extensions of the tax_return for the taxable_year for which the election is to be effective sec_301_9100-7t provides that the election under sec_168 is made by attaching a statement to the tax_return for the taxable_year for which the election is to be effective under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' sec_301_9100-3 provides that requests for relief under ' will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election to use the ads under sec_168 for determining depreciation for 5-year_property 15-year_property and residential_rental_property placed_in_service in the taxable_year ended date1 this election must be made by taxpayer filing an amended federal tax_return for the taxable_year ended date1 with a statement indicating that taxpayer is electing to use the ads under sec_168 for determining depreciation for 5-year_property 15-year_property and residential_rental_property placed_in_service in the taxable_year ended date1 except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on whether taxpayer’s classification of each item of depreciable_property placed_in_service by taxpayer during the taxable_year ended date1 is proper under sec_168 or whether taxpayer’s determination of the recovery_period for each item of 5-year_property year property and residential_rental_property placed_in_service by taxpayer during the taxable_year ended date1 is proper under sec_168 and for purposes of determining depreciation under the ads plr-100164-10 in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate lmsb official this ruling is directed only to taxpayer sec_6110 provides that it may not be used or cited as precedent sincerely willie e armstrong jr willie e armstrong jr senior technician reviewer branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number - ------------------------------------------------------------ -------------------------------------------------------- --------------------------------------------------- -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-145553-06 date date dear ---------------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ----------------- in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the projects owned by the borrower listed in appendix a because such borrower is a governmental body and dollar_figure has already been allocated to applications requesting a smaller presp-145553-06 share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-145553-06 borrower name appendix a project type project location --------------------------------- --------------------------------- ------ hydropower facility --------------------------------- --------------------------------- ------ wind facility -------------------------------- -------------------------------- ---------------- -------------------------------- -------------------------------- ----------- total amount requested --------------- ----------------- dollar_figure---------------- ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service department of the treasury washington dc uniform issue list contact person telephone number in reference to t ep ra t1 room date ot am attn legend employer a state b plan x dear this is in response to a ruling_request dated date as supplemented by correspondence dated date conceming the pick up of certain employee contributions to plan x under sec_414 of the internal_revenue_code the following facts and representations have been submitted employer a an agency of state b adopted plan x a defined_benefit_plan for the benefit of its employees plan x requires mandatory employee contributions and is qualified under code sec_401 plan x provides that a municipality may pick up the mandatory employee contributions z pursuant to a resolution dated date employer a has agreed to pick up ie assume and pay the mandatory employee contributions to plan x in lieu of employees paying such contributions eligible employees do not have the option to receive the picked up contributions in cash in lieu of having such contributions paid to plan x ls based on the foregoing facts and representations you have requested the following ruling no part of the contributions to pian x picked up by employer a on behalf of eligible employees will constitute taxable_income to such employees in the year of the pick up code sec_414 provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in code sec_401 established by a state government or a political_subdivision thereof or any agency_or_instrumentality of any one of the foregoing and are picked up by the employing unit - the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of code sec_414 is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer schoo district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue tuling held further that under the provisions of code sec_3401 the schoo district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees' salaries with respect to such picked up contributions the issue of whether contributions have been picked up by an employer within the meaning of code sec_414 is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension pian furthermore it is immaterial for purposes of the applicability of code sec_414 whether an employer picks up contfibutions through a reduction in salary an offset against future salary increases ora combination of both in revrul_87_10 1987_1_cb_136 the intemal revenue service considered whether contributions designated as employee contributions to a govemmental plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate 8s employer a's resolution satisfies the criteria set forth in revrul_81_35 and revrul_81_36 by providing that employer a will make contributions in lieu of contributions by eligible employees and that no employee will have the option of feceiving the contribution instead of having it contributed to plan x accordingly we conclude that the resolution adopted by employer a satisfies the requirements of code sec_414 thus the amounts picked up by employer a for employees shall be treated as employer contributions and will not be includabie in employees’ gross_income for the taxable_year in which such amounts are contributed to pian x because we have determined that the picked up amounts are to be treated as employer contributions they are excepted from wages as defined in code sec_3401 for federal_income_tax withholding purposes therefore no withholding of federal_income_tax is required from employees’ salaries with respect to such picked up amounts the effective date for the commencement of any proposed pick up as specified in the final resolution cannot be any earlier than the later of the date the final resolution is signed or put into effect this ruling is based on the assumption that plan x is qualified under code sec_401 a at the time of the contributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as the whether the amounts in question are paid pursuant to a salary reduction agreement’ within the meaning of code sec_3121 this ruting is directed only to the taxpayer who requested it code sec_6110 provides that it may not be used or cited by others as precedent sincerely yours de ban anwcea chief employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of the ruling notice le


