t c memo united_states tax_court gustafson's dairy inc petitioner v commissioner of internal revenue respondent docket no filed date john s ball and beverly h furtick for petitioner michael a pesavento and benjamin a deluna for respondent memorandum findings_of_fact and opinion colvin judge respondent determined the following deficiencies in and additions to petitioner's federal income taxes this case was previously assigned to judge edna g parker in gustafson's dairy inc v commissioner tcmemo_1995_11 she decided whether to shift the burden_of_proof to respondent under sec_534 trial was held before judge parker she died on date before deciding the case the chief_judge reassigned the case to this division of the court we granted petitioner's motion for a new trial and a new trial was held fye mar deficiency additions to tax sec_6653 sec_6653 sec_6653 dollar_figure big_number big_number dollar_figure big_number -- -- -- dollar_figure percent of the interest due on the deficiency after concessions we must decide whether petitioner is liable for the accumulated_earnings_tax imposed by sec_5313 for fiscal years and we hold that it is not whether petitioner is liable for additions to tax for negligence we hold that it is to the extent discussed below table of contents i findings_of_fact page a b petitioner and the gustafson family petitioner the gustafson family officers and stock ownership stock purchase agreement repayment of debt owed to shareholder dairy operations milk production and processing petitioner's and fiscal years ended on march unless otherwise indicated section references are to the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure for fiscal_year respondent determined that petitioner was liable for the environmental_tax under sec_59a in the amount of dollar_figure petitioner offered no evidence or argument relating to this issue respondent contends that it is merely computational we leave resolution of the amount petitioner owes to the rule_155_computations petitioner's finance sec_1 the dairy association petitioner's sales to winn-dixie and others competition disease sec_11 petitioner's environmental system petitioner's capital expenditures program the super_trust petitioner's expansion plans insurance petitioner's financial condition petitioner's bardahl calculations petitioner's business practices ii opinion accumulated_earnings_tax basic rules burden_of_proof whether petitioner was formed_or_availed_of to avoid shareholder level taxation whether petitioner intended to avoid shareholder level taxes factors identified in treasury regulations conclusion reasonable accumulation for business needs conclusion environmental_tax negligence background herd expansion and pollution control capital improvements debt retirement self-insurance for replacement of herd c a b c d e f i findings_of_fact some of the facts have been stipulated and are so found a petitioner and the gustafson family petitioner petitioner is a florida corporation the principal_place_of_business of which was in green cove springs florida when it filed its petition in this case petitioner produces raw milk and processes it into dairy products petitioner reports its income using the accrual_method of accounting petitioner's fiscal_year ends on march the gustafson family agnes and frank gustafson established a dairy in green cove springs florida in they moved it to the present location in the 1920's and incorporated petitioner in agnes and frank gustafson had six children three of their children died before the years in issue f n noel gustafson helen gustafson amara and julia gustafson bagley g j pete gustafson died in two of their children were alive at the time of trial e s gustafson age and ellen gustafson townsend age e s sherwood gustafson jr is the son of e s gustafson officers and stock ownership pete and noel gustafson worked full time for petitioner noel gustafson was president and manager of petitioner until he died in e s gustafson became petitioner's president and chief_executive_officer in and remained in that position through the years in issue sherwood gustafson was the executive vice president and general manager in the years in issue e s gustafson and sherwood gustafson have worked for petitioner all of their adult lives e s gustafson ran petitioner and was involved in virtually all aspects of petitioner's business in the years in issue from date to date the members of petitioner's board_of directors were e s gustafson pete gustafson and sherwood gustafson e s gustafson and sherwood gustafson were petitioner's only board members in fiscal_year sherwood gustafson's son e s eddie gustafson iii works on the farm under the direction of the farm manager he is a member of the fourth generation of the gustafson family working for petitioner petitioner's stock is wholly owned by descendants or by spouses of descendants of agnes and frank gustafson or by trusts of which members of the gustafson family are the beneficiaries during the years at issue there were no discordant shareholders stock purchase agreement gustafson family shareholders have kept control of petitioner by restricting the sale or disposition of petitioner's stock to outsiders beginning in petitioner held an option granting it the right to redeem its preferred_stock for dollar_figure per share if a shareholder transferred his or her stock including a transfer when a shareholder died under the agreement petitioner had years to pay for the redeemed stock petitioner's policy has been to redeem a shareholder's stock under the stock purchase agreement when he or she dies to provide money for estate_taxes and administration under section and to keep control of the company in the gustafson family in and petitioner paid dollar_figure to redeem stock held by noel gustafson's estate petitioner also redeemed julia bagley's stock when she died in during the years in issue petitioner expected that it would need about dollar_figure to redeem the stock of pete gustafson however petitioner did not redeem his stock when he died in because his estate did not need money to pay estate_taxes petitioner plans to redeem ellen gustafson townsend's stock when she dies the redemption price for her shares will be dollar_figure repayment of debt owed to shareholder during its fiscal_year petitioner repaid dollar_figure in debentures it owed to pete gustafson's trust and related interest of dollar_figure dollar_figure total petitioner's tax attorney advised petitioner to retire the debentures most of the debentures would have become payable in or when pete gustafson died whichever occurred first pete gustafson wa sec_84 years old in and not in good health under sec_303 a distribution_of_property to a shareholder to redeem the shareholder's stock to pay death taxes is treated as a distribution in full payment in exchange for the redeemed stock one of the debentures would have matured in one in and one in b dairy operation sec_1 milk production and processing petitioner operates a dairy farm that produces raw milk during the years in issue petitioner's dairy herd was one of the largest in the united_states at one location petitioner also operates a dairy processing plant that produces finished dairy products and a milk distribution business petitioner's dairy farm and milk processing plant border the southern city limits of green cove springs petitioner's operations have gradually shifted over the years including the years at issue from milk producing to milk processing petitioner also owns and manages a beef herd grows timber and raises crops petitioner has an open herd rather than a closed herd in an open herd replacement cows are bought from third parties in a closed herd replacements are raised from calves on the farm petitioner had in inventory and bought the following number of cows from fiscal_year to fiscal_year fiscal_year cattle inventory cattle purchased dairy dairy big_number big_number big_number big_number big_number not available not available big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner reduced the size of its dairy herd from to so it could participate in the milk diversion program which was administered by the u s department of agriculture dairy and tobacco adjustment act of publaw_98_180 sec d a of the agricultural act of 97_stat_1128 the purpose of the program was to reduce the production of raw milk in the united_states id petitioner received dollar_figure dollar_figure in fiscal_year and dollar_figure in fiscal_year from the program the program ended on date the dairy association during the years in issue petitioner's dairy produced about one-third of the raw milk it needed in its processing plant during the years in issue petitioner sold all of the milk it produced to a dairy cooperative the florida dairy farmers association dairy association and bought all of the milk it processed and sold from the dairy association petitioner joined the dairy association so it would have enough milk to process petitioner bought more than dollar_figure of raw milk to process in each of the years in issue petitioner's payments to the dairy association were to percent of petitioner's cost_of_goods_sold for the years at issue petitioner's sales to winn-dixie and others petitioner sells milk products under its own label petitioner distributes its products to about