department of the treasury internal_revenue_service washington d c cc intl br6 number release date date uilc internal_revenue_service national_office field_service_advice memorandum for from subject steven a musher chief branch cc intl this field_service_advice responds to your request for field_service_advice dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend a b c agency allowances authorizations corporation a corporation b corporation c_corporation d costs country customers date a date b date c date d entities events individuals items owners payments permits service a service b service c service d service e status year year issue whether a consequence of the sham_transaction and assignment_of_income in this case is a constructive_dividend from corporation a to its shareholders and a capital_contribution from the shareholders to corporation c conclusion the assignments of income from corporation a to corporation c were distributions from corporate earnings that yielded direct benefits to the common shareholders of corporation a and corporation c accordingly the payments should be classified as constructive dividends to the shareholders of corporation a and subsequent contributions by those shareholders to the capital of corporation c facts background corporation a is a domestic provider of service a to customers at issue in this field_service_advice are substantially_all tax years subsequent to year pursuant to authorizations and various permits from agency corporation a provided service b to all customers in conjunction with service a if a customer also desired service c he made payments to corporation a historically corporation a included these payments in its gross_income on date a corporation a formed a wholly-owned country subsidiary_corporation b the name of which was subsequently changed to corporation c on date b after several capital contributions by corporation a to corporation c_corporation a declared a taxable dividend of one share of corporation c stock per share of corporation a stock to be paid to corporation a shareholders-of-record as of date c_corporation a held a minority interest in corporation c consisting of a of the shares outstanding on date d the proportionate ownership of the individual shareholders in corporation c was similar but not identical to that of the individual shareholders in corporation a from time to time corporation a obtained from individuals shares of corporation c however in general corporation a later distributed such shares to owners thereby eliminating its ownership of corporation c shares for each year at issue although the shares of corporation c could be transferred the right of transfer was limited on any particular date the shareholders of corporation a were substantially identical to the shareholders of corporation c although the proportionate ownership_interest of a particular shareholder in corporation a and corporation c would likely not be identical some shareholder divergence was also attributable to intra-family and charitable gifts of shares as well as some stock redemptions by corporation a during the years at issue corporation a had substantial earnings_and_profits thus any distributions of property by corporation a to its shareholders would constitute dividends for federal_income_tax purposes transaction prior to year corporation a had obtained from entities proposals for alternative methods of treating payments in order to implement one of these proposals corporation a formed the corporation that came to be known as corporation c in the manner described above starting in year corporation a decided to shift the payments earned for service c to corporation c as a means of shifting this income corporation a entered into a contract with an unrelated party corporation d whereby the latter agreed to provide service d to corporation a in connection with corporation a’s performance of services a and c to its customers corporation a in turn agreed to pay corporation d the income from the payments that were earned from service c net of costs incurred by corporation a corporation a then deducted the net payments remitted to corporation d on its income_tax return in order to transfer the net payments to corporation c_corporation d entered into a contract with corporation c whereby the latter agreed to perform service e for corporation d in exchange for this service corporation d paid corporation c b of the payments corporation d received from corporation a less certain expenses and fees charged by corporation d hence corporation d acted merely as an intermediary for transferring the payments less certain expenses and fees to corporation c while corporation d and corporation c agreed to perform services d and e for the benefit of corporation a neither entity assumed costs in connection with events instead costs were assumed by corporation a as events occurred under the newly-structured transaction corporation a attempted to avoid federal_income_tax on payments and corporation c accumulated investment_income from those amounts in country without imposition of either country tax or u s income_tax on a current basis on corporation a corporation c or the shareholders the restructuring was performed for the purpose of avoiding tax and the arrangement between corporation a corporation c and corporation d lacked economic_substance and business_purpose the purpose of the arrangement with corporation d and corporation c was to confer tax-free benefits on the shareholders of corporation a and corporation c the arrangement was a sham that involved an assignment_of_income from corporation a to corporation c accordingly corporation a is not entitled to deduct the net payments remitted to corporation d pursuant to their contract law and analysis the correct characterization of excessive payments between corporations under common ownership arises in several contexts including sec_61 sec_162 and sec_482 to date the courts have not articulated a single rule to govern the classification of such payments in all cases rather the facts in each case must be examined in order to determine the correct characterization of the payments sec_316 of the code provides that any distribution_of_property made by a corporation to its shareholders out of earnings_and_profits accumulated after date is a dividend in general a distribution by a corporation or a payment by a corporation for the benefit of a shareholder whether or not it is formally declared as a distribution will in the absence of a corporate business_purpose constitute a constructive_dividend to the shareholder an undeclared distribution by a corporation may be treated as a constructive_dividend to the shareholder if it is made for the shareholder’s direct benefit in such cases the distribution need not be made directly to the shareholder but may be made to another party 61_tc_232 in revrul_69_630 1969_2_cb_112 the service treated an excessive payment between brother-sister_corporations as a dividend to the common shareholders and a capital_contribution by the shareholders to the related corporation that received the excessive payment in the revenue_ruling individual a caused his wholly- owned corporation x to sell certain assets at a less than arm’s length price to another corporation wholly-owned by him y a principal purpose of the sale was the avoidance of federal_income_tax the commissioner made an allocation of income pursuant to sec_482 in order to reflect an arm’s length price the effect of this allocation was to increase x’s income and y’s basis in the transferred assets this increase was treated as a distribution to a with respect to his x stock and a capital_contribution by a to y revrul_78_83 1978_1_cb_79 held that if property is transferred from brother_corporation to a sister corporation without adequate_consideration a constructive distribution has been made to the common parent regardless of whether a motive existed for improper allocation of income or deductions between the corporations some courts have applied a demonstrable business_interest theory for example in knipe v commissioner tcmemo_1965_131 aff’d per curiam sub nom 356_f2d_514 3rd cir cert_denied 385_us_822 the tax_court held that where payments by a brother because the arrangement was a sham and an assignment_of_income we need not consider how sec_482 might apply to a sister corporation purportedly for services lacked a valid transferor business_purpose they constituted constructive dividends to the common shareholders courts often require a showing of direct benefit as a prerequisite for finding a constructive_dividend to the common shareholder s for example in 52_tc_888 aff’d 441_f2d_593 5th cir the service argued that a transfer of cash between brother-sister_corporations was a constructive_dividend to the common shareholder and a contribution of capital to the transferee corporation because the tax_court viewed the benefit to the common shareholder to be merely derivative it held there was no constructive_dividend rushing t c pincite in white tool v commissioner tcmemo_1980_443 aff’d 677_f2d_528 6th cir cert_denied 459_us_907 a profitable brother_corporation made excessive payments to its loss sister corporation for rental of four motor vehicles and an airplane the commissioner determined an arm’s length rent allocated the excessive rent from the loss_corporation to the profitable corporation and classified the greater than arm’s length amount as a constructive_dividend to the common shareholders of the two corporations although the tax_court upheld the primary allocation of income pursuant to sec_482 it viewed the benefits to the shareholders as derivative in nature and declined to find a constructive_dividend see also r t french co v commissione60_tc_836 shareholder benefit was derivative no constructive_dividend to common parent of brother-sister_corporations that engaged in non-arm’s-length transaction where parent never received the income and where actual dividends_paid to parent exceeded amount of asserted constructive dividends 89_tc_1010 aff’d on this issue 914_f2d_396 3rd cir payments from affiliates to parent although not deductible as insurance premiums were not constructive dividends because they benefited the affiliates in aod the service declined to acquiesce in white tool and stated that in its view the existence of a constructive_dividend should be determined not based on whether a direct benefit accrues to the shareholder but based on whether the intercorporate transfer serves a demonstrable legitimate business_interest of the transferor emphasis added in this connection an earlier decision 74_tc_60 held that a valid business_purpose for the payment although not controlling is a significant factor under the direct benefit test a court might conclude based on white tool and rushing that the tax_avoidance benefits to the shareholders in this case are nevertheless only derivative rather than direct such that no constructive dividends resulted to them although this case is arguably distinguishable in that the tax_avoidance was egregious it is uncertain whether that distinction would compel a different outcome on the constructive_dividend issue regardless of whether the demonstrable business_interest or the shareholder direct benefit test applies the result in this case is in our view the same namely a constructive_dividend to the shareholders followed by the shareholders’ contribution to the capital of corporation c we have considered and eliminated for now the potential alternative characterizations of the excessive payments attributable to the assignments of income in this case as either loans or as non-shareholder contributions by corporation a to corporation c excessive payments or other transfers of funds between commonly-controlled corporations generally will not be characterized as debt unless the economic_substance of the transaction indicates that the parties intended to create indebtedness 61_tc_367 critical inquiry is whether there was a genuine intention to create a debt with a reasonable expectation of repayment and whether that intention comport ed with the economic reality of creating a debtor-creditor relationship 398_f2d_694 3rd cir court must determine whether investment analyzed in terms of economic reality is risk capital subject_to the fortunes of the corporate venture or represents a strict debtor-creditor relationship see also 154_f3d_61 3rd cir in particular a debt will not be found unless there is an unconditional obligation either express or implied to repay the funds in question fin hay realty f 2d pincite in 104_tc_424 the service imputed_interest on certain intercorporate payments pursuant to sec_482 and argued that the amounts should be treated as debt the irs prevailed on that theory primarily because the taxpayer failed to carry his burden of showing that the amounts in question were not debt in the instant case there is no evidence direct or indirect whether in terms of writings course of conduct of the parties or otherwise of a debt obligation the transfers to corporation c occurred at regular intervals over a period of c years without any repayment demand for repayment or other evidence that a repayment obligation existed since as noted above sec_482 need not be applied in this case we do not address the separate analysis of secondary adjustments to conform accounts to reflect primary adjustments under sec_482 pursuant to the regulations and applicable revenue procedures see generally sec_1_482-1 revproc_99_32 1999_34_irb_296 superseding revproc_65_17 1965_1_cb_833 similarly the facts known to date do not support characterizing the excessive payments attributable to the assignments of income as non-shareholder contributions by corporation a to corporation c the legislative_history of sec_118 recognizes that contributions to capital may be made by persons other than shareholders section deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services s rep no 83d cong 2d sess for example a developer local_government or business organization may contribute property to a corporation in order to obtain a specific benefit such as the location of a business in a particular locality e g may department stores v commissioner tcmemo_1974_253 aff’d 519_f2d_1154 8th cir in determining whether payments are capital contributions courts generally look to the intent of the transferor among the factors indicating that a transfer is a contribution_to_capital are bargaining with respect to the amount contributed and a likelihood that the contribution will result in additional income for the transferor while courts have found capital contributions where unrelated parties made payments to induce some action by the corporation or where shareholders made payments to their corporation no decision has found a capital_contribution where excessive payments were made between brother-sister_corporations further corporation c’s assets include the net amount of payments remitted by corporation a to corporation d that were subsequently transferred to corporation c as discussed above the consequences of the determination that the income belongs to corporation a were constructive dividends to the shareholders followed by deemed contributions by the shareholders of the constructive_dividend proceeds to the capital of corporation c the capital contributions thus belong to corporation c this conclusion would be the same even if it were determined that the deemed transfers constituted non-shareholder contributions by corporation a to the capital of sister corporation c rather than deemed contributions by the shareholders to the capital of corporation c under either characterization from the perspective of corporation c the transfers were capital contributions and the resulting assets belonged to corporation c we note that with respect to the basis of the corporation c stock in the hands of the shareholders all taxable years prior to year are now closed for most individual shareholders to the extent that the shareholders failed to report income on account of the constructive dividends received from corporation a in the closed years the duty_of_consistency would bar them from claiming a step-up in the basis of their stock in corporation c as a result of the deemed contributions of capital to corporation c the duty_of_consistency doctrine prevents a taxpayer after taking a position in one year that is to his advantage and once an adjustment with respect to that year is barred from adopting a contrary position in a subsequent year 605_fsupp_26 d mont thus for example a taxpayer who benefited from a representation in one tax_year may not reduce his tax in a subsequent tax_year by arguing after the statute_of_limitations has run on the earlier year that his original representation was incorrect and that more tax was due in the now-closed year see 854_f2d_755 5th cir cert_denied 490_us_1065 109_tc_290 thus the duty_of_consistency prevents a taxpayer from obtaining a permanent exclusion of income that is taxable or from deducting the same expense in multiple taxable years letts t c pincite the duty_of_consistency has three elements the taxpayer represented a fact or reported an item for federal_income_tax purposes for a particular year the service acquiesced in or relied upon the representation of fact or the reported_item for that year and the taxpayer attempts to change the representation or reporting in a subsequent year after expiration of the period of limitation and the change is detrimental to the service herrington f 2d pincite and 105_tc_324 a taxpayer’s inclusion or omission of a particular item on a tax_return can be a representation that the facts are consistent with how the item is reported thus failure to report a particular item_of_income may be an implied representation of