retail outlets petitioner maintains a fleet of more than trucks to distribute its products about percent of petitioner's sales of processed milk in the years in issue were to six customers winn-dixie stores inc winn-dixie publix lil' champ pic-n-sav walgreens and miller enterprises petitioner's biggest customer was winn-dixie winn-dixie has purchased milk products from petitioner for almost years almost half of petitioner's sales during the years in issue were to winn-dixie petitioner processes packages and distributes some of the superbrand products the private label milk for winn-dixie petitioner provided superbrand milk for winn-dixie's stores in winn-dixie's jacksonville district petitioner also processes and sells milk to winn-dixie under the gustafson's dairy label petitioner must pass inspections conducted by winn-dixie to retain its winn-dixie superbrand account petitioner has complied with modifications requested by winn-dixie during its periodic inspections of petitioner's plant petitioner has never had a written contract with winn-dixie winn-dixie could end its relationship with petitioner without notice but had not done so by the years in issue about years before trial winn-dixie began to produce superbrand milk in its own_production facilities winn-dixie now processes and packages superbrand milk for all of its stores in florida except those in the jacksonville district petitioner is the sole remaining outside supplier of winn-dixie's superbrand milk winn-dixie was founded by four brothers named davis and is headquartered in jacksonville florida the davis family owned a controlling_interest in winn-dixie during the years at issue the children of agnes and frank gustafson had a close social relationship with the davis brothers over the years including the years at issue competition petitioner's major competitors in the years in issue were dean foods borden's the largest milk processor in the country during the 1980's sealtest and flav-o-rich these are large publicly held corporations the number of milk processors in northern florida has steadily declined in the last to years many of the processors which were similar in size to petitioner had gone out of business or sold out to larger companies before or during the years in issue diseases petitioner frequently reviewed the risk of exposure of its cattle to diseases and contaminated feed with its veterinarian although the threat to petitioner's cattle from individual diseases has changed over the years the overall risk posed by disease has increased as its cattle have become more concentrated in smaller areas some diseases have been cured but the risk from others such as bovine virus diarrhea bovine leukemia virus and fescue foot has increased the fact that petitioner has an open herd increases the herd's risk of disease because diseased cows may be brought into the herd petitioner's dairy herd is at risk of suffering from diseases such as brucellosis tuberculosis and mastitis the herd is also at risk of being exposed to contaminants such as aflatoxin contamination of feed petitioner has never lost cattle because of tuberculosis or aflatoxins cows brought to florida are tested for brucellosis and tuberculosis brucellosis is a contagious disease cows with brucellosis must be slaughtered about big_number of petitioner's big_number cows died of brucellosis from date to date and about of petitioner's other cows were afflicted by brucellosis petitioner received a slaughter price for each cow it culled from its herd during the brucellosis outbreak in the mid-1970's during the years in issue the slaughter price was about dollar_figure per cow and the replacement cost was dollar_figure to dollar_figure petitioner could also receive indemnities of dollar_figure from florida and an amount unspecified in the record from the federal government for each cow slaughtered due to brucellosis petitioner's herd was vaccinated for brucellosis from to and was quarantined by the state of florida from the mid-1970's to date although petitioner's herd was brucellosis-free in about of its cows tested positive for brucellosis from to petitioner would receive no indemnity if it destroyed animals because they had tuberculosis or certain other diseases petitioner's environmental system in date a dike forming a part of petitioner's animal waste control system failed causing effluent to be discharged over a 10-acre area petitioner knew by the end of date that it had significant environmental problems but did not fully appreciate how severe those problems were the chief engineer of the soil conservation service scs of the u s department of agriculture evaluated petitioner's property and made recommendations for designing petitioner's environmental system he told sherwood gustafson during the design process from date to date that petitioner would have to reduce the size of the herd because petitioner's land could not accommodate an animal waste control system for all of its existing herd petitioner applied for a permit to build a new animal waste control system the environmental system in the scs designed petitioner's new environmental system the florida department of environmental regulation der approved the plans in date the new system required petitioner to keep its herd in a small high-intensity area hia and to build a 90-acre holding lagoon the environmental system could accommodate big_number cows scs designed the environmental system to accommodate as many cows as possible petitioner applied for a construction permit around date the florida der issued the permit on date due to delays in construction the permit was extended to date and then to date petitioner spent dollar_figure for pollution control in fiscal_year and dollar_figure in fiscal_year petitioner spent dollar_figure on the environmental system from date to date c petitioner's finance sec_1 petitioner's capital expenditures program in date petitioner's board_of directors told its controller to prepare detailed 5-year capital_expenditure projections for its annual meetings petitioner's board_of directors made this request after petitioner had received dollar_figure from the milk diversion program john fisher petitioner's controller for the years in issue prepared the capital expenditures program cep report with the help of e s gustafson sherwood gustafson and petitioner's attorney james sheehan petitioner's controller's date cep report stated that a petitioner must expand its herd and milking facilities to meet the demand of the milk cooperative because government programs will reduce the number of cows in florida and b due to the exorbitant increase in liability insurance costs petitioner will reduce insurance from dollar_figure to dollar_figure and self-insure for the remaining dollar_figure petitioner's board analyzed its business needs in detail in each of the years in issue and concluded that it needed much more money than it had the cep listed three categories of expenditures category one was capital expenditures self- insurance reserves and petitioner's working_capital needs for the next fiscal_year category two listed probable needs for the years after the next fiscal_year category three projected probable needs for the years after that petitioner intended to implement the plans recorded in all three categories but category one was more definite than category two and category two was more definite than category three the cep did not count amounts transferred to the super_trust discussed below at paragraph i-c-2 as funds available to meet petitioner's projected expenses petitioner projected in the cep for fiscal years that it would spend or accumulate the following amounts in thousands of dollars category one equip constr pollution land working_capital self-ins liab self-ins herd total category two equip constr pollution land1 herd expansion self-ins herd total category three equip constr land herd expansion self-ins herd total dollar_figure -- big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number -- big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- -- big_number big_number dollar_figure dollar_figure -- big_number -- dollar_figure big_number -- dollar_figure dollar_figure -- big_number -- dollar_figure dollar_figure -- big_number dollar_figure dollar_figure big_number big_number dollar_figure dollar_figure big_number big_number dollar_figure dollar_figure big_number big_number dollar_figure dollar_figure -- big_number dollar_figure grand total dollar_figure dollar_figure dollar_figure dollar_figure in the projections for category two for and category one for the dollar_figure amount for land assumed petitioner would buy big_number acres at dollar_figure per acre in the category two projection the dollar_figure amount for land assumed petitioner would buy acres at dollar_figure per acre these amounts were based on the assumption that petitioner would expand its herd by big_number cows these amounts were to provide new facilities needed for a larger herd this amount included dollar_figure for pollution control petitioner concedes that the amount for self-insurance for the expanded part of the herd should have been dollar_figure not dollar_figure petitioner's projected and actual expenses compared as follows category one projected expenses dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure category two projected expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number actual expenses in following year dollar_figure big_number big_number big_number big_number dollar_figure actual expenses in second and third years dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure year equip constr pollution land equip constr pollution land equip constr pollution land total year equip constr pollution land herd expansion equip constr pollution land herd expansion equip constr pollution land herd expansion total the super_trust a formation and purpose on date e s gustafson formed gustafson's dairy farm super_trust the super_trust to induce petitioner's shareholders to make some of their personal assets available to petitioner to help meet petitioner's long-term financial needs ie to years in the future and to hold petitioner's voting_stock e s gustafson was the grantor and individual trustee the florida national bank later first union national bank of florida was the corporate trustee petitioner's board authorized the creation of the super_trust tax considerations were not a factor when petitioner established the super_trust the super_trust agreement charged the trustee of the super_trust with determining the highest_and_best_use of petitioner's big_number acres and other land to be acquired by petitioner deciding the size of the dairy herd and whether to split the dairy herd into smaller herds and making decisions concerning the distribution of petitioner's products the super_trust did not manage petitioner and was not concerned with meeting petitioner's short-term years or less needs b funding of the super_trust petitioner and members of the gustafson family contributed liquid_assets and stock in petitioner to the super_trust these assets were held in separate funds for each contributor petitioner transferred dollar_figure to the super_trust in fiscal_year and dollar_figure in fiscal_year petitioner accounted for these transfers on its books by reducing cash and retained earnings by the amounts of the transfers petitioner reported these transfers as nondeductible_contributions from retained earnings on its federal_income_tax returns petitioner received the net_income from its fund but was not entitled to have its principal returned until the super_trust was terminated e s gustafson had sole discretion to invade the principal of petitioner's fund in the super_trust and to direct how to use it c trust income the super_trust filed form sec_1041 u s fiduciary income_tax return for and it reported no taxable_income for those years most of its income was from tax-exempt municipal_bonds petitioner failed to report dollar_figure of taxable_income and dollar_figure of tax-exempt municipal_bond interest earned by the super_trust in fiscal_year petitioner concedes that it should have reported this income for petitioner's failure to report the income did not result in an income_tax deficiency because petitioner's income was more than offset by fuel excise_tax credits in petitioner's expansion plans in petitioner decided to develop a comprehensive land use plan for the big_number acres adjoining its dairy petitioner believed that the area around the dairy would be developed and that petitioner would move petitioner projected in category two of its cep for fiscal_year and in category one of its cep for fiscal_year that it needed to spend dollar_figure on land petitioner negotiated to buy property from the roberts family the roberts property in however petitioner did not buy the roberts property during the years in issue petitioner's board learned that union camp corp planned to develop big_number acres of land that it owned adjacent to and south of petitioner's property the union camp project was named the villages of seminole forest union camp announced the project on date around date petitioner bought big_number acres of land from union camp the union camp property for dollar_figure in cash of which dollar_figure came from petitioner's fund in the super_trust the union camp property adjoined petitioner's land and increased petitioner's land holdings to about big_number acres in union camp announced that it would not develop the villages of seminole forest and petitioner dropped its plans to develop its property contiguous to the union camp property insurance a herd insurance petitioner carried no commercial insurance on its herd in the years in issue most dairy farmers do not commercially insure their herds because it is too expensive petitioner estimated how much it needed for a reserve by subtracting the expected salvage price from the replacement cost for its herd of big_number cows petitioner assumed that its replacement cost would be dollar_figure per cow in and dollar_figure in and petitioner increased the self-insurance reserve for fiscal years and because the cost of cows increased petitioner estimated that it would receive a slaughter price of dollar_figure for each cow thus petitioner's board had a reserve of dollar_figure in fiscal_year big_number cows x dollar_figure and dollar_figure in fiscal years and big_number cows x dollar_figure to cover losses to the dairy herd in the event of disease or other disaster b liability insurance petitioner bought commercial liability insurance and funded a reserve for self-insurance for risks above dollar_figure in the years in issue during the years in issue petitioner was covered by insurance_company of north america ina primary liability insurance policies petitioner had the following commercial liability insurance policies some of petitioner's insurance policies provided per occurrence coverage and others provided aggregate coverage a per occurrence policy pays up to the amount of the policy for each covered loss an aggregate policy pays no more than the amount of the policy during the policy period regardless of the number of claims category policy amounts annual premium business auto dollar_figure per occurrence dollar_figure-big_number comprehensive general liability big_number per occurrence products liability big_number per occurrence and aggregate big_number big_number the premium for comprehensive general liability insurance includes the premium for products liability insurance petitioner had insurance on its farm buildings and farm personal_property petitioner also had umbrella policies8 in the years in issue from to petitioner carried dollar_figure of umbrella coverage in date u s fire insurance co u s fire decided not to offer umbrella policies with coverage exceeding dollar_figure u s fire's decision remained in effect for to months in date u s fire notified petitioner that it would not renew petitioner's dollar_figure umbrella policy at the end of the policy period on date as a result an umbrella insurance_policy is a supplemental liability policy that protects against losses above the amount covered by other liability insurance policies petitioner reduced its umbrella coverage from dollar_figure to dollar_figure and self-insured for risks above dollar_figure petitioner had an umbrella policy providing per occurrence and aggregate coverage of dollar_figure the annual premium for this policy was dollar_figure to dollar_figure benefits under this policy were payable only if petitioner had exhausted the primary policies petitioner had the following umbrella insurance coverage from to policy period insurer limit sec_11 western employer sec_1 u s fire u s fire ina ina ina ina dollar_figure mil per occur and aggregate dollar_figure mil per occur dollar_figure mil per occur dollar_figure mil aggregate dollar_figure mil aggregate dollar_figure mil aggregate dollar_figure mil aggregate annualized premium dollar_figure big_number big_number big_number big_number big_number big_number petitioner's financial condition petitioner paid no dividends in fiscal_year but it paid dividends annually from through the years in issue petitioner paid almost dollar_figure in dividends to its stockholders from date to date an average of about during the first months of the fiscal_year from mar to date petitioner carried dollar_figure of commercial umbrella liability insurance percent of its net after-tax_income during the years at issue petitioner's net_income after taxes was dollar_figure for fiscal_year dollar_figure for fiscal_year and dollar_figure for fiscal_year petitioner paid dividends of dollar_figure averaging about dollar_figure percent of net after-tax_income in each of those years petitioner's book income taxes paid book net_income after taxes dividends_paid and percentage of net_income paid as dividends for fiscal years to were as follows tax_year ending book net_income income taxes paid and dividends book net_income after dividends federal taxes taxes paid dollar_figure dollar_figure dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total dollar_figure dollar_figure dollar_figure dollar_figure percentage of net_income paid as dividends petitioner's annual sales increased from dollar_figure in fiscal_year to dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year petitioner paid salaries to its officers from fiscal_year to fiscal_year as follows fiscal_year e s gustafson g j gustafson sherwood gustafson dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner's net available current_assets ie current_assets plus liquid_assets held in