fact with respect to that item which the taxpayer cannot repudiate at a later date letts t c pincite 244_f2d_874 9th cir failure to report receipt of funds on an income_tax return was a representation that the funds were a loan repayment when the duty_of_consistency applies the commissioner may proceed as if the original representation on which he relied continues to be true even if it is not and the taxpayer is estopped from advancing a contrary position cleo perfume inc v commissioner tcmemo_1998_155 the duty_of_consistency does not apply to a mutual mistake of law provided that both the taxpayer and the commissioner had knowledge of or equal access to facts that would have alerted them to the mistake herrington v commissioner f 2d pincite letts t c pincite 100_f3d_778 10th cir estate of ashman v commissioner tcmemo_1998_145 169_f2d_483 1st cir taxpayer was entitled to change position in second return to report constructive receipt of salary in an earlier year because this was a question of law not fact if the shareholders in the instant case failed to report dividend income in the years prior to year they implicitly represented that the assignments of income from corporation a to corporation c did not result in constructive dividends this position might have been reasonable if for example under different facts the transfers had a valid business_purpose or if the shareholders did not directly benefit from the transfers on the facts of this case however the duty_of_consistency bars the shareholders from disavowing the original representation although the mistake in this case was legal in nature the commissioner did not have equal access to the facts for the years that are now closed in effect the commissioner was led to rely on the belief that the transaction between corporation a and corporation c constituted legitimate service e whereas in reality it was a sham_transaction and an assignment_of_income from corporation a to corporation c motivated by tax-avoidance considerations the commissioner failed to advance the constructive-dividend theory in the intervening years because he was unaware of the true nature of the transaction under these circumstances the shareholders cannot assert the question of law exception to the duty_of_consistency thus the shareholders would be precluded from arguing that they had dividend income in the closed years and that they are entitled to a corresponding step-up in the basis of their stock in corporation c case development hazards and other considerations if you have any questions please call ___________________________ steven a musher chief branch


internal_revenue_service department of the treasury number release date index no mr dear mr washington dc person to contact sean dwyer id no telephone number refer reply to cc ita - cor-109145-01 date date commissioner rossotti asked me to respond to your letter dated date concerning obesity and weight-loss programs you asked the internal_revenue_service to issue a revenue_ruling allowing obese individuals to deduct the costs of weight-loss programs as medical_care expenses under sec_213 of the internal_revenue_code the current irs position on weight-loss programs is stated in revrul_79_151 1979_1_cb_116 this ruling holds that if participation in the program was to improve the participant’s appearance general health and sense of well-being the expenses of the program are not for medical_care and therefore are not deductible of course the expenses of a weight-loss program prescribed to treat a specific disease are for medical_care and are deductible also the cost of surgery to promote the proper function of the body or prevent or treat a disease is a medical_care expense we appreciate your suggestion and the references you provided to studies on obesity each year the irs and the department of the treasury review the many suggestions for revenue rulings and other forms of guidance to be published the projects selected are announced in the annual priority guidance plan input such as you have provided is helpful to us in selecting projects for the priority guidance plan i hope this information is helpful please call sean dwyer at the number above if you have any questions sincerely associate chief_counsel income_tax accounting by robert a berkovsky chief branch


t c memo united_states tax_court yusufu yerodin anyika and cecelia francis-anyika petitioners v commissioner of internal revenue respondent docket no filed date yusufu yerodin anyika and cecelia francis-anyika pro sese lisa blades for respondent memorandum findings_of_fact and opinion wells judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ federal income taxes for their and tax years respectively respondent also determined penalties pursuant to sec_6662 of dollar_figure and dollar_figure respectively the issues we must decide are whether petitioners are real_estate professionals as defined in sec_469 if petitioners are not real_estate professionals whether their rental real_estate losses are phased out pursuant to sec_469 whether petitioners are liable for a sec_6662 penalty_for_substantial_understatement_of_income_tax and or negligence for whether petitioners are liable for a sec_6662 penalty for negligence for and whether petitioners are liable for a penalty pursuant to sec_6673 findings_of_fact some of the facts and certain exhibits have been stipulated the parties’ stipulations of fact are incorporated in this opinion by reference and are found accordingly at the time they filed their petition petitioners resided in pennsylvania petitioners yusufu yerodin anyika mr anyika and cecelia francis-anyika mrs francis-anyika are married and filed joint returns for tax years and mr anyika is employed as an engineer and he work sec_37 hours per week weeks per year mrs francis-anyika is employed as a nurse and she work sec_24 hours per week mr anyika has been purchasing renovating managing and selling rental properties since the 1990s he views his rental 1all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated real_estate activity as a second job and as an investment during and mr anyika owned two rental properties petitioners used turbotax software to prepare their and tax returns and they did not consult a tax professional petitioners reported dollar_figure and dollar_figure in wages on their and tax returns respectively on their tax_return petitioners deducted dollar_figure in rental real_estate losses on audit respondent disallowed all but dollar_figure of the claimed deductions on their tax_return petitioners deducted dollar_figure in rental real_estate losses on audit respondent disallowed the entire amount of petitioners’ claimed rental real_estate deductions as a result of the disallowances and a few other adjustments that petitioners do not dispute respondent adjusted petitioners’ tax_liabilities from dollar_figure to dollar_figure for their tax_year and from dollar_figure to dollar_figure for their tax_year in accordance with the adjustments respondent determined deficiencies in petitioner’s taxes of dollar_figure and dollar_figure respectively and issued a notice_of_deficiency after receiving respondent’s notice_of_deficiency petitioners timely petitioned this court this case was originally scheduled for trial on date but was rescheduled for date unfortunately in spite of the continuance and in spite of our order compelling petitioners to answer respondent’s interrogatories and turn over documents they planned to use as evidence at trial petitioners failed to provide respondent with any of the requested items petitioners contend that they had reached an agreement with respondent’s counsel that respondent’s counsel would obtain the requested documents from the internal_revenue_service employee responsible for auditing petitioners’ returns respondent denies that such an agreement ever existed respondent has moved pursuant to sec_6673 for sanctions against petitioners on the basis of their failure to cooperate with respondent’s requests for documents opinion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer has the burden of proving it incorrect rule a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving that they have met all requirements necessary to be entitled to the claimed deductions rule a 503_us_79 the burden_of_proof on a factual issue that affects a taxpayer’s liability for tax may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue sec_7491 petitioners have neither claimed nor shown that they complied with the substantiation requirements of sec_7491 therefore the burden_of_proof remains on petitioners see rule a sec_469 generally disallows any passive_activity_loss a passive_activity is the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the year over the aggregate income from all passive activities sec_469 a rental_activity generally is treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 in establishing whether a taxpayer’s real_property activities result in passive_activity_losses each interest in rental real_estate is treated as a separate rental real_estate activity unless the qualifying taxpayer makes an election to treat all interests in rental real_estate as a single real_estate activity sec_469 an exception to the rule that a rental_activity is per se passive is found in sec_469 which provides that the rental activities of a taxpayer who is a real_estate_professional are not per se passive activities but are treated as a trade_or_business subject_to the material_participation requirements of sec_469 sec_1_469-9 income_tax regs 2a rental_activity is any activity where payments are principally for_the_use_of tangible_property sec_469 a taxpayer qualifies as a real_estate_professional and is therefore not engaged in a passive_activity under sec_469 if i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 in the case of a joint_return the foregoing requirements for qualification as a real_estate_professional are satisfied if and only if either spouse separately satisfies the requirements id thus if either spouse qualifies as a real_estate_professional the rental activities of the real_estate_professional are not per se passive under sec_469 sec_1_469-5t temporary income_tax regs fed reg date sets forth the requirements necessary to establish the taxpayer’s hours of participation as follows the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries although reasonable means may be interpreted broadly a postevent ballpark guesstimate will not suffice 135_tc_365 and cases cited therein even if taxpayers fail to qualify as real_estate professionals under sec_469 and must therefore treat losses from their rental properties as passive_activity_losses they may still be eligible to deduct a portion of their losses pursuant to sec_469 sec_469 provides a limited exception to the general_rule that passive_activity_losses are disallowed a taxpayer who actively participates in a rental real_estate activity may deduct a maximum loss of up to dollar_figure per year related to the activity the deduction is phased out as adjusted_gross_income modified by sec_469 exceeds dollar_figure with a full phaseout occurring when modified_adjusted_gross_income equals dollar_figure sec_469 petitioners contend mr anyika satisfies the sec_469 requirements for being a real_estate_professional to support their contention they rely principally on mr anyika’s testimony that he worked the equivalent of hours per day days per week weeks per year doing maintenance repairs and renovations to petitioners’ rental properties in their petition and at trial petitioners contended that mr anyika qualified as a real_estate_professional because he had spent at least hours actively managing the rental properties on form_4564 information_document_request submitted by petitioners during their audit petitioners declared under penalty of perjury that mr anyika devoted hours per year to working on the rental properties during and during the trial the court explained that in order to qualify as a real_estate_professional under sec_469 a taxpayer must spend at least hours materially participating in the real_estate business and additionally must devote more than one-half of his total personal services working hours to his real_estate business it was only after the court had explained the law that mr anyika understood for the first time that he would have to have spent at least big_number hours engaged in the real_estate business in order to qualify as a real_estate_professional under sec_469 after understanding that to qualify he had to spend more hours engaged in managing the rental properties than he did working as an engineer mr anyika began to contend that he had spent the equivalent of hours per day days per week weeks per year big_number hours per year working on the rental properties after being confronted during trial by the evidence of his prior signed statement that he worked hours per year on the rental properties mr anyika stated that he was speaking from memory with the exact numbers and that to be sure he would need to look over the numbers more closely in addition to mr anyika’s testimony petitioners submitted real_estate titles and various bills and receipts to substantiate mr anyika’s work on the rental properties unfortunately for petitioners mr anyika’s testimony at trial that he devoted approximately big_number hours per year to working on the rental properties contradicts his prior statement during the audit that he worked only hours per year on the rental properties mr anyika made the 800-hour estimate on a form_4564 which he signed under penalty of perjury we do not find mr anyika’s testimony that he worked approximately big_number hours per year on the rental properties credible not only does it contradict his earlier signed statement but it also changed during trial once mr anyika realized that he would need to have devoted more hours to his real_estate properties than to his job as an engineer ie he would need to have spent more than big_number hours working on the rental properties instead of the hours he had originally believed would be sufficient for him to qualify as a real_estate_professional under sec_469 we therefore conclude that mr anyika was not a real_estate_professional under sec_469 for or accordingly we hold that 3even if we did find mr anyika’s trial testimony credible he admitted in his testimony that his numbers were simply an estimate and that he did not remember the exact hours and such a rough after-the-fact estimate of his hours would not qualify as a reasonable means of establishing the extent of his participation in the rental_activity see 135_tc_365 petitioners’ rental activities during and were passive activities pursuant to sec_469 even though we have held that petitioners’ rental activities were passive we still must consider whether petitioners are eligible to deduct a portion of their real_estate losses pursuant to sec_469 because of mr anyika’s active_participation in managing the rental properties the active_participation standard is met as long as the taxpayer participates in a significant and bona_fide sense in making management decisions or arranging for others to provide services such as repairs see moss v commissioner t c pincite madler v commissioner tcmemo_1998_112 it is clear from the record that petitioners fully own the rental properties and that mr anyika has personally been very active in managing the rental properties moreover respondent concedes that mr anyika actively participated in real_estate activities during and accordingly we hold that petitioners are entitled to deduct a portion of their real_estate losses pursuant to sec_469 however petitioners’ income is subject_to the phaseout under sec_469 during both and petitioners’ modified_adjusted_gross_income was more than dollar_figure requiring that the dollar_figure maximum deduction be reduced by percent of the amount by which their income exceeded dollar_figure sec_469 we next consider the penalties determined pursuant to sec_6662 subsection a of sec_6662 imposes an accuracy-related_penalty of percent of any underpayment that is attributable to causes specified in subsection b subsection b applies the penalty to any underpayment attributable to inter alia a substantial_understatement_of_income_tax sec_6662 or negligence or disregard of rules or regulations sec_6662 there is a substantial_understatement_of_income_tax for any_tax year where the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return for the tax_year or dollar_figure sec_6662 however the amount of the understatement may be reduced by any portion of the understatement attributable to any item for which there was substantial_authority for the