petitioner's fund in the super trust10 less current liabilities were as follows fiscal_year current_assets liabilities current net liquid_assets dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner concedes that amounts it held in the super_trust are liquid_assets available to it for purposes of this case big_number big_number big_number petitioner's current asset to current_liability ratios were dollar_figure for fiscal_year dollar_figure for fiscal_year and dollar_figure for fiscal_year petitioner's retained earnings increased from dollar_figure to dollar_figure from date to date as follows retained earnings and super_trust funds book beginning retained earnings year additions deductions book ending retained earnings dollar_figure dollar_figure dollar_figure big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number super_trust funds total of and n a n a n a n a n a n a big_number big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number petitioner's bardahl calculations petitioner estimated its working_capital needs in the capital reports at each of the year-end meetings petitioner did not use the bardahl11 formula to calculate its working_capital bardahl manufacturing corp v commissioner tcmemo_1965_200 needs for fiscal_year the minutes for petitioner's date board meeting included a bardahl calculation for the first time the minutes of the date meeting also included a bardahl calculation petitioner based its bardahl calculations on its prior year's expenses because petitioner had not closed its books by the time of the year-end meetings and operating_expenses for the current_year were not available based on its operating_expenses for the year ending date petitioner concluded that it needed dollar_figure for working_capital for fiscal_year for fiscal_year petitioner concluded that it needed dollar_figure for working_capital petitioner's business practices e s gustafson regularly gave about dollar_figure of his own money as christmas gifts to petitioner's employees neither he nor petitioner deducted these gifts e s gustafson made christmas gifts to the employees for about years including the years in issue petitioner did not lend money to or own stock in its suppliers during the years at issue petitioner's officers and directors do not serve as officers or directors of any of its suppliers petitioner did not lend money to its shareholders or invest in unrelated businesses or ventures during the years in issue petitioner does not own any airplanes yachts condominiums or similar facilities and does not insure the lives of its shareholders ii opinion a accumulated_earnings_tax basic rules a corporation is subject_to the accumulated_earnings_tax if it is formed_or_availed_of to avoid income_taxation of its shareholders by accumulating earnings_and_profits sec_532 the most important factor in deciding if the accumulated_earnings_tax applies is whether a corporation accumulates earnings_and_profits beyond the reasonable_needs_of_the_business 393_us_297 101_tc_397 a corporation that accumulates earnings_and_profits beyond its reasonable business needs is presumed to do so to avoid income_tax of its shareholders sec_533 a taxpayer can rebut the presumption with a preponderance of evidence to the contrary sec_533 the accumulated_earnings_tax does not apply if a corporation has unreasonably accumulated earnings but lacks the proscribed purpose technalysis corp v commissioner supra pincite 28_tc_153 affd 251_f2d_278 7th cir the accumulated_earnings_tax is a penalty and is strictly construed 422_us_617 pelton steel casting co v commissioner supra pincite- whether a corporation was formed_or_availed_of to avoid tax or has permitted its earnings_and_profits to accumulate beyond its reasonable needs are questions of fact united_states v donruss co supra pincite 304_us_282 44_tc_566 burden_of_proof before respondent issued the notice_of_deficiency in this case respondent notified petitioner that respondent proposed to issue a notice_of_deficiency for fiscal years and including a determination that petitioner is liable for accumulated_earnings_tax under sec_531 petitioner submitted a timely statement under sec_534 stating the grounds on which it relied to establish that it had not accumulated earnings beyond the reasonable needs of its business in this statement petitioner alleged that it had the following grounds for accumulating earnings a working_capital needs b self- insurance general and product_liability c replacement of its herd d replenish increase herd and animal waste control system e capital improvements f dependence on winn-dixie and fears of competition and g herd relocation and land development in its petition petitioner asserted that it had two additional grounds for accumulation stock_redemption and retirement of debt in gustafson's dairy inc v commissioner tcmemo_1995_ we held that the burden_of_proof is on respondent for ground d for and and for the first dollar_figure for and for ground e to the extent of petitioner's purchase of the union camp property for dollar_figure the burden_of_proof is on petitioner as to whether it permitted its earnings_and_profits to accumulate beyond the reasonable needs of its business for all other grounds and whether it was formed_or_availed_of to avoid shareholder level taxation gustafson's dairy inc v commissioner supra b whether petitioner was formed_or_availed_of to avoid shareholder level taxation whether petitioner intended to avoid shareholder level taxes e s gustafson and sherwood gustafson thought that petitioner would have difficulty surviving in competition with large corporate milk producers they knew that many dairy farmers in northern florida had gone out of business before or during the years at issue they were concerned that petitioner might lose the winn-dixie account they wanted petitioner to be able to redeem the stock of pete gustafson when he died they wanted petitioner to be free of debt by the time of the years at issue sherwood gustafson had worked for petitioner for years his entire adult life he felt responsible for the continued survival of the business his lifelong commitment to running the dairy gave him a strong sense of obligation that petitioner survive in a highly competitive business avoidance of tax at the shareholder level played no part in the financial management of petitioner by e s gustafson and sherwood gustafson respondent contends that petitioner was formed_or_availed_of to avoid shareholder level taxation respondent argues that petitioner's detailed plans are an attempt to avoid the accumulated_earnings_tax respondent argues that the fact that e s gustafson and sherwood gustafson knew about the accumulated_earnings_tax during the years in issue that petitioner attached bardahl computations to its minute sheets and that petitioner used language in its cep and minutes like that used in the accumulated_earnings_tax statutes shows that petitioner acted merely to avoid the accumulated_earnings_tax we disagree petitioner properly had and contemporaneously recorded its specific and definite plans respondent argues that we should disregard petitioner's grounds for accumulating funds that were not listed in the cep12 and argues that petitioner's failure to include certain grounds in the cep shows that those grounds were not bona_fide we disagree petitioner reasonably recognized the potential harm to its business if it lost the winn-dixie account the fact that it petitioner did not list the following grounds for accumulation in its cep a dependence on winn- dixie competition b herd relocation and land development c stock_redemption and d debt retirement could not quantify the amount it needed for this potential problem does not make it any less of a concern respondent contends that petitioner formed the super_trust solely to conceal income and avoid the accumulated_earnings_tax respondent argues that petitioner incorrectly accounted for its contributions to the super_trust and that petitioner should have reported income from the super_trust during the years in issue we disagree that petitioner created the super_trust to avoid the accumulated_earnings_tax also the super_trust properly filed form sec_1041 for and and petitioner reported its transfers to the super_trust on schedule m-2 of its and returns the super_trust served many legitimate purposes for example it helped to induce the shareholders to pledge their funds for the long-term benefit of the company respondent admitted in the answer to petitioner's amended petition13 that the super_trust funds were pledged for the reasonable business needs of petitioner respondent contends that in estimating its reasonable business needs petitioner's cep erroneously failed to consider petitioner's projected future revenues we disagree respondent cites 277_f2d_526 2d cir petitioner amended paragraph s of its petition as follows s the funds in the super_trust are held for the reasonable business needs of the petitioner affg 31_tc_415 for the proposition that the taxpayer must assume that it will continue to be profitable in analyzing its business needs at the end of each year or to count future revenues as a source for financing those needs respondent's reliance on dixie inc v commissioner supra is misplaced the u s court_of_appeals for the second circuit noted in passing that the taxpayer had not considered future earnings as one of several factors showing that the taxpayer did not formulate a specific and definite plan for which accumulating earnings would have been reasonable id factors identified in treasury regulations treasury regulations list the following as examples of factors to consider in determining whether a corporation was formed_or_availed_of to avoid income_tax of its shareholders a dealings between the corporation and its shareholders for the personal benefit of the shareholders such as personal loans b corporate investment of undistributed assets in unrelated businesses or investments and c the corporation's dividend history sec_1_533-1 income_tax regs we next consider how those factors apply here a dealings between petitioner and its shareholders petitioner did not lend money to or spend funds to personally benefit its shareholders b investment in unrelated businesses petitioner did not invest in unrelated businesses c petitioner's dividend history petitioner paid dividends which averaged about percent of its after-tax_income from through the years in issue dividends averaged about percent for the years in issue petitioner paid substantial salaries to its officers from to this generally shows that the taxpayer did not intend to avoid shareholder level taxes technalysis corp v commissioner t c pincite bremerton sun publ'g co v commissioner t c pincite 44_tc_453 respondent points out that petitioner's controller and sherwood gustafson did not know how e s gustafson decided the amount of dividends to pay and argues that petitioner's dividend history was poor in view of its increasing liquidity respondent contends that petitioner's dividends were not sufficient we disagree level dividends may be sufficient bremerton sun publ'g co v commissioner supra john p scripps newspapers v commissioner supra pincite the taxpayer paid the same amount of dividends for years respondent relies on 72_tc_158 in that case the taxpayer paid minimal dividends before the first year in issue the taxpayer's president and sole shareholder reduced his salary so that the total amount he received from the taxpayer dividends plus salary was virtually unchanged for years id pincite unlike doug-long inc petitioner paid a reasonable amount of dividends from to the salaries paid to petitioner's officers steadily increased before the years in issue and petitioner did not reduce dividends to keep payments to its shareholders level although petitioner could have paid larger dividends it reasonably chose to use those funds to expand its business its business did grow as shown by the substantial increase in its annual sales from to we think petitioner prudently decided to pay reasonable dividends and salaries to its officer- shareholders and retained the rest of its earnings to expand the business see john p scripps newspapers v commissioner supra pincite taxpayer acted prudently in distributing a substantial part of its earnings and retaining the remainder to use to expand its operations conclusion we conclude that petitioner was not formed_or_availed_of to avoid income_tax on its shareholders c reasonable accumulation for business need sec_1 background a business may accumulate earnings to meet its reasonably anticipated needs sec_537 sec_1_537-1 income_tax regs the corporation must have specific definite and feasible plans to use the accumulation sec_1_537-1 income_tax regsdollar_figure we consider the judgment of corporate management in deciding if its accumulation of earnings was reasonable 292_f2d_470 9th cir affg 33_tc_141 technalysis corp v commissioner supra pincite a corporation's reasonably anticipated needs are considered based on the facts at the end of the taxable_year sec_1 b income_tax regsdollar_figure treasury regulations state that sec_1_537-2 income_tax regs lists several nonexclusive examples of reasonable grounds for accumulating earnings_and_profits to provide for bona_fide expansion of business or replacement of plant to acquire a business_enterprise through purchasing stock or assets to provide for the retirement of bona_fide indebtedness created in connection with the trade_or_business to provide necessary_working_capital for the business such as for the procurement of inventories to provide for investments or loans to suppliers or customers if necessary in order to maintain the business of the corporation or to provide for the payment of reasonably anticipated product_liability losses sec_1_537-1 income_tax regs provides continued subsequent events may not be considered to show that an accumulation was unreasonable if the taxpayer reasonably anticipated the need at the end of the taxable_year but may be considered to determine whether the corporation consummated or intended to consummate the plan for which the earnings_and_profits were accumulated id at the start of the trial the parties agreed that the standard stated in sec_1_537-1 income_tax regs applies in deciding what is relevant to whether petitioner's accumulation was reasonable we next consider whether petitioner had reasonable grounds for its accumulation of earnings in the years in issue continued consideration shall be given to reasonably anticipated needs as they exist on the basis of the facts at the close of the taxable_year thus subsequent events shall not be used for the purpose of showing that the retention of earnings or profits was unreasonable at the close of the taxable_year if all the elements of reasonable anticipation are present at the close of such taxable_year however subsequent events may be considered to determine whether the taxpayer actually intended to consummate or has actually consummated the plans for which the earnings_and_profits were accumulated in this connection projected expansion or investment plans shall be reviewed in the light of the facts during each year and as they exist as of the close of the taxable_year if a corporation has justified an accumulation for future needs by plans never consummated the amount of such an accumulation shall be taken into account in determining the reasonableness of subsequent accumulations herd expansion and pollution control respondent has the burden_of_proof on these issues for and and to the extent of dollar_figure for pollution control for petitioner has the burden_of_proof for amounts above dollar_figure for gustafson's dairy inc v commissioner tcmemo_1995_11 a herd expansion petitioner claims that it needed to accumulate dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year to replenish and enlarge the dairy herd respondent argues that petitioner had no definite plans to enlarge the herd because the cep contained no projections in category one for herd expansion for the years in issue respondent points out that petitioner's herd decreased from big_number cows in to big_number cows in respondent argues that the fact that petitioner's herd decreased before and during the years in issue and the fact that petitioner never implemented its plan to enlarge its herd shows that petitioner's accumulation for this purpose was not reasonable respondent contends that petitioner and not the scs chose the big_number cow limit we disagree petitioner listed in the cep for fiscal years through that it projected to accumulate amounts for herd expansion in category two and category three using an assumed market price of dollar_figure in and dollar_figure in and and an assumed expansion of big_number head petitioner planned to enlarge its herd but was forced to postpone its plans because the dike failed in date the scs designed the environmental system to accommodate the largest permissible herd on petitioner's land the maximum number of cows that petitioner could have on its existing land was big_number thus the limit on herd size in response to petitioner's animal waste problems does not show that petitioner did not want to increase its herd petitioner's accumulation for herd expansion in was reasonable because petitioner did not know at the end of fiscal_year that it would have to limit the size of its herd petitioner had definite and specific plans to expand its herd in and and reasonably accumulated dollar_figure in and dollar_figure in and for this purpose b pollution control petitioner contends that it reasonably accumulated dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year for pollution control and improvements to its environmental system respondent concedes that petitioner reasonably accumulated dollar_figure in and dollar_figure in for pollution control the lesser_of the category one projected expenses in and and the actual expenses in the year immediately after the projections respondent argues that petitioner did not anticipate spending large amounts for pollution control in or accumulate large amounts for this purpose until the dike ruptured in date about months before the end of fiscal_year petitioner began to accumulate earnings_and_profits for pollution control in because it knew it had problems with its animal waste control system petitioner projected that it needed to accumulate dollar_figure in category two to improve its pollution control in fiscal_year dollar_figure in fiscal_year dollar_figure in category one and dollar_figure in category two and dollar_figure in fiscal_year dollar_figure in category one and dollar_figure in