taxpayer’s treatment or with respect to which the relevant facts were adequately disclosed on the taxpayer’s return and there was a reasonable basis for the taxpayer’s treatment sec_6662 sec_6662 also imposes a penalty for negligence or disregard of rules or regulations under sec_6662 negligence is any failure to make a reasonable attempt to comply with the provisions of this title we have defined negligence as a lack of due care or a failure to do what a reasonable and prudent person would do under the circumstances 114_tc_259 failure to maintain adequate books_and_records or to substantiate items properly constitutes negligence sec_1_6662-3 income_tax regs a taxpayer is considered to have disregarded rules or regulations even if such disregard is careless meaning that the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs generally the commissioner bears the burden of production with respect to any penalty including the accuracy-related_penalty sec_7491 116_tc_438 to meet that burden the commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty higbee v commissioner supra pincite the commissioner has the burden of production only the ultimate burden of proving that the penalty is not applicable remains on the taxpayer id respondent contends that the sec_6662 penalty for is justified on the basis of substantial_understatement_of_income_tax and or negligence see sec_6662 for their tax_year petitioners understated their tax_liability by dollar_figure an amount which is greater than both dollar_figure and percent of the amount required to be shown on their return dollar_figure petitioners do not argue that the amount of their understatement should be reduced because they had substantial_authority for any item or because their position with respect to any item was adequately disclosed accordingly we hold that petitioners are liable for the sec_6662 and b penalty for because they substantially understated their income_tax respondent contends that petitioners are liable for the sec_6662 penalty for on the basis of negligence see sec_6662 petitioners did not consult a tax professional when preparing their return for either year rather petitioners based their deductions on their belief that mr anyika was a real_estate_professional however petitioners have not explained how they arrived at their conclusion that mr anyika qualified as a real_estate_professional and mr anyika acknowledged during trial that he had misunderstood the relevant statute and the requirements for being a real_estate_professional a reasonable person in mr anyika’s position understanding that the tax law governing the deductions he claimed was complex would have consulted a tax professional instead of merely assuming that he qualified on the basis of his own conclusions even if mr anyika had been correct in his understanding of the law he was negligent in ensuring that he complied with it at trial mr anyika was unsure of the number of hours he had spent working on the rental properties and his testimony and prior statement regarding the number of those hours were inconsistent it is clear that mr anyika did not carefully document the hours he worked on the rental properties and that petitioners therefore failed to keep records adequate to substantiate the deductibility of their real_estate losses such a failure is evidence of negligence see sec_1_6662-3 income_tax regs on the basis of the record we conclude that respondent has met the burden of production in showing that petitioners were negligent in preparing their tax returns for and sec_6664 provides a reasonable_cause and good_faith exception to penalties under sec_6662 sec_6662 penalties will not apply to any portion of an underpayment to the extent that the taxpayer had reasonable_cause and acted in good_faith for that portion sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant see id furthermore an honest misunderstanding of fact or law that is reasonable in the light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 petitioners contend that they used turbotax software to prepare their returns for both years and that the software program is to blame for any miscalculations in their income however petitioners have not provided any evidence showing the information that they entered into the software program a preliminary showing that would be required to decide whether the software program is in any way at fault for petitioners’ underpayment see paradiso v commissioner tcmemo_2005_187 such software is only as good as the information the taxpayer puts into it see bunney v commissioner supra pincite we have held that the misuse of tax preparation software even if unintentional or accidental is no defense to penalties under sec_6662 see lam v commissioner tcmemo_2010_82 respondent has produced evidence that petitioners were negligent in not maintaining records necessary to substantiate that mr anyika qualified as a real_estate_professional and that they did not act as reasonable persons would have to ensure their compliance with the tax laws and petitioners have not shown that their deficiencies were due to anything other than their own negligence or disregard of the rules and regulations petitioners are therefore liable for the sec_6662 penalties see higbee v commissioner t c pincite their use of turbotax does not establish reasonable_cause and good_faith see lam v commissioner supra respondent has satisfied the burden of production with respect to the sec_6662 penalties petitioners’ understatement of income_tax on their return is substantial under sec_6662 because it exceeds dollar_figure and is greater than percent of the amount required to be shown on their return petitioners’ and returns were both filed negligently the burden therefore is on petitioners to prove they acted with reasonable_cause and in good_faith we conclude that petitioners failed to carry their burden accordingly we hold that petitioners are liable for the sec_6662 accuracy-related_penalties for their and tax years finally we consider whether petitioners are liable for a penalty pursuant to sec_6673 sec_6673 provides that this court may require the taxpayer to pay a penalty not in excess of dollar_figure whenever it appears to this court that a the proceedings were instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies respondent has moved that the court impose a penalty contending that petitioners instituted or maintained this proceeding primarily for delay and that petitioners’ position is frivolous or groundless although petitioners’ behavior was negligent and evidenced a lack of respect for the relevant law and the court’s procedures it does not appear from the record that petitioners’ primary purpose in instituting or maintaining their case was delay petitioners were uncooperative and failed to reply to respondent’s requests for documents or to this court’s order compelling the same but we note that petitioners are pro_se and to a certain extent appeared confused by the proceedings no doubt their confusion was due in part to mr anyika’s failure to read some of the documents sent to him but negligent disorganization does not amount to purposeful delay additionally although petitioners were mistaken about the applicable law and although the evidence they offered did little to support their position their shortcomings do not make their case frivolous or groundless see demoss v commissioner tcmemo_1993_636 accordingly we decline to impose a penalty under sec_6673 in reaching these holdings we have considered all the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number ------------------- ------------- --------------------------- ------------------------------- --------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-124507-05 date june ------- taxpayer ---------------------------------------------------- year dear -------------- this refers to a form_1128 application to adopt change or retain a tax_year submitted by taxpayer requesting to change its accounting_period for federal_income_tax purposes from a taxable_year ending july to a taxable_year ending december effective december year taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations revproc_2002_37 2002_1_cb_1030 provides procedures for certain corporations to obtain automatic approval to change their annual_accounting_period under sec_442 of the internal_revenue_code