category two petitioner had projected before the dike broke that it would spend these amounts after the dike broke petitioner projected that it would spend much more to fix its system to comply with der but petitioner still underestimated the cost petitioner projected that it would spend more than it actually spent for category one and less than it actually spent for category two in category one projected expenses exceeded actual expenses by dollar_figure for and by dollar_figure for in category two actual expenses exceeded projected expenses by dollar_figure for by dollar_figure for and by dollar_figure for we conclude that petitioner reasonably accumulated dollar_figure for fiscal_year dollar_figure for fiscal_year and dollar_figure for fiscal_year for pollution control capital improvements petitioner has the burden_of_proof on this issue gustafson's dairy inc v commissioner supra a equipment and construction petitioner accumulated dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year to buy equipment and vehicles and to make other capital improvements respondent concedes that petitioner reasonably accumulated dollar_figure for fiscal_year dollar_figure for fiscal_year and dollar_figure for fiscal_year for those purposes respondent disputes petitioner's claim that it needed to accumulate funds to build more facilities to accommodate its expanded herd respondent points out that petitioner had big_number cows in and contends that petitioner had no need to build additional facilities if petitioner increased its herd to big_number cows we disagree the existing facilities including a milking parlor that could accommodate big_number cows needed to be modernized or replaced and petitioner planned to expand its herd to big_number cows respondent argues that most of the capital assets petitioner bought during the years in issue were items that petitioner bought each year such as trucks loaders and refrigerators and were not assets bought as part of a capital expansion program respondent argues that petitioner incorrectly counted this need for funds both in its working_capital calculations and in the capital improvements category we need not decide whether petitioner included this need for funds both in the capital improvements category and in the working_capital category because we have not separately considered petitioner's working_capital needs petitioner's category one and two expenses projected for equipment and construction were generally less than its actual expenses for those purposes during those periods actual expenses in category one exceeded projected expenses by dollar_figure for dollar_figure for and dollar_figure for in category two actual expenses exceeded projected expenses by dollar_figure for and dollar_figure for projected expenses exceeded actual expenses by dollar_figure for this confirms that petitioner intended to spend the amounts it accumulated for equipment and construction within the projected time periods see sec_1 b income_tax regs we hold that petitioner reasonably accumulated dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year for equipment and construction b land development petitioner contends that it needed to accumulate dollar_figure during the years in issue to buy land respondent argues that petitioner had no plans to move its operations to a less populated area and to develop its land into a planned community during the years in issue and that it was not reasonable for petitioner to accumulate funds to develop land respondent argues that because the dairy is a pre-existing use clay county will never force it to relocate we need not consider this point because petitioner did not accumulate funds to move its operations respondent argues that petitioner bought the union camp property in date after respondent began a tax audit of petitioner in date to avoid liability for the accumulated_earnings_tax respondent contends that petitioner's failure to buy land from date to date shows that petitioner was not serious about buying land we disagree the cep projects expenses of dollar_figure for land the cep for projected expenses of dollar_figure for land petitioner paid about dollar_figure for the union camp property in fiscal_year the fact that petitioner bought the union camp property in date does not show that petitioner was not previously interested in buying land sherwood gustafson learned in or that union camp might sell some of its land adjoining petitioner's land sherwood gustafson credibly testified that petitioner would have bought the roberts property if it had not bought the union camp property petitioner had specific definite and feasible plans in fiscal_year to use the dollar_figure to buy the union camp property we conclude that it was reasonable for petitioner to accumulate dollar_figure in fiscal_year and dollar_figure in fiscal_year to buy land debt retirement petitioner has the burden_of_proof on this issue gustafson's dairy inc v commissioner tcmemo_1995_11 petitioner accumulated dollar_figure in fiscal_year to retire debentures held by pete gustafson respondent points out that petitioner's debentures owed to pete gustafson did not mature until the earlier of or when pete gustafson died respondent argues that petitioner failed to show that it had a definite purpose or plan to accumulate funds to retire debt during the years at issue we disagree petitioner retired the debt held by pete gustafson during fiscal_year paying a total of dollar_figure petitioner was obligated to repay the debt when he died pete gustafson wa sec_83 years old and in poor health in petitioner reasonably believed that it would have had to retire the debentures long before petitioner redeemed the debentures because it wanted to be debt-free petitioner paid more than dollar_figure in accrued interest on the debentures during fiscal_year petitioner's tax attorney advised it to redeem the debt because the interest on it was no longer deductible redemption of debt is a valid justification for an accumulation sec_1_537-2 income_tax regs we do not think the fact that petitioner did not earmark these amounts in the cep shows that it did not reasonably accumulate amounts for that purpose we find that petitioner reasonably accumulated dollar_figure in to retire the debt held by pete gustafson self-insurance for replacement of herd petitioner has the burden_of_proof on this issue gustafson's dairy inc v commissioner supra petitioner contends that it accumulated dollar_figure in fiscal_year dollar_figure in fiscal_year and dollar_figure in fiscal_year to self-insure against loss of the dairy herd due to diseases or other natural disasters this reserve was based on an assumed herd size of big_number cows and a replacement cost net of the estimated slaughter price it would receive of dollar_figure per cow in fiscal_year and dollar_figure per cow in fiscal years and petitioner did not have commercial insurance for the risk of loss of the dairy herd few florida dairies insure their herds because herd insurance is expensive not because there is no risk of loss the fact that most dairies do not buy insurance suggests that it was reasonable for petitioner to not buy insurance see sec_1_537-1 income_tax regs prudent businessperson standard respondent argues that the risks to the herd were too remote to justify maintaining self-insurance respondent points out that except for the brucellosis outbreak in the 1970's petitioner's herd has not had significant losses respondent points out that hoof-and-mouth disease was eradicated in the united_states in the 1920's that none of petitioner's cows have had tuberculosis that petitioner has lost no cattle from natural disasters and that petitioner's barns built in can withstand 100-mph winds respondent also points out that petitioner's expert richard moscicki testified that there was a low probability that petitioner would lose its entire herd due to disease or toxic contamination finally respondent contends that the fact that petitioner waited more than years after the brucellosis outbreak to create the self-insurance reserve shows that petitioner's purpose was to avoid the accumulated_earnings_tax we disagree that petitioner exaggerated the threat of disease or other possible loss to its herd petitioner lost about big_number cows during the brucellosis outbreak in the 1970's about of its cows tested positive for brucellosis from to and its cows were quarantined during the years in issue petitioner's risks increased in the 1980's as more of its cattle were concentrated in smaller areas loss history is relevant if it provides information about the likelihood of the harm cf sec_1_537-1 income_tax regs referring to product_liability_loss reserves however a taxpayer is not precluded from insuring against a potential loss just because the taxpayer has not previously experienced that particular loss emi corp v commissioner tcmemo_1985_386 respondent contends that petitioner improperly failed to consider that an uninsured loss of cattle could provide tax reductions or that it may have legal recourse against the supplier of contaminated feed we disagree an income_tax deduction would not necessarily provide funds when needed to buy new cattle and would provide no benefit if petitioner had no income if petitioner lost cattle due to contaminated feed it could take years to recover against the supplier we conclude that petitioner's accumulation of funds to self-insure the herd was reasonable d conclusion petitioner's reasonable business needs exceeded its net liquid_assets as shown below herd expansion dollar_figure dollar_figure dollar_figure pollution control big_number big_number big_number equip constr big_number big_number big_number land big_number big_number debt retirement big_number self-insurance herd big_number big_number big_number working capital16 big_number big_number total net liquid_assets dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner has also shown that it needed working_capital and at least some accumulations for self-insurance for liability however in light of the foregoing we need not separately discuss these points as conceded by respondent we conclude that petitioner did not accumulate earnings_and_profits beyond its reasonable business needs we concluded above that petitioner was not formed_or_availed_of to avoid income_tax on its shareholders see paragraph ii-b-3 either conclusion would justify our finding that the accumulated_earnings_tax does not apply see 101_tc_397 thus we hold that the accumulated_earnings_tax does not apply e environmental_tax respondent determined that petitioner was liable for the environmental_tax under sec_59a in the amount of dollar_figure for the fiscal_year petitioner had the burden_of_proof but presented no evidence or argument on this issue respondent states that this issue is computational the parties should resolve the amount petitioner owes in the rule computation f negligence respondent determined that petitioner is liable for additions to tax for negligence for each of the years in issue negligence is lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 citing marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 under sec_6653 and b for fiscal years and and sec_6653 for fiscal_year the addition_to_tax applies only if there is an underpayment_of_tax as defined in sec_6653 as discussed above petitioner is not liable for the accumulated_earnings_tax the only possible underpayment relates to the environmental_tax under sec_59a petitioner has presented no evidence or argument as to whether any underpayment of the environmental_tax was reasonable thus if the rule computation shows that petitioner underpaid the environmental_tax all of that underpayment is due to negligence to reflect the foregoing and concessions decision will be entered under rule


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc4920dal dallas tx date dec-72017 tax_exempt_and_government_entities_division release number release date uil code person to contact identification_number contact telephone number in reply refer to last date for filing a petition with the tax_court mar -7 certified mail - return receipt requested dear is this a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons you are not described in sec_50l c of the code because you are not operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 c and sec_1 c -l c that accomplish one sec_501 and sec_1 c -i d or more exempt purposes specified in primarily activities engage you not do in contributions to internal_revenue_code your organization are no longer deductible under section of the you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you may write to the courts at the following united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc u s district_court for the district of columbia constitution ave n w washington dc the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights we can offer help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your tax problem with the irs if you qualify for assistance which is always free we will do everything possible to help you visit taxpayer_advocate its gov or call we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours maria hooke director eo examinations enclosures publication fi department of the treasury internal_revenue_service tax exempt and government entities irs exempt_organizations examinations pegust taxpayer_identification_number form es gs tax_year s ended december 20xx person to contact id number contact numbers telephone fax number manager’s name 1d number manager's contact number response due_date date certified mail - return receipt requested dear ' why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren’t an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also letter rev catalog number 34809f may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely director eo examinations letter rev catalog number 34809f enclosures report of examination form_6018 form_4621 copy of form 1023ez copy of determination_letter dated 11-07-20xx publication publication letter rev catalog number 34809f form_886 a department of the treasury - internal_revenue_service schedule no or name of taxpayer exhibit year period ended explanation of items 20xx12 date of notice date issues whether the organization continues to qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code facts filed the 1023ez streamlined application_for recognition of exemption under sec_501 of the internal_revenue_code on november 20xx organization granted exemption as a c on november 20xx effective date is october 20xx organization checked on form 1023ez they will be organized and operated exclusively for charitable purpose the organization was selected for audit to ensure that the examined organization's activities and operations align with its approved exempt status organization filed form 990ez for december 20xx tax_year organization’s form 990ez for december 20xx identifies their mission statement as to help the needy they do this by having members participate in charity events in all of their regions including program in our program in as well as to provide other assistance to individuals in they provide assistance in these areas by conducting poker runs chili cook off and easter egg hunts money made from these activities is donated back to the communities where the activities were conducted these activities are conducted by different as well as and organization has total revenue listed as dollar_figurexx xxx contributions and grants of dollar_figurexx xxx and program service revenue of dollar_figurex xxx expenses were identified as insurance office expenses travel website state filing fees funeral expense and conferences conventions and meetings expenses were in the amount of dollar_figurexx xxx conference and conventions were the largest expense and were in the amount of dollar_figurex xxx letter with form_4564 idr nformation document request was sent to organization on march 20xx idr requested organization to send copy of articles of incorporation and any amendments detailed list of activities they conduct meeting minutes from october 20xx to march 20xx organization was asked to explain their responses to line and of the form 1023ez do you or will you donate funds to or pay expenses for individual s do you or will you engage in financial transactions for example loans payments rents etc with any of your officers directors or trustees or any entities they own or control form 886-a reev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘treasury - internal_revenue_service 20xx12 organization replied on april 20xx was established in 19xx on march 20xx we voted to attorney he suggested a not for profit this made sense to the the purchase xx acres of vacant land in to help the family of a former member who was killed in a construction accident during the summer of 20xx we had a few ideas of how to title the ownership of the land by establishing a business_entity after receiving council from a entire membership because we were already doing a lot of charitable events we obtained a law firm and established the c under the name patch we wear on our vests since the purchase of the land we have erected a building built showers and restrooms on the property we hold charitable events at this location and offer its use to local organizations for their events at no cost at the other states where we are established we organize and attend many charitable events as shown with the flyers and photos provided with this letter we help raise funds at these events by putting on raffles poker runs etc we do have a web site it is based ona provided a list of members of the who they gave loans to and forgave loans either because the member died or could not afford to pay them back to help with funeral_expenses gave donations to family members of included in reply from organization dated april 20xx were the organizations minutes december 20xx included purchasing the property in unanimously to purchase for dollar_figurexx xxx with all members voting may 20xx officer discussed the meeting with the attorney organization discussed land trust idea for property attorney states he had not heard of a land trust and suggested a not for profit vote was unanimous talk of spending one work day on logging of property september 20xx talked about building a metal prefab building for property to store tools and equipment idea of getting water ran to the building for showers and toilets spoke to logging company and cant log until fall may 20xx discussed report report discussed the logging of the property with the chapters and how they want quality not quantity