a corporation complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner of the internal_revenue_service to change its annual_accounting_period under sec_442 and the income_tax regulations thereunder section of revproc_2002_37 provides that a form_1128 filed pursuant to the revenue_procedure will be considered timely filed for purposes of sec_1_442-1 only if it is filed on or before the time including extensions for filing the return for the short_period required to effect such change taxpayer did not file its form_1128 by the due_date of the return for the short_period required to effect such change however taxpayer requested an extension of time to file its form_1128 under sec_301_9100-3 soon thereafter sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government plr-124507-05 based on the facts and information submitted and the representations made the service holds that taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly taxpayer has satisfied the requirements of the regulations for the granting of relief and the service considers taxpayer's late filed form_1128 requesting permission to change to december effective december year timely filed since the director internal_revenue_service center where the taxpayer’s returns are filed has jurisdiction of a change in accounting_period under revproc_2002_37 we have forwarded the application to the director ---------------------------------- direct any further communication regarding this matter to the service_center the service based the ruling contained in this letter upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling however as part of an examination process the service may verify the factual information representations and other data submitted this ruling addresses the granting of sec_301_9100-3 relief only the service expresses no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically we express no opinion as to whether the code and applicable regulations or as to whether revproc_2002_37 permit the taxpayer to change to the tax_year requested in the subject form_1128 sec_6110 provides that this ruling directed only to the taxpayer requesting it may not be used or cited as precedent by the provisions of a power_of_attorney currently on file we are sending a copy of this ruling letter to the taxpayer’s authorized representative enclosures michael j montemurro acting branch chief office of associate chief_counsel income_tax and accounting sincerely the service will process the taxpayer’s application_for a change in accounting_period under revproc_2002_37


t c no united_states tax_court robert and marie banat petitioners v commissioner of internal revenue respondent docket no filed date h submitted requests for abatement of interest to the internal_revenue_service prior to date the date of enactment of sec_6404 i r c after date r sent to h a notice of final disallowance of abatement of interest pursuant to sec_6404 h and w filed a petition for review of the failure to abate interest r filed a motion to dismiss for lack of jurisdiction as to h on the ground that the request for abatement of interest was submitted prior to the effective date of sec_6404 and as to w on the ground that no notice of final disallowance of abatement of interest was mailed to her held we have jurisdiction to review the denial of h's request for abatement of interest but we lack jurisdiction as to w robert and marie banat pro_se thomas j kerrigan for respondent opinion cohen chief_judge this case is before us on respondent's motion to dismiss for lack of jurisdiction the issue is whether the court has jurisdiction pursuant to sec_6404 to consider petitioners' claims seeking abatement of interest unless otherwise indicated all section references are to the internal_revenue_code in effect at the time the petition was filed and all rule references are to the tax_court rules_of_practice and procedure the resolution of this issue turns on the effective date of sec_6404 background petitioners are husband and wife who resided in brooklyn new york at the time the petition was filed on date petitioner robert banat submitted requests for abatement of interest to the internal_revenue_service irs pursuant to sec_6404 for the taxable years through the requests were submitted on form sec_843 claims for refund and request for abatement and were signed by petitioner robert banat only all requests were disallowed by the irs associate chief new york city appeals_office by issuance of a notice of disallowance notice dated date the notice is addressed to petitioner robert banat only and states as follows this is your notice of disallowance as required_by_law we are disallowing your claim_for_abatement of interest under sec_6404 of the internal_revenue_code for the reason s stated below we did not find any errors or delays relating to the performance of a ministerial_act if you disagree with our denial of your abatement of interest claim and you meet the eligibility requirements described below you may request review of our denial in the tax_court your request for tax_court review must be received by the tax_court within days of the date of this disallowance notice petitioners filed their petition on date which date i sec_89 days after the mailing of the notice of disallowance on date respondent filed a motion to dismiss for lack of jurisdiction therein respondent seeks dismissal as to petitioner robert banat on the ground that his requests for abatement of interest were submitted prior to the effective date of sec_6404 with respect to petitioner marie banat respondent seeks dismissal on the ground that she has not filed requests for abatement of interest for the taxable years in issue and no notice of final_determination was mailed to her discussion this case presents an issue of first impression concerning the effective date of sec_6404 added by sec_302 of the taxpayer bill of right sec_2 tbor publaw_104_168 110_stat_1452 sec_6404 authorizes us to review denials by the commissioner of requests for abatement of interest under sec_6404 sec_6404 provides in pertinent part as follows g review of denial of request for abatement of interest -- in general --the tax_court shall have jurisdiction over any_action brought by a taxpayer who meets the requirements referred to in sec_7430 to determine whether the secretary's failure to abate interest under this section was an abuse_of_discretion and may order an abatement if such action is brought within days after the date of the mailing of the secretary's final_determination not to abate such interest tbor sec_302 provides that sec_6404 applies to requests for abatement after the date of the enactment of this act tbor was enacted on date respondent's position in this case is that we lack jurisdiction to review the denial of petitioner robert banat's requests for abatement of interest because the requests were submitted prior to date petitioners object on the basis that they were issued a notice of final_determination that specifically authorizes the filing of a petition with this court this court is a court of limited jurisdiction and may exercise jurisdiction only to the extent expressly provided by statute 66_tc_61 as such we must decide whether tbor sec_302 confers jurisdiction to review the denial of the requests for abatement of interest in this case as provided by tbor sec_302 our jurisdiction applies to requests for abatement of interest after date according to respondent tbor sec_302 precludes judicial review of all requests for abatement of interest submitted to the irs prior to date with respect to requests made and denied prior to date we agree see white v commissioner t c ___ date we decline however to interpret the effective date provision to preclude jurisdiction with respect to requests for abatement of interest pending with the irs on date tbor is intended by the congress to provide for increased protections of taxpayer rights in complying with the internal_revenue_code and in dealing with the internal_revenue_service irs in its administration of the tax laws h rept pincite it would be inconsistent with that intent to interpret the effective date language in a manner that would deny judicial review to taxpayers whose requests are continuing considered and denied after the date of enactment in our view the denial of a request that is pending with the irs after date may be the subject of review under sec_6404 in this case petitioner robert banat's requests for abatement of interest were pending on date and denied on date respondent issued a notice of disallowance that constituted a final_determination not to abate interest pursuant to sec_6404 and a timely petition was filed accordingly we hold that we have jurisdiction to review respondent's denial of petitioner robert banat's requests for abatement of interest sec_6404 rule b with respect to petitioner marie banat no request for abatement of interest was ever made to the irs and no notice of final_determination not to abate interest pursuant to sec_6404 was issued in a case seeking the review of the failure to abate interest jurisdiction in this court depends in part upon the issuance of a valid notice of final_determination not to abate interest sec_6404 rule b because no notice of final_determination denying a request for abatement of interest was issued to petitioner marie banat we hold that we lack jurisdiction insofar as this case pertains to her to reflect the foregoing an appropriate order will be issued