of members club jewelry is earned not given away chapter’s to pay for gas when national officers have to go somewhere burned old patches and constitution brought up adding brothers to the board_of directors and the filing of the form_990 and discussed the nation’s annual september 20xx suggestion was made all new members should have to pay dollar_figurexxx donation for the land is having financial problems all in favor of writing off loan is unanimous brother form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer schedule no or exhibit yeat period ended explanation of items department of the treasury - internal_revenue_service 20xx12 elections are being held took everyone to the spot where memorial site will be discussed club history and what plans are for the future members asking for retirement keep in touch with retired brothers when it comes to runs need bothers to have a list of all health issues spoke of wreck and fundraiser for thanked the brothers for donations to his daughter and his family called and stuff december 20xx vote was made on skipping nationals to save money money spent on property and building was dollar_figurexx xxx for property and building dollar_figurexx xxx publications conducted one of the publications show the christmas presents to the children who spent christmas at group delivering sent publications showing the charitable activities they have thank you letter was received by thanking them for their support at a fundraiser and the help they received in sales of raffle tickets from newspaper article regarding a gifts to a family whose daughter was discovered to have kidney cancer the club paid for the families rent electric bill phones and other items showed up to present had chili cook off with all proceeds being donated to various publications were received identifying other from ' and receiving certificates of appreciation for their help and donations in regards to phone conversation with of was other chapters of the on july 20xx question was asked who do they meet with regarding travel conferences and conventions’ his reply identified their website as law sec_501 exempts from federal_income_tax organizations organized and operated exclusively for religious charitable scientific or educational_purposes whereby no part of the net_earnings inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not intervene on behalf of or in opposition to any candidate for public_office form 886-a crev department of the treasury - internal_revenue_service page -3- department of the treasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items 20xx12 sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more purposes specified in such section if an organization fails to meet either the organizational or the operational_test it is not exempt an organization is organized exclusively for one or more exempt purposes only if its articles of the organization as defined in subparagraph of this paragraph a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section you conduct an activity that provides direct benefits to members and private individuals that is more than insubstantial in nature for this reason you are not operating exclusively for exempt purposes sec_1_501_c_3_-1 of the regulations as a result you do not satisfy the operational_test requirement to be recognized as exempt under sec_501 of the code and are not as described in sec_501 of the code sec_1_501_c_3_-1 states that an organization will be regarded as operated exclusively for one or more purposes only if one or more such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose it engages primarily in activities which accomplish sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 provides that the terms private_shareholder_or_individual as used in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for charitable purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 states that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if it operates the trade_or_business in furtherance of its exempt purposes the organization must not be organized or operated for the primary purpose of carrying on an unrelated_trade_or_business in 325_us_844 the court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt_purpose form 886-a crev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service 20xx12 in easter house v united_states cl_ct citing sec_1 c - d ii of the regulations aff'd without opinion 846_f2d_78 fed cir that an organization is not operated exclusively for exempt purposes if public interest it serves a private rather than a in 477_f2d_340 4th cir cert_denied 413_us_910 the fourth circuit held that operating for the benefit of private parties constitutes a substantial nonexempt purpose governments position you do not meet the operational_test under sec_1_501_c_3_-1 as stated in sec_1_501_c_3_-1 an organization must be both organized and operated exclusively for one or more exempt purposes you do not engage primarily in activities which accomplish one or more exempt purposes specified in sec_501 of the code and sec_1_501_c_3_-1 of activities are being conducted under the name of the was organized and operated for the benefit per flyers and thank you letters received by only members or family of members are receiving loans or donations for funeral_expenses your activities do not further a charitable purpose as that term is defined in sec_1_501_c_3_-1 such as relief of the poor and distressed advancement of education or science or the lessening of the burdens of government although you do charitable activities you do so under the name of the for profit and some of the this activity alone does not meet the operational_test you do not meet the operational_test under sec_1_501_c_3_-1 because you do not engage in activities that accomplish one or more exempt purposes specified in sec_501 of the code because you do not meet the operational_test you cannot be exempt under sec_501 see sec_1_501_c_3_-1 very little of your activities accomplish a charitable purpose under sec_1 c - d as stated above the term charitable is to be used in its generally accepted legal sense sec_1_501_c_3_-1 and the presence of a single non-exempt purpose if substantial in nature will destroy an exemption better business bureau v u s in addition you do not meet the requirements of sec_1_501_c_3_-1 of the regulations which requires you to operate exclusively in activities which accomplish one or more exempt purposes your financial records show a substantial amount of your funds are paid out for the benefit of members of and you are not operated exclusively for one or more exempt purposes as set forth in sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations because your net_earnings inure in whole or in part to the benefit of private individuals thus you provide a substantial private benefit to form 886-a rev department of the treasury - internal_revenue_service page -5- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer 20xx12 schedule no or exhibit year period ended conclusion and is one and the same organization funds that come into are from members of the or from fundraising done by the loans and pay towards funeral_expenses of these funds are used to give members only does do charitable activities but they do so in the name of is not described in sec_501 of the internal_revenue_code because they are not operated exclusively for exempt purposes according to sec_1 c -1 a does not meet the operational_test under sec_501 c because as stated in sec_1 c -1 c -1 they are not operated exclusively for one or more sec_501 c purposes such as religious educational charitable scientific or testing for public safety based on the facts and circumstances presented we conclude that you do not qualify for recognition of exemption from federal_income_tax as an organization described in sec_501 of the code accordingly you do not qualify for exemption as an organization described in sec_501 and you must file federal_income_tax returns contributions to the organization are not deductible under sec_170 exemption is revoked to effective date of exemption january 20xx form 886-a rev department of the treasury - internal_revenue_service page -6- form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx12 form 886-acrev department of the treasury - internal_revenue_service page -7-


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-163846-04 uilc date june to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities --------------------------- subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion concerning the following businesses under the railroad retirement act and the railroad unemployment insurance act --------------------------------------------------- ----------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------- ------------------------------------------------------------------------- -------------------------------------------- ---------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that --------------------------- ceased to be an employer under the railroad_retirement_tax_act act effective -------------------------- and that under these facts ---------------------------------------is not a covered employer under the act please take the appropriate action regarding these businesses cc _____________________________ janine cook