significant index no third party contacts - employees of the company date - date departmen of t e treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division apr fie hat in re dear company this letter constitutes notice that a conditional waiver of a portion of the minimum_funding_standard has been granted for the above-named pension_plan for the plan_year beginning date this conditional waiver has been granted in accordance with sec_412 of the internal_revenue_code the code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which this conditional waiver has been granted is dollar_figure million which is the portion of the minimum_funding_standard for the plan_year after the payment of the amount required under sec_412 of the code to amortize any waivers for prior plan years that otherwise in the absence of any waiver for the plan_year would be equal to the quarterly installment under sec_412 due to be paid under sec_412 not later than date the company formerly operated as a division of another purchased its major operating_assets from the steel company in through a leveraged employee_stock_ownership_plan - ‘ transaction through the the company was employee owned until when the company’s stock began trading publicly the company is a major integrated producer of with principal product lines consisting of ' in recent years the u s and - of crisis characterized by record operating losses more than two dozen bankruptcies and the permanent closure of a significant amount of productive capacity during this time the company like most u s has been in a state producers has sustained significant operating losses and decreased liquidity as a result of adverse market conditions resulting from a slowing economy depressed product selling prices and high levels of foreign imports the company experienced net losses for the fiscal years ending date through and reported both negative working_capital and negative net_worth for the fiscal_year sec_2001 and sec_2002 the company commenced a restructuring in the spring of to fundamentally reposition its business to focus on higher margin value-added products the restructuring included reductions in workforce streamlining management entering into financing programs with vendors to improve liquidity increasing liquidity and borrowing availability by refinancing the company’s working_capital facilities through a senior credit facility restructuring long-term debt and lowering debt service_costs as part of its recovery efforts the company has secured concessions from its bargaining unit employees including cancellation of a planned dollar_figure per hour wage increase that would have gone into effect in date an immediate percent pay and wage reduction a six-month postponement of percent of vacation pay that would have been payable to certain employees in date and freezing of plan benefit accruals intended to become effective on or about date the same pay reduction and plan freeze will also be applicable on the same dates to all of the company's salaried employees the company plans to reposition its business by pursuing the acquisition of strategic assets from other and pursuing other asset acquisitions that meet the company’s goal of exiting the - the company expects its proprietary technology to that are working to reposition their business with a polymer film to be a major source of growth the company has substantial obligations related to its employee post-retirement plans for medical and life_insurance benefits and pensions the company has stated that it is currently holding meetings with its pre-age retirees to discuss significant reductions in future health care costs the above-named defined_benefit_plan was originally effective plan contributions for the plan years requirement for those years and the resulting large credit balances in the funding_standard_account were sufficient to meet minimum_funding requirements for the exceeded the minimum_funding plan years the minimum_funding requirements for the and plan years include approximate additional funding charges of -and estimated for for of market_value of assets to accrued liability is approximately actuarial report for the plan gives investment losses and the retirement of nearly result of corporate restructuring as primary causes of decreases in the plan’s funded status participants with enhanced benefits in as of date the ratio percent the and early asa this waiver has been granted subject_to the following condition which you have agreed to within days from the date of this letter all necessary documents to provide an arrangement that is satisfactory to the pension_benefit_guaranty_corporation pbgc to secure the repayment of the waived amount will be executed if the company fails to meet the above condition this waiver is retroactively null and void q a-8 of notice_89_52 1989_1_cb_692 provides that the determination of of the current year’s minimum_funding requirement should generally be made assuming that no waiver will be granted for the current plan_year in this instance a waiver of the entire minimum_funding requirement for after the payment of the amount required under sec_412 of the code to amortize any waivers for prior plan years was requested only a portion of the minimum_funding requirement for has been waived at this time anticipated that the company will request modification of the amount waived later in however q a-8 of notice_89_52 further provides that if any amount is disregarded in anticipation of a waiver of such amount for the current plan_year and such waiver is subsequently denied the rules regarding interest charges and liens under sec_412 and n apply therefore if the company does not request and obtain further modification s of the amount waived until the entire minimum_funding requirement after the payment of the amount required under sec_412 of the code to amortize any waivers for prior plan years is waived then the interest charges under sec_412 and liens under sec_412 will apply to any amounts of required quarterly installments that have not been paid timely it is because a waiver of the minimum_funding_standard has been granted for the pian year in computing the quarterly contribution in the instant case the determination of of the current year’s minimum_funding requirement should take into account the waiver amortization payment required in the plan_year for the waiver your attention is called to sec_412 of the code and sec_304 of erisa which describes the consequences which result in the event the plan is amended to increase benefits to change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived amount remains unamortized please note that any amendment to other retirement or profit sharing plans maintained by the company to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan_year ending date the date of this letter should be entered on schedule b actuarial information we have sent a copy of this letter to the classification in and to your authorized representatives form on file with this office if you have any questions concerning this letter please contact oo relating to this letter please refer to a in any correspondence ‘as well sincerely jrbod carol d gold director employee_plans cc cc